FYI: 11th Cir Says No CAFA Subject Matter Jurisdiction Unless At Least One Putative Class Member Meets $75k Amount in Controversy

The U.S. Court of Appeals for the Eleventh Circuit recently held that the lower court lacked subject matter jurisdiction to hear Plaintiff's class action suit originated in that court and brought under the Class Action Fairness Act ("CAFA") where the plaintiff failed to allege that at least one class member had an amount in controversy greater than $75,000.  A copy of the opinion is attached. 

           

The plaintiff filed a putative class action in federal court against DirectTV, Inc. ("DirectTV"), alleging that DirectTV violated Georgia state common law by charging fees to subscribers when they canceled their subscriptions early.  Plaintiff invoked the district court's subject matter jurisdiction under 28 U.S.C. §1332(d)(2), which incorporates CAFA's provisions.  DirectTV moved the district court to compel Plaintiff to submit to arbitration pursuant to the subscriber agreements and, alternatively, to dismiss the claim for damages for failure to state a claim.

 

The district court denied DirectTV's motion to compel arbitration, but granted its motion to dismiss for failure to state a claim.  Upon DirectTV's appeal, the Eleventh Circuit held that the lower court lacked subject matter jurisdiction under CAFA, vacated its order, and remanded with instructions to dismiss the case.

 

According to the Eleventh Circuit, a federal court has subject matter jurisdiction over a class action brought under CAFA and originated in federal court if:  1) the "amount in controversy [is] over $5,000,000, obtained by aggregating the claims of the individual class members;  2) there is "minimal diversity" between the parties;  3) the class action is "filed under Federal Rule of Civil Procedure 23";  4) the plaintiff alleges "that there are 100 or more plaintiffs within the proposed class(es)";  and 5) at least one of the plaintiffs alleges "an amount in controversy that satisfies the current congressional requirement for diversity jurisdiction provided in 28 U.S.C. §1332(a)."

           

Addressing the last requirement, the Court reasoned that, while 28 U.S.C. §1332(d) "may have altered § 1332(a) to require only minimal diversity in CAFA actions…there is no evidence of congressional intent in § 1332(d) to obviate § 1332(a)'s $ 75,000 requirement as to at least one plaintiff." 

 

In the case before it, the Eleventh Circuit held that the plaintiff's complaint adequately alleged the first four elements of a class action under CAFA.  However, no class member alleged an amount in controversy over $75,000 and therefore the plaintiff lacked a "basis for invoking the federal courts' subject matter jurisdiction under CAFA."

 

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.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

 

FYI: Cal App Ct Upholds Dismissal of Elder Abuse Claims

A California appellate court recently upheld the dismissal of allegations against a bank that had extended a mortgage loan to plaintiff's elderly and disabled father, and allowed plaintiff's father to make several fraudulent money transfers from his bank account, claiming: (1) negligence per se based on the bank's alleged failure to report under reporting requirements of elder abuse statues; (2) breach of fiduciary duty or negligence in connection with the loan and fund transfers; and (3) for financial abuse of an elder under elder abuse statutes .  A copy of the opinion is attached. 

In this alleged elder abuse lawsuit, the father of the plaintiff had obtained a mortgage loan from the defendant bank after he was found to have a form of dementia.  Plaintiff's father also fell victim to various scams and transferred large amounts of money from accounts he held with the defendant bank.  Plaintiff brought this action against the bank, alleging that the mortgage loan was "predatory" and constituted financial abuse of an elder, and also claiming that, based on elder abuse statutes, her father suffered injury due to the bank's failure to report suspected financial abuse in connection with the fund transfers.  The trial court dismissed the complaint, and this appeal followed.

The appellate court affirmed the trial court's decision that plaintiff's claims predicated on elder abuse statutes failed as a matter of law.  The court first noted that changes made after the plaintiff's father's death to the section of the elder abuse statutes which governs mandatory reporting by banks and financial institutions (CA Welf. & Inst. Code s. 15630.1) were inapplicable to her claims.  The court further held that the plaintiff's complaint did not state a claim against defendant bank under section 15630.1. 

