FYI: 4th Cir Rejects Challenge to Consumer Plaintiffs Lawyers' Solicitations Under Litigation Exception to DPPA

The U.S. Court of Appeals for the Fourth Circuit recently upheld a summary judgment ruling in favor of a group of consumer plaintiffs lawyers, holding that:  (1) letters sent by the lawyers to prospective consumer plaintiffs in a related lawsuit were impermissible "solicitations" under the federal Driver Privacy Protection Act; but  (2) the solicitations were so closely intertwined with, and integral to, the litigation that obtaining plaintiffs' personal identifying information was permissible as a litigation exception under the DPPA.

 

A copy of the opinion is available at: 

http://pacer.ca4.uscourts.gov/opinion.pdf/102021.P.pdf.

 

Plaintiffs-appellants ("Car Buyers") filed a putative class-action complaint against a number of attorneys ("Lawyers") under the federal Driver Privacy Protection Act of 1994 ("DPPA"), claiming that certain mailings they received from the Lawyers violated that DPPA. 

 

The complaint alleged that, during the course of investigating potential claims and pursuing a group-action lawsuit against various car dealerships for alleged deceptive practices in supposed violation of a South Carolina consumer protection law ("Dealers Act"), the Lawyers had sought and unlawfully obtained personal information about the Car Buyers from South Carolina's Department of Motor Vehicles ("DMV") under the state Freedom of Information Act. 

 

The Car Buyers alleged that the Lawyers had impermissibly obtained and used protected personal information about their car purchases, addresses, and telephone numbers for purposes of lawyer advertising and solicitation. The Car Buyers sought liquidated, compensatory and punitive damages, as well as a permanent injunction under the DPPA.

 

The Lawyers countered that they had obtained the Car Buyers' personal information properly under the litigation exception to the DPPA, as they were investigating additional potential claims related to the ongoing Dealers Act litigation.  Moreover, the Lawyers also asserted that because they had acted as "private attorneys general" in the Dealers Act litigation, the "state action" exception also applied to their requests for information to the DMV.

 

The district court granted summary judgment in favor of the Lawyers and dismissed the claims with prejudice, ruling that the Lawyers had not engaged in prohibited solicitation, but that even if they had engaged in solicitation, the Lawyers' conduct satisfied the litigation and state action exceptions to the DPPA's prohibitions and was therefore lawful.  The lower court reasoned that the Lawyers' conduct was analogous to that of a state attorney in the related Dealers Act litigation and thus constituted an "investigation in anticipation of litigation" or a permitted use "in connection with [a] civil . . . proceeding."  

 

The Car Buyers appealed, and the Fourth Circuit affirmed on slightly different grounds.

 

As you may recall, the DPPA prohibits any person from knowingly obtaining or disclosing "personal information" such as social security numbers, telephone numbers, and addresses from state DMVs "for any use not permitted" under the DPPA.  18 U.S.C. § 2722.   The DPPA in turn permits the disclosure of personal information for purposes of bulk distribution for surveys, marketing or solicitations, provided the person to whom the information pertains has given his express consent to the state.  18 U.S.C. § 2721(b)(12).  Moreover, the DPPA's "litigation exception" permits a state DMV to disclose personal information of drivers and car owners for use "in connection with" litigation, including civil or criminal actions.  18 U.S.C. §2721(b)(4).  Further, under the "state action" exception, a private person acting on behalf of a federal, state or local agency, may obtain such information from a DMV.  18 U.S.C. § 2721(b)(1).

 

In analyzing whether the Lawyers had engaged in "solicitation" in violation of the DPPA, the Fourth Circuit applied a "consumer-protective objective standard" and noted in part that the letters sent to the Car Buyers described the letters as "advertising material."   According to the Court, a reasonable recipient would thus understand such material to be a lawyer's solicitation for business.   

 

The Court further noted that the letters encouraged recipients to respond to the Lawyers to learn about their rights in the Dealers Act litigation and to "participate in the case" but made no mention that the recipients' interests may have already been represented in that group-action litigation.  Looking at the various factors, the Fourth Circuit agreed with the Car Buyers and ruled that the letters were improper solicitations under the DPPA.

