FYI: Cal App Ct Upholds Dismissal of Claims Against MERS and Servicer

The Court of Appeal of the State of California, Fourth District, recently
held that the plaintiff borrowers had no cause of action against the loan
servicer or MERS for supposed wrongful foreclosure, or declaratory relief
pursuant to California Civil Code section 2943, based on alleged lack of
standing and alleged failure to comply with section 2943.

A copy of the opinion is available at:
http://www.courtinfo.ca.gov/opinions/documents/E052011.PDF

The plaintiffs' $380,000 loan was secured by a deed of trust. The deed of
trust identified MERS as "acting solely as a nominee for Lender and
Lender's successors and assigns," and stated that "MERS is the beneficiary
under this Security Instrument." Subsequently, Countrywide Home Loans,
Inc. ("Countrywide"), identifying itself as a debt collector and the
servicer of the loan on the note holder's behalf, notified plaintiffs that
their loan was delinquent.

The plaintiffs' attorney allegedly wrote to Countrywide requesting
information concerning the loan, including a beneficiary statement and
payoff demand statement pursuant to Civil Code section 2943. The
plaintiffs' counsel allegedly repeated the requests. However, Countrywide
allegedly failed to identify the current beneficiary on the note and deed
of trust.

The plaintiffs attempted to assert numerous causes of action against
Countrywide and MERS. Both defendants demurred. The trial court
sustained the demurrer without leave to amend.

On appeal, the plaintiffs challenged the order sustaining the demurrer
only with respect to the cause of action for damages for wrongful
initiation of foreclosure, and for declaratory relief based on the
plaintiffs' interpretation of California Civil Code section 2924,
subdivision (a).

As the basis for their claims, the plaintiffs alleged the note was "sold
and resold" on the secondary mortgage market, allegedly making it
difficult or impossible to ascertain the actual owner of the beneficial
interest in the note. They alleged that the identity entity that
currently held an ownership interest was unknown, and that because
Countrywide failed to comply with its statutory duty to provide them with
the documents they requested, they allegedly did not know to whom they
owed the obligation to repay the loan.

In addition, the plaintiffs alleged that the lender did not assign the
note to MERS and did not authorize MERS or any other person to assign the
note to anyone on its behalf. They alleged that the entity who directed
the initiation of the foreclosure process was not the note's rightful
owner and was acting without the rightful owner's authority.

The plaintiffs further alleged that the entity which initiated foreclosure
proceedings had no legal authority to do so, because it supposedly was
neither the current beneficiary of the deed of trust, or the agent of the
current beneficiary. They argued that section 2924, "by necessary
implication," provides that a borrower who is subject to foreclosure under
a deed of trust may file an action to challenge the foreclosing party's
standing to do so. The balance of their argument was that MERS had no
legal authority to initiate a foreclosure.

In upholding the decision of the trial court, the Appellate Court noted
that the issues the plaintiffs raised concerning MERS and the securitized
mortgage market were recently discussed in Gomes v. Countrywide Home
Loans, Inc., 192 Cal. App. 4th 1149 (4th Dist. 2011) (see our prior
update).

The Appellate Court stated, "[w]e agree with the Gomes court that the
statutory scheme (§§ 2924-2924k) does not provide for a preemptive suit
challenging standing." Further, the "plaintiffs' claims for damages for
wrongful initiation of foreclosure and for declaratory relief based on
plaintiffs' interpretation of section 2924, subdivision (a), do not state
a cause of action as a matter of law."

The Appellate Court further held that "even if such a statutory claim were
cognizable, the second amended complaint does not state facts upon which
such a claim could be based as to MERS and Countrywide." In so holding,
the Court noted that the complaint alleged the foreclosure proceedings
were not initiated by Countrywide or MERS. Further, it did not allege the
initiating entity was acting as an agent for MERS or for Countrywide.

Accordingly, the Appellate Court held that "even if a statutory action for
damages or for declaratory relief were available to challenge the standing
of the foreclosing entity, the second amended complaint does not allege
any facts upon which such an action could be based with respect to
Countrywide or MERS."

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 Holds Class Plaintiffs May Recover Cumulative Damages Under FDCPA and Rosenthal Act

The U.S. Court of Appeals for the Ninth Circuit recently held, that where
debts were too old to be legally reported, a debt collector's letter
implying that the debts could be reported to credit reporting agencies
violated the federal Fair Debt Collection Practices Act and the California
Rosenthal Act. The Court also held that the plaintiffs may recover
cumulative damages under both the federal and state fair debt collection
statutes.