 

The court pointed to a subdivision of that section which bars civil actions under the section by private individuals, and further states that the section does not “limit, expand, or otherwise modify any civil liability or remedy that may exist under this or any other law."  The court held that this subdivision, by its plain language, precludes any expansion of tort liability, and rejected the plaintiff's suggestions that imposition of the reporting duty enlarged the bank's exposure to potential tort claims based on other theories, such as negligence per se. 

The court further held that the plaintiff did not state a claim for breach of fiduciary duty or negligence under common law principles applicable to banks, citing another California appellate opinion which held that "as a general rule, a financial institution owes no duty of care to a borrower when the institution's involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money." 

 

Additionally, the court noted that the relationship between a bank and its depositor is not fiduciary in character.  The court found that the complaint was properly dismissed because plaintiff failed to allege facts to suggest that the defendant undertook a special fiduciary duty to plaintiff's father, that the bank knew of the supposed fraud on her father, and also failed to allege an adequate basis for rescission of a contract.

Finally, the court held that the plaintiff did not state a claim for financial abuse of an elder under the elder abuse statutes, as she failed to allege that the bank acted in bad faith, or with a fraudulent intent and further failed to allege that the bank knew of the schemes that victimized her father.

 

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.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

 

FYI: 9th Cir Says No PMSI in Negative Equity for "910 Vehicle," Split with Other Circuits

The U.S. Court of Appeals for the Ninth Circuit recently affirmed the decision of the Bankruptcy Appellate Panel that a creditor does not have a purchase money security interest in the negative equity of a vehicle traded in at the time of a new vehicle purchase.  A copy of the opinion is attached. 

The debtor in a Chapter 13 bankruptcy case brought in California bought a car within 910 days of her bankruptcy filing.  As part of the transaction, the debtor traded in her old car, in which she had approximately $7,000 of negative equity (meaning that she owed more on the old car then what it was worth).  The car dealership paid off the balance on the trade-in car and added the negative equity to the total amount financed.  When the debtor filed for bankruptcy protection under Chapter 13, she still owed on the car loan, which included the negative equity from the trade-in car.  The debtor proposed bifurcating the claim into secured and unsecured portions.  The holder of the debt objected, claiming that it had a purchase money security interest (“PMSI”) in the entire amount of the claim, including the negative equity.  The bankruptcy court held that the debt holder did not have a PMSI in the portion of the loan related to the negative equity charges, allowing part of the loan to have a non-purchase money status, with the remainder covered by a PMSI.  The Bankruptcy Appellate Court affirmed the bankruptcy court decision and this appeal followed.

In a decision that creates a circuit split with eight other circuits, the Ninth Circuit affirmed the ruling of the Bankruptcy Appellate Court, declining to adopt the reasoning of its sister circuits.  In doing so, the Ninth Circuit looked to the “hanging paragraph” provision of the Bankruptcy Code.  By way of background, and as you may recall, in 2005, Congress amended Chapter 13 of the Bankruptcy Code by adding the "hanging paragraph" (so called because the paragraph is unnumbered), which prevents the bifurcation of a secured claim potentially into secured and unsecured portions when the creditor has a "purchase money security interest" in a motor vehicle acquired for the debtor’s personal use within 910 days of the debtor’s bank­ruptcy filing.  At issue in this case is whether there was a PMSI in the negative equity in the trade-in vehicle. 

The Court noted that the key issue of the appeal is the meaning of “price” for the purposes of a PMSI, given that a purchase money obligation, as defined in the Uniform Commercial Code, is an “obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used” and the Official Comment of the UCC defines “price” to include “obligations for expenses incurred in connection with acquiring rights in the collateral, sales taxes, duties, finance charges, interest … and other similar obligations.”

