Friday, April 27, 2012

FYI: Cal App Confirms No Requirement to Record Assignment to Note Holder in Foreclosure of Deed of Trust

The California Court of Appeal, First District, recently held that California's statutory requirement to record an assignment to the note holder prior to foreclosure applied only to mortgages and not to deeds of trust, and that a non-judicial foreclosure sale on a deed of trust was valid without a pre-sale recording reflecting the assignment to the note holder.  
 
A copy of the opinion is available at: 
 
As you may recall, Cal. Civ. Code § 2932.5 provides as follows: "Where a power to sell real property is given to a mortgagee, or other encumbrancer, in an instrument intended to secure the payment of money, the power is part of the security and vests in any person who by assignment becomes entitled to payment of the money secured by the instrument. The power of sale may be exercised by the assignee if the assignment is duly acknowledged and recorded."
 
Plaintiff Borrower defaulted on a residential mortgage loan secured by a deed of trust.  After the borrower's default, a substitute trustee ("Trustee") sold the property at public auction to the servicer ("Purchaser").  Shortly after the sale, a Trustee's Deed Upon Sale was recorded in favor of the Purchaser. 
 
The Borrower later filed a complaint against the Trustee and the Purchaser, attempting to assert numerous causes of action, including unfair competition and unlawful business practices under California's Business and Professional Code.   The complaint alleged that the foreclosure was unlawful because there was no recorded assignment to the note holder prior to the foreclosure sale.  The Purchaser demurred, asserting that the Borrower had failed to state a claim because California's Civil Code Section 2932.5 did not require the recording of an assignment to the note holder when the note is secured by a deed of trust prior to foreclosure sale
 
After sustaining the demurrer and denying the Borrower's motion for reconsideration, the trial court entered judgment in favor of the Trustee and Purchaser. 
 
The Borrower appealed.  The Court of Appeal affirmed. 
 
Relying on "well settled" federal and California case law, the Court of Appeal ruled that Section 2932.5 applied only to mortgages and not to deeds of trust.  See Stockwell v. Barnum, 7 Cal. App. 413 (1908).  In so doing, the Court observed that Stockwell distinguished between a mortgage, which creates only a lender's lien on the real property owned by the mortgagor, and a deed of trust, which passes legal title to a trustee possessing the power of sale, regardless of the holder of the underlying note.
 
Based on various federal and state court opinions that blurred the distinction between mortgages and deeds of trust, the borrower unsuccessfully argued that the purpose of Section 2932.5 is to allow borrowers to identify the holder of their loans.  The Court of Appeal noted that, contrary to the Borrower's assertion, "Section 2932.5 requires the recorded assignment of a mortgage so that a prospective purchaser knows that the mortgagee has the authority to exercise the power of sale," and that "[t]his is not necessary when a deed of trust is involved, as the trustee conducts the sale and transfers title."

The Court further observed that applying Section 2932.5 to deeds of trust would effectively transfer the power of sale to the lender, contrary to the terms of the trust deed and the state statutory requirements for transferring the power of sale to a different trustee.
  
In confirming that Section 2932.5 applied only to mortgages, the Court concluded that because title transfers to the trustee under a deed of trust, and thus enables the trustee to transfer marketable record title to a purchaser, there was no requirement to record an assignment to the note holder prior to the initiation of the non-judicial foreclosure of the deed of trust.


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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Tuesday, April 24, 2012

FYI: CFPB Requests Information on Consumer Lending Arbitrations and Arbitration Agreements

The federal Consumer Financial Protection Bureau (CFPB) announced a Request for Information Regarding Scope, Methods, and Data Sources for Conducting Study of Pre-Dispute Arbitration Agreements.
 
A copy of the Request is available at:

As you may recall, the Dodd-Frank Act requires the CFPB to study the use of pre-dispute arbitration clauses in consumer financial markets, and allows the CFPB to issue related regulations for the protection of consumers.

For example, the CFPB requests information regarding:

  • The prevalence of use of arbitration clauses in consumer financial products and services;
  • The use and impact of arbitration proceedings, including what claims consumers and companies bring in arbitration;
  • The use and impact of arbitration agreements outside of arbitrations, such as on the price and availability of financial services products to consumers.