A copy of the opinion is available at:
http://www.ca9.uscourts.gov/datastore/opinions/2011/09/23/10-55379.pdf.

The plaintiff consumer ("Debtor") brought a putative class action against
Arrow Financial Services, LLC, a debt buyer and collector ("Debt
Collector"), for alleged violations of the Fair Debt Collection Practices
Act, 15 U.S.C. §1692e ("FDCPA"), and California's Rosenthal Fair Debt
Collection Practices Act, Cal. Civ. Code §1788, et seq. ("Rosenthal
Act").

The Debt Collector allegedly purchased a portfolio of old debts that could
no longer legally be reported to any credit reporting agencies. See 15
U.S.C. §1681c(a)(4). Nevertheless, in an attempt to collect on these
obsolete debts, the Debt Collector allegedly sent substantially identical
letters to about 40,000 debtors residing in California, informing them "if
we are reporting the account, the appropriate credit bureaus will be
notified that this account has been settled." The letters also contained
a disclosure which stated in part that "a negative credit report
reflecting on your credit record may be submitted to a credit reporting
agency if you fail to [pay the debt]."

The Debtor alleged that the letters supposedly would mislead recipients to
believe that failure to pay the debts would result in negative credit
information being reported to the credit reporting agencies. Granting
summary judgment for the plaintiffs, the District Court held that the
letters violated the FDCPA and the Rosenthal Act. Further, a jury later
awarded the class members separate statutory damages under each statute.
The Debt Collector appealed, and the Ninth Circuit affirmed.

Analyzing whether the Debt Collector's letters were a "false, deceptive,
or misleading representation or means in connection with the collection of
any debt" in violation of the FDCPA, the Ninth Circuit observed that a
debt collection letter violates the FDCPA where the "least sophisticated
debtor" could reasonably read the letter in more than one way, one of
which is inaccurate.

The Ninth Circuit rejected the Debt Collector's argument that the
conditional language, "if we are reporting the account," could not
reasonably be read to mean that the Debt Collector would in fact report
the debt to the credit reporting agencies. In so ruling, the Court noted
that the letters could reasonably suggest either that (1) the Debt
Collector was not reporting the debt to any credit reporting agencies and
would make no report in the event of payment, or (2) under certain
circumstances, the Debt Collector could and would report the debt.
Because the Debt Collector could not legally report the obsolete debts to
the credit reporting agencies under any circumstances, the Court ruled
that the implication that a positive report could be made was misleading.
The Court also pointed out that the Debt Collector failed to include
clarifying language to explain the conditions under which it could legally
report a debt.

The Ninth Circuit further examined whether the letters also violated the
FDCPA by making a "threat to take any action that cannot legally be taken
or that is not intended to be taken." The Court observed that a mere
implied threat in the Debt Collector's letters to report the obsolete
debts would be sufficient to violate the FDCPA. Again, the Court rejected
the Debt Collector's argument that it would be unreasonable to read the
letters as implying a threat to make a negative report if the debt were
not paid, because the letters indicate that only a positive report would
be made once the debt was paid. The Court noted that in order to make the
purportedly "positive" report, the Debt Collector would first have to make
a "negative" report of the existence of a delinquent and unpaid debt.

The Ninth Circuit also held that the Rosenthal Act permits class actions,
and that class members were entitled to cumulative recovery of damages
under both the FDCPA and the Rosenthal Act. The Court cited the FDCPA's
provision that state law is not preempted except to the extent of any
inconsistency between the FDCPA and state law, and that no inconsistency
exists where state law provides greater consumer protection than does the
FDCPA. The Court rejected the Debt Collector's argument that the
plaintiffs should not recover multiple awards for the same loss, and noted
that the Rosenthal Act specifically provides that its remedies are
intended to be cumulative and in addition to remedies available under any
other law. Finally, the Court noted that although the FDCPA places a cap
on statutory damages, there is no per se prohibition on cumulative class
recovery under both the state and federal statutes.