The Court disagreed with the debt owner’s claim that the negative equity is an “expense,” rather, the Court noted that it is the payment of an antecedent debt, not “an expense incurred in buying the new vehicle.”  Further, the Court found that the transactions of (1) combining a new vehicle purchase with (2) negative equity from an old vehicle as a “package deal” are not closely connected so as to satisfy the requirements of the UCC Official Comment and negative equity cannot call under the other similar obligations category of “price” as noted in the Official Comment.

The Court also disagreed with the debt owner’s claim that its position was in harmony with federal bankruptcy law, finding that the debt owner’s position is not consistent with the Bankruptcy Code, as under the Code, “security interests are given preferential treatment to the extent that the obligation relates to the receipt of truly new value, not just old obligations that have been repackaged.” Finally, the Court disagreed with the debt owner’s argument that the California Automobile Sales Finance Act should be used in determining the “price of the collateral” and found that any conclusion in favor of the debt owner based on the phrase “value given to enable the debtor…” would be erroneous.    

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.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

 

FYI: Goldman Sachs Settles "Subprime Securitizer" Lawsuit with SEC for $550M

The Securities and Exchange Commission announced that Goldman Sachs will pay $550 million, and reform its business practices, in order to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse.

 

A copy of Goldman's consent to the settlement is available at:

http://www.sec.gov/litigation/litreleases/2010/consent-pr2010-123.pdf

 

A copy of the proposed final judgment against Goldman is available at:

http://www.sec.gov/litigation/litreleases/2010/judgment-pr2010-123.pdf

In its complaint, the SEC alleged that Goldman misstated and omitted key facts regarding a synthetic collateralized debt obligation (CDO) it marketed that hinged on the performance of subprime residential mortgage-backed securities. Goldman allegedly failed to disclose to investors material information about the CDO (known as ABACUS 2007-AC1), particularly the role that hedge fund Paulson & Co. Inc. played in the portfolio selection process and the fact that Paulson had taken a short position against the CDO.

In agreeing to the SEC's largest-ever penalty paid by a Wall Street firm, Goldman also acknowledged that its marketing materials for the subprime product contained incomplete information.  However, Goldman agreed to settle the SEC's charges without admitting or denying the allegations, by consenting to the entry of a final judgment that provides for a permanent injunction from violations of the antifraud provisions of the Securities Act of 1933.  Of the $550 million to be paid by Goldman in the settlement, $250 million would be returned to harmed investors through a Fair Fund distribution and $300 million would be paid to the U.S. Treasury.

The landmark settlement also requires remedial action by Goldman in its review and approval of offerings of certain mortgage securities, including the role and responsibilities of internal legal counsel, compliance personnel, and outside counsel in the review of written marketing materials for such offerings. The settlement also requires additional education and training of Goldman employees in this area of the firm's business. In the settlement, Goldman acknowledged that it is presently conducting a comprehensive, firm-wide review of its business standards, which the SEC has taken into account in connection with the settlement of this matter.

The settlement is subject to approval by the Honorable Barbara S. Jones, of the U.S. District Court for the Southern District of New York.  If approved, the settlement would resolve only the SEC's enforcement action against Goldman related to the ABACUS 2007-AC1 CDO, but not any other past, current or future SEC investigations against the firm, and not the SEC's litigation against Fabrice Tourre, a vice president at Goldman.

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.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

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From: Ralph T. Wutscher [mailto:rwutscher@krw-llp.com]
Sent: Thursday, June 24, 2010 3:49 PM
To: Ralph Wutscher
Cc: SoCalOffice; dcoffice@kahrlwutscherllp.com; chicagooffice@kahrlwutscherllp.com
Subject: FYI: Morgan Stanley Settles "Subprime Securitizer" Dispute with MA AG for $102M

Massachusetts Attorney General Martha Coakley announced that Morgan Stanley agreed to pay $102 million to affected Massachusetts homeowners and the Commonwealth following an investigation by the Attorney General’s Office into Morgan’s role in the securitization and financing of Massachusetts subprime loans.  A copy of the Assurance of Discontinuance is attached.

