FYI: 2nd Cir Says FDCPA "Judicial District" May Not Mean "County," and Liability Possible Even for Consensual Dismissal of Lawsuit

The United States Court of Appeals for the Second Circuit recently held that:  (1) the term "judicial district" in the FDCPA's venue provision, as applied to state-court debt collection actions, must be defined in accordance with the judicial system of the state in which the debt collection action is brought; and (2) even the consensual dismissal of an debt collection action filed in the incorrect venue may give rise to FDCPA liability.  A copy of the opinion is attached.

Debt collector Cohen & Slamowitz LLP ("C&S") brought a debt collection action against the consumer in Syracuse City Court.  Although the consumer resided in the same county as the City of Syracuse, the consumer obtained the dismissal of that action pursuant to Section 213 of New York's Uniform City Court Act ("Section 213") on the basis that he did not reside in the City of Syracuse or a town contiguous thereto.

The consumer filed suit in federal court against C&S, alleging that C&S violated the FDCPA's venue provisions by suing him in a judicial district in which he did not reside.  The district court granted C&S's motion to dismiss because, among other reasons, that court interpreted "judicial district" under the FDCPA to mean "county."  The consumer appealed and the Second Circuit vacated and remanded the case.

As you may recall, the FDCPA's venue provision requires that debt collection actions be brought "only in the judicial district or similar legal entity . . . in which [the] consumer resides at the commencement of the action." 15 U.S.C. § 1692i(a)(2)(B). 

Relying on the definition of "judicial district" "at the time the FDCPA was enacted," and the Congressional intent behind the FDCPA, the Second Circuit concluded "that the term 'judicial district,' as applied to state-court debt collection actions, must be defined in accordance with the judicial system of the state in which the debt collection action is brought."

In this case, the city court "of which C&S availed itself is governed by laws that limit the territorial extent of those courts based on a defendant's contacts with the forum" and, accordingly, "those laws delimit the 'judicial district' by which compliance with the FDCPA's venue provisions must be measured."  

Therefore, the "FDCPA's term 'judicial district,' as applied to a case where a debt collector sues a consumer in one of New York State's city courts, extends no farther than the boundaries of the city containing that court and the towns within the same county that are contiguous by land thereto.  And, because the proper 'judicial district' in this case did not include the town where [the consumer] resided, the district court erred in dismissing [the consumer's] complaint."

The Court rejected C&S's arguments that "judicial district" should encompass the entire county of the consumer's residence even when a consumer is sued in a city court.  First, C&S argued "that the dismissal of its lawsuit, on consent, does not give rise to a violation of the FDCPA's venue provisions because Section 213 is addressed to the issue of jurisdiction, which C&S contends is irrelevant to the FDCPA's venue analysis." 

However, the Court held that where, as here, "a state law outlines the required nexus between the residence or activities of the consumer and the location of the court, such a law sets forth the appropriate 'judicial district' for purposes of the FDCPA with respect to debt collection actions brought in that court, regardless of whether that provision is styled as jurisdictional or otherwise."

The Court also rejected C&S's argument that the "dismissal here should not give rise to a FDCPA violation because Section 213 provides that actions dismissed thereunder may be refiled in the appropriate court."  The Court reasoned that "it is irrelevant to the FDCPA whether state law sets forth a procedure for refiling actions that are dismissed based on defective venue."  In addition, the ability of the debt collector to refile the suit in fact contributes to the threat of 'forum abuse' that inspired Congress to enact 15 U.S.C. § 1692i." 

Finally, the Court rejected the lower court's reasoning for dismissing the consumer's complaint.  First, the district court stated that dismissal was warranted because it "had difficulty concluding" that C&S's act of bringing suit in Syracuse City Court was "intended to be unfair, harassing, and deceptive."  However, "this is an affirmative defense" and "[t]o recover damages under the FDCPA, a consumer does not need to show intentional conduct on the part of the debt collector."

The Court also rejected the lower court's interpretation of "judicial district" to mean "county."  Distinguishing the district cases relied upon by the lower court, the Court stated that the standard it had adopted "enables debt collectors to predict with accuracy and ease whether suing a consumer in a given forum would violate the FDCPA's venue provisions."  In addition, the Court noted "that the conclusion we reach today is consistent with that of the only of our sister Circuits that has devoted extended consideration to the meaning of this statutory phrase."  See Newsom v. Friedman, 76 F.3d 813 (7th Cir. 1996). 

 

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

 
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FYI: FRB Issues Final Rule on Escrow Accounts for Certain First-Lien Jumbo Mortgage Loans, Additional Proposed Escrow Account Rule

The Federal Reserve Board issued a final rule revising the escrow account requirements for certain first-lien jumbo mortgage loans, implementing provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act's amendments to the Truth in Lending Act.

The final rule is available at:
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110223b2.pdf
 
The final rule implements a provision of the Dodd-Frank Act that increases the annual percentage rate threshold used to determine whether a mortgage lender is required to establish an escrow account for property taxes and insurance for first-lien, jumbo mortgage loans.

As you may recall, in July 2008, the FRB issued final rules requiring creditors to establish escrow accounts for first-lien higher-priced mortgage loans.  A first-lien mortgage is considered a higher-priced mortgage loan if its APR is 1.5 percentage points or more above the current average prime offer rate.  Under the final rule being issued today, the escrow requirement will apply to first-lien jumbo loans only if the loan's APR is 2.5 percentage points or more above the average prime offer rate.  The APR threshold for non-jumbo loans remains unchanged.

The final rule is effective for covered loans for which the creditor receives an application on or after April 1, 2011.

The FRB also requested public comment on a second proposed rule to implement certain provisions of the Dodd-Frank Act's amendments to TILA that would lengthen the minimum period for mandatory escrow accounts for first-lien, higher-priced mortgage loans from one to five years, and longer under certain circumstances such as when the loan is delinquent or in default.

