FYI: Ill App Ct Rules in Favor of Foreclosing Mortgagee in Borrower's Challenge to Validity of Summons

The Illinois Appellate Court, First District, recently held that a summons in a mortgage foreclosure case was valid, because it bore the seal of the trial court clerk and the clerk's stamped name, and in so holding rejected the borrowers' argument that the summons must bear the clerk's cursive signature. 

 

A copy of the opinion is available at:

http://www.state.il.us/court/Opinions/AppellateCourt/2011/1stDistrict/December/1110640.pdf

 

The borrowers argued that the trial court should have granted their motion to quash service, because the summonses issued to them did not bear the court clerk's cursive signature.  Because they alleged that service was improper, they also asserted that the court did not have personal jurisdiction over them.

 

It was undisputed that the borrowers each were served with a mortgage foreclosure complaint and summons in the case.  The summonses had the seal of the court clerk and the clerk's stamped printed name.  In support of their position, the borrowers cited to Illinois Supreme Court Rule 101(a), which provides that "[t]he summons shall be issued under the seal of the court, [at]tested in the name of the clerk, and signed with his name." 

 

The Court concluded that the real issue was what constituted a signature under the Rule.  Examining relevant precedent, the Court determined that a signature need not be written in cursive form in order to validate a summons.  The Court explained that "signing" is the act of putting down a person's name in order to attest to the validity of an instrument.  A signature may be stamped, printed, or made legible by using any other device.  Reviewing precedential case law and quoting Black's Law Dictionary, which defines a "signature" as a "person's name or mark written by that person or at that person's direction," the Court declared that a "mark" cannot be construed as a cursive signature.

 

The Appellate Court therefore found no authority that supported the proposition that the clerk's stamped name in this case was invalid because it was not in cursive form.  In addition, the borrowers presented no evidence to establish that the summonses were not issued under the circuit court clerk's authority.  Accordingly, the Court held that the summonses were properly issued, and affirmed the judgment of the lower court also rejecting the borrowers' arguments.

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:
http://updates.kw-llp.com

 

 

FYI: 9th Cir Rules Signed Right to Cancel Disclosures Inconclusive, Missing Numerical Dates on NORTC Violates TILA

The U.S. Court of Appeals for the Ninth Circuit recently held that:  (1) a borrower's signed acknowledgment of receipt of the Notice of Right to Cancel did not amount to conclusive proof that notice was delivered as required; and  (2) a Notice of Right to Cancel that does not include the numerical date of closing and the numerical date on which the right to cancel expires violates TILA. 

 

A copy of the opinion is available at: 

http://www.ca9.uscourts.gov/datastore/opinions/2011/12/29/10-55064.pdf.

 

The plaintiff borrowers, who allegedly could not read English, claimed that they received an unsolicited offer from a mortgage broker to refinance their home loan.  Subsequently, the borrower's mortgage broker appeared at the Borrowers' home with loan documents supposedly drawn up using allegedly inflated income figures taken from a loan application that had been filled out by an agent of the lending Bank ("Bank").  Despite the Borrowers' supposed protests, the mortgage broker allegedly refused to leave or reschedule until such time as the Borrowers' English-speaking daughter could assist them with understanding the loan documents.  After these alleged pressure tactics, the Borrowers signed the documents and accepted the loan proceeds.  

 

The Borrowers sought to rescind the loan by contacting both the mortgage broker and the Bank, but were allegedly informed that it was too late to rescind.  The Borrowers then filed a lawsuit alleging that the right-to-cancel notice provided to them violated the Truth in Lending Act ("TILA") in that it supposedly lacked material provisions, including the date of closing and the date on which the right to rescind expired. 

 

The Bank filed a motion to dismiss, which the district court granted, ruling that the Borrowers were entitled to a three-day rescission period because the notice provided to them complied with TILA.  In so ruling, the district court focused on the form the Borrowers signed — and attached to their complaint — acknowledging their execution of a proper notice. 

 

The Borrowers appealed, and the Ninth Circuit reversed, ruling that the complaint was not subject to dismissal, because the Borrowers might be able to prove at trial that the notice they in fact received did not comply with TILA.

