FYI: 7th Cir Reverses DWP of Putative FDCPA Class Action Claims

The U.S. Court of Appeals for the Seventh Circuit recently reversed a
lower court's decision to dismiss a putative class action lawsuit against
a debt collector for want of prosecution, because the mistakes made by the
plaintiff's attorney were not sufficient to justify the dismissal. A copy
of the opinion is attached.

A consumer sued a debt collection law firm, Harris & Harris, Ltd.
("Harris") for alleged violations of the federal Fair Debt Collection
Practices Act ("FDCPA"). Both parties agreed that Harris violated the
FDCPA with respect to the consumer, and that the consumer was entitled to
modest statutory damages. However, the consumer's attorney also included
in his complaint two putative class counts, which alleged that the
envelopes and payment reminders used by Harris to collect debts violated
the FDCPA on a classwide basis.

The lower court "expressed doubt that it would ever certify a class" in
this matter, but nevertheless continued the matter several times to permit
the consumer's attorney to expand on and amend the putative class claims.
On several occasions, the consumer's attorney failed to meet the lower
court's deadlines, and arrived for a hearing after the court had already
considered his case. Due to the consumer's attorney's failure to appear
and repeated failure to meet other deadlines, the lower court dismissed
the case for want of prosecution.

As you may recall, Federal Rule of Civil Procedure 41(b) provides that
"[i]f a plaintiff fails to prosecute or to comply with.a court order, a
defendant may move to dismiss the action or any claim against it." In
addition, Federal Rule of Civil Procedure 23 provides that a court "must
determine by order whether to certify the action as a class action" at an
"early practicable time."

The Seventh Circuit held that the lower's court decision to dismiss the
action for want of prosecution was an abuse of discretion. In reaching
that conclusion, the Court first noted that dismissal for want of
prosecution is an "extraordinarily harsh sanction." Gabriele v. Hamlin,
514 F.3d 734, 736 (7th Cir. 2008). In addition, dismissal for want of
prosecution should be imposed based on a consideration of, among several
other factors, whether the mistakes made are the responsibility of the
plaintiff or the plaintiff's lawyer, and the prejudice to the defendant as
a result of those mistakes. Aurora Lamp & Lighting Inc. v. International
Trading Corp, 325 F.3d 752, 755 (7th Cir. 2003).

Here, the Court indicated that the attorney's fees Harris had to incur due
to the repeated errors of the consumer's counsel were not sufficient
prejudice, and noted that all of the mistakes made were attributable to
the consumer's attorney, rather than to the consumer herself.

In addition, the Court noted that despite the questionable nature of the
class action claims, the borrower's individual allegation against Harris
appeared to have merit. It also observed that several less severe
mechanisms were available to dismiss the class action claims: the lower
court could have used Federal Rule of Civil Procedure 41(b) to dismiss
only the class action claims, allowing the individual claim to survive, or
it could have declined to certify the action as a class action under
Federal Rule of Civil Procedure 23.

The Court placed emphasis on the fact that the borrower's attorney did not
receive any warning from the lower court that he was on "thin ice."

Therefore, "[g]iven the nature of [the borrower's attorney's] mistakes,
the court's ongoing approach to the case, and the lack of any explicit
warning," the Court reversed and remanded the lower court's decision to
dismiss the action for want of prosecution.

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: 9th Cir Rejects MERS Challenge, Rejects Equitable Tolling Theory Based on Spanish-Language Negotiations, Rejects Borrowers' IIED Claim

The U.S. Court of Appeals for the Ninth Circuit recently ruled in favor of
Mortgage Electronic Registration Systems, Inc. ("MERS") in a putative
class action challenging the MERS system under common law fraud and state
UDAP theories.

The Court also rejected the borrowers' equitable tolling argument as to
the TILA and state UDAP statute of limitations, based upon the borrowers
speaking only Spanish but their loan documents being only in English. In
addition, the Court held that providing an unaffordable loan to a borrower
was not "extreme and outrageous" as is required to state a claim for
intentional infliction of emotional distress.

A copy of the opinion is available at:
http://www.ca9.uscourts.gov/datastore/opinions/2011/09/07/09-17364.pdf

The three named plaintiffs in the case obtained home loans or refinanced
existing loans in 2006. The plaintiffs each executed a deed of trust in
favor of their lender, naming MERS as the "beneficiary" and as the
"nominee" for the lender and lender's "successors and assigns." The
plaintiffs do not speak or read English, and negotiated the mortgage loans
with their lenders in Spanish, but were provided with, and signed, copies
of their loan documents written in English.

The plaintiffs subsequently defaulted on their loans. Following default,
their respective lenders appointed trustees to initiate nonjudicial
foreclosure proceedings. MERS's beneficial interests in the deeds of
trust were all assigned to a foreclosure trustee.

