Saturday, February 19, 2011

FYI: 7th Cir Says FDCPA Debt Collector May Contact Debtor's Attorney After Payment Refusal, Communications-Stop Demand

The United States Court of Appeals for the Seventh Circuit recently held that the FDCPA does not prevent a debt collector from communicating with a debtor's attorney after the debtor refuses payment and requests that the debt collector cease communications with the debtor.  A copy of the opinion is attached. 

After receiving demands from a debt collector for payment of a debt, a debtor retained a lawyer, who sent the debt collector a letter stating that the debtor refused to pay and lacked assets that the creditor could seize. The letter concluded: "we request that you cease all further collection activities and direct all future communications to our office." 

The debt collector refrained from calling or writing to the debtor, but did call the lawyer with a request for payment.  The debtor then filed a lawsuit asserting violation of 15 U.S.C. §1692c(c) of the federal Fair Debt Collection Practices Act ("FDCPA").  The debtor alleged that by contacting the attorney the debt collector violated the FDCPA's prohibition on contacting a debtor after he refuses to pay a debt.  The district court found in favor of the debt collector, holding that the debtor's lawyer was not a "consumer" as defined in the FDCPA and therefore that communications with him were not prohibited.

As you may recall, in relevant portion, §1692c(c) provides that where "a consumer notifies a debt collector in writing that the consumer refuses to pay a debt or that the consumer wishes the debt collector to cease further communication with the consumer" then "the debt collector shall not communicate further with the consumer" except under certain limited circumstances.  Section 1692c(d) defines the word "consumer" for the purpose of §1692c.  It provides that "consumer" includes "consumer's spouse, parent (if the consumer is a minor), guardian, executor, or administrator." 

The debtor argued that whether or not a debtor's lawyer was "the consumer," the lawyer was the debtor's agent, and therefore that communications to the lawyer should be treated as communications to the debtor. The debtor noted that 15 U.S.C. §1692a(2) defines "communication" as "the conveying of information regarding a debt directly or indirectly to any person through any medium."  The debtor then reasoned that anything a debt collector says to a debtor's lawyer is an indirect communication to the debtor. The debtor therefore argued that once a debtor invokes his rights under §1692c(c), any communication to either the debtor or his lawyer is forbidden, unless it comes within one of the exceptions of the FDCPA.  The Court noted that at least one district judge had accepted the argument made by debtor.  However, the Court also noted that no appellate court had addressed the issue. 

In rejecting the debtor's argument, the Seventh Circuit held that subsections (a) and (b) of §1692c provided guidance as to whether a debtor's attorney was intended to be included in the definition of "consumer."  Subsections (a) and (b) provide as follows in relevant portion:



"(a)    Communication with the consumer generally

"Without the prior consent of the consumer given directly to the debt collector or the express permission of a court of competent jurisdiction, a debt collector may not communicate with a consumer in connection with the collection of any debt—

* * *

"(2)    if the debt collector knows the consumer is represented by an attorney with respect to such debt and has knowledge of, or can readily ascertain, such attorney's name and address, unless the attorney fails to respond within a reasonable period of time to a communication from the debt collector or unless the attorney consents to direct communication with the consumer; or

        * * *

"(b)    Communication with third parties

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



The Court stated that the debtor's "argument makes hash of [subsections (a) and (b)], because if the word 'consumer' is replaced by 'lawyer' (whether because a lawyer is a 'consumer' or because a communication to a lawyer is an indirect communication to a consumer) both subsections become gibberish."  The Court further found that "[t]he problem is not simply that the words 'consumer' and 'attorney' must mean different things in this subsection," but also that "the point of subsection (a)(2) is to tell the debt collector that it is OK to communicate with the debtor's attorney even when it is forbidden to communicate with the debtor." 

The Seventh Circuit therefore ruled that to read §1692a(2) as prohibiting communications with a debtor's attorney would be implausible.  It noted that such a reading would prevent debt collectors from engaging in settlement negotiations with an attorney to avoid litigation.  The Court questioned:  "Why would Congress have provided that hiring a lawyer makes it impossible for the debtor and debt collector to communicate through counsel?"