Pursuant to the settlement, Morgan will provide pay $58 million to more than 1000 Massachusetts homeowners, $23 million to the Massachusetts Pension Fund for investment losses, and $19.5 million in taxpayer money to the Commonwealth’s General Fund.

As a result of a lengthy investigation, the Attorney General’s Office alleged that Morgan entered the subprime arena in Massachusetts by offering funding to retail lenders that specialized in loans to less-qualified borrowers.  Morgan provided billions of dollars to subprime lender New Century Mortgage, which alleged used Morgan funds to target lower-income borrowers and to supposedly lure them into loans that "consumers predictably could not afford to pay."  The MA AG claimed that the loans often were "unsustainable because of payment shock or poor underwriting," and that "borrowers would have to refinance in the short term or face foreclosure."  Some Morgan Stanley investment bankers allegedly referred to New Century as Morgan’s “partner” in the subprime lending business.

In addition to the $102 million in financial compensation, the settlement also requires Morgan to change its business practices going forward and to provide information and materials needed in the Attorney General’s ongoing investigation of the subprime securitization marketplace.

Today’s settlement is the latest in a series of actions brought by the Attorney General’s Office in response to the economic and lending crisis.  AG Coakley’s Office has been a national leader in bringing actions on behalf of homeowners and taxpayers against companies relating to their role in the subprime marketplace, including Goldman Sachs, Fremont, and Option One (see our updates, below).

Allegations in the Assurance of Discontinuance (attached) include that Morgan provided warehouse lending to New Century, and after New Century made the loans, Morgan would place the loans into a securitization pool, and then act as the underwriter selling investments backed by the subprime loans in the pool.

As part of this securitization process, Morgan employed third party due diligence providers to review the quality of New Century’s loans.  During this review, Morgan allegedly learned:

• New Century allegedly repeatedly violated the Massachusetts Division of Banks’ “borrower best interest” standard when it made subprime loans, and thus made loans that violated Massachusetts law.
• New Century allegedly calculated the Debt to Income (DTI) ratio for borrowers based only on the initial “teaser rate” for the loans, rather than the fully indexed interest rate that would kick in after the teaser period expired.  When calculated using the fully indexed rate, almost 40% of the loans failed Morgan’s own internal underwriting standards for whether the borrower could pay them.
• The large majority of New Century loans supposedly failed the basic test of their own underwriting guidelines and could only be approved as “exception” loans, which required the presence of “compensating factors.”  Sample reviews by Morgan vendors showed that many of these loans violated the guidelines in several different ways, and about one-third of the randomly sampled loans lacked compensating factors to justify the extension of credit.
• Appraisals used by New Century to value the collateral backing the loans (the homes) allegedly were often significantly different from BPOs that Morgan obtained to check New Century’s figures.  
• New Century originated a large number of “stated income loans.”  In fact, a Morgan employee allegedly noted that New Century overused stated income loans to the point of abuse.

All of these due diligence discoveries underscored the riskiness and/or uncertainty relating to New Century’s loans and whether borrowers would be able to pay them back.  According to the MA AG, it is illegal under Massachusetts law to make loans without reasonably assessing a borrower’s ability to pay the loan according to its terms.    

In late 2005 and early 2006, Morgan began rejecting greater numbers of New Century loans as a result of the due diligence findings.  After New Century suggested it would shift its business elsewhere, Morgan allegedly began again to include a wider range of New Century loans in its purchase pools.  A Morgan Stanley senior banker allegedly purchased loans that Morgan’s own internal due diligence team initially rejected, and Morgan allegedly waived vendor concerns regarding a substantial number of the New Century loans identified as having material problems. 

