Friday, September 23, 2022

FYI: AZ Sup Ct Holds Notice of Trustee's Sale Does Not Accelerate Debt, Foreclosure Not Time-Barred

The Supreme Court of Arizona recently held that recording a notice of trustee's sale, by itself, is not an affirmative act that accelerates the debt.  Therefore, the Court held, the foreclosure at issue in the notice of trustee's sale in this case was not time-barred.

 

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

 

A borrower obtained a loan for which he executed a promissory note secured by a deed of trust against his residential property. The promissory note and deed of trust included optional acceleration clauses authorizing the lender to accelerate the debt if the borrower defaulted. To initiate the acceleration clauses, the promissory note required that the borrower be given notice of acceleration, and the deed of trust also required that the lender provide notice to the borrower of "(a) the default; (b) the action required to cure the default; (c) a date . . . by which the default must be cured; and (d) that failure to cure the default . . . may result in acceleration . . . and sale of the property."

 

The borrower eventually defaulted on the loan. The lender sent the borrower a notice of default, but it did not state that failure to cure the default would result in the acceleration of the loan or sale of the property. The borrower did not cure the default, which led to two notices of trustee's sales being recorded. However, neither notice invoked the optional acceleration clause, and the property was not sold.

 

Eventually, the borrower sought declaratory relief, arguing that the current servicer could not foreclose on the property because Arizona's six-year statute of limitations had expired. See A.R.S. § 12-548(A)(1). The borrower then moved for summary judgment, asserting that the notices of trustee's sales accelerated the debt, triggering the statute of limitations, and that the statute of limitations had run.

 

The servicer responded and cross-moved for summary judgment, arguing that the notices of trustee's sales did not accelerate the debt and that the borrower presented no evidence that the servicer intended to accelerate the debt. The trial court granted the borrower' summary judgment motion, concluding that the notices of trustee's sales accelerated the debt.  The servicer appealed.

 

On appeal, the intermediate appellate court reversed the trial court's ruling and held that "absent an express statement of acceleration in the notice of trustee's sale, or other evidence of an intent to accelerate, recording a notice of trustee's sale, by itself, does not accelerate a debt." The borrower timely appealed to the Arizona Supreme Court.

 

The borrower argued that recording a notice of trustee's sale accelerates the debt as a matter of law because the debtor has a reasonable expectation that the lender intends to sell the property and collect on the entire debt, notwithstanding the requirements for acceleration in the note and deed of trust. 

 

However, the Supreme Court of Arizona noted that parties are generally "free to contract as they please," Shattuck v. Precision-Toyota, Inc., 115 Ariz. 586, 588 (1977) (quoting Naify v. Pacific Indem. Co., 76 P.2d 663, 667 (Cal. 1938)), and when entered into voluntarily, courts will enforce the contract's provisions. 1800 Ocotillo, LLC v. WLB Grp., Inc., 219 Ariz. 200, 202 ¶ 8 (2008).

 

The Supreme Court of Arizona determined that the promissory note gave the lender discretion to accelerate the debt, rather than automatically accelerating the debt upon default. See Prevo v. McGinnis, 142 Ariz. 298, 302 (App. 1984). Additionally, the promissory note required the lender to give notice of acceleration. Thus, the Court concluded that it had to enforce the provisions of the promissory note, and the parties were bound by their agreement.

 

Nevertheless, the Supreme Court of Arizona also recognized that a deed of trust "is a creature of statutes." In re Krohn, 203 Ariz. 205, 208 ¶ 9 (2002); see also A.R.S. §§ 33-801 to -821. The deed of trust statutory scheme allows lenders to sell property without judicial action, and "thus strip[s] borrowers of many of the protections available under a mortgage." Krohn, 203 Ariz. at 208 ¶ 10 (emphasis omitted) (quoting Patton v. First Fed. Sav. & Loan Ass'n, 118 Ariz. 473, 477 (1978)). For this reason, courts should interpret a deed of trust consistent with its plain language and in favor of protecting borrowers. Id.; see also Schaeffer v. Chapman, 176 Ariz. 326, 328 (1993).

 

Here, the Court held that the deed of trust's plain language did not create a self-executing or automatic acceleration upon default. Consequently, the debt was not automatically accelerated under the provisions contained in the deed of trust. See Schaeffer, 176 Ariz. at 328

 

Furthermore, the notices of trustee's sale in this case did not refer to or invoke the deed of trust's optional acceleration clause.  Therefore, the Supreme Court of Arizona concluded that recording the notices did not accelerate the borrower's debt.

 

The Court also ruled that the plain language of A.R.S. § 33-813(A), which sets forth the procedure for reinstating a defaulted contract secured by a deed of trust, supports this conclusion. Section 33-813(A) provides that "[i]f . . . all or a portion of a principal sum . . . of the contract . . . secured by a trust deed becomes due or is declared due by reason of a breach or default," the debtor "may reinstate by paying . . . the entire amount then due"—not the entire loan balance—as late as the day before the trustee's sale. Accordingly, the Court held that when a trustee's sale is merely noticed under § 33-813(A), the entire debt is not accelerated because, under the plain language of the statute, a debtor can cure the default and reinstate the contract by paying only the "amount then due" before the trustee's sale is held.