Ultimately, the Court held Congress did not intend such a result.  The Court reasoned that the debtor's reading of the FDCPA "causes serious problems for the structure and operation of subsections (a)(2) and (b), and is not supported by subsection (d)—which. . . does not include the debtor's lawyer in the definition of 'consumer.'" 

Therefore, the Court concluded that "§1692c as a whole permits debt collectors to communicate freely with consumers' lawyers."   

 


Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois  60602
Direct:  (312) 551-9320 
Fax:  (312) 284-4751
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

 

 


 
 
 

Wednesday, February 16, 2011

FYI: 10th Cir Holds Financial Institution Bond Only Applied to Losses Due to Forgery or Alteration of Guaranty

The United States Court of Appeals for the Tenth Circuit recently held
that a provision in a Financial Institution Bond was unambiguous, and
applied to protect against loss resulting from extending credit based on a
good faith reliance on a corporate guaranty only where that Guaranty was
forged or altered. A copy of the opinion is attached.

A bank extended credit to a customer, which was secured by a corporate
guaranty. After the customer defaulted, the corporate guaranty also
failed. The bank obtained a judgment against the guarantor, but it was
uncollectible.

The bank then sought recovery from its insurer under a Financial
Institution Bond, asserting that Insuring Agreement (E)(1) protected it
from a loss resulting from having extended credit based on its good faith
reliance on a corporate guaranty. The insurer refused to indemnify the
bank based on the qualifying language following (E)(1)(i), which it
claimed applied to all of Insuring Agreement (E)(1) and limited recovery
under Insuring Agreement (E)(1) to documents that contained a forged
signature, that were altered, or that were lost or stolen. The bank sued
alleging breach of the Financial Institution Bond and for breach of the
duty of good faith and fair dealing. Following cross-motions for summary
judgment, the district court found in favor of the insurer.

In upholding the ruling of the lower court, the United States Court of
Appeals for the Tenth Circuit noted that the issue revolved around the
meaning of the language in the bond and whether it was ambiguous. The
bond began with an introductory sentence, which stated: "The Underwriter .
. .agrees to indemnify the Insured for:" The bond then proceeds to set
out Insuring Agreements (A) through (F).

Insuring Agreement (E)(1) states as follows:

SECURITIES

(E) Loss resulting directly from the Insured having, in good faith,
for its own account or for the account of others,

(1) acquired, sold or delivered, or given value, extended credit or
assumed liability, on the faith of, any original

* * *

(f) Corporate, partnership or personal Guarantee,
(g) Security Agreement,
(h) Instruction to a Federal Reserve Bank of the United States, or
(i) Statement of Uncertificated Security of any Federal Reserve Bank
of the United States

which

(i) bears a signature of any maker, drawer, issuer, endorser,
assignor, lessee, transfer agent, registrar, acceptor, surety, guarantor,
or of any person signing in any other capacity which is a Forgery, or
(ii) is altered, or
(iii) is lost or stolen[.]

In ruling in favor of the insurer, the appellate court found that Section
(E)(1) subsections (i)-(iii) unambiguously applied to (E)(1)(a)-(i), and
not just (E)(1)(i) as the bank claimed. Thus, it applied to (E)(1)(f)
under which the bank claimed to be entitled to indemnification. Because
there was no forgery, the appellate court held that the bank was not
entitled to indemnification.

The appellate court also held that there was no ambiguity created by the
fact the bond already included an Insuring Agreement (D), which provided
indemnification for forgeries and alterations. The court found that this
did not create an ambiguity as "Insuring Agreement (D) and Insuring
Agreement (E) cover[ed] different types of forgeries and alterations."


Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: 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


The information transmitted (including attachments) is covered by the Electronic Communications Privacy Act, 18 U.S.C. 2510-2521, is intended only for the person(s) or entity/entities to which it is addressed and may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient(s) is prohibited. If you received this in error, please contact the sender and delete the material from any computer.

Notice Under U.S. Treasury Department Circular 230: To the extent that this e-mail communication and the attachment(s) hereto, if any, may contain written advise concerning or relating to a Federal (U.S.) tax issue, United States Treasury Department Regulations (Circular 230) require that we (and we do hereby) advise and disclose to you that, unless we expressly state otherwise in writing, such tax advise is not written or intended to be used, and cannot be used by you (the addressee) or other person(s), for purposes of (1) avoiding penalties imposed under the United States Internal Revenue Code or (2) promoting, marketing or recommending to any other person(s) the (or any of the) transaction(s) or matter(s) addressed, discussed or referenced herein. Each taxpayer should seek advice from an independent tax advisor with respect to any Federal tax issue(s), transaction(s) or matter(s) addressed, discussed or referenced herein based upon his, her or its particular circumstances.