 

However, the Fourth Circuit rejected the Car Buyers' argument that any impermissible use of personal information, such as the solicitations in this case, would automatically be a violation of the DPPA.  In so ruling, the Court adopted the persuasive reasoning of the Eleventh Circuit in Rine v. Imagitas, Inc., 590 F.3d 1215 (11 Cir. 2009), which held that overlapping provisions of the DPPA must be given effect, unless they are completely at odds, and that non-consensual solicitation inextricably intertwined with the state-action exception is not actionable.  See also Thomas  v. George, Hartz, Lundeen, Fulmer, Johnstone, King & Stevens, P.A., 525 F.3d 1107(11th Cir. 2008)(lawyer's purported prohibited solicitation was tied to  investigation in anticipation of litigation). 

 

Consistent with the Eleventh Circuit's reasoning, the Court agreed that full effect should be given to the permissive use protected by the litigation exception and that to hold otherwise would be an unreasonable reading of the DPPA. 

 

Accordingly, under the facts and circumstances in this case, the Fourth Circuit ruled that the solicitation was not actionable by the Car Buyers, because "under the pragmatic approach to the litigation exception," the Lawyers had to first engage in the solicitation in order to make appropriate use of the personal information in the Dealers Act litigation, and such use was integral to and inextricably intertwined with conduct permitted pursuant to the litigation exception. 

 

Finally, the Fourth Circuit also rejected the Car Buyers' assertion that the district court had engaged in procedural impropriety by taking judicial notice of the documents associated with the Dealers Act litigation that the Lawyers had attached to their pleadings.  The Court pointed out that the lower court had taken judicial notice of the materials, not for the facts asserted therein, but as evidence of the intended and actual use of the Car Buyers' personal information. 

 

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: 7th Cir Rules Against Lender on Insurance Bond Claim for "Counterfeit" Certificate of Origin

The U.S. Court of Appeals for the Seventh Circuit recently held that an insurer was not liable to cover a bank's loss resulting from the bank's reliance on a fraudulent certificate of origin as part of the collateralization of a loan, where the loss did not result from reliance on a "counterfeit" within the plain language of the insurance bond.

 

A copy of the opinion is available at: 

http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=11-2082_002.pdf.

 

Plaintiff lending bank ("Bank") extended a loan to a borrower for purposes of purchasing a motor home from the borrower's own dealership.  Pledging the motor home as security for the loan, the borrower allegedly presented to the Bank a certificate of origin for the motor home.  The borrower ultimately defaulted on the loan and, when the Bank sought to repossess the motor home, the Bank discovered that the specific motor home purportedly represented by the certificate of origin did not exist and that the certificate of origin was fabricated using a fictitious vehicle identification number. 

 

After discovering the fraud, the Bank sought to recover its loss through the Bank's insurance bond with defendant insurer ("Insurer").  The Bank claimed that the certificate of origin presented by the borrower was "counterfeit" and thus a covered loss under the bond.    The Insurer denied coverage, asserting that the insurance bond did not cover the particular fake certificate of origin because the certificate was not "counterfeit" as defined by the insurance bond.

 

The Bank filed suit in district court.  The parties filed cross motions for summary judgment.  Agreeing with the Insurer, the district court determined that the fraudulent certificate of origin was not "counterfeit" within the meaning of the insurance bond and granted summary judgment in favor of the Insurer.

 

The Bank appealed.  The Seventh Circuit affirmed, and ruled that the fraudulent certificate of origin was not "counterfeit" within the plain language of the insurance bond.

 

The applicable insurance bond defined the term "counterfeit" as "a written imitation of an actual, valid Original which is intended to deceive and to be taken as the Original."  Further, the bond in turn defined term "Original" as "the first rendering or archetype, and does not include photocopies or electronic transmissions . . . "

 

Noting that the terms in the applicable insurance bond have a long history of interpretation by the courts, the Seventh Circuit also noted that the applicable version of the insurance bond contained a definition of "counterfeit" that reflected case law requirements that a "counterfeit" document be an imitation of an actual, valid original. 