 

Despite this plain language, the borrower cited Baseline Financial Services v. Madison, 229 Ariz. 543 (App. 2012) to urge the Supreme Court of Arizona to create a bright-line rule that would establish that the recording of a notice of trustee's sale accelerates a debt even when the terms of the deed of trust do not require notice of acceleration. The appellate court in Baseline held that, to exercise its option to accelerate the debt, a3 creditor "must undertake some affirmative act to make clear to the debtor it has accelerated the obligation," even if the parties agreed the option to accelerate does not require notice to the debtor. Id. ¶ 8

 

However, the Supreme Court of Arizona held that recording a notice of trustee's sale, by itself, is not an affirmative act that accelerates the debt. The Court's conclusion was bolstered by the fact that the lender did not accelerate the debt by exercising its right to sell the borrower's property and Section 33-813(A)'s plain language that allows the debtor to cure its default and reinstate the contract by paying the entire amount in arrears before the trustee's sale.

 

Accordingly, the Court reversed the trial court's ruling and remanded for entry 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

 

 

 

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Wednesday, September 21, 2022

FYI: 3rd Cir Vacates $3.7MM Attorney Fee Award in Class Action Settlement

The U.S. Court of Appeals for the Third Circuit recently overturned a $3.7 million attorney fee award in a class action settlement.  In so ruling, the Third Circuit held that:

 

* The appellant did not waive its right to appeal due to an agreement for "final evaluation and decision" by a magistrate judge, or due to statements made by counsel for the appellant in a prior court proceeding;

 

* The record relied upon by the lower court in calculating the lodestar fee award was insufficient.

* The record was also insufficient to determine the propriety of a lodestar fee multiplier, if such a multiplier were even appropriate in this case.

 

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

 

This appeal arose from the settlement of a class action lawsuit filed by various name plaintiffs against an automotive manufacturer ( "Company") alleging that the Company knowingly manufactured and sold defective vehicles. Plaintiffs' complaint included various causes of action including alleged violations of the Magnuson-Moss Warranty Act, state consumer fraud and deceptive practices claims.

 

The parties resolved all issues with the exception of the amount of attorney's fees awarded to the plaintiffs' counsel. In an attempt to narrow the issues needed to be resolved by the court, the parties agreed to a "high-low" arrangement. In this arrangement, the plaintiffs agreed to not seek an award of fees that exceed $3.7 million dollars and the Company agreed that attorneys' fees should at least be $1.5 million dollars. The parties jointly agreed to submit the issue of the attorneys' fees to a magistrate judge for ruling.

 

In support of the fee award, the plaintiffs submitted summary charts of the time they committed to the matter and more specific declarations in support of the award of legal fees. The magistrate judge agreed with the plaintiffs, and using the Lodestar analysis awarded Plaintiffs' counsel with $1.9 million in legal fees plus a lodestar multiplier award of $1.8 million dollars which resulted in a total fee award of $3.7 million dollars.

 

The Company appealed.

 

Before examining the specific issues raised by the Company, the Third Circuit first addressed whether or not the Company waived its right to appeal by agreeing to submit the fee issue to the magistrate judge for "final evaluation and decision" or whether waiver occurred due to statements made by counsel for Company in a prior court proceeding.

 

Plaintiffs' counsel argued that after the magistrate judge's ruling counsel for the Company's statement that "We put it in the hands of the Court, and you've made your decision, Judge" effectively barred the Company from seeking an appeal. The Third Circuit disagreed stating that judicial admissions are required to be "unequivocal" or "deliberate, clear, and unambiguous." In re Motors Liquidation Co., 957 F.3d 357, 360 (2d Cir. 2020) The Appellate Court held that the statements made by counsel for the Company merely acknowledged the adverse result of the hearing and did not meet this standard required to constitute a waiver.

 

The Third Circuit also considered whether or not the parties' agreement to submit the issue of attorney's fees to the magistrate judge for a "final evaluation and decision" could be construed as a waiver of their right to appeal. The Third Circuit noted the distinction between prior case precedent which has construed waiver of the right to appeal without requiring an express waiver of appeal. In re Odyssey Contracting Corp., 944 F.3d 483 (3d Cir. 2019).  However, in class action settlement cases the Fifth Circuit and Tenth Circuit have required express waiver of the right to appeal when the parties have stipulated that a court will decide a certain issue.  See In re Deepwater Horizon, 785 F.3d 986, 997 (5th Cir. 2015); Montez v. Hickenlooper, 640 F.3d 1126, 1132 (10th Cir. 2011)). Here, the Third Circuit did not agree that the Company waived its right to appeal and concurred with the Fifth and Tenth Circuit's prior holding requiring an express waiver of the right to appeal.

 

After deciding that the Company did not waive its right to an appeal, the Third Circuit addressed two substantive issues raised by the Company. 

 

In reviewing a fee award, the Third Circuit noted that "so long as it employs correct standards and procedures and makes findings of fact [that are] not clearly erroneous," a trial court has discretion to decide the amount of an award. However, the lower courts must "clearly set forth their reasoning for fee awards so that we will have a sufficient basis to review for abuse of discretion."