 

As you may recall, TILA provides in pertinent part that a consumer may rescind a loan up to three business days after a loan transaction and that the rescission period is extended up to three years "[i]f the required notice or material disclosures are not delivered."  15 U.S.C. §1635(a); 12 C.F.R. §226.23(a)(3).  Further, a creditor must "deliver two copies of the notice of the right to rescind to each consumer" and those copies must include "[t]he date the rescission period expires."  12 C.F.R. §226.23(b)(1).  The disclosure of the right to cancel must be set forth "clearly and conspicuously in writing, in a form the consumer may keep."  12 C.F.R. §226.17(a)(1).

 

Focusing on the copy of the Notice of Right to Cancel that the Borrowers attached to the complaint, the Ninth Circuit ruled that the document merely proved that the Borrowers had signed the Notice of Right to Cancel.  This created a rebuttable presumption that the required disclosures had been delivered to the Borrowers.  See 15 U.S.C. §1635(c)("written acknowledgment of receipt of any disclosures . . . does no more than create a rebuttable presumption of delivery thereof").   

 

However, in so ruling, the Court rejected the Bank's argument that the Borrowers' signatures on the Notice of Right to Cancel proved conclusively that it had been "delivered" to them as required by TILA.  The Court noted that TILA's requirements are not satisfied merely by providing someone a document just long enough to sign it.  The Court stressed that "[d]elivery under TILA requires a permanent physical transfer" of the Notice of Right to Cancel from the creditor to the consumer, as opposed to mere signing of the disclosures. 

 

The Court also rejected the Bank's argument that the Borrowers failed to allege enough facts in their complaint to rebut the presumption of delivery of the Notice of Right to Cancel.  Citing its opinion in  In re Gilead Sciences Sec. Litigation., 536 F.3d 1049, 1057 (9th Cir. 2008), the Court stated that if the "plaintiff alleges facts to support a theory that is not facially implausible, the court's skepticism is best reserved for later stages of the proceedings when the plaintiff case can be rejected on evidentiary grounds."  

 

Noting that the Borrowers had alleged in their complaint that the notice they received did not comply with TILA, the Court concluded that they could present evidence at trial at which point the trier of fact could decide whether the Borrowers had been able to rebut the statutory presumption.  Accordingly, the court ruled that the complaint was not subject to dismissal, because "a complaint containing allegations that, if proven, present a winning case is not subject to dismissal . . . no matter how unlikely such winning outcome may appear to the district court." 

 

The Court also took issue with the alleged deficiencies in the notice of right to cancel disclosures, which supposedly omitted the date of closing and the date on which the right to rescind expired, as well as a potential misdating of the disclosures.   The Ninth Circuit held that, if the Borrower could prove that they were not allowed to keep two completed and accurate copies of the disclosure notice, the Bank would have forfeited the benefit of the three-day cooling off period and the Borrowers would have three years to rescind. See Semar v. Platte Valley Fed. Sav. & Loan Ass'n, 791 F.2d 699, 701-02 (9th Cir. 1986) ("If the lending institution omits the expiration date . . . the borrower may rescind the loan within three years after it was consummated.").  There is no indication that the Court took into account contrary authority under TILA, Regulation Z, and from other Circuits.

 

The Court noted that if the Borrowers could prove at trial that the notice they received violated TILA, they would be entitled to the three-year rescission period.

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:
http://updates.kw-llp.com

 

 

FYI: 8th Cir Rules in Favor of Lender in "Show Me the Note" Case

The U.S. Court of Appeals for the Eighth Circuit recently upheld the validity of a foreclosure by advertisement under Minnesota law, rejecting the borrower's "show me the note" and other challenges.  A copy of the opinion is attached.

 

The borrower sued his foreclosing mortgagee and a junior lienholder in state court, challenging the validity of the foreclosure.  The case was removed to federal district court, where it was referred to a federal magistrate judge for recommendations on the defendants' motions for summary judgment. 

 

The claim against the assignee was a "show me the note" challenge.  The Eighth Circuit explained that such claims challenge foreclosures based on the theory that the original paperwork evidencing a note and mortgage has been lost due to the practice of reselling and bundling mortgages.  The "show me the note" plaintiff usually alleges that a foreclosure is invalid, unless the original note is produced. 

 

In this case, the assignee produced the original promissory note and the borrower examined it.  Accordingly, the magistrate judge recommended granting the assignee's motion for summary judgment. 

 

Likewise, the federal magistrate judge recommended granting the junior lienholder's motion for summary judgment.  The borrower alleged that the junior lienholder violated the Minnesota Uniform Commercial Code, when it "foreclosed" on the borrower's mortgage.  The magistrate judge rejected that claim, because the junior lienholder did not participate in the foreclosure, but rather redeemed its interest in the property after the borrower failed to exercise his right to redemption.