The plaintiffs filed their putative class action, alleging conspiracy by
their lenders and others to use MERS to commit fraud. They also alleged
that their lenders violated the federal Truth in Lending Act ("TILA"), and
the Arizona Consumer Fraud Act ("ACFA"), and committed the tort of
intentional infliction of emotional distress ("IIED") by supposedly
targeting the plaintiffs for loans they allegedly could not repay when the
loans were extended.

The trial court dismissed the plaintiffs' first amended complaint, without
leave to amend. Further, the trial court denied leave to file a proposed
second amended complaint, and to add a new claim for wrongful foreclosure.

On appeal, the plaintiffs only addressed the district court's: (1)
dismissal of their claim for conspiracy to commit fraud through the MERS
system; (2) failure to address their oral request for leave to add a
wrongful foreclosure claim; (3) dismissal of the foreclosure trustee from
the suit; (4) denial of leave to amend their pleadings regarding equitable
tolling of their TILA and ACFA claims; and (5) dismissal of their claim
for IIED.

On appeal, the Ninth Circuit noted that the main premise of the
plaintiffs' lawsuit was that the MERS system impermissibly "splits" the
note and deed of trust by facilitating the transfer of the beneficial
interest in the loan among lenders while maintaining MERS as the nominal
holder of the deed. The Ninth Circuit rejected this theory.

The plaintiffs' lawsuit was also premised on the fact that MERS does not
have a financial interest in the loans, which, according to the
plaintiffs, renders MERS's status as a beneficiary a sham. The Ninth
Circuit rejected this theory, also.

With respect to the conspiracy to commit fraud claim, the plaintiffs
alleged that MERS members conspired to commit fraud by using MERS as a
sham beneficiary, supposedly promoting and facilitating predatory lending
practices through the use of MERS, and supposedly making it impossible for
borrowers or regulators to track the changes in lenders.

In upholding the lower court's ruling that the plaintiffs failed to state
a cause of action, the Ninth Circuit held "[t]he plaintiffs' allegations
fail to address several of [the] necessary elements for a fraud claim."
Specifically, the plaintiffs failed to identify any false representations
made to them about the MERS system, and failed to allege they relied on
misrepresentations about MERS in deciding to enter into their home loans.

Moreover, the Ninth Circuit found the plaintiffs' allegations were
undercut by the language in the standard deed of trust, which provided
that MERS was acting "solely as a nominee for Lender and Lender's
successors and assigns" and holds "only legal title to the interest
granted by Borrower in this Security Instrument." The Court held that
"[b]y signing the deeds of trust, the plaintiffs agreed to the terms and
were on notice of the contents." The Court further held that "[i]n light
of the explicit terms of the standard deed. . ., it does not appear that
the plaintiffs were misinformed about MERS's role in their home loans."

With respect to the wrongful foreclosure claim, the Ninth Circuit held
that "[t]he plaintiffs' oral request to add a wrongful foreclosure claim
was procedurally improper and substantively unsupported." The plaintiffs
based their wrongful foreclosure claim on the novel theory that "all
transfers of the interests in the home loans within the MERS system are
invalid because the designation of MERS as a beneficiary is a sham and the
system splits the deed from the note, and, thus, no party is in a position
to foreclose."

The Court rejected this argument, holding "[e]ven if MERS were a sham
beneficiary, the lenders would still be entitled to repayment of the loans
and would be the proper parties to initiate foreclosure after the
plaintiffs defaulted on their loans." The Court further held that "the
notes and deeds are not irreparably split: the split only renders the
mortgage unenforceable if MERS or the trustee, as nominal holders of the
deeds, are not agents of the lenders."

With respect to the allegations against the foreclosure trustee, the Court
noted the only allegations the plaintiffs directed against the foreclosure
trustee was that the trustee supposedly "failed to recognize that its
appointment was invalid." The Ninth Circuit held the plaintiffs failed to
state a cause of action, because the trustee had an "'absolute right'
under Arizona law 'to rely upon any written direction or information
furnished to him by the beneficiary.'"

The plaintiffs also asserted that the district court failed to address the
equitable tolling of their purported claims under TILA and the ACFA. The
plaintiffs alleged their TILA claim should have been tolled because they
only speak Spanish, but received their loan documents in English. The
Court disagreed, finding "the plaintiffs have not alleged circumstances
beyond their control that prevented them from seeking a translation of the
loan documents that they signed and received."

Further, the Court also held that the plaintiffs failed to state a claim
for equitable estoppel because they "failed to specify what true facts are
at issue, or to establish that the alleged misrepresentation and
concealment of facts is 'above and beyond the wrongdoing' that forms the
basis for their TILA and [ACFA] claims."