FYI: Cal Sup Ct Says Recording ZIP Code Violates CA Song-Beverly Credit Card Act

The Supreme Court of California recently held that a business violates the
California Song-Beverly Credit Card Act of 1971 (the "Credit Card Act"),
which prohibits businesses from requesting that cardholders provide
"personal identification information" during credit card transactions and
then recording that information, when the business requests and records a
customer's ZIP code during a credit card transaction.

A copy of the opinion is available online at:
http://www.courtinfo.ca.gov/opinions/documents/S178241.PDF

The language of Section 1747.08 of the Credit Card Act provides that no
business "that accepts credit cards.shall.request, or require as a
condition to accepting [a] credit card as payment., the cardholder to
provide personal identification information, which the [business]
accepting the credit card [records] upon the credit card transaction form
or otherwise." Section 1747.08 further defines personal identification
information as "information concerning the cardholder, other than
information set forth on the credit card, and including, but not limited
to, the cardholder's address and telephone number."

Plaintiff credit card holder was asked for her ZIP code during a purchase
at one of defendant retailer's stores. Plaintiff provided the requested
information, which defendant recorded and then later cross-referenced with
available databases to determine plaintiff's home address.

Plaintiff sued, asserting a violation of the Credit Card Act. The trial
court ruled against the plaintiff, concluding that a ZIP code does not
constitute "personal identification information" as that term is defined
in Section 1747.08 of the Credit Card Act. The Court of Appeal affirmed,
and the plaintiff appealed to the Supreme Court of California.

The Court considered the lower Court's conclusion that ZIP code
information is not subject to Section 1747.08 because, although an address
and telephone number are "specific in nature regarding an individual., a
ZIP code pertains to the group of individuals who live within the ZIP
code." Overruling and reversing the lower courts' decisions, the
California Supreme Court noted that "a ZIP code is readily understood to
be part of an address; when one addresses a letter to another person, a
ZIP code is always included," and thus "the statute should be construed as
encompassing not only a complete address, but also its components."
Further, even a complete address is unlikely to be specific to an
individual, because multiple individuals often reside in the same
household.

The Court also noted that all of the elements of Section 1747.08
"constitute information unnecessary to the sales transaction that, alone
or together with other data such as a cardholder's name or credit card
number, can be used for the retailer's business purposes." A broader
interpretation of Section 1747.08 is preferred, ruled the Court, both
because "courts should liberally construe remedial statutes in favor of
their protective purpose" and because "[t]he Court of Appeal's
interpretation.would permit retailers to obtain indirectly what they are
clearly prohibited from obtaining directly, 'end-running' the statute's
clear purpose." The Court also concluded that the terms chosen by the
legislature "suggest. the Legislature did not want the category of
information protected under the statute to be narrowly construed."

The Court then ruled that a broad interpretation is also consistent with
subdivision D of Section 1747.08, which allows businesses to require a
cardholder to provide reasonable forms of identification, such as a
California state identification card, but specifically disallows the
recording of that information. Because such identification would include
information such as a ZIP code, the Court ruled, it would be inconsistent
to otherwise allow the recording of information in a manner explicitly
prohibited by subdivision D of the Section 1747.08.
The Court then examined the legislative history of Section 1747.08 and
concluded that the legislature enacted its precursor "to address the
misuse of personal identification information for, inter alia, marketing
purposes" and concluded that the statute's "overriding purpose [is] to
'protect the personal privacy of consumers who pay for transactions with
credit cards.'" The Court also observed that the Senate Committee on
Judiciary analysis expressed the same motivating concerns.

The Court then examined subsequent amendments to Section 1747.08, which
"permit.businesses to require cardholders provide identification so long
as none of the information [is] recorded." Disregarding defendant's
reliance on commentary by the State & Consumer Services Agency, which
characterized these subsequent amendments as "a clarifying, nonsubstantive
change," the Court ruled "that former subdivision (d) was considered
merely clarifying and nonsubstantive suggests the Legislature understood
former section 1747.08 to already prohibit the requesting and recording of
any of the information, including ZIP codes, contained on driver's
licenses and state identification cards."