 

The district court adopted both recommendations, granted the motions for summary judgment, and dismissed the borrower's claims with prejudice.  The borrower appealed.

 

On appeal, the borrower raised two arguments.  First, he contended that Minnesota law requires a mortgagee to possess both the note and the mortgage in order to foreclose by advertisement.  Second, he contended that there was a material issue of fact as to whether the assignee in this case actually possessed the note at the time it began foreclosure proceedings.

 

With respect to the borrower's first argument, held that under Minnesota law the right to enforce a mortgage through foreclosure by advertisement is that of the legal, rather than the equitable, holder of the mortgage.  The assignment of the promissory note merely operates as an equitable assignment of the underlying mortgage.  Any dispute that arises between the holder of the legal title and the holder of equitable interest in the title does not affect the status of the mortgagor for purposes of foreclosure by advertisement. 

 

The Eighth Circuit held that, because the assignee held legal title to the borrower's mortgage through a recorded assignment, the assignee was entitled to foreclose by advertisement under Minnesota law, even if the promissory note (and the associated equitable interest in the mortgage) had been transferred to another entity.

 

With respect to the borrower's argument regarding the timing of the assignee's possession of the note, the Court of Appeals held that, even if Minnesota law required the assignee to possess the note, summary judgment in favor of the assignee was proper, because there was no genuine issue of material fact that the assignee was not the holder of the note at the time of the foreclosure.  The record clearly showed that both the mortgage and the note were assigned to the assignee prior to the commencement of foreclosure by advertisement.  Moreover, the borrower presented no evidence to overcome the presumption of the validity of the foreclosure arising under Minnesota law based on the sheriff's certificate of sale.

 

The Court also held that the borrower's challenge to the junior lienholder's redemption of the property, for the most part, was directly tied to his claim that the assignee's foreclosure was invalid.  Because the Court found the foreclosure to be valid, the borrower's challenge failed.

 

The Court noted that the borrower put forth "one untethered argument," which focused on the junior lienholder's merger with another bank, after the redemption of the home.  The borrower argued that, even though the merger was not complete until after the redemption of the home, the assets of the junior lienholder (including the second mortgage and note on the home) had been transferred to the other bank before the redemption, and thus the junior lienholder did not own the second mortgage or note at the time of redemption. 

 

The Court, however, declined to address this argument, because the borrower first raised the issue on appeal and did not develop a factual record on the issue in the district court.  Consequently, the record on appeal did not contain the necessary findings to evaluate the validity of the borrower's arguments.

 

Accordingly, the Court of Appeals affirmed the judgment of the district court, granting summary judgment in favor of the defendants.

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:
http://updates.kw-llp.com

 

 

FYI: 7th Cir Holds Borrower's Testimony Sufficient to Overcome TILA Presumption of Delivery

The U.S. Court of Appeals for the Seventh Circuit recently held that a borrower's allegation that he received only one copy of the notice of his right to cancel was sufficient to survive summary judgment, despite the fact that the rebuttable presumption of delivery arising from the borrower's signed acknowledgment to the contrary.  A copy of the opinion is attached.

 

A borrower sued his mortgage lender, alleging that he was provided only one copy of the notice of his right to cancel his loan (the "NORTC").  At the closing, the borrower signed a document stating that he had been provided with two copies of the NORTC.

 

The borrower testified that he placed all of the documents he received at the closing in a filing cabinet, which he allegedly did not disturb until he examined the documents two years later.  At that time, he allegedly discovered there was only one copy of the NORTC in his file. 

 

The closing agent for the borrower's transaction testified that it was her regular practice to review all documents with the borrower prior to closing, and to provide borrowers with two copies of the NORTC  The borrower submitted an affidavit in response, stating that the closing agent "did not review anything at the end of the closing" with the borrower.  

 

The lower court granted the lender's motion for summary judgment, and the borrower appealed. 

 

As you may recall, the federal Truth in Lending Act ("TILA") provides that a borrower must be provided with two copies of the notice within three days of the closing of the transaction.  15 U.S.C. 1635(a); 12 C.F.R. 226.23(b)(1).  If the notice is not provided, the time to rescind is extended from three days to three years.  12 C.F.R. 226(a)(3).  A borrower's signed acknowledgement of the receipt of two copies of the notice creates a rebuttable presumption that the notice was in fact received.  Id. at 226(c). 