Finally, with respect to the IIED allegations, the Ninth Circuit held the
plaintiffs failed to state a cause of action because they "essentially
allege that the lenders offered them loans that the lenders knew they
could not repay," which was not "extreme and outrageous" as is required to
state a claim for IIED.

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: Ill App Ct Rejects Borrower's Untimely Challenge as to Service of Process

The Illinois Appellate Court for the First District recently held that a
borrower or other defendant waives his right to challenge jurisdiction
where he files a motion to stay a foreclosure sale without first or
simultaneously filing a motion challenging jurisdiction, or moving for an
extension of time to do so.

A copy of the opinion is available at:
http://www.state.il.us/court/Opinions/AppellateCourt/2011/1stDistrict/Sept
ember/1102632.pdf

Plaintiff Deutsche Bank National Trust Company ("Deutsche Bank") filed a
mortgage foreclosure action against defendants Carolyn A. Hall-Pilate and
John J. Pilate. The special process server executed two returns of
service indicating that John was served with a summons and complaint for
himself and on behalf of his wife, Carolyn.

When the borrowers did not appear and answer, Deutsche Bank filed a motion
for default. The trial court continued the motion on March 18, 2008,
because John Pilate had appeared pro se before the court and requested
time to consult with an attorney. The borrowers were granted 28 days to
file an appearance and answer or otherwise plead to the complaint.

After the borrowers still failed to file an appearance or response to the
complaint, the trial court granted Deutsche Bank's motion for default
judgment, and entered orders appointing a foreclosure sale officer and for
judgment for foreclosure and sale. Deutsche Bank filed a motion for an
order approving the report of sale and distribution following the judicial
sale.

On September 12, 2008, an "additional" appearance was filed by a law firm,
as counsel for the borrowers. The law firm also filed an emergency motion
to stay approval of the property sale. The trial court denied the
borrowers' emergency motion for a stay, and entered an order approving the
report of sale and distribution, confirming the sale and order of
possession.

On May 29, 2009, the borrowers filed a motion to quash service through new
counsel, asserting that John was out of state when the service of process
allegedly occurred. The trial court denied the motion to quash service.

On appeal, the borrowers argued that the trial court erred in denying
their motion to quash service because the borrowers did not file any
appearance or other pleadings prior to the entry of the default judgment.
Deutsche Bank argued that the borrowers waived their jurisdictional
objections when they filed their emergency motion to stay the approval of
a judicial sale prior to final judgment in the case.

The Appellate Court noted that section 2-301 of the Illinois Code of Civil
Procedure governs challenges to personal jurisdiction. The court held
that "[u]nder section 2-301, an objection to the court's jurisdiction must
be raised in the first pleading or motion filed, other than a motion for
an extension of time to answer or otherwise appear, but such objection may
be raised alongside other motions seeking relief on different grounds."

The Court noted that the borrowers "did not comply with the requirements
of section 2-301 to preserve their objection to the trial court's
jurisdiction because they filed a motion to stay the approval of the
property sale without also challenging the court's jurisdiction." In
addition, the Court ruled that "by participating in the case without
raising an objection to personal jurisdiction," the borrowers "voluntarily
submitted to the trial court's jurisdiction and waived any objection."

The borrowers also asserted that any waiver of personal jurisdiction did
not apply to Carolyn because she did not appear at the initial hearing.
However, the court was "not persuaded as the relevant action by the
defendants was the filing of the emergency motion for a stay which was
filed on behalf of both defendants. Thus, [Carolyn], with her husband,
sought relief from the trial court and waived any challenge to personal
jurisdiction."

The Court held that "[s]ince defendants in the instant case appeared in
this case before a final judgment was entered against them by filing a
motion seeking relief from the trial court and recognizing its
jurisdiction, defendants waived all objections to the trial court's
jurisdiction."

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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FYI: 2nd Cir Rejects Borrower's Arguments that Release Provisions Were Obtained by Duress

The U.S. Court of Appeals for the Second Circuit recently affirmed the
dismissal of allegations that a lender obtained release agreements from a
borrower through economic duress, because no evidence appeared in the
record to suggest that the lender made a wrongful threat against the
borrower. A copy of the opinion is attached.

Wells Fargo Bank, N.A., ("Wells Fargo") agreed to extend a line of credit
to Interpharm, Inc. ("Interpharm"), a drug manufacturer. The line of
credit was secured by various assets, including Interpharm's accounts
receivable, inventory, and equipment. Interpharm defaulted on the line of
credit agreement, and subsequently entered into and defaulted on each of a
series of forbearance agreements with Wells Fargo.

Each forbearance agreement included a provision wherein Interpharm
released all claims to date against Wells Fargo, as well as a merger
clause stating that the written agreement represented the entire agreement
between the parties. In addition, one of the forbearance agreements
reflected Wells Fargo's decision to exclude certain receivables from the
calculation used to determine the amount of money available to Interpharm,
as well as to reduce the percentages used for that calculation.