Further, the Court noted, even "the 1990 version of former section 1747.08
forbade businesses from "requir[ing] the cardholder.to provide personal
identification information." Given that the provision was later
"broadened, forbidding businesses from "request[ing], or requir[ing] as a
condition to accepting the credit card., the cardholder to provide
personal identification information." the Court ruled, "[t]he obvious
purpose of the 1991 amendment was to prevent retailers from requesting
'personal identification information and then matching it with the
consumer's credit card number.'" Further, "[t]hat the Legislature so
expanded the scope of former section 1747.08 is further evidence it
intended a broad consumer protection statute."
Therefore, the Court concluded, "in light of the statutory language, as
well as the legislative history and evident purpose of the statute, we
hold that personal identification information, as that term is used in
Section 1747.08, includes a cardholder's ZIP code."

The Court also rejected the business's contention that a broad
interpretation of Section 1747.08 would "be unconstitutionally oppressive
because it would result in penalties 'approach[ing] confiscation of
[defendant's] entire business.'" The "statute does not mandate fixed
penalties; rather it sets the maximum. at $250 for the first violation and
$1,000 for subsequent violation[s]," the Court ruled, and thus "the amount
of the penalties awarded rests within the sound discretion of the trial
court."

Finally, the Court rejected the business's argument that the Court's
ruling "should be prospectively applied only." Instead, the Court ruled,
"[i]n our view, the statute provides constitutionally adequate notice of
proscribed conduct." Further, because the filing of the plaintiff's
complaint predated contrary precedent, "it therefore cannot be
convincingly argued that the practice of asking customers for their ZIP
codes was adopted in reliance on [contrary precedent]."

Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: 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

The information transmitted (including attachments) is covered by the Electronic Communications Privacy Act, 18 U.S.C. 2510-2521, is intended only for the person(s) or entity/entities to which it is addressed and may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient(s) is prohibited. If you received this in error, please contact the sender and delete the material from any computer.

Notice Under U.S. Treasury Department Circular 230: To the extent that this e-mail communication and the attachment(s) hereto, if any, may contain written advise concerning or relating to a Federal (U.S.) tax issue, United States Treasury Department Regulations (Circular 230) require that we (and we do hereby) advise and disclose to you that, unless we expressly state otherwise in writing, such tax advise is not written or intended to be used, and cannot be used by you (the addressee) or other person(s), for purposes of (1) avoiding penalties imposed under the United States Internal Revenue Code or (2) promoting, marketing or recommending to any other person(s) the (or any of the) transaction(s) or matter(s) addressed, discussed or referenced herein. Each taxpayer should seek advice from an independent tax advisor with respect to any Federal tax issue(s), transaction(s) or matter(s) addressed, discussed or referenced herein based upon his, her or its particular circumstances.

FYI: Ill App Ct Upholds Refusal to Enforce Arbitration Agreement as Arbitrators Not Available

The Appellate Court of Illinois, First District, recently held that an
arbitration agreement contained in a loan agreement between a lender and
borrower would not be enforced, notwithstanding the FAA's provision
allowing a court to appoint an arbitrator where there is a "lapse in the
naming of an arbitrator," where the arbitration agreement allowed for only
two organizations to administer a dispute between the parties and neither
was available. A copy of the opinion is attached.

The borrower obtained a loan from the lender by entering into a loan
agreement and promissory note. The loan agreement contained an
arbitration provision that provided that either party could choose to have
any claim related to the loan agreement arbitrated, but that the claim
must be arbitrated either by the American Arbitration Association ("AAA")
or the National Arbitration Forum ("NAF"). The lender initiated
collection proceedings against the borrower alleging that the borrower had
defaulted under the loan agreement and promissory note. The borrower filed
a counterclaim for herself and a putative class of similarly situated
Illinois consumers against the lender alleging violations of the Truth in
Lending Act, the Illinois Consumer Installment Loan Act (205 ILCS 670/1,
et seq.), and the Illinois Interest Act (815 ILCS 205/1, et seq.).

