FYI: 9th Cir Voids Foreclosure Sale, Holds Mortgagee Failed to Properly Announce Postponement of Sale, Allows Damages to Borrower

The U.S. Court of Appeals for the Ninth Circuit recently held that: (1) a mortgagee's failure to publicly announce the postponement of a foreclosure sale violated Hawaii's non-judicial foreclosure statute, (2) the proper remedy for such violation was voiding the subsequent foreclosure sale, (3) such violation constituted a deceptive trade practice under Hawaii law, (4) the proper determination of damages for the deceptive practice required a finding that the deceptive practice was the cause of Debtor's damages, and (5) on remand, calculation of attorneys' fees may take into account the mortgagee's settlement offer to the Debtor.
 
A copy of the opinion is available at: 

http://www.ca9.uscourts.gov/datastore/opinions/2012/03/26/09-60019.pdf.

 

Plaintiff-appellant ("Debtor") allegedly defaulted on a home mortgage loan.  During the course of the ensuing foreclosure action, and shortly before the scheduled foreclosure sale of the property, the Debtor filed for Chapter 13 bankruptcy protection.   As a result of the bankruptcy, the loan owner and mortgage servicer (collectively "Lender") postponed the sale of the property and publicly announced the postponement in a manner consistent with Hawaii foreclosure law. 

 

Having to postpone the sale again, however, on the date of the scheduled sale, Lender's counsel sent its secretary to the location of the sale in order to announce that the sale was being postponed one more time.  While at the site of the scheduled foreclosure sale, the secretary asked a number of persons in attendance if they were interested in purchasing the Debtor's property, but allegedly failed either to announce to anyone that the sale had been postponed again or to post any information about the postponement.
 
The Lender then moved for relief from the automatic stay in order to proceed with the sale at a later date.  The bankruptcy court granted the motion, and the property was sold to the Lender who also obtained an order of eviction in a subsequent eviction proceeding. 

 

The Debtor filed a complaint in bankruptcy court alleging among other things that the sale of the property violated the automatic stay, breached the terms of the mortgage contract, constituted an unfair and deceptive trade practice under Hawaii law, and violated the statutory requirements for non-judicial foreclosures.

 

The bankruptcy court determined that the Lender's failure to publicly announce the postponement of the foreclosure sale violated the "public announcement" requirement under Hawaii's non-judicial foreclosure statute.  The bankruptcy court also ruled that the Lender had breached the mortgage contract in that the contract required compliance with state law in any foreclosure proceeding.  The bankruptcy court thus voided the foreclosure sale of the property.

 

The bankruptcy court also concluded that the improper postponement constituted an unfair and deceptive trade practice in violation of Hawaii law, and thus awarded treble damages to the Debtor based on the Debtor's lost equity in the house and the rental value of the house for the time that she was not in possession of the property.  The court also awarded attorney fees for defending the eviction action.   In addition, the court awarded attorneys' fees to the Debtor for the breach of contract claim and the consumer protection claim.   Allocating the fees equally between the contract and consumer claims, the court calculated the amount of attorneys' fees for the contract claims as twenty-five percent of the judgment, the statutory limit that prevailing parties may collect under Hawaii law. 

 

Lender appealed, challenging the bankruptcy court's determinations of liability, damages, and attorney fees.  The Debtor cross-appealed, claiming that the attorneys' fees for the contract claim should not have been limited to twenty-five percent of the value of the equity.  The Ninth Circuit's Bankruptcy Appellate Panel ("9th Cir BAP") reversed, ruling that the Lender had satisfied the public announcement requirement, had not breached the mortgage contract, and that there had been no deceptive practice. 

 

The Debtor appealed.  The Ninth Circuit reversed on the issue of liability and remanded for a determination on damages and attorneys' fees.

 

As you may recall, under Hawaii law, a foreclosure sale may be postponed by the mortgagee "by public announcement." HRS § 667-5.  Hawaii also permits a prevailing party in contract claims to collect attorney's fees up to twenty-five percent of the judgment.  HRS § 607-14.  In addition, a consumer who establishes a violation of Hawaii's unfair or deceptive practices act is entitled to treble damages for damages sustained as a result of the deceptive action.  HRS §§ 480-2(a), 480-13. 

 

The Ninth Circuit noted first that Hawaii law does not define the term "public announcement," but determined that under the plain meaning of the statute no such announcement had been made. In so doing, the Court took issue with the 9th Cir BAP's reliance on statutory context and purpose to define the term, in lieu of the plain language.  Accordingly, the Ninth Circuit concluded that the Lender had violated the "public announcement" requirement of HRS 677-5. 