The CFPB expressly states that it is not seeking comment on either: (a) whether it should, by regulation, prohibit or impose conditions or limitations on the use of pre-dispute arbitration agreements with respect to consumer financial products or services; or (b) whether any such regulation would serve to protect consumers or otherwise be in the public interest.

Responses to the Request for Information are due by June 23, 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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Monday, April 23, 2012

FYI: Ill App Ct Holds Penalties for TCPA Violations Not Insurable

The Appellate Court of Illinois, Fourth District, recently held that the damages provided for by the Telephone Consumer Protection Act ("TCPA") were punitive, and therefore not insurable under Illinois law. 
 
A copy of the opinion is available at:
http://www.state.il.us/court/Opinions/AppellateCourt/2012/4thDistrict/4110527.pdf.
 
Theodor W. Lay ("Lay") operated a real estate agency.  He faxed an advertisement regarding a real estate property to numerous recipients who had not previously consented to the receipt of such a communication, including Locklear Electric, Inc. ("Locklear").  Locklear initiated a class action against Lay, on the grounds that the latter's faxed advertisements violated the TCPA. 
 
Although Lay was insured by Standard Mutual Insurance Company ("standard"), he opted to engage independent counsel, and settled with Locklear.  Per the terms of the settlement, Lay assigned his rights against Standard to Locklear, and Locklear agreed not to otherwise pursue Lay's assets.
 
The federal district court approved the settlement.  Separately, Standard filed a declaratory action to determine its responsibility for coverage.  In that action, both Standard and Locklear filed cross motions for summary judgment, and the trial court granted Standard's motion, finding that Standard had no duty to defend, and no duty to indemnify.  Locklear appealed. 
 
As you may recall, the TCPA makes it unlawful to send unsolicited advertisements via fax machines, and creates a private right of action for recipients of such communications.  Plaintiffs may sue for actual damages, or $500 per violation, whichever is greater.  47 U.S.C. s. 227(b).  In Illinois, punitive damages are not insurable. 
 
On appeal, the case turned on whether the TCPA's damages provision constituted punitive damages. 
 
The Court observed that a statutory penalty must "(1) impose automatic liability for a violation of its terms;" (2) set forth a predetermined amount of damages; and (3) impose damages without regard to the actual damages suffered by the plaintiff."  McDonald's Corp. v. Levine, 108 Ill. App. 3d 732, 738, 439 N.E. 2d 475, 480 (1982). 
 
With that standard in place, the Court held that "the $500 in...damages provided in the TCPA is a penalty and is in the nature of punitive damages."  It reached that conclusion predominantly on the basis that the actual damages suffered by a plaintiff upon receipt of a single unwanted fax were likely to be quite small, and bore little relationship to the $500 in punitive damages provided for by statute.    
 
Therefore, the Court determined that TCPA damages are "not insurable as a matter of Illinois law and are not recoverable from Standard."  Accordingly, the Court affirmed the judgment of the lower court.
 


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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Sunday, April 22, 2012

FYI: 11th Cir Rules No Private Right of Action Under HAMP

The U.S. Court of Appeals for the Eleventh Circuit recently held that the Home Affordable Modification Program ("HAMP") does not create a private cause of action.  Our prior update regarding a similar Seventh Circuit opinion is below.
 
A copy of the Eleventh Circuit's opinion is available at:
http://www.ca11.uscourts.gov/opinions/ops/201115166.pdf.
 
Plaintiff-appellant borrower (the "borrower") defaulted on his mortgage loan, and attempted to arrange a loan modification with defendant-appellee lender ("lender").  Although the two parties agreed to a temporary modification, the lender then indicated that it would not extend a permanent loan modification to the borrower.     
 
The borrower sued, alleging that the lender had not complied with its obligations under HAMP. The borrower alleged breach of contract and promissory estoppel, among other claims, in connection with his HAMP allegations
 
The lower court found in favor of the lender, on the grounds that HAMP does not provide a private cause of action.  In addition, the lower court found that the borrower's claims failed as a matter of law if considered independently of HAMP.  The borrower appealed. 
 