The lender then filed a motion to compel arbitration and stay proceedings.
The trial court denied the motion, finding the arbitration agreement
impossible to enforce because NAF ceased administering consumer
arbitrations and AAA issued a moratorium on consumer debt arbitrations.

In upholding the lower court's ruling, the appellate court held that the
agreement between the parties to arbitrate allowed for only two
organizations to administer any dispute between the parties in
arbitration, neither of which was available. Because the two exclusive
administrators were unavailable due to external constraints, the
arbitration agreement between the parties was impossible to enforce.
Additionally, the court held that an alternative administrator could not
be named by the court because the designation by the parties of two
exclusive arbitration organizations was an integral part of the agreement
between the parties.

In making its ruling, the appellate court noted that "[i]t is well
established that agreements to submit to arbitration, as an alternative
method of dispute resolution, are favored at both the state and federal
level." However, the court acknowledged that an agreement to arbitrate is
a contract and parties to an agreement to arbitrate disputes
"are bound to arbitrate only those issues they have agreed to arbitrate,
as shown by the clear language of the agreement and their intentions
expressed in that language."

The appellate court rejected the lender's argument that the court could
select a substitute arbitrator pursuant to Section 5 of the Federal
Arbitration Act, which allows a court to appoint an arbitrator where there
is a "lapse in the naming of an arbitrator." 9 U.S.C. §5. The appellate
court reasoned that Section 5 could not be used by the court to select a
new arbitrator where the chosen forum was "an integral part of the
agreement to arbitrate" rather than an "ancillary logistical concern."
The Court held that the designation of the NAF or the AAA was not
ancillary or a logistical concern.

The Court found that the arbitration agreement at issue made it clear that
if a party required arbitration it must choose either the NAF or the AAA.
Thus, although the parties agreed to arbitration, the exclusive
administrators required by the Arbitration Agreement were not available to
arbitrate the matter. Therefore, "external events to the parties'
agreement have foreclosed the arbitration of the parties' claims, and thus
the circuit court could not enforce the Arbitration Agreement."


Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: 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


The information transmitted (including attachments) is covered by the Electronic Communications Privacy Act, 18 U.S.C. 2510-2521, is intended only for the person(s) or entity/entities to which it is addressed and may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient(s) is prohibited. If you received this in error, please contact the sender and delete the material from any computer.

Notice Under U.S. Treasury Department Circular 230: To the extent that this e-mail communication and the attachment(s) hereto, if any, may contain written advise concerning or relating to a Federal (U.S.) tax issue, United States Treasury Department Regulations (Circular 230) require that we (and we do hereby) advise and disclose to you that, unless we expressly state otherwise in writing, such tax advise is not written or intended to be used, and cannot be used by you (the addressee) or other person(s), for purposes of (1) avoiding penalties imposed under the United States Internal Revenue Code or (2) promoting, marketing or recommending to any other person(s) the (or any of the) transaction(s) or matter(s) addressed, discussed or referenced herein. Each taxpayer should seek advice from an independent tax advisor with respect to any Federal tax issue(s), transaction(s) or matter(s) addressed, discussed or referenced herein based upon his, her or its particular circumstances.

Tuesday, February 15, 2011

FYI: 9th Cir Confirms BK Action for Violation of Discharge Injunction Must Be Brought by Motion, Not by Adversary Proceeding

The United States Court of Appeals for the Ninth Circuit recently affirmed
a district court's dismissal of an adversary complaint for alleged
violation of a discharge of debt injunction under 11 U.S.C. § 524. The
Court held that "[a]n action for contempt for violation of a discharge
injunction under § 524 must be brought via motion in the bankruptcy case,
not via an adversary proceeding."

A copy of the opinion is available online at:
http://www.ca9.uscourts.gov/datastore/opinions/2011/02/10/09-55810.pdf

The debtor in this matter had filed for Chapter 7 bankruptcy, and been
granted a discharge of debt under 11 U.S.C. § 524. Despite this
discharge, some credit reporting agencies continued to report the debtor's
previous debt to Wells Fargo Bank, N.A. amounting to $80,831, which the
creditor then confirmed in alleged violation of § 524.