 

Turning to the issue of remedies for violating foreclosure procedure, the Ninth Circuit ruled that Hawaii law requires strict compliance with the requirements of the non-judicial foreclosure statute.   In so ruling, the court relied on the Hawaii Supreme Court's opinion in Lee v. HSBC Bank USA, 218 P.3d 775 (Haw. 2009), which held that non-compliance with the foreclosure statute invalidates a subsequent foreclosure sale.  See also Silva v. Lopez, 5 Haw. 262, 1884 WL 6695 (1884) (technical violations of foreclosure procedures void a foreclosure sale).  The Court thus concluded that the proper remedy was avoidance of the foreclosure sale.  The Court further ruled that breach of the mortgage contract requiring the Lender to comply with the non-judicial foreclosure statute was an alternative basis for voiding the sale.

 

With regard to the deceptive practices claim, the Ninth Circuit agreed with the bankruptcy court's determination that because the failure to make a public announcement of the postponement of the foreclosure sale was "likely to mislead a consumer," it constituted a deceptive practice under HRS § 480-2.  The Court noted, however, that (1) in order to be entitled to damages for such deceptive practice, the Debtor must demonstrate that the enumerated damages were traceable to the improper postponement of the foreclosure sale, and (2) the bankruptcy court's failure to specify the cause of the Debtor's damages could suggest that the Debtor's losses stemmed from her default rather than from the improper manner in which the postponement was handled.  Accordingly, the Court remanded the case back to the bankruptcy court to determine the cause of Debtor's damages, including the loss of the property.

 

Moreover, in light of the its remand of the damages-causation issue, the Ninth Circuit also vacated the award of attorneys' fees.  In addressing the bankruptcy court's calculation of attorneys' fees, the Court pointed out that, consistent with its recent decision in Ingram v. Oroudjian, 647 F.3d 925 (9th cir. 2011), the bankruptcy court could consider evidence of a settlement offer the Lender purportedly made to the Debtor. 

 

In addition, the Ninth Circuit rejected the Debtor's argument that it was improper to limit the amount of attorneys' fees for the breach of contract claim to twenty-five percent of the value of the lost equity under Hawaii law.  In so ruling, the Court noted that the debtor's complaint requested only monetary damages and that her subsequent election to recover the mortgaged property did not allow the amount of fees recovered to exceed the twenty-five percent statutory limit under section 607-14.

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: CFPB Gets It Wrong on Rescission

As widely reported in the media, the federal Consumer Financial Protection Bureau filed its first amicus brief in the U.S. Court of Appeals for the Tenth Circuit, in connection with a TILA rescission appeal.  A copy of the amicus brief is attached.

 

The issue in the case is whether a TILA rescission lawsuit filed more than three years after closing is timely, when the borrower demanded rescission under TILA in writing and before the three year period under 15 U.S.C. § 1635(f) expired.  The CFPB takes the position that "§ 1635(f) defines the time to notify the lender, and not the time to sue the lender."

 

However, the CFPB states in its brief (at p. 4):

 

"Specifically, the right to rescind applies to open-end and closed-end loans secured by a lien on the consumer's principal dwelling (e.g., home equity lines of credit, second mortgages, and refinances). See generally 12 C.F.R. §§ 1026.15, 1026.23. The right to rescind does not apply to first mortgages. 15 U.S.C. § 1635(e)(1)."

 

Although the recitation of the borrower's allegations is not completely clear, it appears that under the CFPB's reading of TILA, the borrower in this case has no right to rescind under TILA.

Also of note, the CFPB states (at p. 24):

 

"The fact that § 1635 does not expressly limit the time period for litigation does not mean no limit exists. Some courts have concluded that TILA's general one-year statute of limitations, 15 U.S.C. § 1640, permits consumers to bring suit to compel compliance with their rescission within one year of the lender's refusal to unwind the transaction after receiving the notice of rescission. See, e.g., In re Hunter, 400 B.R. at 660-61 (N.D. Ill. 2009); Barnes, 2011 WL 4950111. There is some support for this approach in the legislative history. See S. REP. NO. 96-368, at 32 (1979), reprinted in 1980 U.S.C.C.A.N. 236, 268. Other courts have criticized application of § 1640 to rescission under § 1635. See, e.g., McOmie, 667 F.3d at 1327-28; Bradford, 799 F. Supp. 2d at 632-33.  If § 1640 does not apply, courts may apply well-established borrowing doctrines to find an analogous statute of limitations. See, e.g., Graham Cnty. Soil & Water Conservation Dist. v. United States ex rel. Wilson, 545 U.S. 409, 414-15 (2005); Bowdry v. United Air Lines, 956 F.2d 999, 1004-05 (10th Cir. 1992)."

