FYI: 7th Cir Rules in Favor of Mortgage Servicer in "Pyramiding of Late Fees" Putative Class Action

The U.S. Court of Appeals for the Seventh Circuit recently upheld the
grant of summary judgment in favor of a loan servicer in a putative class
action involving alleged breach of contract and alleged pyramiding of late
fees under Indiana's Home Loan Practices Act (IHLPA), Ind. Code §
24-9-1-1, et seq., as the named-plaintiff borrower failed to present any
evidence of a breach of contract, and could not show any intentional
violation of the IHLPA. A copy of the opinion is attached.

In August 2004, the plaintiff borrower secured financing from WMC Mortgage
Company to purchase a home in Indiana. WMC subsequently assigned the
servicing obligations to defendant America's Servicing Company ("ASC").
Under the terms of the loan, mortgage payments were due on the first of
each month, with a 15-day grace period after which ASC assessed a late
fee. If plaintiff skipped a month, his next payment was applied to the
principal and interest for the missed month.

In the fall of 2006, the borrower missed his September and October
payments. In November, he contacted ASC and entered into his first
forbearance agreement. The agreement provided he would not have to make
his November payment; rather, it would be pro rated and added to his
regular monthly payments over the next eight months—from December 2006
through July 2007.

The borrower also had until the 15th of each month to make his payments,
but there was no grace period before ASC would assess a late fee, and the
agreement also stated that credit reporting would continue until the loan
was current.

The borrower made payments under the forbearance agreement around the 15th
of each month from December through March. In April, he received a second
forbearance agreement from ASC under which ASC agreed not to accelerate
the total loan amount if he made payments by the 27th of the month from
April through July. This plan also included no grace period for late fees,
and clearly stated that credit reporting would continue "until the loan is
current."

The borrower attempted to refinance his loan in August of 2007, and found
that ASC had, contrary to his purported understanding of the forbearance
agreements, been reporting his late payments to the credit bureaus during
the forbearance agreement periods, and had assessed him late fees between
November and July. He subsequently brought suit when ASC refused to
remove the late fees and retract and negative credit reporting, alleging
among other things breach of contract, and pyramiding of late fees under
the IHLPA.

The borrower argued that ASC breached the contracts by assessing late fees
and reporting late payments even though he paid on time and in full as the
forbearance agreements required. ASC contended that it did not breach the
terms of the contracts because when plaintiff entered into the first
forbearance agreement he had already missed two payments— September and
October 2006—and the forbearance agreement did not change the fact that
those two previous payments were still outstanding.

The appellate court found this fact "devastating" to the borrower's claim,
as the original mortgage agreement made clear that if the borrower missed
a payment, his next payment would be applied to the "Periodic Payment in
the order in which it became due," and the forbearance agreement "clearly
stated that this provision remained in effect." Even if the borrower had
continued to pay according to the forbearance agreement, the Court noted
that he would still be late as he was more than a month behind when
entering into the agreement, and therefore ASC was justified in assessing
the late fees.

The appellate court also noted that even if plaintiff was correct in
stating that he believed according to his phone conversation with an ASC
representative that there would be no late fees or negative credit
reporting during the forbearance plan, this was immaterial. Under the
Indiana Lenders Liability Act, the borrower could not assert a breach of
contract claim based on alleged oral modifications to loan agreements.
IND. CODE § 26-2-9-4(b). The appellate court stated it had "already
found, the language of the contracts is clear—ASC had the right at all
times, under the original contract and both forbearance agreements, to
charge Collins late fees and report his late payments."

Finally, the appellate court addressed plaintiff's claims that ASC
violated IHLPA by not considering the forbearance agreements when
assessing late fees, and that he had "every expectation" that he would not
be assessed these fees if he made the payments under these agreements.

The appellate court found that the borrower had not shown, as required by
the IHLPA, that ASC (1) knowingly or intentionally, (2) made a material
misrepresentation, or (3) concealed material information regarding the
terms or conditions of the transactions.

