FYI: WV Fed Ct Holds Common Law Claims Preempted Under HOLA

The U.S. District Court for the Southern District of West Virginia recently held that a borrower's negligence and unconscionable conduct claims against a federal savings bank were preempted by HOLA and its relevant implementing regulation, 12 C.F.R. § 560.2.  A copy of the opinion is attached.

Plaintiff, an elderly homeowner with an existing mortgage on her home, entered into a reverse mortgage through HUD.  After Plaintiff entered into the reverse mortgage agreement, Plaintiff refinanced her reverse mortgage with defendant Home Loan Investment, F.S.B. ("Home Loan").  Home Loan then transferred Plaintiff's loan to defendant Citimortgage, Inc. ("Citimortgage").  Plaintiff subsequently refinanced the mortgage loan from Home Loan with defendant Advanced Financial Services, Inc. ("Advanced").  Plaintiff alleged that she had no recollection of entering into a loan agreement with either Home Loan or Advanced.  When Advanced threatened foreclosure, Plaintiff filed this action, alleging, among other things: 1) negligence of Home Loan: 2) unfair or deceptive acts and practices of Home Loan: 3) unconscionable conduct of all defendants; and 4) assignee liability on the part of Citimortgage.  Defendant Home Loan filed a motion to dismiss for failure to state a claim, asserting that: 1) the Home Owners' Loan Act of 1933 ("HOLA") and its accompanying regulation, 12 C.F.R. § 560.2, preempted all of plaintiff's claims against Home Loan and 2) plaintiff's claims for unfair and deceptive acts and practices and unconscionable conduct were time-barred.  Citimortgage filed a motion to dismiss as well, incorporating all of Home Loan's arguments and this opinion followed.

As you may recall, HOLA granted the Office of Thrift Supervision ("OTS") authority to regulate federal savings and loan banks and under this authority, OTS promulgated a preemption regulation in 12 C.F.R. § 560.2 to provide consistent national regulations and to preempt state laws that burden federal saving and loan banks from freely exercising their federally-granted powers.  In 61 Fed Reg. 50951, OTS outlined the proper analysis for courts to employ when confronted issues of whether a state law is preempted by HOLA and 12 C.F.R. § 560.2, pursuant to which a court is to first determine whether plaintiff's state law claims fall within section 560.2(b) of the regulation, which provides illustrative examples of the types of state laws preempted.  If the answer is yes, plaintiff's claim is preempted, if the answer is no, the court is to then determine whether plaintiff's state law claim affects lending and if so, whether it clearly falls into section 560.2(c) of the regulation, which provides categories of state laws that are not preempted to the extent that they only incidentally affect lending operations.

The court first addressed Home Loan's preemption claims under HOLA and 12 C.F.R. § 560.2, along with Plaintiff's counter-argument that her claims fell within the exceptions to preemption provided for in 12 C.F.R. § 560.2(c).  Noting that the Fourth Circuit has yet to consider the application of section 560.2 to state law claims, for guidance the court looked to decisions from the the Seventh, Eighth and Ninth Circuits, all of which took a similar approach to interpreting section 560.2, which involved looking at the each of a plaintiff's underlying allegations and the specific nature of each state law claim individually to determine whether an allegation is a state-based cause of action or an attempt at regulation preempted by section 560.2(b).  Accordingly, the court looked at each of Plaintiff's claims individually to determine if they were preempted by HOLA. 

The court first looked at Plaintiff's claim that Home Loan was negligent in ignoring Plaintiff's grant of a publicly recorded power of attorney, finding that placing a duty on a federal savings and loan bank to inquire further into the discovery of a power of attorney on the record would place a significant burden upon federal savings and loan banks during the '[p]rocessing, origination, servicing, sale or purchase of, or investment or participation in, mortgages," such that this particular state law claim "more than incidentally affects lending" and would fall into the category of claims that are preempted by section 560.2(b).  The court next looked at Plaintiff's claim that Home Loan was negligent by failing to determine whether Plaintiff could afford the mortgage loan, finding that placing such a burden on a federal savings and loan bank would force such banks to engage in comprehensive calculations of the income and expenditures of mortgage applicants which more than incidentally affects lending and accordingly, this claim was preempted by section 560.2(b) as well.

The court also looked to whether Plaintiff's claim that Home Loan engaged in unconscionable conduct by unconscionable inducement into the mortgage loan was preempted by section 560.2(b), finding that Plaintiff's claims would require federal savings banks to make determinations of, among other things, whether borrowers can afford the loan and whether borrowers will live long enough to repay the loan, and because, according to the court, only the OTS can compel federal savings banks to engage in complex assessments of borrowers' financial and other conditions, "any attempt to impose similar requirements through state law is preempted by HOLA." 