 

In so ruling, the Seventh Circuit rejected the Bank's argument that the fake certificate of origin was an imitation of an actual, valid certificate of origin, because the fake certificate merely imitated other certificates in general, but not the actual, original certificate of origin for the specific motor home purportedly used as the collateral.  The Court observed that the fake certificate was a complete fabrication bearing a fictitious vehicle identification number. 

 

The Seventh Circuit thus held that, because the fake certificate did not correspond to any actually existing certificate of origin and, as such, could not be an imitation "of an actual, valid Original," the fake certificate could not qualify as a "counterfeit" for purposes of the insurance bond. 

 

In so ruling, the Court also noted that the denial of coverage based on the nature of the fake certificate was consistent with the rationale for not insuring the risk of reliance on a document that purports to be something that never existed.

 

 

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: Judge Enters Consent Judgments in $25B National Servicing Settlement

As widely reported in the news media, Judge Rosemary Collyer of the U.S. District Court for the District of Columbia entered the proposed consent judgments against the five largest mortgage loan servicers, including the attached sample Settlement Term Sheet and additional exhibits specific to each defendant. 

 

This effectuates the $25 billion national servicing (or so-called "robo-signing") settlement, brought by 49 state Attorneys General and the U.S. Department of Justice. 

 

The Attorneys General set up a website which provides additional documentation regarding the settlement, including a "Settlement Executive Summary" and "Settlement Fact Sheet," at:

 

http://www.nationalmortgagesettlement.com/

 

 

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: Cal App Ct Reverses Judgment Against Commercial Guarantor, Citing State Lease Non-Termination Law

The California Court of Appeal, Second District, recently held that a guarantor of a commercial loan was not liable, where the lease met California's non-termination requirements, and the borrower had not "terminated" the lease in a manner that would trigger the guaranty obligations.

 

A copy of the opinion is available at: 

http://www.courtinfo.ca.gov/opinions/documents/B229879.PDF.

 

Plaintiff lender ("Lender") filed suit against the guarantor ("Guarantor") of a loan used to purchase commercial property.  The borrower's commercial tenant, a financial institution, went out of business, abandoned the property, and the tenant and its successor-in-interest ceased paying rent to the borrower.  The borrower later stopped making its loan payments to Plaintiff Lender and defaulted on the loan.  Plaintiff Lender obtained title to the property pursuant to a non-judicial foreclosure sale, and filed suit against the loan Guarantor for the balance due on the loan.  Both parties filed cross-motions for summary judgment addressing the recourse provision in the loan agreement.
 
The trial court concluded that the tenant had terminated the lease without the Plaintiff Lender's consent and that the Guarantor was thus liable on the guaranty, pursuant to the recourse provision in the loan agreement.  The court awarded the Lender over $42 million in damages plus attorney fees and costs.  The Guarantor appealed the judgment and award of attorney fees. 

 

The Court of Appeal reversed and remanded with instructions to grant summary judgment in favor of the Guarantor, ruling that the lease had not been "terminated" in a manner that triggered the recourse and guaranty provisions.

 

As you may recall, the California Civil Code provides that, except as otherwise provided in Section 1951.4, a lease terminates when a lessee of real property breaches the lease and abandons the property before the end of the lease term. Cal. Civ. Code § 1951.2, subdivision (a).   Section 1951.4, subdivision (b), in turn provides that even where a lessee has breached a lease and abandoned the property, the lease continues in effect until such time as the lessor terminates the lessee's right of possession.  Cal. Civ. Code § 1951.2, subdivision (b).
 
The loan guaranty agreement here provided that the guaranty would kick in upon the occurrence of certain events, including the termination or cancellation of the lease without the prior written consent of the Plaintiff Lender.  Further, the lease provided that "[n]o act by Lessor [the borrower] other than giving notice of termination to Lessee shall terminate Lessee's right to possession."