 

The Seventh Circuit noted that there were inconsistencies in the borrower's testimony -- specifically, although the borrower testified that he did not disturb the file containing his closing documents, he admitted during a deposition that there were documents in that file which post-dated the closing. 

 

Nevertheless, the Seventh Circuit held that the borrower's testimony, "if believed," was sufficient to rebut the presumption that the notice was received.  In so ruling, the Court placed emphasis on the language used in TILA regarding the rebuttable presumption:  "written acknowledgement of receipt of [the notice]...does no more than create a rebuttable presumption of delivery thereof."  15 U.S.C. Sec. 1635(c).  The Seventh Circuit read that language to suggest that "Congress was warning courts not to overstate the importance of the acknowledgement."

 

The lender argued that if the presumption of delivery could be rebutted by "nothing more than the borrower's say-so," the presumption of delivery provided for by TILA is of little practical effect. 

 

The Seventh Circuit disagreed, holding that the borrower's testimony that the file remained undisturbed and that the closing practices differed from the standard procedures described by the closing agent was "enough to permit a reasonable jury to find in [the borrower's] favor."  Therefore, it reversed the decision of the lower court, and 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:
http://updates.kw-llp.com

 

 

FYI: 6th Cir BAP Rules Against Mortgagee in Debtor's Challenge to Lien Involving Manufactured Home

The Bankruptcy Appellate Panel of the U.S. Court of Appeals for the Sixth Circuit recently held that: (1) a chapter 13 debtor had standing to pursue an avoidance action against the holder of a mortgage on land that included a manufactured home; and (2) the mortgage could be avoided, as the steps necessary to either perfect the lien on the home or convert the home from personal to real property had not been taken.

 

A copy of the opinion can be found at:  http://www.ca6.uscourts.gov/opinions.pdf/11b0016p-06.pdf.

 

Debtor purchased a tract of land using the proceeds of a loan he obtained from a mortgage lender.  The loan was secured by a lien that had been timely and properly recorded.  The lien encumbered the real property and all improvements and fixtures on the land.  Located on the land was a manufactured home.  A letter in the lender's file indicated that prior to the Debtor's purchase of the property, a mobile home had been gutted and then rebuilt as the current manufactured home.  Debtor did not acquire separate title to the manufactured home.  The promissory note and mortgage were eventually assigned to an asset securitization trust (the "Bank"). 

 

Debtor subsequently filed for Chapter 13 bankruptcy protection.  The bankruptcy court granted Debtor's motion for derivative standing to file an adversary proceeding against the Bank to avoid the Bank's lien on the home. 

 

In his adversary action against the Bank, Debtor claimed in part that the Bank's interest in the manufactured home was avoidable because the Bank had failed to perfect its lien on the manufactured home pursuant to Kentucky law.  The Bank asserted various arguments, including that Debtor lacked standing, lacked title to the home, and the home was not part of the bankruptcy estate.  The bankruptcy court rejected the Bank's arguments and ultimately granted summary judgment in favor of the Debtor.  The Bank appealed, and the Sixth Circuit Bankruptcy Appellate Panel (the "Panel") affirmed.

 

The Panel first examined whether the Debtor had standing to bring the lien avoidance action.  Relying on its decision in Countrywide Home Loans v. Dickson (In re Dickson), 427 B.R. 399 (B.A.P. 6th Cir. 2010), the Panel concluded that the Debtor had derivative standing under the Bankruptcy Code to exercise a trustee's power to avoid a lien on a manufactured home.  The Panel noted Dickson's recognition that "the realities of chapter 13 bankruptcies 'make it imperative for a debtor to be able to pursue avoidance claims if the chapter 13 trustee refuses to do so'" for reasons that may include a trustee's lack of resources, the requirements associated with a chapter 13 plan, and the risk that a debtor may be perceived as acting in bad faith if his plan does not seek avoidance of an avoidable lien.   Id. at 405. 

 

As part of its analysis as to whether the lien on the manufactured home had been perfected, the Panel first considered and rejected the Bank's argument that the home did not constitute an asset of the bankruptcy estate.  Concluding that the Debtor had, "at a minimum, an equitable interest" in the home, the Panel ruled that the manufactured home was part of the estate.  See 11 U.S.C. § 541(a)(1)(defining property of the estate as "all legal and equitable interests of the debtor in property as of the commencement" of bankruptcy proceedings). 