Because the "plain language" of the forbearance agreements specifically
provided that all terms of the original mortgage remained in full force
and effect, including the provision that payments would be applied in the
order they became due, and there was no grace period in either agreement,
the borrower could not prove that ASC had "knowingly or intentionally"
made a material misrepresentation or concealed material information
concerning these agreements.

Accordingly, the appellate court affirmed the decision of the district
court granting ASC's summary judgment motion with regard to both the
plaintiff's breach of contract and IHLPA claims.

Ralph T. Wutscher
McGinnis Tessitore 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@mtwllp.com

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FYI: 6th Cir BAP Allows Homestead Exemption Under Ohio Law, Despite Undisclosed Contract to Sell Home

The Bankruptcy Appellate Panel of the Sixth Circuit recently reversed a
lower court ruling, and held that debtors in bankruptcy proceedings were
entitled to claim a homestead exemption under Ohio law, even though they
failed to disclose in their bankruptcy petition that they had a binding
contract to sell their home, and misrepresented in their bankruptcy
filings that they intended to remain in the home.

A copy of the opinion is available at:
http://www.ca6.uscourts.gov/opinions.pdf/11b0004p-06.pdf.

A married couple ("debtors") entered into a binding contract to sell their
home, and then filed a petition for relief under chapter 7 of the
Bankruptcy Code. Debtors claimed a homestead exemption in the amount of
$40,400. They did not disclose the existence of the home-sale contract in
their petition, and stated that they intended to remain in the home on
their Chapter 7 Individual Statement of Intention. The debtors then sold
their home, seeking to retain the $40,400 exemption amount.

The Trustee objected to the homestead exemption, arguing that the
exemption was improper because debtors did not intend to remain in the
home. The bankruptcy court sustained the Trustee's objection. The
debtors appealed.

As you may recall, Ohio Rev. Code § 2329.66(A)(1) provides for an
exemption of $20,200 per person "in one parcel or item of real or personal
property that the person…uses as a residence." The statute does not
address whether debtors must intend to continue to use the property as a
home post-petition to qualify for a homestead exemption.

Because no Ohio state court had considered whether debtors must intend to
occupy a property in the future to claim a homestead exemption, the Panel
based its decision largely on principals of statutory interpretation. It
began by noting that "Ohio courts follow the rule that exemption statutes
are to be construed liberally in favor of the debtors…." Further, "[i]n
construing statutes, it is the duty of the courts to give effect to the
words used, not to…insert words not used."

The Panel also surveyed the decisions of bankruptcy courts interpreting
Ohio law on the instant issue, and found inconsistent results. However,
it observed that "it is a well-established principle" that a debtor's
right to exemptions are determined as of the day the petition for
bankruptcy is filed.

Based on the principles discussed above, the Panel held that the plain
language of Ohio Rev. Code § 2329.66(A)(1) "does not permit inquiry into
the Debtors' intent to continue to use their property as a residence."

Instead, the Panel held that "all that is required" is that the debtors
own the property and occupy it as their principal residence at the time
they filed for bankruptcy. Because in the Panel's view the debtors
clearly met that requirement, the Panel found that they were entitled to a
homestead exemption. It therefore reversed the order of the lower court.

Ralph T. Wutscher
McGinnis Tessitore 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@mtwllp.com

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FYI: NV Sup Ct Requires Strict Compliance w/ Foreclosure Mediation Rules, Describes Factors for Sanctions

The Supreme Court of the State of Nevada recently held that a lower court
abused its discretion in allowing a foreclosure to continue despite the
beneficiary's alleged failure to comply with Nevada's statutory
foreclosure mediation rules. The Court also described factors for trial
courts to analyze when assessing sanctions for non-compliance with the
mediation rules.

A copy of the opinion is available at:
http://www.nevadajudiciary.us/index.php/advancedopinions/1163-pasillas-v-h
sbc-bank-usa-

HSBC Bank USA, as Trustee for Luminent Mortgage Trust ("HSBC") instituted
foreclosure proceedings against the appellants-borrowers ("borrowers").
The borrowers elected to mediate, pursuant to Nevada's Foreclosure
Mediation Program. Two separate mediations occurred, without resolution.
During the mediation, HSBC's counsel indicated that they could not approve
a loan modification without investor approval.