The proposed rule is available at:
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110223b1.pdf

The proposal also would implement new disclosure requirements of the amendments.  Disclosures would be required at least three business days before consummation of a mortgage loan to explain, as applicable, how the escrow account works or the effects of not having an escrow account if one is not being established. The proposed rule also would require consumers to receive disclosures three days before an escrow account is closed.

The proposed rule also would exempt certain loans from the statute's escrow requirement. The primary exemption would apply to mortgage loans extended by creditors that operate predominantly in rural or underserved areas, originate a limited number of mortgage loans, and do not maintain escrow accounts for any mortgage loans they service.

The Board is soliciting comment on the proposed rule for 60 days after publication in the Federal Register, which is expected shortly.

 
 
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

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FYI: Cal App Ct Upholds Dismissal of MERS Challenge

The California Court of Appeals, Fourth Appellate District, recently upheld the dismissal of a borrower's action challenging the authority of MERS to foreclose in a non-judicial foreclosure.  A copy of the opinion is attached. 

A borrower obtained a loan in the amount of $331,000 from a lender to finance the purchase of real estate.  In connection with that transaction, he executed a promissory note (the "Note"), which was secured by a deed of trust. The deed of trust identified the lender, as well as naming Mortgage Electronic Registration Systems, Inc. ("MERS") as beneficiary.

After the borrower defaulted on his loan payments, he was mailed a notice of default and election to sell, which initiated a non-judicial foreclosure process. The notice of default was sent to borrower by ReconTrust, which identified itself as an agent for MERS. Accompanying the notice of default was a declaration signed by an employee of Countrywide, which was acting as the loan servicer.

The borrower then filed a lawsuit against Countrywide, MERS and ReconTrust, attempting to allege a number of different causes of action.  The only causes of action at issue on the appeal were the first and second causes of action. 

The borrower's first cause of action was titled "Wrongful Initiation of Foreclosure" and alleged that "the person or entity who directed the initiation of the foreclosure process, whether through an agent of MERS or otherwise, was neither the Note's rightful owner nor acting with the rightful owner's authority."  In other words, the first cause of action asserted that MERS did not have authority to initiate the foreclosure because it was not authorized to do so by the current owner of the Note.

The borrower's second cause of action sought declaratory relief on the issue of whether California "[Civil Code section 2924, subdivision (a)] allows a borrower, before his or her property is sold, to bring a civil action in order to test whether the person electing to sell the property is, or is duly authorized to so by, the owner of a beneficial interest in it." The court noted that although designated a cause of action for declaratory relief, the second cause of action served simply as a legal argument in support of the first cause of action.  The defendants filed a demurrer as to the first and second causes of action, which the trial court sustained without leave to amend.

In sustaining the ruling of the trial court, the appellate court first noted that California's non-judicial foreclosure scheme is set forth in California Civil Code sections 2924 through 2924k, which "provide a comprehensive framework for the regulation of a non-judicial foreclosure sale pursuant to a power of sale contained in a deed of trust."  The court noted that "[t]he purposes of [the] comprehensive scheme are threefold: (1) to provide the creditor/beneficiary with a quick, inexpensive and efficient remedy against a defaulting debtor/trustor; (2) to protect the debtor/trustor from wrongful loss of the property; and (3) to ensure that a properly conducted sale is final between the parties and conclusive as to a bona fide purchaser."  Finally, the court stated that

"[b]ecause of the exhaustive nature of this scheme, California appellate courts have refused to read any additional requirements into the non-judicial foreclosure statute."

With the purpose of California's comprehensive non-judicial foreclosure scheme in mind, the court ruled that the borrower was "attempting to interject the courts into" the scheme without pointing to any legal authority to do so.  The borrower argued that such authority was provided by Civil Code section 2924, subdivision (a).  The court rejected the argument noting that Section 2924, subdivision (a)(1) states that a "trustee, mortgagee, or beneficiary, or any of their authorized agents" may initiate the foreclosure process. The court further ruled that "nowhere does the statute provide for a judicial action to determine whether the person initiating the foreclosure process is indeed authorized, and we see no ground for implying such an action."

The court then discussed three federal district court cases, which the borrower cited as purported legal authority for the alleged right to challenge an entity's ability to initiate the foreclosure process.  The court found that the cases were not controlling, nor were they on point, as none recognized "a cause of action requiring the noteholder's nominee to prove its authority to initiate a foreclosure proceeding."  Further, the court noted that "the district court cases from outside of California are inapposite because they do not apply California non-judicial foreclosure law." 

Finally, the borrower argued that even if California's non-judicial foreclosure law did not provide for the filing of a lawsuit to determine whether MERS had been authorized by the holder of the Note to initiate a foreclosure, the court should nevertheless interpret such a right as the "[l]egislature may not have contemplated or had time to fully respond to the present situation."  Again, the court rejected this argument, finding that "because California's non-judicial foreclosure statute is unambiguously silent on any right to bring the type of action identified by [the borrower], there is no basis for the courts to create such a right."  The court therefore held that "the trial court properly sustained Defendants' demurrer to the first and second causes of action in [the borrower's] complaint."

In addition, the appellate court went on to hold that "[a]s an independent ground for affirming the order sustaining the demurrer. . .  even if there was a legal basis for an action to determine whether MERS has authority to initiate a foreclosure proceeding, the deed of trust. . . establishes as a factual matter that [borrower's] claims lack merit."  The court noted that the language of the deed expressly stated MERS had the authority to initiate a foreclosure. 

Finally, the court held that the borrower would not be able to cure the defects of his complaint simply by amending the allegations.  The court therefore held that "the trial court properly sustained the demurrer without leave to amend."

 
 
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

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