 

First, the Company argued that the trial court's fee award was based on insufficient information. Generally, when courts calculate attorney fee awards, they often use the lodestar method. "Lodestar, though, is a term-of-art used by courts to denote an award that is "calculated by multiplying the number of hours [the lawyer] reasonably worked on a client's case by a reasonable hourly billing rate for such services based on the given geographical area, the nature of the services provided, and the experience of the attorney." In re Rite Aid Corp. Sec. Litig., 396 F.3d at 305, 299 (3d Cir. 2005). As the plaintiffs' counsel were seeking to recover legal fees pursuant to a fee shifting statute "any hours to be used in calculating attorneys' fees . . . be detailed with sufficient specificity." Keenan v. City of Philadelphia, 983 F.2d 459, 472 (1992).

 

In support of their fee award, Plaintiffs' counsel submitted summary charts which included three pages of information that summarized their time over a three year period along with declarations by the plaintiff's counsel. However, the Third Circuit ruled this was not sufficient information for the lower court to base its fee award stating "[w]e simply cannot discern from the charts whether certain hours are duplicative (a determination that is particularly crucial here, given that three plaintiffs' firms seek fees for performing the same categories of work) or whether the total hours billed were reasonable for the work performed." Furthermore, the Third Circuit noted that contemporaneous billing records are not required but preferred. As a result, the Third Circuit vacated the trial court's fee award and remanded for further proceedings.

 

Lastly, the Company raised the issue of whether or not the lodestar multiplier awarded by the lower court was proper. The Company argued that "multipliers are inappropriate where fees are based on a fee-shifting statute, determined by a lodestar calculation, as they were here."  However, the Third Circuit noted that the lower court "awarded the attorney's fees pursuant to a contract — the settlement agreement — not pursuant to a statute."

 

Because the Third Circuit ruled that the original fee award should be vacated, the lodestar multiplier was also required to be vacated.  Although the Third Circuit did not specifically opine on the validity of the lodestar multiplier, the Third Circuit recommended that the lower court provide additional reasoning to support its multiplier because the previous ruling did not contain a "sufficient basis to review" its decision to award the fee multiplier. Rite Aid, 396 F.3d at 301.

 

Accordingly, the Third Circuit vacated the judgment of the lower court and remanded for further proceedings.

 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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Saturday, September 17, 2022

FYI: 3rd Cir Grants Motion to Compel Arbitration in Case Where Validity of Assignment of Contract at Issue

The U.S. Court of Appeals for the Third Circuit recently confirmed that parties may contractually delegate questions of arbitrability to the arbitrator and reversed a trial court's order denying a debt buyer's motion to compel arbitration when there was a question about the validity of assignment of the underlying contract.

 

"Arbitration is a contractual obligation," the Third Circuit held. "Thus, parties to a contract may delegate questions of arbitrability to an arbitrator. If parties clearly and unmistakably make this choice, then district courts generally must send threshold questions of arbitrability to arbitration to comply with the parties' agreement."

 

A copy of opinion is available at:  Link to Opinion

 

A non-bank finance company and a borrower entered into a loan contract that included a very broad arbitration agreement including "the enforceability, or the arbitrability of any Claim pursuant to this Agreement, including but not limited to the scope of this Agreement and any defenses to enforcement of the Note or this Agreement."  The arbitration agreement also applied to any assignees or successors of the original parties.

 

Subsequent to the formation of the contract, the finance company assigned the contract to a debt buyer company, which attempted to collect the balance due from the borrower.  At issue was the fact that the loan had an interest rate of 26.91% that would ordinarily run afoul of Pennsylvania's usury law.  The finance company issued the loan under the Consumer Discount Company Act (CDCA) which creates an exception to Pennsylvania's usury limits.  The finance company was licensed by Pennsylvania's Department of Banking to issue CDCA loans, but the debt buyer was not.

 

The borrower filed a class action lawsuit against the debt buyer arguing that the attempt to collect the loan was unlawful because the debt buyer did not have the requisite CDCA license and did not seek approval of the Pennsylvania Department of Banking to purchase his loan and the loans of the putative class.

 

The debt buyer filed a motion to compel arbitration that was originally denied by the trial court in order that the parties could engage in brief discovery to determine whether the debt buyer either had the requisite license or had obtained approval from the Pennsylvania Department of Banking.  After the discovery revealed that the debt buyer did not in fact have either the license or the Department of Banking's blessing, the trial court held that the assignment from the finance company to the debt buyer was invalid and denied the debt buyer's motion to compel arbitration.

 

The Third Circuit had recently held that the question of arbitrability may be delegated to an arbitrator so long as the contract expressly provides for that delegation in MZM Constr. Co., Inc. v. New Jersey Bldg. Labs Statewide Benefit Funds, 974 F.3d 386, 392 (3d Cir. 2020).  Here, the issue was whether the challenge to the legality of an assignment of a loan that is subject to an agreement to arbitrate can also challenge the formation of the arbitration agreement itself.

 

The Third Circuit rejected the borrower's preliminary argument that the debt buyer was not a "party" that could move to compel arbitration under the Federal Arbitration Act (FAA) because the assignment to the debt buyer was invalid.  Rather, the Court held that "party" under the FAA referred to litigants and not parties to the agreement.

 

Moving on to the "threshold arbitrability question" the Third Circuit disagreed with the trial court's finding that it must answer the question of who decides whether the parties must arbitrate: the arbitrator or the court.  The Court discussed the strong federal policy in favor of resolving disputes through arbitration and ensuring that courts will honor and enforce contractual provisions related to arbitration.