 

The Panel then examined the Bank's argument that the manufactured home was subject to the Bank's lien as an improvement to real property.  Noting that property interests are created by state law unless federal law has an overriding interest, the Panel observed that in Kentucky, manufactured homes are considered personal property for which a certificate of title is required and that, in order to be perfected,  the lien must be noted on the certificate of title.  See Ky. Rev. Stat. Ann. §§186A.070(1),  §186A.190(2). 

 

The Panel also observed, however, that if an affidavit of conversion to real property is filed and the certificate of title surrendered, "a manufactured home can be converted from personal property to an improvement to real property . . . thereby allowing perfection through first recording without notice."   Again citing Dickson, the Panel further noted that a creditor may obtain a perfected lien on a manufactured home through a state court order converting the home to an improvement to real property.  The Panel pointed out that in this case the steps necessary for such conversion had not been taken.   See Ky. Rev. Stat. §§186A.297, 382.110.  Thus, the manufactured home remained personal property, and the only way of perfecting a lien on the home was to place a notation on the certificate of title, which was not done.

 

The Panel also rejected the Bank's argument that the manufactured home was a "fixture" and as such was specifically covered by the language of the mortgage loan.  In ruling that the home did not become a fixture on the land subject to the mortgage, the Panel distinguished this case, involving perfection of a security interest in a manufactured home as against other creditors, from the court opinion relied on by the Bank relating to conveyance of an affixed manufactured home without a title in a divorce proceeding. 

 

The Panel observed that even if the mortgage had given the Bank a lien on the manufactured home, the Bank failed to perfect that lien by noting its lien on the certificate of title.  See Whisman v. Whisman, 2007-CA-002534-MR, 2009 WL 2971552 (Ky. Ct. App. Sept. 18, 2009)(in a court-ordered sale of real property pursuant to a divorce proceeding, an affixed manufactured home without a title may be conveyed by deed). 

 

Finally, the Panel refused to consider the Bank's argument that the priority scheme set forth in Article 9 of Kentucky's version of the Uniform Commercial Code provides that a mortgage is a means of perfecting a lien on a manufactured home that is a fixture.  Because the Bank raised this assertion for the first time on appeal, the Panel concluded that the Bank had waived the argument.

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:
http://updates.kw-llp.com

 

 

FYI: 7th Cir Confirms Municipal Fines Not "Debts" Under FDCPA

The U.S. Court of Appeals for the Seventh Circuit recently held that unpaid municipal fines are not "debts" under the federal Fair Debt Collection Practices Act, and therefore cannot be the subject of an FDCPA claim against a debt collector.  A copy of the opinion is attached.

 

The plaintiff individual ("Plaintiff") had been fined by the City of Chicago ("City") for municipal code violations on property he previously owned.  The City retained the Defendant law firm ("Firm") to collect the unpaid fines.  

 

Plaintiff filed suit, claiming he was a  "consumer" entitled to the protection afforded by the Fair Debt Collection Practices Act, 15 U.S.C. §§1692-1692p ("FDCPA"),  that the Firm violated the FDCPA by among other things harassing him and failing to validate the amount of the alleged debt.  The Firm moved to dismiss for failure to state a claim, arguing that the FDCPA applies only to "consumers" and that "fines" are not "debts" within the purview of the FDCPA. 

 

Agreeing with the Firm that fines are not covered by the FDCPA, the lower court dismissed Plaintiff's lawsuit for failure to state a claim.  Plaintiff appealed, asserting that the trial court failed to address whether the Firm violated the FDCPA's debt validation provision, section 1692g. 

 

The Seventh Circuit affirmed, based on the FDCPA's definition of "debt."  The appellate court first noted that Plaintiff did not challenge the lower court's conclusion that municipal fines are not "debts" covered by the FDCPA but nevertheless relied on the FDCPA's provisions governing "debt" validation.  The court then examined the FDCPA's definition of "debt" to determine whether the Firm's collection activity could possibly be covered by the FDCPA.

 

As you may recall, the FDCPA defines "debt" as a "transaction in which money, property, insurance, or services which are the subject of the transaction are primarily for personal, family or household purposes."  15 U.S.C. §1692a(5).  In addition, section 1692g governs the method by which debt collectors must validate disputed debts.  See 15 U.S.C. §1692g. 