The lower court dismissed the adversary proceeding, and the debtor
appealed. The appellate court referenced that the "civil contempt power
of bankruptcy judges" as based on 11 U.S.C. § 105. The Court then looked
to its previous decisions, which held that "the availability of contempt
proceedings under §105 for violation of a discharge injunction under § 524
does not create a private right of action for damages." The Court stated
that this precedent alone would be enough to "dispose of the present
case," and further noted that the proper procedure for "an action for
contempt arising out of the violation of an order" from the bankruptcy
case is to bring a motion in the bankruptcy case.

The Court next delineated the differences in procedure in bankruptcy court
between "contested matters" and "adversary proceedings." As the Court
noted, Bankruptcy Rule 9020 "provides that Bankruptcy Rule 9014 governs
contempt proceedings in bankruptcy." Bankruptcy Rule 9014 "governs
contested matters," which are distinguished from adversarial proceedings
governed by Part VII of the Bankruptcy Rules.

The Court disagreed with the debtor's argument that "because Bankruptcy
Rule 9014 invokes certain rules utilized for adversary proceedings"
pursuant to Part VII, "any motion brought pursuant to Rule 9014 could also
impliedly be brought as an adversary proceeding." The Court noted that a
"plain reading" of the language of Rule 9020 states that contempt
proceedings "brought by the trustee or a party in interest" qualify as
contested matters required to be brought by a motion in the bankruptcy
case pursuant to Rule 9014. The Court further stated that Rule 9020
"exists solely for the purpose of mandating this" result.

In closing, the Court noted that even in the absence of Rule 9020, the
debtor's action does not qualify as an adversarial proceeding as described
in Bankruptcy Rule 7001, as the debtor specifically requests punitive
damages, and such damages are not a form of equitable relief.

In addition to seeking punitive damages, debtor also sought an injunction
for the violation of the discharge which "already exists by operation of
law." The Court finally stated that "[a]n injunction against violating an
existing injunction would be superfluous." Thus, the Court ruled that the
Appellant would suffer "no prejudice from the bankruptcy court's
requirement to proceed by motion rather than by adversary proceeding
because he has failed to pursue the avenue of relief that no court has
denied" him, that of bringing the proper motion in bankruptcy court.

The Court further denied the debtor's arguments attempting to
differentiate "motions" from "applications" as mere semantics, and stated
there was no conflict in the Bankruptcy Rules when using one term rather
than the other, as "in the Southern District of California . . . the words
are generally considered synonymous."

Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: 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

The information transmitted (including attachments) is covered by the Electronic Communications Privacy Act, 18 U.S.C. 2510-2521, is intended only for the person(s) or entity/entities to which it is addressed and may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient(s) is prohibited. If you received this in error, please contact the sender and delete the material from any computer.

Notice Under U.S. Treasury Department Circular 230: To the extent that this e-mail communication and the attachment(s) hereto, if any, may contain written advise concerning or relating to a Federal (U.S.) tax issue, United States Treasury Department Regulations (Circular 230) require that we (and we do hereby) advise and disclose to you that, unless we expressly state otherwise in writing, such tax advise is not written or intended to be used, and cannot be used by you (the addressee) or other person(s), for purposes of (1) avoiding penalties imposed under the United States Internal Revenue Code or (2) promoting, marketing or recommending to any other person(s) the (or any of the) transaction(s) or matter(s) addressed, discussed or referenced herein. Each taxpayer should seek advice from an independent tax advisor with respect to any Federal tax issue(s), transaction(s) or matter(s) addressed, discussed or referenced herein based upon his, her or its particular circumstances.

Sunday, February 13, 2011

FYI: Ill App Ct Upholds Dismissal of Usury, UDAP, and Other Allegations in Foreclosure/Forbearance Case

The Appellate Court of Illinois for the First District recently held that an interest provision in a loan agreement was not ambiguous and therefore the borrower was not entitled to claims under the Interest Act, good faith and fair dealing, and statutory and consumer fraud, based on alleged misrepresentations and ambiguity in the interest provision.  A copy of the opinion is attached. 

The borrower and lender entered into a loan agreement to finance the development of a residential condominium project.  After the borrower defaulted on the loan, the parties executed a series of forbearance agreements.  The loan remained unpaid and ultimately the lender filed a complaint for foreclosure. 