Moreover, as New Century finally spiraled towards bankruptcy, its risky lending practices exposed to the public, Morgan Stanley continued to lend money to the subprime originator even when other banks would no longer provide New Century with cash.  During early March 2007, Morgan Stanley provided millions of dollars that the AG claims "New Century used directly to finance a last round of unsustainable predatory loans in Massachusetts." 

Throughout 2006 and the first half 2007,  Morgan continued to securitize New Century’s predatory subprime loans, and sold investments to two Massachusetts state entities—the Massachusetts Pension Reserves Investment Trust (PRIT) and the Massachusetts Municipal Depository Trust (MMDT).  According to the AG, this "led to state funds being used to fuel predatory subprime lending, and to significant losses for PRIT and the MMDT."

Under the terms of today’s settlement, Morgan will make the following payments and conduct reforms:

• Pay $58 Million in principal reduction and related relief to over 1000 Massachusetts subprime borrowers
• $19.5 Million payment to the Commonwealth
• $23.4 Million to PRIT and the MMDT
• $2 Million to non-profit groups throughout the Commonwealth to assist victims of subprime foreclosure
• Not fund unfair subprime loans in Massachusetts
• Make additional disclosures to Massachusetts investors regarding its future subprime securitizations
• Provide documents and information to the Attorney General’s Office in its ongoing review of industry subprime securitization practices.

 

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.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

 

 

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From: Ralph T. Wutscher [mailto:rwutscher@krw-llp.com]
Sent: Tuesday, May 12, 2009 11:28 AM
To: Ralph T. Wutscher
Subject: FYI: Goldman Settles "Subprime Securitizer" Dispute with MA AG for $50M

Attorney General Martha Coakley’s Office announced that it has reached a $50M settlement agreement with Goldman Sachs & Company, including substantial principal write-downs and refinancing options for loans owned by Goldman and/or serviced by Litton.  Copies of the settlement agreement, and a diagram explaining the write-down process on 1st and 2nd lien loans, are attached.

 

The Attorney General’s Office has been investigating the role of investment banks in the origination and securitization of subprime loans in Massachusetts.  In order to resolve any potential claims stemming from the Attorney General’s investigation, Goldman has agreed to provide loan restructuring valued at approximately $50 million to Massachusetts subprime borrowers.  The loan restructuring program is designed to enable borrowers to replace problem loans with new, more affordable loans that take into account the current value of their properties. Goldman has also agreed to make a $10 million payment to the Commonwealth, and will continue to cooperate with the Attorney General in her ongoing investigation of industry practices. 

Under the settlement, Goldman has agreed to significant principal write-downs to allow Massachusetts homeowners to refinance or sell their homes. For homeowners with loans held by Goldman entities, Goldman has agreed to reduce the principal of first mortgages by up to 25-35% and second mortgages by 50% or more.  Borrowers whose first mortgage is significantly delinquent will be required to make a reasonable monthly loan payment while seeking refinancing or until they sell their home. If after six months, a borrower is still unable to find financing or sell his or her home, Goldman will reduce the principal owed on the existing loan to assist the borrower. Additionally, for loans not currently held by Goldman, but which are serviced by Goldman’s affiliated servicing company, Litton Loan Servicing LP, Goldman has agreed to assist qualified borrowers with finding refinancing options and other alternatives to foreclosure.  

The Attorney General’s Office states that it began its investigation into the securitization of subprime loans in December 2007, and that it has focused on a variety of industry practices involved in the issuance and securitization of subprime loans to Massachusetts consumers.  The MA AG's Office also states that it is investigating whether securitizers may have:

• facilitated the origination of "unfair" loans under Massachusetts law;
• failed to ascertain whether loans purchased from originators complied with the originators' stated  underwriting guidelines;
• failed to take sufficient steps to avoid placing problem loans in securitization pools;
• been aware of allegedly unfair or problem loans;
• failed to correct inaccurate information in securitization trustee reports concerning repurchases of loans; and
• failed to make available to potential investors certain information concerning allegedly unfair or problem loans, including information obtained during loan diligence and the pre-securitization process, as well as information concerning their practices in making repurchase claims relating to loans both in and out of securitizations.