The mediator filed a statement alleging that HSBC supposedly did not
participate in good faith, and supposedly did not bring complete copies of
all the required documents to the mediation, among other things.
Borrowers filed a petition for judicial review in district court, which
did not impose sanctions and authorized the foreclosure to continue.
Borrowers appealed.

As you may recall, Nevada's Foreclosure Mediation Program requires that
owners of owner-occupied residences be provided with an election of
mediation form along with the notice of default and election to sell.
Should a borrower elect mediation, the beneficiary of the deed of trust is
required to: (1) attend the mediation; (2) mediate in good faith; (3)
provide various required documents (including original or certified copies
of the deed of trust, note, and any assignments); and (4) provide access
at all times during the mediation to a person with authorization to modify
the loan. See NRS 107.086 and Nevada's Foreclosure Mediation Rules
("FMR").

In the event of a violation of those rules, the homeowner may petition the
district court for sanctions. The district court "may issue an order
imposing such sanctions . . . as the court determines appropriate." See
FMR 5(7)(f).

The Court found that the mediator's statement "clearly and unambiguously
set out [HSBC's] failure" to comply with the statutory requirements
regarding mediation. Specifically, the mediator claimed that HSBC
allegedly failed to bring complete copies of all of the required documents
to the mediation, and allegedly did not have someone present at the
mediation with the authority to modify the loan.

Further, the Court interpreted NRS 107.086 to "mean that commission of any
one of these four statutory violations prohibits the program administer
from certifying the foreclosure process to proceed and may also be
sanctionable."

Therefore, the Court held that the lower court abused its discretion in
authorizing the foreclosure process to proceed, and remanded the case back
to the lower court with instructions to determine appropriate sanctions.

The Court concluded by laying out several factors to guide the lower
courts in determining sanctions: "whether the violations were intentional,
the amount of prejudice to the nonviolating party, and the violating
party's willingness to mitigate any harm by continuing meaningful
negotiation."

Ralph T. Wutscher
McGinnis Tessitore 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@mtwllp.com

NOTICE: We do not send unsolicited emails. If you received this email in
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Our updates are available on the internet, in searchable format, at:
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FYI: 6th Cir BAP Confirms Incorporating Legal Description by Reference Into Mortgage Document

The Bankruptcy Appellate Panel of the U.S. Court of Appeals for the Sixth
Circuit recently confirmed the validity of a mortgage where the property
description is attached as an exhibit to the mortgage, rather than
providing a full property description within the mortgage document.

A copy of the opinion is available at:
http://www.ca6.uscourts.gov/opinions.pdf/11b0006p-06.pdf

The debtor granted a mortgage in favor of American General Home Equity,
Inc. ("American General") to secure indebtedness of $132,897.86. In the
space provided for property description, the mortgage read "see EXHIBIT
'A.'" The page following page containing the debtor's signature was
marked "EXHIBIT A LEGAL DESCRIPTION," and contained a full legal
description of the property. That page was attached and recorded with the
mortgage. The debtor subsequently filed a Chapter 7 bankruptcy.

The Trustee then filed an adversary complaint under 11 U.S.C. § 544. As
you may recall, under section 544, a Trustee is considered a bona fide
purchaser of the debtor's property. The Trustee's complaint sought to
avoid the mortgage granted in favor of American General, arguing that the
mortgage was avoidable because the property encumbered was not described
prior to the signature page of the mortgage. Moreover, the Trustee argued
that the language "see EXHIBIT A" does not satisfy the statutory
requirements under Kentucky law. After filing cross-motions for summary
judgment, the bankruptcy court ruled in favor of American General.

On appeal, the Trustee again argued that the legal description was
insufficient because it appeared after the page of the mortgage containing
the debtor's signature, and that because the mortgage lacked the words
"attached hereto" or "made part hereof" after the words "EXHIBIT A," the
incorporation by reference doctrine did not apply.