The borrowers filed an answer, affirmative defenses and counterclaims based on alleged violations of the Illinois Interest Act (815 ILCS 205/1, et seq.), the duty of good faith and fair dealing, the Illinois Consumer Fraud and Deceptive Business Practices Act (ICFA) (815 ILCS 505/1, et seq.), and common law fraud.  The borrower's allegations revolved around the general contention that the lender did not disclose its method of computing and charging interest, and unlawfully increased the amount of interest charged on the loan. 

The lender moved to strike and dismiss all affirmative defenses and counterclaims.  The circuit court granted the motion, dismissing the affirmative defenses and counterclaims with prejudice.  The circuit court later denied a motion to reconsider its dismissal, and the borrowers appealed. 

In upholding the circuit court, the appellate court first examined language in the forbearance agreement signed by the borrower that provided that the borrower had "no claims or defenses to the enforcement of the rights and remedies of Lender thereunder," and that the agreements and relevant loan documents "constitute the legal, valid and binding obligations of Borrower, enforceable against it in accordance with their respective terms, and Borrower has no valid defense to the enforcement of such obligations."  The court noted that the forbearance agreements containing a waiver of defenses were executed in 2008, and the alleged offenses occurred upon the execution of the Note in 2005.

The appellate court held that Illinois law permits a party to contractually waive all defenses, though the duty of good faith and fair dealing is not waived absent an

"express disavowal," which the appellate court found the above language did not do.  However, the appellate court noted that a waiver of defenses was inapplicable to claims originating under the ICFA. 

Nevertheless, the appellate court found the waiver of defenses was essentially part of the consideration that the lender received in exchange for a forbearance agreement.  It noted that it "would be inclined to find that defendants also waived any affirmative defense or counterclaim based upon the Interest Act and common law fraud."  However, the Court "nevertheless address[ed] defendants' contentions for the sake of completeness."

The Court noted that each of the borrowers' affirmative defenses and counterclaims revolved around the same basic theory – that the borrowers were mislead as to the amount of interest that would be paid under the loan.  The court noted that there are generally three different methods lenders use to compute interest:  the 365/365 method, 360/360 method, and 365/360 method.

The lender utilized the 365/360 method when charging interest under the loan, but the borrowers argued that the loan identified the rate as "per annum," which they argued is defined as "by the year."  The relevant portion of the loan provided as follows with respect to interest charged:  "Interest shall be computed on the principal balance outstanding from time to time, on the basis of a three hundred sixty (360) day year, but shall be charged for the actual number of days within the period for which interest is being charged."

The Court noted that the phrase per annum does not appear in the interest provision. The Court therefore found that there was no ambiguity in the language and that the loan provided for the 365/360 method of interest calculation.  Therefore, the appellate court held that the lender did not violate the Interest Act.  

The Court next discussed the claims revolving around a duty of good faith and fair dealing.  It noted that they occur "when one party is given broad discretion in performing its obligations under the contract."  The plaintiff borrowers alleged that the defendant lender breached this duty by (1) "deliberately creat[ing] ambiguity in the language of the loan documents" as to the calculation of interest; and (2) "exercise[ing] its discretion to calculate interest in a manner that charged *** more interest than Defendants reasonably expected."  The Court first noted that the duty of good faith and fair dealing, did "not arise out of precontractual actions and is only applicable to the conduct of parties to an existing contract."  Accordingly, it held that any allegations relating to the formation of the loan agreement did not implicate or violate the duty of good faith and fair dealing.  The Court further found that since the agreement was not ambiguous, the lender did not exercise any discretion and therefore the second argument was also without merit. 

With respect to the statutory and common law fraud claims, the Court noted that the borrowers' fraud claims were predicated upon an assertion that the interest calculation method was deceptive and based upon misrepresentations and false statements.  The Court held that there could be no statutory or common law fraud because there was no evidence of any impropriety or deception on the part of the lender and because it already determined that the loan agreement was unambiguous. 

Finally, the appellate court found that the claims were properly dismissed with prejudice because the borrowers would not be able to cure the defect in the claims simply be repleading.  However, the Court denied the lender's request for sanctions against the borrowers for filing a frivolous appeal, noting that while it was unpersuaded by the borrowers' arguments, it was not unreasonable that the borrowers would appeal the circuit court's decision given that the primary issues on appeal were subject to de novo review and largely dependent upon an interpretation of a single contract provision. 