 

The trial court and the dissenting Third Circuit judges wanted to make the determination of whether there is an agreement to delegate questions of arbitrability to the arbitrator, but the Third Circuit majority held that this decision is for the arbitrator. There was no dispute that the borrower and the finance company agreed that arbitrability would be determined by the arbitrator. The trial court made the determination that the assignment to the debt buyer was invalid whereas the Third Circuit reasoned that such a determination would render the delegation provision in the arbitration agreement meaningless. The Third Circuit recognized that the arbitrator could later find that the assignment was invalid but also noted that this was not definite as there was a question as to whether the CDCA applied now that the loan was charged off.

 

On the issue of delegating arbitrability to the arbitrator the Third Circuit noted that a party would have to challenge the very formation of the arbitration agreement unless the delegation clause was being separately challenged.  Here, the borrower argued that the challenge to the assignment constituted a challenge to the formation of the agreement to arbitrate but this argument was rejected by the Third Circuit as there was no dispute that the borrower entered into a valid arbitration agreement with the finance company and that the finance company subsequently assigned that agreement to the debt buyer.  Thus, the challenge was really to the validity of the assignment and not the agreement.

 

The Appellate Court further reasoned that "because the parties clearly and unmistakably intended to delegate the issue of enforceability of the contract to an arbitrator, the challenge to the enforceability of the arbitration agreement must be decided by the arbitrator and not the court."

 

Ultimately, the arbitration agreement at issue was very broad and included "any Claim . . . includ[ing] . . . the arbitrability of any Claim . . . and any defenses to enforcement of the Note or this Agreement."  The Third Circuit concluded that the arbitrator will determine these issues and that the District Court's opinion making that determination had to be reversed and thus remanded the case to the District Court with instructions to refer the matter to arbitration.

 

This case is significant for debt buyers and other assignees that have faced challenges from plaintiffs related to assignments in the face of motions to compel arbitration. So long as the contractual provision is clear and unmistakable (as it was here), courts in the Third Circuit will have to refer the question of arbitrability, including the alleged validity of the assignment, to an arbitrator.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

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Thursday, September 15, 2022

FYI: 2nd Cir Rejects Standing, Conflict of Interest, Service Award, and Other Objections to Class Settlement Against Student Loan Servicer

The U.S. Court of Appeals for the Second Circuit recently affirmed a trial court's certification and approval of a class settlement involving claims by student loan borrowers against their loan servicer.

 

In so ruling, the Second Circuit rejected several arguments brought by the objectors who filed this appeal, including:

 

•           Challenges to standing for named plaintiffs and settlement class members who no longer have their loans serviced by the defendant

•           Challenges to the fairness of the class settlement

•           A First Amendment challenge relating to the cy pres award included in the settlement

•           A conflict of interest argument due to the fact that a labor union was paying the plaintiffs' counsel's bills

•           Challenges to the $15,000 service awards granted to the named Plaintiffs

 

A copy of opinion is available at:  Link to Opinion

 

This appeal arose from the settlement of a putative class action lawsuit brought by individuals with active student loans ("Borrowers" or "Plaintiffs") against their student loan servicing company ("Company".)  A group of public servants with active student loans serviced by the Company contacted the Company for assistance repaying their student loans. Unsatisfied with the response from the Company, the Plaintiffs alleged that Company did not "lived up to its obligation to help vulnerable borrowers get on the best possible repayment plan and qualify for Public Service Loan Forgiveness [PLSF]."

 

The Company moved to dismiss. The trial court granted the motion, dismissing all of the Plaintiffs' claims with the exception of a claim brought under New York's General Business Law Section 349 which prohibits "deceptive acts of practices in the conduct of any business … or in the furnishing of any service" in the state.

 

The parties subsequently reached a class settlement resolution that, among other things, required the parties to seek certification of a mandatory nationwide settlement class in which the settlement class members agreed to release all claims in exchange for non-monetary relief. The settlement class members retained the right to file individual lawsuits for monetary relief on a non-class basis including "Aggregate Actions of five or more individuals."

 

In exchange, the Company agreed to implement the following reforms:

 

(1) enhancing internal resources for call-center representatives by, among other things, "updating job aids to clarify that customer service representatives should discuss loan forgiveness including PSLF with borrowers prior to offering forbearance";

(2) updating written communications with borrowers by "creating forms that can be sent via email to borrowers who request additional information about PSLF";

(3) improving its website and chat communications with borrowers by "requiring customer service representatives to look for keywords or phrases that indicate borrowers' possible eligibility for forgiveness programs"; and

(4) training customer service representatives to follow the new practices, and regularly monitoring their calls to ensure compliance.

 

The Company also agreed to contribute $2.25 million dollars in cy pres relief to establish a non-profit that would "provide education and student loan counseling to borrowers employed in public service," as well as $15,000 in service awards for the named plaintiffs.

 

The trial court found certification of the settlement class was proper and approved the settlement. At the settlement hearing, two members of the settlement class objected to the settlement on various grounds. The trial court overruled the objections and found the settlement to be "fair, adequate and reasonable."

 

The two individuals who objected to the class settlement appealed, raising numerous issues.