 

In ruling on the applicability of the FDCPA to the fines imposed by the City, the court noted that its interpretation of "debt" was consistent with that of the Federal Trade Commission.  The appellate court also noted that precedential court opinions addressing the issue have consistently concluded that a fine is not a "debt" under the FDCPA, because a fine does not arise from a consensual consumer transaction. 

 

The Seventh Circuit agreed and likewise concluded that the FDCPA's definition of "debt" excludes fines from its coverage.    Accordingly, the Court ruled that Plaintiff's complaint failed to state a claim under the FDCPA, because the Plaintiff's entire argument regarding supposedly faulty debt validation hinged on the existence of a "debt" as defined by the FDCPA.

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:
http://updates.kw-llp.com

 

 

FYI: 6th Cir Upholds HOLA Preemption of Allegedly Usurious Prepayment Penalty, But Allows Related Breach of Contract Claim

The U.S. Court of Appeals for the Sixth Circuit recently held that two borrowers' cause of action relating to an allegedly excessive prepayment penalty under the Michigan Usury Act was preempted, but that the borrowers' cause of action based on the contractual loan agreement was not.   

 

A copy of the opinion is available at:

http://www.ca6.uscourts.gov/opinions.pdf/11a0322p-06.pdf.

 

Two borrowers paid off their mortgage early, and were charged fees in connection with the prepayment by their servicer.  Their mortgage allegedly provided that prepayments could be made without paying an extra charge.  The borrowers sued, alleging violations of the Michigan Usury Act, and breach of contract, among others. 

 

The lower court dismissed the suit, on the grounds that the borrowers' claims were preempted by the Home Owners' Loan Act ("HOLA").  The borrowers appealed. 

 

The Sixth Circuit confirmed that the Dodd-Frank Act amendments affecting preemption under HOLA are not retroactive.  Thus, preemption based on HOLA was at the time of the challenged charges governed by the implementing regulations of the Office of Thrift Supervision ("OTS").  Those implementing regulations provide that "state laws purporting to impose requirements regarding... loan related fees..." are preempted by HOLA.  12 C.F.R. Sec. 560.2(b). 

 

On appeal, the Sixth Circuit drew a distinction between "[s]tate laws that propose to regulate a federal organization's lending activities" and actions based on contractual provisions that are "imposed by the contracting party upon itself."  It noted that the Michigan Usury Act, which prohibits charging certain prepayment fees, falls into the preempted category relating to lending activities, whereas the borrowers' breach of contract claim falls into the non-preempted category relating to contracts. 

 

The Sixth Circuit held that because the Michigan Usury Act is "the type of state law explicitly listed as preempted" in HOLA's implementing regulations, the lower court properly dismissed the borrowers' claim based on that Act. 

 

In addition, even though the federal savings association servicer did not extend the loans at issue, the Sixth Circuit held that "[c]ontrary to the Moloskys' claims, HOLA preemption is applicable in situations where, as here, a federal savings association did not originate the loan but instead later serviced it."

 

The Sixth Circuit came to the opposite conclusion with regard to the borrowers' breach of contract claim.  It noted that state contract and commercial law are specifically exempted from preemption, if such laws "only incidentally affect the lending operations of Federal savings associations..."  12 C.F.R. Sec 260.2(c).  Although the Court acknowledged that state contract law which "seeks to effectuate a state's public policy" might be preempted by HOLA, it nevertheless observed that "state contract law that seeks to effectuate the intent of the parties" is not. 

 

Therefore, the Sixth Circuit held that the borrowers' breach of contract claim was not preempted by HOLA, and remanded the matter back to the lower court for further proceedings.  

 

In addition, the Court held that "M.C.L. § 565.41 does not prohibit the charging of recording fees," and therefore the borrowers failed to state a claim under state law relating to the servicer's charges for recording fees for the release of lien. 

 

Likewise, the Court held that the borrowers failed to state a claim under Michigan Consumer Protection Act, M.C.L.§ 445.901 et seq., because the Michigan Consumer Protection Act by its own terms does not apply to activities authorized under federal law, which here included a federal savings association's servicing of residential mortgage loans and recording releases of related liens.

 

The Sixth Circuit also held that the borrowers' allegations that the servicer violated RESPA in connection with its charges for recording fees relating to the releases of liens "failed to state a claim under RESPA because 12 U.S.C. § 2607, under which they have brought their claim, does not apply to fees assessed after a property's settlement."

 

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:
http://updates.kw-llp.com