FYI: Ill App Says Default Interest Rate Did Not Violate State Usury Statute

An Illinois appellate court recently held that an interest after default provision in a note providing the terms of a loan secured by an apartment complex did not violate the Illinois Interest Act's limits on late payment penalties and was also not an unenforceable penalty.  A copy of the opinion is attached.

Defendant borrower refinanced a mortgage loan with plaintiff, which was secured by an apartment complex.  Defendant defaulted on the loan and subsequently filed affirmative defenses and counterclaims when plaintiff sought to foreclose, alleging, among other things, that the interest after default provision of the note providing the terms of the loan violated Section 4.1a(f) of Illinois' Interest Act and constituted an unenforceable penalty.  The circuit court granted plaintiff's motion to strike and dismiss defendant's affirmative defenses and counterclaim and this appeal followed. 

In affirming the circuit court's holding, the appellate court first addressed whether § 4.1a(f) of the Interest Act was applicable to the default interest provision at issue in this case.  In making this determination, the court characterized "default interest" as "a vehicle of liquidated damages as opposed to penalties," noting that "default interest serves to balance the risk of lending to a defaulted borrower."  The court found this distinction significant, given that § 4.1a(f) of the Interest Act, in the court's view, only dealt with penalties. The court further found that the default interest provision was not a "delinquency charge" on an "installment in default," as defined in § 4.1a(f), given that the default was on the entire loan, not just an installment of the loan.  Accordingly the court found that the circuit court did not err in holding that § 4.12(f) was inapplicable to the default provision in this case.

The court further agreed with the circuit court's holding that the default interest provision, which provided for an increased interest rate of 7.250 percent over the Index upon default, was not an unlawful penalty, again noting that the default provision was essentially a liquidated damages clause, which the court found to be reasonable and therefore enforceable and not an unlawful penalty. 

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: 2nd Cir Denies Appeal of Remand Order in Mortgage Securities Class Action

The U.S. Court of Appeals for the Second Circuit recently held that the Class Action Fairness Act of 2005 (“CAFA”) barred appellate review of an order remanding to state court a securities class action that was brought pursuant to the terms of a pooling and servicing agreement.  A copy of the opinion is attached.

 

Plaintiffs in this case were holders of certificates issued by securitized trusts which held mortgage loans originated by the lending subsidiary of Countrywide Financial Corporation (“Countrywide”).  Plaintiffs brought this putative class in New York state court against Countrywide and several of its affiliates (“Defendants”), seeking declaratory judgments that Countrywide’s loan servicing subsidiary was required to repurchase loans under that were held by the securitized trust and modified pursuant to a multistate settlement.  Defendants removed the action to federal court, claiming diversity jurisdiction under CAFA’s minimal diversity provision.  The district court granted Plaintiff’s motion to remand. 

 

The Second Circuit dismissed Defendants' appeal of the order to remand for lack of appellate jurisdiction.  In doing so, the court explained that although CAFA expanded the general rule that an order to remand is not appealable, it also set forth certain circumstances under which appellate review of such orders is barred, including a claim related to rights and duties created to or pursuant to any security (as defined by the Securities Act of 1933).  The court read this together with an identical provision of CAFA which provides that there is no CAFA minimal diversity jurisdiction for claims related to rights and duties created to or pursuant to any security (as defined by the Securities Act of 1933), noting that if the district court lacked CAFA diversity jurisdiction, then the appellate court similarly would lack jurisdiction to review a remand order.  

 

The court explained that the “key distinction between suits that were immune from removal under CAFA and those that were not is that immune suits sought to enforce the rights of the securities ‘holders as holders,’” and in this case, plaintiffs’ asserted right to force Defendants to repurchase the loan arose from the deal instrument themselves, not from an extrinsic provision of state law, such that plaintiffs sought enforcement of their rights as holders rather than purchasers of securities.  The court also rejected Defendants’ arguments that the legislative history and purpose of CAFA supported removal, ultimately holding that, because plaintiffs’ sole claim “relates to the rights, duties . . . and obligations relating to or created by or pursuant to [a] security,” plaintiffs’ suit fell within the exception to CAFA diversity jurisdiction and accordingly, the court was required to dismiss the appeal because it lacked jurisdiction to hear it.

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: US Sup Ct Holds Legal Error is Not FDCPA "Bona Fide Error"

The United States Supreme Court recently held that the bona fide error defense to a violation of the Fair Debt Collection Practices Act ("FDCPA") does not apply when the violation results from a debt collector's mistaken interpretation of the legal requirements of the FDCPA.  A copy of the opinion is attached.   