 

First, the appellant's objected to the fairness of the settlement under Fed. R. Civ. Pro. 23(e). To evaluate the fairness reasonableness of the settlement, the Second Circuit reviewed the nine factors set out in its prior ruling in City of Detroit v. Grinnell Corp., 495  F.2d 448 (2d Cir. 1974). The nine (9) factors are:

 

"(1) the complexity, expense and likely duration of the litigation; (2) the reaction of the class to the settlement; (3) the stage of the proceedings and  the amount of discovery completed; (4) the risks of establishing liability; (5) the risks of establishing damages; (6) the risks of maintaining the class action through the trial; (7) the ability of the defendants to withstand a greater judgment; (8) the range of reasonableness of the settlement fund in light of the best possible recovery; (9) the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of  litigation."

 

On appeal the Second Circuit gives the "the trial judge's views" of these factors "great weight." Grinnell, 495 F.2d at 454. The Second Circuit particularly noted the trial court's "careful" analysis of the nine factors, specifically factors seven, eight, and nine. The Second Circuit held that although the Company could have withstood a greater judgment, the settlement was within the range of reasonableness because there was a risk that there would have been no recovery at all if the case proceeded.

 

As a result, the Second Circuit found the trial court did not abuse its discretion in its application of the nine Grinnell factors in approving the settlement.

 

Appellants separately challenged a $2.5 million cy pres award included in the settlement terms. Appellants argued that the award to the non-profit entity was improper because it did not provide a "direct benefit" to the settlement class members.

 

The Second Circuit disagreed citing In re Google Inc. Street View Elec. Commc'ns Litig., 21 14 F.4th 1102, 1116 (9th Cir. 2021), under which ruling cy pres awards with a "direct and substantial nexus" to the interests of the class may be approved. The Second Circuit agreed with the trial court that the cy pres award contained a direct and substantial nexus to the interest of the class and should be approved. 

 

The appellants also brough a First Amendment challenge on the basis that the cy pres award was a state action that unlawfully compelled speech that violated of the First Amendment. The Court of Appeals also denied this constitutional challenge and ruled the cy pres award was not a state action that implicated the First Amendment. Instead, the Court of Appeals held, the trial court merely reviewed the settlement agreement in order to determine whether it was fair, reasonable, and adequate under Fed. R. Civ. Pro 23(e). Additionally, the Second Circuit noted that the settlement agreement could be enforced by the parties without implicating the First Amendment.

 

Another issue raised by the appellants on appeal was the issue of standing. Some members of the class were no longer using the Company to service their student loans.  Therefore, the appellants argued that the class did not have standing, and the trial court could not certify the settlement class or approve the settlement.

 

The Second Circuit rejected this argument because at least six of the named Plaintiffs continued to have a loan servicing relationship with the Company and the Plaintiffs' complaint plausibly alleged that all named plaintiffs could suffer continued harm by relying on the Company for information regarding the repayment of their loans.  Based on Second Circuit precedent, the Court held that "[i]n a class action, once standing is established for a named plaintiff, standing is established for the entire class."  in Amador v. Andrews 655 F.3d 89, 99 (2d Cir. 2011). Therefore, the Appellate Court rejected the standing challenge.

 

The appellants also raised the issue that there was an improper conflict of interest between Plaintiffs' counsel and the American Federation of Teachers Union ("AFT"), who was paying the legal fees of the Plaintiffs' counsel. Appellants argued that this was a conflict of interest because AFT's interest was not aligned with the members of the class. The "Second Circuit disagreed, noting that AFT's motive was "nothing but admirable", and due to AFT's efforts the class achieved a significant benefit. 

 

Lastly, the appellants raised the issue that the $15,000 service awards granted to the named Plaintiffs were prohibited. In support of this argument, appellants cited two Supreme Court of the United States rulings from the nineteenth century that prohibited service awards to named plaintiffs.  Once again, the Court of Appeals disagreed with the Appellants argument by concluding that the applicable caselaw does not per se prohibit service fee awards to named plaintiffs. See Melito v. Am. Eagle Outfitters, Inc.,(S.D.N.Y. Sep. 8, 2017).

 

After a review of all of the issues raised on appeal, the Second Circuit affirmed the judgment of the trial court. 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

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, September 12, 2022

FYI: 3rd Cir Excludes Home from Bankruptcy When Seller in Installment Sale Contract Obtained Possession Pre-Petition

The U.S. Court of Appeals for the Third Circuit recently held that, because the home seller in an installment sale contract received a judgment of possession before the buyer filed for bankruptcy, the home was not part of the buyer's bankruptcy estate.

 

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

 

The buyer here bought a house through an installment sale contract with the seller. The buyer stopped making payments, and the seller sued. To obtain a second chance, the buyer agreed that if he breached again, the seller could get a judgment for possession and immediately evict him. Another breach would extinguish any rights that the buyer had in the house.

 

Nevertheless, the buyer stopped paying again, and the seller obtained a judgment for possession. The buyer stayed in the house and filed for Chapter 13 bankruptcy. In the bankruptcy petition, the buyer argued that Chapter 13 lets a bankrupt homebuyer "cure[]" a "default" on a mortgage during the bankruptcy process until the home "is sold at a foreclosure sale" 11 U.S.C. § 1322(c)(1). Pennsylvania treats foreclosed installment contracts like mortgages, and therefore the buyer also alleged that said cure gave him an interest in his property.