Additionally, the court found that Plaintiff failed to state a claim against Home Loan for unfair/deceptive acts and practices under the West Virginia Consumer Credit and Protection Act, and accordingly these claims were dismissed against Home Loan.  The court also found that Plaintiff's negligence claims were not barred by West Virginia's applicable two-year statute of limitations, but that her unfair/deceptive acts claims and her unconscionable conduct claim were barred by West Virginia's applicable one-year statute of limitations, and accordingly, these claims were dismissed with prejudice.

Finally, as to Citimortgage, the court found that to the extent Plaintiff's claims were dismissed against Home Loan, the claims were also dismissed against Citimortgage, as assignee of Home Loan.

 

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

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FYI: 3rd Cir Rules in Favor of Card Issuer in Unauthorized Charges Case

The U.S. Court of Appeals for the Third Circuit recently ruled in favor of a credit card issuer in an unauthorized charges case, holding that: (1) Section 1643 of TILA does not provide a credit card holder with a right to reimbursement;  (2) because the cardholder vested his personal assistant with apparent authority, his claims under sections 1643 and 1666 of TILA against a credit card company could not stand; and  (3) that Pennsylvania's economic loss doctrine barred the plaintiff's common law negligence claim against a credit card company for not detecting fraudulent charges made by the plaintiff's personal assistant.  A copy of the opinion is attached.

Plaintiff, a credit card holder, disputed over $1 million in paid and unpaid charges on his Chase credit card, which he alleged were fraudulently made by his personal assistant.    Plaintiff's personal assistant had been responsible for, among other things, picking up Plaintiff's bills from a P.O. Box, opening the bills, preparing and presenting checks for Plaintiff to sign and balancing Plaintiff's check book.  Over a period of seven years, Plaintiff's assistant withdrew cash advances from a Chase credit card in Plaintiff's name on a daily basis, while paying the Chase bills using either forged checks or on-line payments from Plaintiff's bank account.  On three occasions, these transactions triggered Chase's fraud detection service, and each time Chase made calls to Plaintiff's home phone, which were either never returned, or returned by an unknown individual, who was able to verify the account information.  When Plaintiff discovered the fraud, he sent a letter to Chase disputing the paid and unpaid charges and subsequently filed this action against Chase for violation of Sections 1643 and 1666 of TILA and for common law negligence.  Plaintiff sought, among other things, damages in the amount of all payments collected by Chase for money misappropriated and fraudulent purchases.  The district court granted Chase's summary judgment motion on all counts and this appeal followed.

The 3rd Circuit affirmed the district court's order granting Chase's motion for summary judgment on all counts.  The Court first addressed the issue of reimbursement and in doing so agreed with Chase's argument that Section 1643 of TILA does not provide a credit card holder with a right to reimbursement.  The Court explained that this conclusion is consistent with the plain language of Section 1643, which places a ceiling on a card issuer's ability to sue a cardholder to recover fraudulent purchases but does not enlarge a card issuer's liability or give the cardholder a right to reimbursement. 

The Court next addressed Plaintiff's claims under Sections 1643 and 1666, both of which the Court found were dependent on whether Plaintiff had vested his personal assistant with apparent authority to make charges to the Chase account.  The Court looked to decisions of the Second and D.C. Circuits for guidance as to the application of the test for apparent authority, ultimately adopting the D.C. Circuit's more narrow interpretation that "[a]pparent authority is power to bind a principal which the principal has not actually granted but which he leads persons with whom his agent deals to believe that he has granted," noting that "by identifying apparent authority as a limitation on the cardholder's protections under § 1643 [of TILA], Congress recognized that the cardholder is oftentimes in the best position to identify fraud committed by its employees."  As applied to this case, the Court found that Plaintiff's negligent omissions, particularly his failure to ever review his bank statement or exercise any oversight over his employee "led Chase to reasonably believe that the fraudulent charges were authorized," given that it was reasonable for Chase to believe that a prudent business person would oversee his employees and Chase reasonably relied on the continuous payment of the fraudulent charges.  Accordingly, the Court held that Plaintiff had vested his assistant with apparent authority to use his Chase credit card, thus barring his Section 1643 and 1666 claims.

Finally, the Court found that Pennsylvania's economic loss doctrine, which provides that no cause of action exists for negligence that results solely in economic damages unaccompanied by physical or property damage, barred Plaintiff's negligence claim. The Court rejected Plaintiff's argument that a narrow exception to the economic loss doctrine for those who engage in supplying information to others for pecuniary gain should apply in this case, ultimately holding that the Pennsylvania Supreme Court would likely hold that the economic loss doctrine would act as a bar to Plaintiff's negligence claim, given that Plaintiff's damages were economic damages unaccompanied by physical or property damage and that Chase is not in the business of providing Plaintiff with information for pecuniary gain.  In so holding, the Court noted that "Pennsylvania public policy weighs against imposing liability because cardholders, and not card issuers, are in the best position to prevent employees with access to security information from committing fraud."