 

A law firm's foreclosure complaint included a Notice served on a debtor stating that her debt would be assumed to be valid unless she disputed it, in writing.  After the foreclosure action was withdrawn, the debtor filed a lawsuit for damages under the FDCPA, alleging that the law firm had violated §1692g of the FDCPA by requiring that she dispute the debt in writing.  The district court found that the law firm had violated §1692g but that it was shielded from liability by the FDCPA's "bona fide error" defense in §1692k(c), because the violation was not intentional, resulted from a bona fide error and occurred despite the maintenance of procedures reasonably adapted to avoid any such error.  The Sixth Circuit affirmed, holding that §1692k(c) "extends to mistakes of law."  The Supreme Court granted certiorari in light of a conflict among the circuits regarding the scope of the FDCPA's bona fide error defense.

In a 7-2 decision, the Supreme Court reversed the judgment of the Sixth Circuit.  Justice Sotomayor delivered the opinion of the Court, joined by Justices Roberts, Stevens, Thomas, Ginsburg, and Breyer.  Justice Scalia concurred in part and concurred in the judgment.  Justices Kennedy and Alito dissented.  Because the question was not raised on appeal, the Court did not address whether inclusion of an "in writing" requirement in a notice violates §1692g.

In declining to adopt an expansive reading of the bona fide error defense to include all types of error, including mistakes of law, the Court first pointed out the long recognized maxim that "ignorance of the law will not excuse any person, either civilly or criminally," such that an act may be "intentional" for purposes of civil liability, even if the actor lacked actual knowledge that its conduct violated the law.  In support of this holding, the Court pointed to other circumstances, such as in the Federal Trade Commission Act, where Congress had more clearly demonstrated its intent to provide a mistake of law defense to civil liability by including explicit language to that effect, which is not present in §1692k(c).   

 

The Court found additional support for its holding in the context and history of the FDCPA, noting a protection separate from the bona fide error defense in §1692k(e) of the FDCPA for "any act done or omitted in good faith in conformity with any advisory opinion of the [FTC]" and reasoning that debt collectors would rarely need to consult the FTC if the bona fide error defense applied also to mistakes of law.  The Court also noted that Congress copied verbatim the pertinent portions of TILA's bona fide error defense into the FDCPA, after there Federal Courts of Appeals had held that TILA's bona fide error defense only referred to clerical errors (before TILA's bona fide error defense was amended).   

 

Finally, the Court disagreed with the argument that its interpretation of the bona fide error defense would have "unworkable practical consequences" and result in "a flood of lawsuits," which, in the dissent's view would create "an irreconcilable conflict between an attorney's personal financial interest and her ethical obligation of zealous advocacy on behalf of a client."  The Court reasoned that the FDCPA contains provisions that expressly guard against abusive lawsuits and attorney liability and that "it is hardly unique" to impose some constraint on a lawyer's advocacy.   

 

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: 6th Cir BAP Says Borrower Has Derivative Standing to Pursue Lien Avoidance Adversary Action

The Bankruptcy Appellate Panel of the United States District Court for the Sixth Circuit recently held that: 1) a debtor had standing to bring an adversary proceeding to avoid a lien on her manufactured home and 2) the lien on the debtor's home was properly avoided when the lien was perfected during the 90 day preference period provided for in 11 U.S.C. § 547.  A copy of the opinion is attached.

A debtor obtained a loan from a lender, which was secured by a mortgage on certain real property.  The debtor used the proceeds of the loan to purchase a manufactured home which she placed on the mortgaged property.  The lender initiated foreclosure proceedings when the debtor subsequently defaulted on the mortgage, asserting a security interest in both the real property and the manufactured home, despite not having noted its lien on the certificate of title of the home.  The state court ordered that the manufactured home be deemed converted to real property for purposes of sale of the property.

When the debtor subsequently filed for Chapter 13 relief, the trustee and the debtor opposed the lender's motion for relief from stay seeking to sell the mortgaged property.  The trustee did not file an adversary proceeding, but the debtor filed an adversary complaint, pursuant to a court order allowing her to do so if the trustee did not pursue an adversary proceeding.  The parties filed cross motions for summary judgment, and the bankruptcy court granted the debtor's motion for summary judgment, holding that the debtor had standing to bring the adversary proceeding and that the lien was properly avoided.  This appeal followed.

The court upheld the bankruptcy court's ruling in favor of the debtor on both the standing and avoidance counts.  As to the issue of the debtor's standing to seek to avoid the lender's lien, the court held that the bankruptcy court properly granted the debtor derivative standing to pursue lien avoidance under 11 U.S.C. §§ 544 and 547. The court noted that this decision was based on, among other things, the fact that a Chapter 13 trustee often lacks the resources to pursue meritorious avoidance claims. 

The court also found that the debtor could properly avoid the lien under 11 U.S.C. § 547.  In holding that all of the required elements of a preference existed in this case, the court reasoned that the lien was perfected on the date of the state court judgment (not the date of the mortgage or the date of the filing of a lis pendens, as argued by the lender), which was within the 90 day preference period pursuant to Section 547, thus making the lien avoidable. 

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

 

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.