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: 1st Cir Rejects Consumer's Attempt to Enforce Class Action Judgment Against Def's Accountants and Attorneys

The U.S. Court of Appeals for the First Circuit recently affirmed the
dismissal of claims purportedly arising from the enforcement of a
class-action judgment against the defendant's attorneys and accountants.
The Court held that: (1) representatives of a class certified in one
action could not assert those class-based claims against new defendants
who had not been parties to the prior class-action litigation; and (2) the
constructive trust imposed in the prior litigation excluded payments to
attorneys and accountants for the fair value of their services.

A copy of the opinion is available at:
http://www.ca1.uscourts.gov/cgi-bin/getopn.pl?OPINION=10-2174P.01A.

This appeal arose out of new lawsuits filed to enforce a judgment in a
prior class action law suit brought by plaintiffs-appellants
("Plaintiffs") against various credit repair and debt consolidation
companies. The class action complaint alleged violations of the federal
Credit Repair Organizations Act, 15 U.S.C. § 1679 et seq. (2006) ("CROA")
and the Massachusetts Consumer Protection Act, Mass. Gen. Laws ch. 93A
(2011).

To enforce the $256 million judgment the Plaintiffs won on behalf of the
class, the District Court set up a constructive trust over all fees
consumers had paid to the defendants. Included in the constructive trust
were any payments made by any of the defendant companies to their managers
or employees "that [were] in excess of the fair value of . . . services
rendered." The District Court also expressly reserved jurisdiction over
"any issues that may arise from the enforcement of the judgment[.]"

When the Plaintiffs found that the class action judgment previously
entered against the credit repair and debt consolidation companies was
"uncollectable," the Plaintiffs filed complaints against the companies'
attorneys and accountants who had not been parties to the earlier class
action litigation. These law suits were styled as class actions on behalf
of the same plaintiff class previously certified in the prior law suit.
In this latest round of litigation, the Plaintiffs alleged that: (1) the
attorney and accountant fees paid by the credit repair and debt
consolidation companies were derived from and traceable to the
constructive trust; and (2) these additional defendants violated the CROA
by participating in the same fraudulent conduct that resulted in the class
action judgment.

The District Court granted the defendants' motions to dismiss, in part
because the Plaintiffs were seeking "class-based relief" but had failed to
seek class certification as required by Rule 23 of the Federal Rules of
Civil Procedure. The First Circuit affirmed.

In discussing the constructive trust claims, the First Circuit held that
the constructive trust ordered by the District Court could not be read as
intending to encompass monies paid out prior to the imposition of the
constructive trust for legal and accounting services rendered in the
ordinary course of business and in exchange for fair value. The appellate
court noted that the constructive trust was originally imposed to reach
money transfers to the friends, families, and associates of the Credit
Repair Companies and specifically encompassed payments that exceeded the
fair value of any services rendered to those companies. The Court of
Appeals also noted that the District Court specifically allowed the credit
repair and debt consolidation companies to pay their attorneys and
accountants for the services provided.

The First Circuit also pointed out that issues related to retroactivity,
fair notice, and equity would arise if the order were read to allow the
constructive trust to reach such payments. The Court ruled that the "most
plausible reading of the constructive trust order . . . is that it was
directed at monies derived from fraudulent acts that might yet be in the
defendants' possession but could be . . . improperly siphoned away to
straws, family members, or employees without receiving fair value before
it could be attached and used to satisfy the judgment." The Court also
noted that there was no determination in the class action litigation that
the lawyers and accountants were liable and that "unjust enrichment"
claims against them could be pursued independently, but not as part of a
proceeding to enforce the class action judgment.

As to the CROA claims against the accountants and lawyers, the Court
rejected the Plaintiffs' repeated argument that they were merely
continuing the prior class action to enforce the judgment. The Court
stated that a certified class in one action may not initiate a new and
separate lawsuit against new defendants "unless and until [the class] is
certified in the new action" in accordance with Rule 23. The Court also
noted that the Plaintiffs did not allege or establish compliance with Rule
23, and that they expressly disclaimed any interest in pursuing the CROA
claims on their own behalf against the lawyers and accountants.

The appellate court also pointed out the District Court's observation that
even if the Plaintiffs had filed the CROA claims as individuals, those
claims which merely referenced the class action judgment failed to meet
the pleading standard articulated in Aschcroft v. Iqbal, 129 S. Ct. 1937,
1949-50 (2009).

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.