The Goldman settlement and the Attorney General’s investigation into securitizers reflect the latest aspect of the Office’s comprehensive enforcement approach to combating subprime lending and the foreclosure crisis.  This latest inquiry concerns the role of securitizers—those who bundled mortgage loans and sold them as mortgage-backed securities or other investment vehicles.   

The Attorney General’s Office has sued Fremont Investment & Loan, as well as Option One and its parent H&R Block, alleging unfair, deceptive and predatory lending practices, and obtained preliminary injunctions against those companies.  (See our prior updates below.)  The Office also promulgated new consumer protection regulations, effective in January 2008, governing mortgage lenders and brokers. 

For a map of Massachusetts illustrating locations of loans covered by this agreement, please see:

http://www.mass.gov/Cago/docs/press/2009_05_11_goldman_map.pdf

Let me know if you have any questions.  Thanks.

 

Ralph T. Wutscher
Kahrl Wutscher LLP
105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

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

RWutscher@kahrlwutscherllp.com

http://www.krw-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.

 

 

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From: Ralph T. Wutscher [mailto:rwutscher@krw-llp.com]
Sent: Thursday, December 11, 2008 7:18 PM
To: Ralph T. Wutscher
Subject: FYI: MA Sup Ct Affirms Lower Court's Injunction in AG Litigation Against Fremont

The Supreme Judicial Court of Massachusetts affirmed the lower court's grant of a preliminary injunction against the company formerly known as Fremont Investment & Loan.  A copy of the opinion is attached.

 

As discussed in our prior updates below, Fremont appealed a preliminary injunction in favor of the Massachusetts Attorney General that restricts Fremont's ability to foreclose on residential mortgage loans with certain features the judge described a "presumptively unfair." 

 

The Massachusetts high court disagreed with Fremont's argument that:  (1) the lower court retroactively and in an ex post facto fashion applied new rules or standards for defining what is "unfair" under Massachusetts's UDAP statute;  (2) the lower court improperly expended the reach of the state's "predatory lending" statute to reach loans not covered by that statute;  (3) the lower court improperly ignored that the loans at issue were permissible, valid and legal when made; and  (4) the lower court improperly ignored the effects of its ruling on mortgage loan pricing and the availability of credit when considering public policy implications.

 

Let me know if you have any questions.  Thanks.

 

Ralph T. Wutscher
Kahrl Wutscher LLP
105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

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

RWutscher@krw-llp.com

http://www.krw-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.

 

 

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From: Ralph T. Wutscher [mailto:rwutscher@krw-llp.com]
Sent: Tuesday, December 02, 2008 11:38 AM
To: Ralph T. Wutscher
Subject: FYI: Court Rules in MA AG Litigation Against Option One

The Massachusetts Attorney General brought an action against Option One Mortgage Corporation and its affiliates similar to that which she brought against Fremont (see our updates below).  The same court granted the Attorney General's motion for a preliminary injunction in the Option One litigation.  A copy of the opinion is attached.

 

Referencing its earlier Fremont decision, the court held as follows:

 

In this Court's Fremont Decision, the Court found that it is an unfair act in violation of G. L. c. 93 A, section 2 for lender to issue an adjustable rate home mortgage loan secured by the borrower's principal dwelling that the lender reasonably should expect the borrower would be unable to afford to pay or be able to refinance once the introductory period ends unless the fair market value of the home has increased at the close of the introductory period. In that decision, the Court characterized this as structural unfairness. In this decision, this Court characterizes it as reckless disregard of the risk of foreclosure.