The Trustees argument was based on Kentucky Revised Statute § 446.060(1),
which provides that: "[w]hen the law requires any writing to be signed by
a party hereto, it shall not be deemed to be signed unless the signature
is subscribed at the end or close of the writing."

However, the appellate court found that "Kentucky courts have consistently
held that Ky. Rev. Stat. Ann. § 446.060(1) does not abolish the doctrine
of incorporation by reference." Further, the court found that "the
attachment of 'EXHIBIT A' and reference thereof in the mortgage is a
sufficient description of the encumbered property under Kentucky law."

The Court explained that "the description of property intended to be
encumbered by the subject mortgage is made certain by reference to
'EXHIBIT A' which was attached to and recorded with the mortgage." The
Court further noted that "[t]he incorporating language, 'see EXHIBIT A,'
appears before the Debtor's signature making it valid and enforceable
pursuant to the doctrine of incorporation by reference."

The Court then concluded that "[t]he parties' intention to encumber the
property described in Exhibit A is easily ascertainable by a potential
purchaser under reasonable rules of construction."

Ralph T. Wutscher
McGinnis Tessitore 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@mtwllp.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:
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IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by law.

FYI: Cal App Ct Upholds Denial of Class Cert in § 17200 Alleged Deceptive Marketing Case

The Court of Appeal of the State of California, Second Appellate District,
recently upheld the denial of class certification in a § 17200 case
alleging deceptive marketing of insurance products, on the ground that the
defendant did not use a common marketing strategy, and therefore "whether
any proposed class member actually heard any alleged misrepresentation was
an issue incapable of common proof, requiring denial of the class
certification motion."

A copy of the opinion is available at:
http://www.courtinfo.ca.gov/opinions/documents/B216742.PDF.

The appellate court noted that, under the California Unfair Competition
Law (Bus. & Prof. Code § 17200), the putative class plaintiffs were
required to prove only that the alleged misrepresentations made to the
public were likely to deceive, not that members of the public were
actually deceived, relied on the misrepresentation, or suffered damages.
See In re Tobacco II Cases (2009) 46 Cal. 4th 298. However, the appellate
court also noted that "when the class action is based on alleged
misrepresentations, a class certification denial will be upheld when
individual evidence will be required to determine whether the
representations at issue were actually made to each member of the class."

The appellate court first addressed the plaintiffs' argument that there
was a common marketing scheme generated from the defendant's headquarters.
The defendant presented evidence contradicting this argument, and the
trial court found the defendant's evidence persuasive.

The appellate court affirmed the trial court's decision, based in part on
the holding in Kaldenbach v. Mutual of Omaha Life Ins. Co. (2009) 178 Cal.
App. 4th 830. In Kaldenbach, the court affirmed denial of class
certification in an action brought against an insurance provider based on
evidence that, although the insurance agents were provided with sales
presentations and illustrations, the agents were also "taught to tailor
their presentations to each customer." The appellate court therefore
found that because "the trial court determined, based on substantial
evidence, that the alleged misrepresentations of permanence were not
commonly made to members of the class," the denial of class certification
must be upheld.

The appellate court also affirmed that the materiality of the alleged
misrepresentations was not subject to common proof. While acknowledging
that materiality is determined based on an objective standard, the
appellate court agreed with the trial court that "the issue is nonetheless
subject to individual proof under the circumstances of this case."

The Court noted that the plaintiffs "assume that anyone who purchases
universal insurance does so because of one such difference [from term
insurance]: a universal policy (if sufficiently funded) can be permanent,
while term insurance is not." However, because "there are many other ways
in which universal insurance varies from term insurance," and the
policyholders "may have purchased their insurance for any of these
reasons," the materiality of the alleged misrepresentations made by
insurance agents was not subject to common proof.

Accordingly, the trial court's order denying class certification was
affirmed, and the appellate court remanded the matter for further
proceedings consistent with its opinion.

Ralph T. Wutscher
McGinnis Tessitore 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@mtwllp.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:
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IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by law.