FYI: 4th Cir Rules in Favor of Mortgage Servicer on False Reporting and on Unfair Debt Collection Practices Allegations

The U.S. Court of Appeals for the Fourth Circuit recently affirmed a district court's order granting summary judgment in favor of a mortgage servicer on claims of false reporting of credit information and unfair debt collection practices, holding that:  (1) the borrower's FCRA claims were barred by the two-year statute of limitations;  (2) the borrower's state law claims were preempted by 15 U.S.C. 1681t(b)(1)(F);  (3) the borrower failed to present evidence that the servicer acted with the malice or willful intent to injure, as required under 15 U.S.C. 1681h(e); and  (4) the borrower's unfair debt collection practices claim failed because she failed to prove proximate causation, an element of her state law claim. 

A copy of the opinion is available at:  http://pacer.ca4.uscourts.gov/opinion.pdf/081851.P.pdf

A borrower brought claims against Washington Mutual Bank ("WaMu") for false reporting of credit information and unfair debt collection practices.  She alleged that, as a result of the allegedly false reporting, she was denied credit on multiple occasions, including a business loan that she claims would have allowed her to start a business that would have made $3,000,000 in annual profits.  She also alleged violations of unfair debt collection practices provisions of the North Carolina Unfair and Deceptive Trade Practices Act.

She filed her claims outside of FCRA's two-year statute of limitations, and the Fourth Circuit upheld the lower court's ruling that the borrower's FCRA claims were time-barred.  

The Fourth Circuit also upheld the lower court's ruling that several of the borrower's state law claims were preempted by 15 U.S.C. § 1681t(b)(1)(F).  Noting that the borrower's state-law allegations concerned WaMu's reporting of allegedly inaccurate credit information to consumer reporting agencies, an area regulated in great detail under §§ 1681s-2(a)-(b), the Court held that the borrower "seeks to use § 75-1.1 as a 'requirement or prohibition' under North Carolina law concerning 'subject matter regulated under section 1681s-2,' it is squarely preempted by the plain language of the FCRA."  

Although the borrower argued her state law claims were authorized by 15 U.S.C. § 1681h(e), the Fourth Circuit upheld the lower court ruling that she failed to present evidence that WaMu acted with the "malice or willful intent to injure" necessary to benefit from this section.  According to the Fourth Circuit, "[r]uling otherwise would require us to broaden the definition of 'malice' to include mere negligence, and such a holding would vitiate both the FCRA's statute of limitations and its preemption provision."

The Fourth Circuit also upheld the lower court's ruling that the borrower's state-law unfair collection practice claim failed because the borrower failed to prove proximate causation, an element of her state law claim.

 

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: 5th Cir Says Differing State Laws Precluded Class Certification Against FNMA

The U.S. Court of Appeals for the Fifth Circuit recently affirmed a district court's denial of class certification in an alleged breach of fiduciary case against Fannie Mae, holding that differences in state law precluded class certification.

 

A copy of the opinion is available at:
http://www.ca5.uscourts.gov/opinions/pub/09/09-40997-CV0.wpd.pdf
 
The key issue in the case was whether Fannie Mae was in a fiduciary relationship with the plaintiff mortgagors.  The plaintiffs were mortgagors whose mortgages for low-income multi-family housing were held or serviced by Fannie Mae and insured by HUD.  HUD required mortgagors participating in its insurance program to sign a Regulatory Agreement.  The Agreement mandated that mortgagors establish two funds with the mortgagee: 1) a Reserve Fund and 2) a Residual Fund.  The Reserve Fund provision of the Agreement specifically contemplated that those funds may take the form of cash deposit or guaranteed investment.  Fannie Mae gave mortgagors certain investment options for both their Reserve Fund and Residual Fund moneys.  Some mortgagors chose to retain the liquidity and not invest any such funds.  The "uninvested funds" were the subject of this lawsuit.  Between 1969 and 1995, Fannie Mae invested "uninvested funds" in the overnight federal funds marketplace, retaining the interest proceeds for itself.

 

Plaintiffs allege that Fannie Mae tried to discourage mortgagor investments in order that Fannie Mae could maximize the earning potential of its federal funds investments.  Plaintiffs sued Fannie Mae on behalf of themselves and those similarly situated for breach of fiduciary duty and also sought relief under an unjust enrichment theory.  

 

The district court found that the class satisfied the requirements of Rule 23(a) but denied certification under Rule 23(b).   The Fifth Circuit Court of Appeals reviewed the denial of class certification for abuse of discretion, and reviewed de novo the question of whether the district court applied the proper local law.

 

The Fifth Circuit applied the analysis in the Restatement (Second) of Conflict of Laws and found that the intention to create a trust (such as giving property to the trustee) manifested outside of Washington D.C. for many of the plaintiffs.  As a result, there was no single jurisdictional law that could be applied to the class as a whole.

 

The Fifth Circuit also turned to the Restatement for guidance to examine the unjust enrichment claims.  The Court concluded there were not sufficient contacts to apply D.C. law to each plaintiff's unjust enrichment claim, and found that D.C. law should not be applied to all putative plaintiff class members in either the fiduciary law or the unjust enrichment claims.

 

The Court found that determining whether a trust or fiduciary relationship has been created (and breached) was not as uniform as the plaintiffs' proposed.  Although the basic principles of fiduciary law may be the same throughout the country, the nuances vary and those nuances affect the outcome of claims.  The Court noted that the plaintiffs failed to demonstrate that state law variations do not preclude the certification of a nationwide class. 