 

However, in its Option One decision, the court changed the criteria for structural unfairness.  Here, the court lowered the introductory rate criterion from 3% to 2%, explaining the revision as follows:

 

In blunter terms, most mortgage loans that fell into delinquency were so carelessly underwritten that the borrower could not afford them even before the payment shock kicked in. Therefore, this Court will revise the second criterion by including all loans with an introductory or "teaser" rate for the initial period that is at least 2 percent lower than the fully indexed rate, and will eliminate this criterion entirely for all loans with a debt-to-income ratio of 55 percent or above.

 

The court also lowered the loan-to-value criterion from 100 percent to 97 percent, with the following explanation:

 

…for all practical purposes, a loan meeting the other three criteria with a loan-to-value ratio of 97 percent will only be able to be refinanced by a loan with a loan-to-value ratio equal to or greater than 100 percent, which will almost certainly not be available to a lender with a 50 percent debt-to-income ratio. Therefore, this Court provides the fourth criterion to require a loan-to-value ratio of 97 percent or a substantial prepayment penalty or a prepayment penalty that extends beyond the introductory period.

 

As with Fremont, the court did not find any evidence of pervasive deception or other wrongdoing on the part of the defendants in the Option One litigation.  Nevertheless, it again found that the Attorney General was likely to prevail at trial on the issue of structural unfairness, and consequently, granted the Attorney General's motion for a preliminary injunction.  Likewise, the Court's preliminary injunction imposed the same review procedure as in the Fremont decision. 

 

Apparently, the court revised the criteria set forth in the Fremont decision upon being informed that only a very small fraction of loans in dispute would have met all four of the criteria imposed against Fremont.  The court felt compelled to change the criteria in order to enjoin the foreclosure of a greater population of loans.

 

Let me know if you have any questions.  Thanks.

 

Ralph T. Wutscher
Kahrl Wutscher LLP
105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

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

RWutscher@krw-llp.com

http://www.krw-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.

 

 

---

From: Ralph T. Wutscher [mailto:rwutscher@rw-llp.com]
Sent: Monday, August 04, 2008 7:12 PM
To: Ralph T. Wutscher
Subject: FYI: MA Sup Ct Requests Amicus Briefs in AG vs. Fremont Litigation

The Supreme Court of Massachusetts announced that it is soliciting amicus briefs in Fremont's appeal of the appellate court's and trial court's decisions.  (See our updates below).

 

Amicus submissions are due on or before September 22, 2008.

 

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher
Roberts Wutscher, LLP
105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

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

RWutscher@rw-llp.com

http://www.rw-llp.com

 

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From: Ralph T. Wutscher [mailto:rwutscher@rw-llp.com]
Sent: Thursday, May 08, 2008 6:05 PM
To: Ralph T. Wutscher (rwutscher@rw-llp.com)
Subject: FYI: MA App Ct Upholds Prelimin Injunction on Foreclosures of Certain "Presumptively Unfair" Loans

A Massachusetts appellate court judge upheld the preliminary injunction entered against Fremont Investment and Loan, preventing Fremont from initiating or advancing foreclosures on loans that are deemed "presumptively unfair" without prior approval from the court.  A copy of the appellate opinion is attached.

 

The appellate court noted that "[i]t has long been understood that a factor to be considered in determining whether a practice should be deemed unfair is whether it is 'within at least the penumbra of some common-law, statutory, or other established concept of unfairness." 

 

Moreover, the court also noted that "[t]he fact that particular conduct is permitted by statute or by common law principles should be considered, but it is not dispositive on the question of unfairness."  According to the appellate court, because the loan terms at issue (see our update below) were not explicitly authorized under state or federal law, Fremont could not qualify for the exemption under the Massachusetts UDAP statute for conduct permitted under state or federal law.

 

The appellate decision here was rendered by a single appellate court justice, under an "abuse of discretion" standard of review.  Fremont was granted leave to move for full panel review by May 15, 2008.

 

Let me know if you have any questions.  Thanks.