 

The CFPB indicates that it "a

lso plans to file amicus briefs in at least three other appellate cases—in the Third, Fourth and Eighth Circuits—in which briefing is still pending. See Sherzer v. Homestar Mortg. Servs., No. 11-4254 (3d Cir. docketed Dec. 16, 2011); Wolf v. Fed. Nat'l Mortg. Ass'n, No. 11-2419 (4th Cir. docketed Dec. 23, 2011); Sobieniak v. BAC Home Loans Servicing, LP, No. 12-1053 (8th Cir. docketed Jan. 1, 2012)."

 

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: 8th Cir Rules In Favor of Debt Collector on Allegations of False Court Filings

The U.S. Court of Appeals for the Eighth Circuit recently held that dismissal of federal Fair Debt Collection Practices Act allegations for alleged factual misrepresentations by a debt collection law firm to a state court during the course of debt-collection proceedings was proper, where evidence supported the debt collector's case and was thus not misleading or otherwise an abuse of the debt collection process.  

 

A copy of the opinion is available at: 

http://www.ca8.uscourts.gov/opndir/12/03/112029P.pdf

 

A divorce agreement between Plaintiff-appellant ("Debtor") and her husband allegedly acknowledged that they held a joint credit card account and that a debt was owed on the account.  The divorce agreement allegedly specified that the husband alone was responsible for payments on the debt.  

 

However, attempting to collect on that debt, a debt collection law firm ("Law Firm") filed suit against the Debtor in Minnesota state court on behalf of the creditor credit card company.  The Debtor and the Law Firm each moved for summary judgment. The Debtor submitted an affidavit stating that the credit card company had no evidence showing that the Debtor ever applied for or received a credit card, agreed to pay the debt allegedly owed, or received any benefit from the credit card.

 

The Law Firm filed a memorandum and affidavit in support of it motion stating that the Debtor assented to the terms of the credit card account by, among other things, using the credit card and making partial payments on the account.   

 

The state court granted summary judgment for the Debtor, ruling that the credit card company had failed to produce evidence that the Debtor had agreed to the terms of the credit card account or benefitted from the use of the credit card, and because her former husband had agreed to be responsible for the debt in the divorce agreement.   

 

The Debtor subsequently filed an action in federal court alleging that the defendant Law Firm violated the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692d-f ("FDCPA"), by allegedly making false statements and misrepresentations in its various filings in the state court action.  The Debtor's complaint also included state law claims for harassment, abuse of process, and malicious prosecution, and sought treble damages for violation of a Minnesota statute regarding deceit by an attorney. 

 

The federal district court granted summary judgment in favor of the Law Firm and dismissed the FDCPA claims, ruling that because the representations made in the state court filings were made to the court and not directly to the Debtor, there was no actionable claim under section 1692e of the FDCPA.  The district court also dismissed the claims based on alleged harassment and unconscionable practices, because the divorce agreement sufficiently linked the debtor to the debt to defeat allegations that the Law Firm had engaged in unconscionable means of collecting the debt.  The Debtor appealed, and the Eighth Circuit affirmed on different grounds.

 

As you may recall, the FDCPA prohibits a debt collector from:  engaging in harassment or abuse, 15 U.S.C. § 1692d; using any false, deceptive, or misleading representations in connection with the collection of a debt, 15 U.S.C. § 1692e; or, using unfair or unconscionable means to collect a debt.  15 U.S.C. §§ 1692f.

 

Noting that courts have struggled to define precisely how a debt collection lawyer's representations during debt collection litigation violate the "conduct-regulating provisions" of the FDCPA, the Eighth Circuit recognized that the district court reasonably concluded that the Eighth Circuit's decision in Volden v. Innovative Fin. Systems, Inc., 440 F.3d 947, 954 (8th Cir. 2006), required dismissal of the Debtor's section 1692e claims, as the alleged misrepresentation was made to the state court rather than directly to the plaintiff.  See, e.g., Jerman v. Carlisle, Mcnellie, Rini, Kramer & Ulrich, LPA, 130 S. Ct 1605, 1622 (2010)('conduct-regulating provisions should not be assumed to compel absurd results when applied to debt collecting attorneys"); Heintz v. Jenkins, 514 U.S. 291, 296-97, 299 (1995) (FDCPA applies to attorneys regularly engaged in debt collection litigation, but the preservation of creditors' judicial remedies may require "additional, implicit, exceptions" to certain provisions). 

 

In so doing, however, the Court declined to follow the district court's broad ruling that false statements not made directly to a consumer debtor are never actionable under Section 1692e.  Instead, in light of the cautionary language in the Supreme Court's opinion in Heintz, the Eighth Circuit chose to adopt a case-by-case approach in order to correctly apply the FDCPA's prohibitions to attorneys engaged in debt collection litigation.
 