 

The bankruptcy court agreed with the buyer's theory. The judge reasoned that, because the buyer remained living at the property, he still had an interest in the property subject to the installment contract and a § 1322(c)(1) remedy. Thus, the bankruptcy judge included the buyer's home in his bankruptcy estate. 11 U.S.C. § 541(a)(1).

 

On appeal, the trial court vacated the bankruptcy court's order, reasoning that, because the judgment for possession was entered before the buyer filed for bankruptcy, no § 1322(c)(1) remedy existed and the home was not part of the bankruptcy estate. The buyer timely appealed.

 

Section 1322 of the Bankruptcy Code lets debtors cure defaults only until their homes are "sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law." 11 U.S.C. §1322(c)(1).

However, unlike a defaulted mortgage, a breached installment contract never ends in a foreclosure sale; the property's title stays with the seller until the contract is paid off. Thus, to determine whether a §1322(c)(1) remedy existed here, the Third Circuit needed an analogue of a foreclosure sale applicable to installment contracts.

 

The Third Circuit has adopted the gavel rule to define a "foreclosure sale." Under the gavel rule, although the legal interest passes at delivery of the deed, a property is "sold" as soon as there is a new equitable owner. In re Connors, 497 F.3d 314, 320-21 (3d Cir. 2007). That sale happens when a bidder wins an auction. So a property is "sold at a foreclosure sale" as soon as the gavel falls. Id.

 

In re Connors thus pegged the "foreclosure sale" to the transfer of equitable ownership.  The Court here determined the installment contract analogue of a foreclosure sale is when a default removes the bankrupt homebuyer's equitable title. Under Pennsylvania law, that happens when a judgment for possession is entered against the homebuyer. See In re Butko, 624 B.R. 338, 378–80 (Bankr. W.D. Pa. 2021) (analyzing a state statute akin to §1322(c)(1)).

 

Thus, the Third Circuit concluded that, when the buyer here filed for bankruptcy months after the seller had obtained a judgment for possession, the buyer had already lost his equitable interest in the house and the house was not part of his bankruptcy estate. 11 U.S.C. §541(a)(1). The analogue of a foreclosure sale had passed, and it was too late to cure. And though the buyer still lived in the home, he had no other good-faith claim to possession.

 

Accordingly, the Third Circuit agreed with the trial court's assessment that the buyer's effort to use §1322(c)(1) came too late, and the Court affirmed the trial court's 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

 

 

 

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Friday, September 9, 2022

FYI: 8th Cir Distinguishes "Article III" and "Statutory" Standing in FDCPA "Third Party Disclosure" Case

The U.S. Court of Appeals for the Eighth Circuit recently affirmed the judgment of a trial court and held that non-consumers cannot bring a claim under Section 1692c(b) of the federal Fair Debt Collection Practices Act (FDCPA).

 

The Eighth Circuit also concluded that there was no abuse of discretion in the trial court because the plaintiff, a bankruptcy attorney, failed to follow the applicable court rules. Further, the Court ruled that the attorney confused Article III standing, which implicates subject matter jurisdiction and was undisputed here, with statutory standing.

 

Thus, because the attorney only alleged a violation of Section 1692c(b), and the trial court determined that Section 1692c(b) does not provide the attorney with statutory standing to sue, the Court concluded that judgment as a matter of law was appropriate.

 

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

 

A bankruptcy attorney sued a debt collection agency after he received a letter from the agency identifying him as the attorney for a consumer named in the letter. In fact, the consumer was not the attorney's client and never had been, and the attorney engaged in an extensive search of his files and records to determine this fact. This search cost the attorney time and resources that he could have spent working on matters for actual clients.

 

The attorney brought his claim in Missouri state court under 15 U.S.C. Section 1692c(b), which prohibits a debt collector from contacting a third party about the collection of a debt without the prior consent of the consumer. The agency properly removed the case to federal court.

 

Eventually, the federal trial court granted the agency's motion for judgment on the pleadings finding that the attorney, a non-consumer, lacked standing to bring a cause of action under Section 1692c(b). The attorney asked for leave to replead his claims pursuant to Section 1692d in his response to the debt collector's motion, but he never filed an actual motion for leave to amend his pleadings. The attorney timely appealed the trial court's judgment.

 

As you may recall, Section 1692c(b) concerns third-party communications by debt collectors:

 

Except as provided in section 1692b[4] of this title, without the prior consent of the consumer given directly to the debt collector, or the express permission of a court of competent jurisdiction, or as reasonably necessary to effectuate a postjudgment judicial remedy, a debt collector may not communicate, in connection with the collection of any debt, with any person other than the consumer, his attorney, a consumer reporting agency if otherwise permitted by law, the creditor, the attorney of the creditor, or the attorney of the debt collector.

 

The Eighth Circuit upheld the trial court's ruling that the debt collector violated Section 1692c(b) by contacting the plaintiff without the consumer's prior consent. However, the Court also recognized that the agency's violation of Section 1692c(b) did not guarantee the attorney statutory standing.

 

The plaintiff attorney relied on the language in 15 U.S.C. § 1692k, the FDCPA's general civil liability provision, to support his argument that he had standing to sue for a Section 1692c(b) violation.