 

Ralph T. Wutscher
Roberts Wutscher, LLP
10 S. LaSalle Street, Suite 3500
Chicago, Illinois  60603
(312) 551-9320  Direct Dial
(866) 581-9302  Facsimile
(312) 493-0874  Mobile
RWutscher@rw-llp.com
http://www.rw-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.

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From: Ralph T. Wutscher [mailto:rwutscher@rw-llp.com]
Sent: Wednesday, February 27, 2008 5:11 PM
To: Ralph T. Wutscher
Subject: FYI: MA Judge Preliminarily Enjoins Foreclosures on Certain "Presumptively Unfair" Loans

The Massachusetts Attorney General obtained a preliminary injunction in a case against Fremont General and Fremont Investment and Loan, preliminarily enjoining Fremont from initiating or advancing foreclosures on loans that are “presumptively unfair.”  A copy of the order is attached.

 

The court held that a loan is “presumptively unfair” if it possesses the following characteristics:

• The loan is an adjustable rate mortgages with an introductory period of three years or less:
• The loan has an introductory or “teaser” interest rate that is at least three percent lower than the fully-indexed rate;
• The borrower has a debt-to-income ratio that would have exceeded 50% (not based on stated-income application representations, but upon other evidence of income), calculated using the fully-indexed rate; and
• Fremont extended 100% financing or the loan has a substantial prepayment penalty or penalty that lasts beyond the introductory period.

Under the terms of the injunction, Fremont must provide the Attorney General’s Office with at least a 30-day notice of all foreclosures it intends to initiate for the approximately 2,200 loans that Fremont still owns and services, and allow the Attorney General an opportunity to object to the foreclosure going forward.  If Fremont has issued a loan that is considered “presumptively unfair,” and the borrower occupies the property as his or her principal dwelling, the Attorney General has 45-days to object to the foreclosure. 

 After the notice and objection process, Fremont may only proceed with a foreclosure to which the Attorney General objects if Fremont files a request with the Court, and the Court reviews the matter and agrees that a foreclose is appropriate.  In considering whether to allow the foreclosure, the court will consider, among other factors, whether the loan is unfair and whether Fremont has taken reasonable steps to work out the loan and avoid foreclosure.  The preliminary injunction does not release borrowers from their monthly mortgage obligations. 

Importantly, the court stated that the evidence showed that Fremont was the victim of misrepresentations on stated-income loan applications, and did not encourage or tolerate such misrepresentations.  Specifically, there was no evidence that:  (1) Fremont knew of any of the alleged misrepresentations of income on the 50 or 60 stated-income loans at issue; or   (2) Fremont recklessly supervised its brokers by continuing to do business with them after Fremont learned that the brokers had a pattern or practice of inflating the borrower's income on loan applications.  Likewise, the court also found no evidence that Fremont had ever misrepresented the terms of the loan to any borrower.

However, even though there was no indication that any of the loans were "high cost mortgage loans" under Massachusetts law, the court found that the Attorney General's theory of "unfairness" fell under the "penumbra" of the interests sought to be protected under the Massachusetts high-cost mortgage loan statute.

 

Also, the court emphasized that "borrowers who have received presumptively unfair loans from Fremont should not interpret this preliminary injunction to mean that they have been released from their obligation to repay these loans.  Borrowers share with Fremont the responsibility for having entered into a mortgage loan they cannot repay.  The spirit of this decision is simply that Fremont, having [allegedly] helped borrowers get into this mess, now must take reasonable steps to help them get out of it."

 

Let me know if you have any questions, or would like to discuss.  Thanks.

 

Ralph T. Wutscher
Roberts Wutscher, LLP
10 S. LaSalle Street, Suite 3500
Chicago, Illinois  60603
(312) 551-9320  Direct Dial
(866) 581-9302  Facsimile
(312) 493-0874  Mobile
RWutscher@rw-llp.com
http://www.rw-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.