In this case, the Court noted that the alleged false statements appeared in summary judgment filings, and did not:  (a) contain any assertions not already known to the Debtor's attorneys;  (b) mislead the court or anyone else; or  (c) cause the Debtor to rely to her detriment on the factual accuracy of those pleadings. 

 

The Court also found it significant that shortly after the filing of the district court case, the credit card company located records showing that the Debtor, contrary to her prior assertions, had written a check to make a payment on the disputed account.  Thus, the Court held that all the Debtor's FDCPA claims failed because that evidence provided factual support for the pleadings filed in the state court action, even if the state action turned out to be unsuccessful for the creditor.

 

Finally, the Eighth Circuit upheld the dismissal of the state law claims based on the alleged deceitful action of the Law Firm in pursuing a supposedly baseless debt collection action, because these claims had not been raised in the state-court proceeding where the deceit allegedly occurred.   

 

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: 8th Cir Upholds Rejection of Putative Classwide Challenge of Certain Closing Fees as UPL

The U.S. Court of Appeals for the Eighth Circuit recently held that: (1) the named plaintiff in a putative class action that was removed to federal court lacked standing to bring a claim alleging that certain loan fees were improperly paid for legal services performed by non-lawyers, and (2) the district court should have dismissed for lack of jurisdiction, rather than grant summary judgment for defendants, where the plaintiff was unable to show that she had paid the disputed fees and thus suffered any injury.

 

A copy of the opinion in available at:

http://www.ca8.uscourts.gov/opndir/12/03/111027P.pdf.

 

Plaintiff-Borrower filed a putative class action in Missouri state court, claiming that a lending bank and a mortgage broker (collectively "Defendants") violated Missouri law by charging certain loan fees for alleged legal services performed by non-lawyers at the closing of the loan, and that such services constituted the unauthorized practice of law.   Plaintiff-Borrower alleged that the administrative and processing fees associated with her mortgage refinancing loan were for the preparation of legal documents used in the refinancing, and were thus improper under the Missouri statute prohibiting the unlicensed practice of law.

 

The Defendants removed the case to federal court under the Class Action Fairness Act ("CAFA"), arguing that the Plaintiff-Borrower had not limited the potential class to Missouri consumers and that consideration of a nationwide class was appropriate in determining the amount in controversy.  The district court rejected the Plaintiff-Borrower's motion to remand.  The Plaintiff-Borrower then filed an amended complaint clarifying that the class consisted only of Missouri plaintiffs, and that the amount in controversy did not exceed the jurisdictional threshold for removal.  Ruling that the Plaintiff-Borrower lacked standing because she had not paid the disputed fees, the district court granted Defendants' motion for summary judgment.  Plaintiff-Borrower appealed.

 

As you may recall, CAFA confers jurisdiction on federal courts over class actions involving more than 100 class members and where the amount in controversy exceeds $5 million and there is minimal diversity among the parties. 28 U.S.C. § 1332(d). 

 

The Eighth Circuit began it analysis by noting that jurisdiction is determined at the time of removal, and that Plaintiff-Borrower's operative complaint did not limit the potential class to Missouri plaintiffs.  The Court of Appeals thus ruled that because a nationwide class was a possibility under the original complaint, the amount in controversy may have exceeded the jurisdictional threshold for removal under CAFA.  The Court further noted that the Plaintiff-Borrower failed to meet her burden to establish to a "legal certainty" that the amount in controversy at the time of removal was for less than $5 million.  Accordingly, the Court of Appeals ruled that the lower court properly denied Plaintiff-Borrower's motion to remand.

 

Turning to the issue of Plaintiff-Borrower's standing, the Court noted that the Plaintiff-Borrower was unable to substantiate her allegations of financial injury by affidavit or other evidence in order to withstand the Defendants' motion for summary judgment.  In so doing, the Court relied on the loan settlement statement and witness testimony to reject the Plaintiff-Borrower's assertion that she paid the disputed fees -- and thus that she paid for alleged unauthorized legal services -- either directly with the money she brought to the loan closing or indirectly through a higher interest rate on her loan.  The Court also rejected the Plaintiff-Borrower's arguments for additional discovery time and judicial notice of legislative materials related to yield spread premiums under TILA and RESPA.

 

The Eighth Circuit concluded that, because Plaintiff-Borrower was unable to show that she had paid the disputed fees, there was no need to address the question of whether those fees were for services performed by non-lawyers. Thus, the Court ruled that, as the Plaintiff-Borrower had not shown injury, she lacked standing to bring her claim, and that, rather than reaching the merits of Defendants' motion for summary judgment, the lower court should have dismissed for lack of 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
 

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