 

The Court of Appeal determined initially that the tenant had breached the lease by stopping its rental payments and abandoning the property.  In so ruling, the Court relied on the explicit terms of the lease defining "default" as including abandonment of the leased premises and failure to pay rent.  The Plaintiff Lender argued that this breach constituted a "termination" of the lease that triggered the guaranty provision in the loan agreement, and cited section 1951.2, subdivision (a) as support for this argument. 

 

The appellate court was not persuaded by Plaintiff Lender's argument, and ruled that section 1951.2 subdivision (a) did not apply to the loan guaranty in this case.  Noting that the lease specifically provided that the parties' intent was that the lease would not be terminable for any reason by the lessee and that any "law to the contrary" would not change the agreement, the Court ruled that under the plain language of the lease, neither failure to pay rent nor abandonment of the property could terminate the lease. 

 

Moreover, the Court pointed out that the Plaintiff Lender had failed to cite the critical provisions of sections 1951.2, subdivision (a) and 1951.4, subdivision (b) limiting termination of a lease to specific instances not present in this case. 

 

The appellate court ruled that the non-termination provision of section 1951.4 applied in this case, where the borrower had not given the tenant notice of termination of tenant's right to possession pursuant to the lease's termination provision.  Accordingly, the Court ruled that the lease did not "terminate" in a manner that would trigger the guaranty obligations, and the Plaintiff Lender's recourse was the security under the deed of trust, which it had already obtained in the non-judicial foreclosure sale.

 

 

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: 10th Cir Confirms Dismissal of Securitization and MERS Challenge

The U.S. Court of Appeals for the Tenth Circuit recently held that the securitization of a home mortgage loan did not render a deed of trust unenforceable under Utah law, and did not deprive MERS the authority to foreclose, where the trust deed explicitly granted foreclosure authority to MERS.

 

A copy of the opinion is available at:   

http://www.ca10.uscourts.gov/opinions/11/11-4118.pdf.

 

Plaintiffs-appellants, including borrowers who had executed a deed of trust to obtain a home mortgage loan  (collectively "Borrowers"), filed a complaint alleging that defendant Mortgage Electronic Registration Systems, Inc. ("MERS") lacked authority to foreclose on their home because the debt had been securitized as part of a pool of asset-backed securities.  The Borrowers argued that the securitization process had severed the debt from its security and thereby rendered the deed of trust unenforceable under Utah law.  The Borrowers also alleged that the foreclosure on their home was improper, because the current investor-owners of the loan were unknown to them.

 

The district court rejected the Borrower's assertions, ruling that MERS had authority to foreclose as the deed of trust expressly established MERS as beneficiary and "nominee for Lender and Lender's successor's and assigns."  Borrowers appealed.  The Tenth Circuit affirmed. 

 

As you may recall, Utah law provides that a transfer of a debt secured by a trust deed operates as a transfer of the security of the debt.  Utah Code Ann.  § 57-1-35.  Borrowers argued that this provision operated to invalidate the trust deed once the debt and its security were purportedly severed in the securitization process.

 

Noting that it recently addressed the "split-note" theory in a case involving factually similar circumstances and one of the plaintiffs in this case, the Tenth Circuit ruled that MERS had the authority to foreclose, because the deed of trust securing the debt expressly granted MERS that authority.  See Commonwealth Property Advocates, LLC v. Mortgage Electronic Registration Sys., Inc.,  ___ F.3d ___, 2011 L 6739431 (10th Cir. 2011). 

 

Here, as in its earlier opinion, the court deferred to the Utah Court of Appeals, which had previously observed that Utah Code Ann.  § 57-1-35 simply recognizes the principle that transfer of a debt does not disturb the underlying security for the debt.  Commonwealth Property Advocates v. Mortgage Electronic Sys., Inc., 263 P.3d 397, 399 (Utah Ct. App).  

 

Thus, as in its earlier opinion, the Tenth Circuit noted that even if the securitization process had divested MERS of its implicit authority to foreclose, the trust deed explicitly granted MERS that authority, and Utah Code Ann.  § 57-1-35 did not operate to preclude granting such authority.  Accordingly, the Court ruled that Borrowers' argument lacked a legal basis under Utah law, and that the district court had properly dismissed their law suit. 

 

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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