 

The Fifth Circuit held that a court may certify a class under (b)(1)(A) if the court finds that separate lawsuits could create inconsistent results that would establish incompatible standards of conduct for the party opposing the class.  The court did not find that separate actions would result in incompatible standards of conduct for Fannie Mae. 

 

Most importantly, the Fifth Circuit found that various state laws apply to different class members.  Therefore, varying judgments with respect to plaintiffs' injunctive requests would not be "incompatible" but rather would reflect diverse state fiduciary law.  The Court noted that the Supreme Court has held that Rule 23(b)(1)(A) encompasses cases in which the defendant is obliged by law to treat members of the class alike.    

 

Thus, the Fifth Circuit Court of Appeals determined that the district court did not abuse its discretion in failing to certify under either Rule 23(b)(3), Rule 23(b)(1)(a), or Rule 23(b)(2) and the denial of class certification was affirmed.

 

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: 9th Cir Says CA Law Does Not Allow Independent/Substantive Cause of Action for Piercing Corporate Veil

The United States Court of Appeals for the Ninth Circuit recently reversed and remanded a district court's ruling that a claim against a corporation's shareholders on an alter ego theory belongs solely to the corporation's bankruptcy trustee.  The Ninth Circuit remanded the case for further proceedings based on its holding that California law does not recognize an independent claim or cause of action that will allow a corporation and its shareholders to be treated as alter egos for purposes of all the corporation's debts.

 

A copy of the opinion is available at: http://www.ca9.uscourts.gov/datastore/opinions/2010/10/21/09-16020.pdf

 

A California corporation breached a contract to deliver almonds to plaintiff, who then brought and prevailed in a foreign arbitration against the California corporation.  The plaintiff then sued the California corporation's shareholders in California state court to collect the arbitration award, seeking to pierce the corporate veil with an alter ego theory.  The plaintiff did not sue the California corporation, which had petitioned for bankruptcy soon after the arbitration.  The shareholders removed the suit to federal court and filed a motion to dismiss, arguing that the plaintiff's claim would harm not just the debtor corporation but all creditors and thus the claim was exclusively the property of the bankruptcy trustee.  The district court agreed and the motion to dismiss the suit was granted.  This appeal followed.

 

The issue on appeal was whether the claims against the shareholders could be brought by the plaintiff, a creditor of the corporation, or only by the bankruptcy trustee. 

 

The Ninth Circuit noted that the shareholders' motion to dismiss was based on a theory that the plaintiff was improperly trying to sue for general conduct that harmed all creditors, and the alter ego claim was therefore a general claim that belonged to the bankruptcy trustee.  Accordingly, the Court first examined whether such an independent alter ego claim exists under California law. 

 

In so doing, the Court ruled that a bankruptcy court and a bankruptcy appellate panel in the Ninth Circuit had misread a California appellate court opinion to imply a general alter ego claim.  Instead, the Ninth Circuit read the same California appellate opinion as simply an attempt to distinguish rights of action that are property brought by the trustee from those that are not. 

 

Ultimately, the Court held that California law does not recognize an independent claim or cause of action that will allow a corporation and its shareholders to be treated as alter egos for purposes of all the corporation's debts.  However, the Court noted that California recognizes the ability of creditors to pierce the corporate veil as a procedural matter.  Accordingly, the Court remanded the case for further proceedings.

 

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: 7th Cir Upholds Dismissal of TILA Rescission Claim for Failure to Allege "Material" Discrepancies

The United States Court of Appeals for the Seventh Circuit recently affirmed the district court's dismissal of a complaint for failure to state a claim for rescission of a mortgage loan under TILA where the borrowers failed to respond to the defendant assignee's contention that none of the misstatements identified in the complaint were "material," as required by TILA for mortgage rescission.  A copy of the opinion is attached.

 

Plaintiff borrowers filed suit in federal district court seeking rescission of their home mortgage under TILA based on contention that ten charges on their loan were inaccurate.  Defendant assignee of the originating lender moved to dismiss the complaint for failure to state a claim, arguing that none of the alleged errors in the disclosure statements related to a "material" disclosure, as required for rescission more than 3 days after closing.  The district court granted the defendant's motion to dismiss and this appeal followed.

 

In upholding the district court's dismissal of the complaint, the Court looked to Regulation Z in interpreting TILA and its disclosure requirements.  Because plaintiffs sought rescission of their loan outside the three-day period allowed under TILA, they were required to demonstrated that the lender failed to make a required "material" disclosure.  As you may recall, Section 226.18 of Regulation Z identifies eighteen categories of information to be disclosed to borrowers in credit transactions, several of which (including the finance charge, the APR and the amount financed, as well as the disclosures required under 15 U.S.C. 1639) are considered "material" under 15 U.S.C. 1602(u).

 

In this case, the Court noted that although the borrowers pointed to ten allegedly misstated charges, they "never explain how the ten allegedly misstated charges are related to the finance charge, the APR, and the amount financed."  In fact, the Court pointed to the defendant assignee's brief, which explained "why none of the ten allegedly inaccurate charges identified in the [plaintiff's] complaint are part of the APR, finance charge, or amount financed."  Rather, the discrepancies raised related to, among other things, disbursement of loan proceeds and discrepancy in the disclosure or property taxes.   The Court also pointed to plaintiff's failure to respond to defendant's arguments in their response brief, holding that "[t]heir failure to respond to U.S. Bank's arguments leads us also to conclude that they have waived any argument that the allegedly erroneous TILA disclosures are in fact 'material.'"

 

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