Because HAMP does not expressly create a private right of action for borrowers, the Eleventh Circuit began its analysis by reviewing the relevant factors to determine whether HAMP might create an implied right of action: (1) whether the plaintiff is one of the class for whose "especial benefit" the statute was enacted; (2) whether there is any indication of legislative intent for or against the creation of a private right of action; (3) whether an implied remedy for the plaintiff is consistent with the purposes of the statute; and (4) whether the cause of action is one traditionally relegated to state law. 
 
After consideration of those factors, the Eleventh Circuit held that "it is clear that no private right of action exists" under HAMP. 
 
To reach that conclusion, the Court first examined the purpose of the Emergency Economic Stabilization Act of 2008 and HAMP, which it noted was to "restore liquidity and stability to the financial system of the United States."  12 U.S.C. Sec. 5201(1).  Further, the Court found no evidence of legislative intent to create a private right of action. 
 
Next, the Court found that "providing a private right of action against mortgage servicers contravenes the purposes of HAMP...because it would likely chill servicer participation based on fear of exposure to litigation." 
 
Finally, the Eleventh Circuit observed that contract and real property law are traditionally "the domain of state law." 
 
Accordingly, and "because none of the relevant factors favor an implied right of action, we conclude that no such right exists." 
 
The Court also considered whether the borrower might have valid claims under state law.  It concluded that he did not.  The borrower did not argue that his breach of contract claim was independent from the lender's obligations under HAMP, and abandoned any argument along those lines.  Moreover, the relevant state law provided that recovery on a theory of promissory estoppel is possible only where the defendant made a promise upon which the plaintiff reasonably relied.  Because the borrower did not make any factual allegations to indicate that the lender promised to modify his loan, the Court found that the promissory estoppel claim failed. 
 
Therefore, the Eleventh Circuit affirmed the lower court's dismissal of the borrower's complaint. 


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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On 3/14/2012 11:26 PM, Ralph Wutscher wrote:
The U.S. Court of Appeals for the Seventh Circuit recently held that a borrower stated valid state law claims in connection with a mortgage servicer's alleged refusal to make a HAMP loan modification permanent after the borrower complied with a "trial" modification.  A copy of the opinion is attached. 
 
The borrower allegedly entered into a four month "trial" loan modification pursuant to a Trial Period Plan ("TPP") with the mortgage loan servicer ("Servicer"), wherein Servicer agreed to permanently modify the loan if she qualified under the HAMP guidelines.  The borrower alleged that she timely made all four payments under the TPP, and that she otherwise qualified for a permanent modification, but that Servicer nevertheless refused to grant her a permanent modification. 
 
The borrower then brought a putative class action asserting seven counts: (1) breach of contract; (2) promissory estoppel; (3) breach of the Servicer Participation Agreement; (4) negligent hiring; (5) fraudulent misrepresentation or concealment; (6) negligent misrepresentation or concealment; and (7) violation of the Illinois Consumer Fraud and Deceptive Business Practices Act ("ICFA"). 
 
The district court dismissed the lawsuit in its entirety pursuant to Rule 12(b)(6).  The district court reasoned that the borrower's claims were premised on Servicer's obligations under HAMP, which does not confer a private federal right of action on borrowers to enforce its requirements.  The borrower then appealed with respect to all claims except the alleged breach of the Service Participation Agreement. 
 
On appeal, the Seventh Circuit noted there were "two sets of issues."  The first issue concerned "whether [the borrower] stated viable claims under Illinois common law and ICFA."  The second issue concerned whether the state-law claims were "preempted or otherwise barred by federal law."  The Seventh Circuit concluded that the borrower stated viable causes of action with respect to her breach of contract, promissory estoppel, fraudulent misrepresentation and ICFA claims, and that HAMP does not preempt otherwise viable state-law claims. 
 
The Seventh Circuit held that the borrower asserted a valid common law claim for breach of contract, by properly pleading the six elements: (1) offer and acceptance, (2) consideration, (3) definite and certain terms, (4) performance by the plaintiff of all required conditions, (5) breach, and (6) damages. 
 