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

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FYI: Ill App Ct Says State Law Does Not Extend TILA Rescission Deadline in Foreclosure

An Illinois appellate court recently confirmed that the right to rescind under TILA expires three years after the closing of a mortgage loan, notwithstanding a state law rule limiting statute of limitations defenses for counterclaim.  A copy of the opinion is attached.

 

The borrower entered into an adjustable rate note and mortgage with Option One Mortgage Corporation in 2002.  The borrower claimed that the HUD settlement statement from closing indicated $3,720 in fees that did not appear on the federal Truth in Lending Disclosure statement.  The mortgage was assigned to Wells Fargo N.A., as trustee after closing.  In April 2007, Wells Fargo initiated foreclosure proceedings.  The borrower's affirmative defense, counterclaim, and third-party complaint, filed in January 2008, all sought rescission under TILA.  The lower court granted the foreclosing plaintiff's motion to dismiss the TILA rescission counterclaim and affirmative defense, finding that the borrower's "right of rescission had expired." 

 

On appeal, the appellate court agreed with the lower court.  At issue in this case was 15 U.S.C. 1635(f), which states that a borrower's "right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of property, whichever occurs first," and 15 U.S.C. 1635(i)(3), which allows that "[n]othing in this subsection affects a consumer's right of rescission in recoupment under State law."   

 

Trying to take advantage of a perceived lack of clarity in the U.S. Supreme Court's Beach v. Ocwen ruling, the borrower argued that, under 15 U.S.C. 1635(i)(3), her "right of rescission in recoupment under State law survives," and that her rescission claim was timely because, under Illinois law, a defendant may plead a counterclaim otherwise barred by the statute of limitations under certain circumstances. 

 

However, the appellate court held that "section 1635(f) is a statute of repose, not a statute of limitations," and "TILA permits no federal right to rescind, defensively or otherwise, after the 3-year period of § 1635(f) has run."  The appellate court held that the borrower would have to point to an Illinois law that provides a rescission in recoupment right in this action.  However, the borrower, "failed to identify a statute, case, or any other source of Illinois law that might afford her a right of rescission in recoupment."  Therefore, the appellate court determined that the borrower's claim was barred because it was not filed within three years of obtaining the mortgage loan, and Illinois law provides no independent right of rescission in recoupment.

 

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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FYI: Sup Ct Says Non-Compliance w/ Rule 7001(6) Did Not Void Discharge of Student Loan Debt

The United States Supreme Court recently held that a bankruptcy court’s confirmation of a Chapter 13 plan that proposed a discharge of interest on student loan debt was not void under Fed R. Bank. P. 60(b)(4), even though in confirming the plan and ultimately discharging the student loan interest, the bankruptcy court failed to comply with the requirements of the Federal Bankruptcy Code and the Federal Rules of Bankruptcy Procedure that an undue hardship determination in an adversary proceeding must be made in order to discharge student loan debt.  A copy of the opinion is attached.  

As you may recall, student loan debt is only dischargeable in bankruptcy if failure to discharge the debt would impose an “undue hardship” on the debtor.  Pursuant to Fed. R. Bank. P. 7001(6), bankruptcy courts are required to make this undue hardship determination in an adversary proceeding. 

In this case, a Chapter 13 debtor filed a plan with the Bankruptcy Court that proposed a discharge of interest on his student loan debt, but in doing so, failed to initiate an adversary proceeding as required by Rule 7001(6).  The Bankruptcy Court confirmed the plan without holding an adversary proceeding.  The student loan creditor received notice of the plan, but did not object to it, did not file an appeal after confirmation of the plan without an adversary proceeding and only sought to collect the ultimately discharged student loan interest three years after it was discharged.  The debtor then filed a motion with the Bankruptcy Court asking it to enforce its discharge order, and the student loan creditor filed a motion asking the Bankruptcy Court to rule that its order confirming the plan was void under Fed. R. Bank. P. 60(b)(4).

The Bankruptcy Court rejected the creditor’s arguments that (1) the discharge was inconsistent with the Bankruptcy Code and (2) its due process rights had been violated because the debtor failed to serve it with the summons and complaint required for an adversary proceeding.  The District Court reversed, and the Ninth Circuit reversed the District Court, agreeing with the Bankruptcy Court’s holding.  The Supreme Court granted certiorari to resolve a disagreement among the Courts of Appeals as to whether an order that confirms the discharge of a student loan debt in the absence of an undue hardship finding or an adversary proceeding, or both, is a void judgment under Fed. R. Bank P. 60(b)(4).

The Supreme Court agreed that the confirmation order was not void under Rule 60(b)(4).  Justice Thomas delivered the unanimous opinion of the Court.