After Interpharm defaulted on the final forbearance agreement, the company
was liquidated. Interpharm then sued Wells Faro, alleging numerous causes
of action including breach of contract and unjust enrichment.
Interpharm's causes of action were based on the theory that it had been
forced to agree to the forbearance agreements through economic duress.

As you may recall, New York law provides that a contract may be voided
based on economic duress where the "agreement was procured by means of (1)
a wrongful threat that (2) precluded the exercise of its free will. See
Stewart M. Muller Constr. Co. v. N.Y. Tel. Co., 40 N.Y. 2d 955, 956
(1976). A threat to exercise a legal right cannot constitute economic
duress. See 805 Third Ave. Co. v. M.W. Realty Assocs., 58 N.Y. 2d 447,
453 (1983).

After reciting the relevant case law, the Court had little difficulty in
affirming the lower court's decision to dismiss Interpharm's claims.
Wells Fargo had the legal right to terminate the line of credit.
Consequently, the Court held that Wells Fargo's threat to do so was not
wrongful, and Wells Fargo's insistence that Interpharm execute various
agreements to induce Wells Fargo to forbear from terminating the line of
credit did not constitute economic duress.

Interpharm advanced two additional arguments. First, Interpharm argued
that Wells Fargo's decision to exclude certain receivables from the
calculation used to determine the line of credit was not reasonable,
within the meaning of a "reasonable discretion" provision in the contract
between the parties. Second, Interpharm argued that Wells Fargo
purportedly agreed to maintain a higher percentage of receivables for use
in that same calculation, an agreement that did not appear in any of the
contracts executed by the parties.

The Court rejected both arguments. The agreement between the parties
afforded Wells Fargo "reasonable discretion" in determining both the
receivables to be used and the percentages of those receivables to be used
to determine the amount of money available to Interpharm. The Court found
that Interpharm failed to allege any facts to show that that Wells Fargo's
decisions fell outside the bounds of "reasonable discretion." Further,
the Court held that as the initial agreement and all subsequent
forbearance agreements included merger clauses, any purported agreement
that did not appear in the written contracts had no bearing on Wells
Fargo's contractual rights.

Thus, the Court affirmed the lower court's judgment of dismissal.

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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FYI: NY Banking Dept Reaches Servicing/Foreclosure Practices Agreement with Goldman, Litton, Ocwen

New York's Department of Financial Services and Banking Department entered
into an agreement with Goldman Sachs Bank, Ocwen Financial Corp. and
Litton Loan Servicing LP regarding certain servicing and foreclosure
practices.

A copy of the Agreement on Mortgage Servicing Practices is available at:
http://www.ins.state.ny.us/press/2011/p1109011_Ocwen_cond_appr_final_sig.p
df

As part of the Agreement, Goldman Sachs will write down approximately $13
million in unpaid principal, consisting of forgiveness on 25 percent of
the principal balance all 60-day delinquent first-lien home loans in New
York serviced by Litton and owned by Goldman Sachs and its subsidiaries as
of August 1, 2011.

The Agreement is a condition of Ocwen's acquisition of Litton, and does
not preclude any future investigations of past practices or release any
future claims or actions. In addition, if any party to this Agreement
agrees with any other regulator to adopt greater consumer protections or
other more rigorous standards than are contained in this Agreement, such
other provisions shall be applicable to the party.

Among other things, the Agreement requires servicing and foreclosure
practice changes in the following areas:

- Document execution
- Accuracy of documentation
- Standing to foreclose
- Identification and contact information of the note holder, and
account/payment history, on request
- Compensation to borrowers, and voiding of third-party sales, in all
wrongful foreclosures
- Regular quality assurance audits of foreclosure and bankruptcy
proceedings
- Oversight of third-party vendors
- Adequate staffing and training
- Single-point-of-contact notices and related requirements
- Toll-free number set up for new loans upon acquisition or transfer of
servicing
- Modification notices
- Independent review of loan mod denials
- Complaint handling and resolution procedures
- Limits on attorneys fees, late fees and delinquency charges, property
valuation fees
- Limits on lender-placed insurance

Ocwen and Litton must implement these requirements within 60 days
following the acquisition. Goldman, which is exiting the mortgage
servicing business with the sale of Litton, has agreed to adopt these
servicing practices if it should ever reenter the servicing industry.

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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CONFIDENTIALITY NOTICE: This communication (including any related attachments) is intended only for the person/s to whom it is addressed, and may contain confidential and/or privileged material. Any unauthorized disclosure or use is prohibited. If you received this communication in error, please contact the sender immediately, and permanently delete the communication (including any related attachments) and permanently destroy any copies.

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