Servicer argued that there was no "offer" because the TPP was not an enforceable offer to permanently modify the mortgage, as it was conditioned on further review of financial information following its completion to make sure the borrower qualified under HAMP.  The Court disagreed, and noted that the promise was conditioned on acts by the borrower to comply with the requirements of the TPP and on her financial information remaining true and accurate.  The Court held that "[o]nce [Servicer] signed the TPP Agreement and returned it to [the borrower], an objectively reasonable person would construe it as an offer to provide a permanent modification agreement if she fulfilled its conditions."   
 
The Seventh Circuit further held that the TPP contained sufficient consideration because the borrower "incurred cognizable legal detriments," and "agreed to open new escrow accounts, to undergo credit counseling (if asked), and to provide and vouch for the truth of her financial information." 
 
Moreover, the requirement "definite and certain terms" was met because although "the trial terms were just an 'estimate' of the permanent modification terms, the TPP fairly implied that any deviation from them in the permanent offer would also be based on [Servicer's] application of the established HAMP criteria and formulas."  Thus, "[t]he terms of the TPP [were] clear and definite enough to support [the borrower's] breach of contract theory." 
 
The Seventh Circuit further also that the borrower asserted a valid promissory estoppel claim, by pleading the elements that (1) defendant made an unambiguous promise to plaintiff; (2) plaintiff relied on such promise; (3) plaintiff's reliance was expected and foreseeable; and (4) plaintiff relied on the promise to her detriment.  The Court held that the borrower properly alleged that Servicer made an unambiguous offer to give her a permanent loan modification if she complied with the terms of the TPP, that the borrower reasonably relied on that promise, and that the reliance led to her detriment because she lost the opportunity to use other remedies to save her home, or simply default. 
 
The Seventh Circuit held that the borrower's claims based on negligence were barred by the economic loss doctrine, which "bars recovery in tort for purely economic losses arising out of a failure to perform contractual obligations."  While there are a number of exceptions to the economic loss doctrine, each are rooted in the general rule that "[w]here a duty arises outside of the contract, the economic loss doctrine does not prohibit recovery in trot for the negligent breach of that duty."  The Court held that "[t]o the extent [Servicer] had a duty to service [the borrower's] home loan responsibly and with competent personnel, that duty emerged solely out of its contractual obligations."  Therefore, the Seventh Circuit ruled the claims based on negligence were properly dismissed. 
 
However, the Court held that the borrower stated a claim for fraudulent misrepresentation, noting that there is an exception to the economic loss doctrine "where the plaintiff's damages are proximately caused by a defendant's intentional, false representation, i.e., fraud."  The Seventh Circuit further held that the borrower adequately pled the elements of a fraudulent misrepresentation claim, which are (1) a false statement of material fact; (2) known or believed to be false by the party making it; (3) intent to induce the other party to act; (4) action by the other party in reliance on the truth of the statement; and (5) damage to the other party resulting from that reliance.
 
The Seventh Circuit noted that "the only element seriously at issue on the pleadings is reasonable reliance."  The Court held that "the TPP as a whole supports [the borrower's] reading of it to require [Servicer] to offer her a permanent loan modification once it determined she was qualified and sent her an executed copy, and she satisfied the conditions precedent." 
 
The Court further held that though the claim represented promissory fraud (i.e. a false statement of intent regarding future conduct), it was nevertheless actionable because the plaintiff alleged it was part of a scheme to defraud, where she accused [Servicer] of a deliberately implementing a "system designed to wrongfully deprive its eligible HAMP borrowers of an opportunity to modify their mortgages." 
 
However, the Seventh Circuit held that the borrower failed to state a claim for fraudulent concealment, which requires a plaintiff to plead all the elements of fraudulent misrepresentation, as well as alleging "the defendant intentionally omitted or concealed a material fact that it was under a duty too disclose to the plaintiff."  The Court held that Servicer did not have a "fiduciary or confidential relationship" with the borrower, nor did it involve a "situation where plaintiff places trust and confidence in defendant, thereby placing defendant in a position of influence and superiority over plaintiff." 
 