In affirming the Ninth Circuit’s holding that the confirmation order was not void, the Supreme Court looked to Fed. R. Bank. P. 60(b)(4), which provides an exception to the finality of a bankruptcy court’s order confirming a debtor’s proposed plan if the final judgment is “void.”  The Court explained that Rule 60(b)(4) applies “only in the rare instance” where a judgment is premised on: 1) a certain type of jurisdictional error or 2) a violation of due process that deprives a party of notice or the opportunity to be heard, and the error in this case did not fall into either of those categories.

As for jurisdictional defects, relief is generally only granted for exceptional cases where there was not even an “arguable basis” for jurisdiction.  The Court found no such “arguable basis” inquiry necessary in this case, given that the undue hardship requirement is a precondition, not a limitation and the requirement derives from the Bankruptcy Rules, which are procedural, not jurisdictional.  As to whether there was a violation of due process that deprived the creditor to be heard in this case, the Court found that the debtor’s failure to serve the creditor with a summons and complaint deprived the creditor of a right granted by a procedural rule, but did not amount to a violation of its constitutional right to due process, given that the creditor received actual notice of the filing and contents of the plan. 

The Court also disagreed with the creditor’s attempts to expand the universe of judgment defects that support Rule 60(b)(4) relief, more specifically, an attempt to argue that the confirmation order was void because the bankruptcy court lacked statutory authority to confirm the plan absent a finding of undue hardship.  The Court explained that the bankruptcy court made a legal error in failing to find undue hardship before confirming the debtor’s plan, but that the order remained binding on the creditor because the creditor had notice of the error and failed to timely appeal and Rule 60(b)(4) “does not provide a license for litigants to sleep on their rights.”

Finally, the Court found that the Ninth Circuit erred in holding that a bankruptcy court must confirm a plan proposing the discharge of a student loan debt without an undue hardship determination in an adversary proceeding unless the creditor timely raises a specific objection, noting that this was “a step too far,” and finding that the Bankruptcy Code makes plain that bankruptcy courts have the authority to direct a debtor to conform his or her plan to the Code. 

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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FYI: 7th Cir Affirms Dismissal of 1983 Claim Against Bank for Freezing SSI Funds

The U.S. Court of Appeals for the Seventh Circuit recently affirmed the dismissal of a suit brought by judgment debtors against their bank under 42 U.S.C. § 1983 for freezing their Social Security benefits, because the debtors failed to allege that the bank had taken any action under color of state law.  A copy of the opinion is attached.

 

Debtors' judgment creditor served a judgment enforcement proceeding seeking to discover any assets of the Debtors in possession of their bank, Charter One Bank ("Charter One").  Pursuant to the citation, Charter One froze the assets in Debtors' checking account, including Social Security benefits which were deposited monthly, despite the statement in the citation explicitly exempting such funds from being frozen. 

 

On various occasions, Debtors asked that their Social Security funds be released, but Charter One refused and, as a result, several of Debtors' checks and bank drafts were retuned due to non-sufficient funds.  Eighteen days after the freeze was imposed, a hearing was held on the matter in which the citation was dismissed, and the freeze subsequently ended by Charter One.

 

Debtors brought suit against Charter One in federal court alleging various violations by Charter One.  Specifically, Debtors sought damages under 42 U.S.C § 1983, alleging that Charter One was "acting under color of state law when, without a hearing, they froze (and later refused to release) Social Security funds they knew were exempt from legal process under 42 U.S.C. § 407(a) [(governing assignment of Social Security benefits)], actions [Debtors] say violated § 407(a) and the Due Process Clause of the Fourteenth Amendment."

 

The District Court granted Charter One's motion to dismiss, finding that Debtors failed to state a claim for which relief could be granted, and the Seventh Circuit affirmed.

 

The Seventh Circuit began by explaining that, to state a claim under § 1983, a "plaintiff must sufficiently allege that (1) a person acting under color of state law (2) deprived him of a right, privilege, or immunity secured by the Constitution or laws of the United States."  And, when a § 1983 action is brought against a private party, two conditions must be met to satisfy the first prong: (1) "the alleged deprivation of federal rights must have been caused by the exercise of a right or privilege created by the state, a rule of conduct imposed by the state, or someone for whom the state is responsible;" and (2) "the private party must be a person who may fairly be said  to be a state actor." 

 

Turning to the first condition, the Court found that Debtors' complaint failed "to allege that Charter One was following the directives of the citations (or any other state-imposed rule of conduct) when it froze Social Security funds it knew were exempt."  Moreover, the citation's language was derived directly from Illinois statute and "required Charter One to restrain only the [Debtors'] non-exempt funds and expressly listed Social Security benefits as exempt assets…"  Accordingly, "any action taken by Charter One against funds it knew were exempt was not in accordance with the citation and Illinois law."  Therefore, because Debtors "did not allege any action by Charter One that was taken under color of state law, Charter One may not be held liable under § 1983."

 

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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