 

Section 1692k(a) provides: "Except as otherwise provided by this section, any debt collector who fails to comply with any provision of this subchapter with respect to any person is liable to such person. . ." Focusing on this language, "with respect to any person is liable to such person," the plaintiff attorney argued that because the agency failed to comply with Section 1692c(b) "with respect to" him by sending him the letter, the agency is liable to him.

 

"[A] statutory cause of action extends only to plaintiffs whose interests 'fall within the zone of interests protected by the law invoked.'" Lexmark Int'l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 129 (2014) (quoting Allen v. Wright, 468 U.S. 737, 751 (1984)). The zone-of-interests test requires courts to use "traditional tools of statutory interpretation" to determine "whether a legislatively conferred cause of action encompasses a particular plaintiff's claim." Lexmark, 572 U.S. at 127.

 

Here, the Eighth Circuit reasoned that Section 1692c(b)'s plain language — "without the prior consent of the consumer" — indicates that the attorney is outside the scope of its protection. Any violation of Section 1692c depends on the debt collector making contact without the consumer's prior consent.

 

The Court thus read the plain language of Section 1692c(b) as making clear that the provision's purpose is to protect consumers, not third parties. Cf. Kuntz v. Rodenburg LLP, 838 F.3d 923, 925 n.2 (8th Cir. 2016) (reviewing Section 1692b(3)'s plain language to determine its purpose). Because the purpose of Section 1692c(b) is to protect consumers alone, the Court concluded that the attorney falls outside Section 1692c(b)'s "zone of interests" and thus could not invoke the protection afforded by it.

 

The Eighth Circuit agreed with the attorney that the FDCPA protects more than just consumers in its regulation of debt collectors. Congress intended for the FDCPA to "make collectors behave responsibly towards people with whom they deal." H.R. Rep. No. 95-131, at 8 (1977). However, as the Sixth Circuit recognized in Montgomery v. Huntington Bank, the Court here held that the availability of relief to non-consumers under other sections of the FDCPA does not guarantee non-consumers relief under Section 1692c. 346 F.3d 693, 696-97 (6th Cir. 2003).

 

The Eighth Circuit joined the other circuits that have considered this issue in concluding that non-consumers cannot bring a claim under Section 1692c(b). See, e.g., Todd, 731 F.3d at 737 ("[Section] 1692c restricts debt collectors' communications with and about consumers and is understood to protect only the consumer-debtors themselves."); Montgomery, 346 F.3d at 696 ("[O]nly a 'consumer' has standing to sue for violations under 15 U.S.C. § 1692c." (citation omitted)); Johnson v. Ocwen Loan Servicing, 374 F. App'x 868, 874 (11th Cir. 2010) (per curiam) (holding that plaintiff lacked standing to sue under Section 1692c because she was not a consumer).

 

The plaintiff attorney also argued that the trial court abused its discretion by refusing to grant him leave to amend his pleading. The attorney cited Federal Rule of Civil Procedure 15(a)(2), which provides a party the opportunity to amend its pleadings with the court's leave and notes that "[t]he court should freely give leave when justice so requires." However, the Eighth Circuit noted that the attorney never filed a motion to amend or a memorandum in support of such a motion. Therefore, the Court concluded that there was no abuse of discretion because the attorney failed to follow the applicable procedural rules of the trial court.

 

Lastly, the attorney asserted that, even if the trial court correctly concluded that he lacks standing to sue under Section 1692c(b), the proper action was to remand the case back to Missouri state court. The attorney then cited case law in which the Eighth Circuit instructed trial courts to remand cases originally filed in state court when the plaintiff lacks Article III standing. See Wallace v. ConAgra Foods, Inc., 747 F.3d 1025, 1033 (8th Cir. 2014).

 

However, the Eighth Circuit determined that the attorney confused Article III standing, which implicates subject matter jurisdiction and was undisputed here, with statutory standing, which implicates whether the plaintiff has the right to sue the defendant to redress alleged injuries. Miller v. Redwood Toxicology Lab'y, Inc., 688 F.3d 928, 934 (8th Cir. 2012). Because this appeal concerned statutory standing under Section 1692c(b), the Eighth Circuit held that the trial court's decision that the attorney lacks statutory standing was a ruling on the

merits of his claim, not on the trial court's jurisdiction.

 

Thus, the Eighth Circuit concluded that the attorney only alleged a violation of Section 1692c(b) and the trial court correctly determined that Section 1692c(b) does not provide the attorney with statutory standing to sue. Accordingly, the Eighth Circuit affirmed the trial court's decision to grant judgment as a matter of law.

 

 

 

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, September 3, 2022

FYI: 11th Cir Holds 1-Year Period for Disputing Wire Transfers Cannot Be Modified by Contract

The U.S. Court of Appeals for the Eleventh Circuit recently held that, consistent with rulings as to an identical New York law, the one-year period to make a demand for a refund of a fraudulent wire transfer under Florida Statutes § 670.202 may be not modified by contract.

 

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

 

An alleged bank employee and co-conspirator supposedly stole over $850,000 from two business owners, along with their families and companies (Plaintiffs), by impersonating the alleged victims, changing their passwords, and transferring money from their bank accounts.

 

The Plaintiffs' deposit account agreement with the bank required them to notify the bank "within 30 days of any unauthorized transaction from the account", and to notify the bank "within 10 days of the regular statement date" if they did not receive a monthly bank statement.  A separate treasury management agreement required the Plaintiffs to examine every bank statement and to notify the bank of any unauthorized transfers within 30 days of the statement date.