The Seventh Circuit held the borrower adequately pled a ICFA claim, which requires pleading (1) a deceptive or unfair act or practice by the defendant; (2) the defendant's intent that the plaintiff rely on the deceptive or unfair practice; and (3) the unfair or deceptive practice occurred during the course of conduct involving trade or commerce.  Moreover, "a plaintiff must demonstrate that the defendant's conduct is the proximate cause of her injury."  In asserting her claim, the borrower incorporated her common law fraud claims.  Additionally, she alleged that Servicer "dishonestly and ineffectually implemented HAMP." 
 
In holding that all the elements for ICFA were met, the Seventh Circuit disagreed with the district court, which dismissed the claim on the grounds that the borrower did not alleged Servicer acted with intent to deceive and because she did not allege pecuniary damages.  The Seventh Circuit stated that "'intent to deceive' is not a required element of a claim under the ICFA, which provides redress 'not only for deceptive business practices, but also for business practices that, while not deceptive, are unfair.'"  The Court also held that the borrower alleged actual pecuniary loss because, among other things, she "incurred costs and fees" and "lost other opportunities to save her home." 
 
After ruling that the borrower asserted several valid state law causes of action, the Seventh Circuit further held that federal law did not preempt or displace the borrower's claims arising out of state law.  In so holding, the court noted that "[p]reemption can take on three different forms: express preemption, field preemption, and conflict preemption."  Servicer conceded that express preemption did not apply, but argued for both field and conflict preemption.  Servicer further argued what the Court called a "novel theory" that the borrower's claims were displaced because they attempt an "end-run" on the lack of a private right of action under HAMP.  The Seventh Circuit held that none of the theories applied.
 
A state law is preempted under field preemption "if federal law so thoroughly occupies the legislative field 'as to make reasonable the inference that Congress left no room for the States to supplement it.'"  Servicer argued that the Home Owners Loan Act ("HOLA") occupies the relevant field, and that HOLA and the corresponding Office of Thrift Supervision ("OTS") regulations displace state common-law suits that effectively impose any standards for the processing and servicing of mortgage loans, whether the conflict with federal policy or not. 
 
The Seventh Circuit held that such a reading was "directly at odds with the saving clause of 12 C.F.R. § 560.2(c), and inconsistent with [its] decision in [In re Ocwen Loan Servicing, LLC Mortg. Servicing Litigation, 491 F.3d 638 (7th Cir. 2007]."  In Ocwen, the court held that "HOLA and the OTS regulations did not preempt suits by 'persons harmed by the wrongful acts of savings and loan associations' seeking 'basic state common-law-type remedies.'"  The court further noted that Ocwen "stands for the principle that HOLA preempts generally applicable state laws only when they 'could interfere with federal regulation' – that is, those that actually conflict with the regulatory program."  Thus, the Court held that field preemption did not apply.
 
Implied conflict preemption may apply where either (1) it is impossible for a private party to comply with both state and federal requirements, or (2) where sate law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.  Servicer did not contend it would be impossible to comply with state-law duties without violating federal law.  Instead, it argued the second version of conflict preemption, known as "obstacle" preemption. 
 
Servicer argued that allowing the borrower's state-law claims would undermine the purposes of Congress by substantially interfering with Servicer's ability to service residential mortgage loans," and "frustrate Congressional objectives in enacting [the 2008 Act] . . . to stabilize the economy and provide a program to mitigate 'avoidable' foreclosures." 
 
The Seventh Circuit held that the first argument was inconsistent with Ocwen, because there the court held that "conventional" state law claims for breach of contract, fraud, and deceptive business practices complemented rather than conflicted with HOLA.  The Court also found that the second argument lacked merit, holding "[t]here is no indication that Congress meant to foreclose suits against servicers for violating state laws that impose obligations parallel to those established in a federal program." 
 
Finally, the Seventh Circuit held that the "end-run" theory to preemption did not apply.  "The end-run theory is built on the novel assumption that where Congress does not create a private right of action for violation of a federal law, no right of action may exist under state law, either."  However, the Seventh Circuit noted that the issue was not "whether federal law itself provides private remedies, but whether it displaces remedies otherwise available under state law."  The Court held that "[t]he absence of a private right of action from a federal statute provides no reason to dismiss a claim under a state law just because it refers to or incorporates some element of the federal law." 
 
"To find otherwise would required adopting the novel presumption that where Congress provides no remedy under federal law, state law may not afford one in its stead." 



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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