 
 
 
Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois  60602
Direct:  (312) 551-9320 
Fax:  (312) 284-4751
Mobile:  (312) 493-0874
Email:  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: 10th Cir Finds No Evidence of Willful Violation in FCRA Inaccurate Reporting Case

The United States Court of Appeals for the Tenth Circuit recently held that a credit reporting agency did not violate the federal Fair Credit Report Act in its response to a consumer's complaints of errors in his record.  A copy of the opinion is attached. 

       
The plaintiff individual was the victim of identity theft, which led to two fraudulent accounts being opened with Verizon Wireless in his name, as well as disputed charges as to his legitimate Verizon accounts.  All accounts were closed, but because the plaintiff had legitimate accounts with Verizon, and failed to pay money owed under the legitimate accounts, Verizon reported his failure to pay the charges to the three major credit-reporting agencies, including Experian Information Solutions, Inc. (Experian).  After disputing the reports and being dissatisfied with the response, the plaintiff brought a lawsuit in federal court naming various Verizon entities and Experian, among others, alleging violations of the Fair Credit Reporting Act (FCRA) and Utah law.  The district court granted summary judgment in favor of Experian finding no violation of FCRA and dismissed the claims against the Verizon entities because the proper Verizon entity was not named as a defendant.  The plaintiff then appealed. 

With respect to Experian, the appellate court noted that the sole issue before it was whether Experian intentionally or recklessly failed to adequately investigate the plaintiff's dispute with Verizon.  As you may recall, the FCRA provides that: "Whenever a consumer reporting agency prepares a consumer report it shall follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates."  15 U.S.C. § 1681e(b).  A "willful" violation is "either an intentional violation or a violation committed by an agency in reckless disregard of its duties under the FCRA."  See Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 57–58 (2007).  A consumer need not prove actual damages if the violation is willful.    

In upholding the district court's ruling, the appellate court noted that the plaintiff presented little evidence regarding what Experian knew and when it knew it, and that there was "a dispute of fact regarding when and how Plaintiff complained to Experian."  The court then went through the relevant facts in the course of its analysis:

The plaintiff stated that he disputed the charges online and that he did so approximately every six months, though he had no records of doing so.  A letter from Experian produced in discovery indicated that it was not Plaintiff that first provided notice of a problem.  Instead, it stated that Experian had "added an Initial Security Alert to [Plaintiff's] credit file as requested on [his] behalf by one or more of the nationwide consumer credit reporting agencies," and further advised Plaintiff of what information he would need to provide (such as his social security number and a police report) to place an extended fraud alert on his credit file and to block information on his file that he believed resulted from identity theft.  Nevertheless, the plaintiff never sent any credit reporting agency a copy of the police report. 

A few months later, the plaintiff sent a letter to the three credit-reporting agencies. The letter provided his name, his current address, and a contact telephone number. It requested a free credit report and the removal from his credit file of derogatory information provided by Verizon.  Experian responded a week later in a letter stating that it could not honor his request because it was "unable to access [his] report using the identification information [he] provided."  The letter explained that for a person to access his own credit report, Experian requires the person's full name, current mailing address and two proofs of the address, social security number, date of birth, and complete addresses for the past two years.  The letter provided an internet address and phone number to contact if Plaintiff already had a personal credit report, thought the information to be inaccurate, and wished to request an investigation.  There was no evidence of a response. 

The Court held that, on this record, Experian was entitled to summary judgment on the willful misconduct claim.  The Court reasoned that the standards employed by Experian and the information it requested from Plaintiff were reasonable.  Further, the court noted that it had "been pointed to no described practice that would be a reckless violation of the FCRA."  Therefore, the court held that a reasonable person reviewing the evidence before the district court could not find Experian to have committed a willful violation of the FCRA.

With respect to the Verizon entities, the Court noted that the issue was whether Plaintiff had named the right entity as a defendant.  The Court held that the plaintiff had not, despite becoming aware of which Verizon entity was the correct entity months before the motions for summary judgment were heard.  After finding that the delay was unexcused, the Court upheld the district court's denial of the plaintiff's motion for leave to amend his pleadings to name the proper entity. 

 
 
Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois  60602
Direct:  (312) 551-9320 
Fax:  (312) 284-4751
Mobile:  (312) 493-0874
Email:  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