 

In addition, the parties agreed to use a security protocol for wire transfers that:  (1) required the Plaintiff business to change its password every 30 days; (2) issued the Plaintiff business "a physical security token that created a one-time passcode to use to log in, as a type of dual-factor authentication"; and (3) sent event notifications to alert the business of "potentially suspicious" activity —- like a password change.

 

A bank employee changed the email address for ten of the Plaintiffs' accounts.  In the coming weeks, the bank received a call from a person who was able to answer certain security questions relating to the Plaintiffs' accounts. The next day, a person emailed from the fraudulent email account to set up a physical security token for a wire transfer, and the bank provided the necessary forms.

 

Two different bank employees determined that the signatures on the forms appeared to match those in the bank's records.  Given the correct responses to the security questions, and apparently matching signatures, the bank sent the physical security token to the fraudsters as requested.

 

Later, the fraudsters transferred roughly $850,000 out of the Plaintiffs' bank account by a series of wire transfers.  Before authorizing the first wire transfer, the bank called the telephone number for the accounts to verify the transactions, and the fraudsters answered as if they were the Plaintiffs.

 

The Plaintiffs asserted that they made numerous calls and emails to the bank to no avail.  The Plaintiffs did not regain access to their accounts until roughly six months later, at which time they discovered the theft.

 

The Plaintiffs sued the bank and the alleged thieves in common law contract, tort, and made a statutory demand for repayment under Florida's law requiring refunds of fraudulent wire transfers (Florida Statutes § 670.202).  The Plaintiffs asserted that the Florida law "provided a one-year time period to notify a bank of an unauthorized wire transfer and further provided that the time-period could not be modified by agreement."  In addition, the Plaintiffs asserted "that because they lived abroad and used the bank accounts only sparingly, [the bank] should have designated those accounts as 'higher risk' and applied stricter anti-fraud controls", and that the bank "hadn't complied with its own procedures because it failed to require in-person authentication."

 

At summary judgment, the trial court ruled in favor of the bank, holding that none of the bank's contractual duties were breached, the tort claims were duplicative of the contract claims, the statutory demand was time-barred by the bank's contractual 30-day limitations period, and regardless that the bank had followed commercially reasonable security procedures.

 

The Plaintiffs appealed.  However, on appeal, the bank found additional documents relevant to the case that it had not previously produced.  Because the "late-breaking discovery implicates factual

issues related to the contractual, tort, and statutory repayment claims," the Eleventh Circuit chose to "resolve only a single legal issue and then vacate and remand the rest of the case to the district court for discovery, repleading, and further litigation."

 

Thus, on appeal, the only issue was "whether the one-year period to make a demand for a refund of a fraudulent wire transfer under Florida Statutes § 670.202 may be modified by the parties".

 

Under Florida law, "[i]f a bank accepts a payment order that isn't verified, then the bank "shall refund any payment" and "shall pay interest on the refundable amount." Fla. Stat. § 670.204(1). "There is a penalty for failing to timely report a fraudulent transfer, though: the customer isn't entitled to the interest if the customer failed to exercise ordinary care and to notify the bank of the fraudulent transfer within a reasonable time that cannot exceed 90 days."  Id. 

 

The Florida law provides that a "'reasonable time' may be fixed by agreement," but "'the obligation of a receiving bank to refund payment' may not be varied by agreement." Id. § 670.202(2).

 

In addition, "if a bank receives 'payment from its customer with respect to a payment order'", then "the customer is precluded from asserting that the bank is not entitled to retain the payment unless the customer notifies the bank of the customer's objection to the payment within one year after the notification was received by the customer." Id. § 670.505.

 

Moreover, Chapter 670 -- the chapter of the Florida statutory provisions at issue -- "has a general rule that 'the rights and obligations of a party to a funds transfer may be varied by agreement of the affected party", but this general rule does not apply to when "otherwise provided in this chapter." Id. § 670.501(1).

 

The Eleventh Circuit agreed with the Plaintiffs that the one-year deadline for reporting fraudulent transfers applied, and could not be modified by the parties.

 

The Eleventh Circuit explained that Florida Statutes § 670.204 distinguished between "(1) a fraudulent transfer and (2) the interest that fraudulent transfer would have accumulated had it not been fraudulently transferred."  If a customer fails to notify a bank of a fraudulent transfer within "a reasonable time," which may be set by agreement, "the sole penalty is that the customer loses the interest on the refunded payment." Id. § 670.204(1). However, the Court noted that Florida explicitly did not also authorize modification to a "reasonable" period for the one-year period for reporting fraudulent transfers.

 

The Eleventh Circuit noted that the "New York Court of Appeals and the Second Circuit also determined that the one-year refund period cannot be modified when it was interpreting New York law (which is identical to Florida's)."  See Regatos v. North Fork Bank, 838 N.E.2d 629, 633 (N.Y. 2005); Regatos v. North Fork Bank, 431 F.3d 394, 395 (2d Cir. 2005).

 

Therefore, the Eleventh Circuit reversed the trial court's ruling that the Plaintiffs' Florida statutory claim was time-barred, and as previously noted, vacated and remanded the rest of the case to the trial court for discovery, repleading, and further litigation.

 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

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


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

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars