FYI: 9th Cir Upholds Dismissal of Various Credit Advertisement Claims, Where Terms and Conditions At Application Provided Missing Disclosure

The U.S. Court of Appeals for the Ninth Circuit recently ruled against a consumer who complained that an advertisement for a credit card did not disclose the annual fee for that card. 

 

In so ruling, the Ninth Circuit held that the consumer's objection that he was not allowed to review certain extrinsic documents did not amount to a challenge to the authenticity of those documents, and thus that the lower court's decision to incorporate those documents by reference in a motion to dismiss was proper.  The Ninth Circuit also held that the consumer's allegations that the failure to disclose the annual fee violated various California laws were without merit, because the borrower admitted in his complaint that he failed to read the terms and conditions of the credit card offer.  

 

A copy of the opinion is available at http://www.ca9.uscourts.gov/datastore/opinions/2012/08/31/10-56488.pdf. 

 

A consumer read a newspaper advertisement for a credit card offered by a bank (the "bank") in conjunction with a consumer electronics retailer ("retailer").  The advertisement stated that applicants would receive $25 worth of reward certificates, but did not indicate that the card included an annual fee.  The consumer signed up for the credit card on the retailer's website, and indicated that he had read the applicable terms and conditions.  Those terms and conditions disclosed the existence of an annual fee. 

 

After paying the annual fee for five years, the consumer initiated a class action lawsuit against the bank and the retailer, alleging that they failed to adequately disclose the existence of the annual fee.  The consumer also stated that he did not in fact read the terms and conditions of the credit card offer.  The bank and retailer filed a motion to dismiss, which the lower court granted on federal preemption grounds. 

 

The consumer then filed an amended complaint, alleging false advertising, fraudulent concealment, and various violations of California's Unfair Competition Law ("UCL"). The bank and retailer filed a Fed. Rules of Civ. Proc. Rule 12(b)(6) motion to dismiss, requesting that the court take judicial notice of various documents reflecting the terms and conditions of their agreement with the consumer (the "disclosure documents").  The disclosure documents were referenced by, but not attached to, the consumer's amended complaint.  The lower court again granted the motion to dismiss, finding that the consumer failed to state claims entitling him to relief. The consumer appealed. 

 

On appeal, the consumer argued that lower court erred in considering documents that were not part of the record, and in addition argued the merits of each of his claims.  As you may recall, the Ninth Circuit has held that courts have discretion to consider extrinsic materials offered in connection with a Rule 12(b)(6) motion to dismiss, and that a lower court's decision to do so will be reviewed for abuse of discretion.  See, e.g., Skilstaf, Inc. v. CVS Caremark Corp., 669 F.3d 1005, 1016 (9th Circuit, 2012). 

 

The Ninth Circuit began its analysis by examining the applicable case law, noting that courts may consider documents whose contents are alleged in, but not attached to, a complaint, where no party questions the contents of those pleadings.  Knievel v. ESPN, 393 F.3d 1068, 1077 (9th Cir. 2005).  In that circumstance, courts may "treat such a document as part of the complaint, and thus may assume that its contends are true for purposes of a motion to dismiss under Rule 12(b)(6)."  United States v. Ritchie, 342 F.3d 908, 908 (9th Cir. 2003).

 

The consumer argued that he did dispute the contents of the pleadings, in that he objected that the disclosure documents were not made available to him.  The Ninth Circuit disagreed, noting that the consumer's objection did not "address, much less cast doubt on" the authenticity of those documents.  Accordingly, the Court held that "where the party opposing incorporation by reference argues only that he did not review or have access to the proffered copies, this does not amount to a challenge to those documents' authenticity." 

 

Having determined that the lower court did not err in considering the disclosure documents, the Ninth Circuit turned to the merits of the consumer's claims. 

 

The consumer's false advertising claim against the retailer relied on California's False Advertising Law, which makes it unlawful for a person to "induce the public to enter into an obligation" based on a statement that is "untrue or misleading."  Cal. Bus. & Prof. Code Sec. 17500.  The consumer alleged that the retailer's advertisement was "untrue or misleading" because it did not disclose the existence of an annual fee. 

 

The Ninth Circuit disagreed, noting that because the advertisement indicated that other restrictions may apply, no reasonable consumer could have "believed that if an annual fee was not mentioned, it must not exist."

 

The Ninth Circuit also rejected the consumer's fraudulent concealment claim.  The Court observed that justifiable reliance was a required element of such a claim, and that the consumer could not establish justifiable reliance where he failed to read the relevant contract.  Accordingly, the Ninth Circuit held that "[t]he only conclusion that reasonable minds may draw is that [consumer's] reliance on the purported representation was manifestly unreasonable." 

 

Finally, the Ninth Circuit examined the consumer's argument that the bank and retailer inadequately disclosed the annual fee in violation of the UCL. The bank and retailer argued that because their annual fee disclosures complied with the Truth in Lending Act ("TILA") and Regulation Z, those disclosures qualified for a "safe harbor" and were not subject to the UCL. 

 

The Ninth Circuit drew a distinction between the advertisement and the disclosure documents, noting that "we have no trouble concluding that TILA and Regulation Z create a safe harbor" for the latter, because such disclosures are explicitly required by TILA. 

 

However, the Ninth Circuit applied a different standard to the advertisement.  Because that advertisement did not disclose the existence of an annual fee, the Court indicated that "no authority provides a safe harbor" to the retailer and bank.  Accordingly, the Ninth Circuit addressed the merits of the consumer's claims. 

 

As you may recall, the UCL prohibits "unfair competition," which is defined to include three varieties: acts or practices which are "unlawful, or unfair, or fraudulent."  Cel-Tech Comms. Inc. v. Los Angeles Cellular Telephone Co., 973 P.2d 527, 540 (Cal. 1999).  The consumer alleged that the bank was guilty of "unlawful" business practices and that the retailer was guilty of "fraudulent" and "unfair" business practices.  The Ninth Circuit considered each in turn. 

 

The Ninth Circuit explained that "[t]o be unlawful under the UCL, the advertisements must violate another 'borrowed' law."  Here, the consumer alleged a violation of an OCC regulation that prohibited national banks from engaging in "unfair or deceptive practices within the meaning of the Federal Trade Commision Act, 15 U.S.C. Sec. 45(a)(1)."  15 U.S.C. Sec. 45(a)(1) provides that a practice is deceptive if it is likely to mislead consumers who are acting reasonably under the circumstances, in a way that is material.

 

For the same reasons described above - that is, that the advertisements referenced "other restrictions," and that the consumer failed to read the terms and conditions of the credit card offer - the Ninth Circuit held that the advertisements were not unlawful under the UCL. 

 

Finally, the Court considered the consumer's allegations of "fraudulent" and "Unfair" business practices.  It quickly disposed of the "fraudulent" allegations, finding that a reasonable member of the public was not likely to be deceived by the bank's actions, for the same reasons as described above. 

 

The allegations of "unfair" business practices required more scrutiny.  The Ninth Circuit began by noting that the UCL does not define "unfair," and that its definition was currently "in flux" among California courts.  However, determining an appropriate definition proved unnecessary, as the Ninth Circuit held that the consumer failed to state a claim regardless of the definition used.  The Ninth Circuit's conclusion was again based on the consumer's failure to read the terms and conditions of the credit card offer, and on his failure to cancel the credit card as soon as he learned of the annual fee.

 

Accordingly, the Ninth Circuit affirmed the judgment of the lower court.   

 

Ralph T. Wutscher
McGinnis 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: Ill App Ct Holds Foreclosure Borrower Should Have Been Granted Evidentiary Hearing on Motion to Void Service

The Illinois Appellate Court for the First District recently reversed a trial court's order denying a borrower's motion to quash service by publication in a foreclosure action, holding that an evidentiary hearing was warranted to determine whether the loan servicer undertook both diligent inquiry and due inquiry to locate borrower prior to moving for service by publication.

 

A copy of the opinion is available at:  http://www.state.il.us/court/Opinions/AppellateCourt/2012/1stDistrict/1102438.pdf.

 

Defendant-borrower ("Borrower") obtained a mortgage loan on a small apartment building, and authorized his attorney to act on his behalf with respect to matters related to the mortgage.  As part of the initial mortgage application, Borrower provided the address and contact information for his place of employment. 

 

The mortgage was later assigned to plaintiff loan servicer ("Plaintiff Loan Servicer"), which confirmed the power of attorney in a letter to Borrower.   

 

After Borrower defaulted on the mortgage, Plaintiff Loan Servicer filed a foreclosure action against him. Plaintiff Loan Servicer used a special process server to attempt to personally serve process on Borrower.  Two employees of the special process server submitted affidavits stating among other things that after due search, careful inquiry and a total of 19 diligent attempts, they were unable to serve Borrower at either Borrower's main residence or his alternate residence.  The affidavits included statements purportedly describing the two properties, and claimed that none of the doorbells or mailboxes at the alternate residence listed Borrower's name, that a neighbor of the main residence claimed not to know Borrower, and that neither address appeared to be vacant.  

 

Relying in part on these affidavits, Plaintiff Loan Servicer moved for service by publication.   Plaintiff Loan Servicer supported its motion with an affidavit stating in part that "upon due inquiry," Borrower could not be found and that upon "diligent inquiry," the last known place of residence could not be ascertained. 

 

The trial court granted Plaintiff Loan Servicer's request for service by publication, and later entered a default judgment against Borrower.  The property was sold to a junior lien holder at the subsequent foreclosure sale.   

 

Borrower filed a motion to vacate the foreclosure judgment and judicial sale and to quash service by publication, claiming that upon due inquiry, Borrower could have been located at either the main residence or alternate residence.  In support of his motion, Borrower submitted an affidavit stating among other things that the process servers incorrectly swore that Borrower's name did not appear on the doorbells at the alternate residence and or on any of the mailboxes, and that on one of the dates in question, Borrower was at the main residence attending an outdoor party.  Borrower supported his affidavit with statements from neighbors and with photographs indicating in part that the process servers' property description and statements regarding the circumstances of service were inaccurate.  Borrower also argued that Plaintiff Loan Servicer never attempted to locate him through his attorney or place of employment. 

 

Denying Borrower's motion to vacate and to quash service, the trial court entered an order confirming the sale of the property.   

 

Borrower moved for reconsideration, requesting an evidentiary hearing to determine whether Plaintiff Loan Servicer had exercised due diligence in attempting to locate and serve him.  The trial court denied Borrower's motion and request.  Borrower appealed. 

 

The Appellate Court reversed and remanded for an evidentiary hearing to determine whether Plaintiff Loan Servicer had conducted both diligent inquiry and due inquiry in its effort to locate Borrower prior to the court's granting leave for service by publication.

 

As you may recall, the Illinois Code of Civil Procedure provides in part that "[w]henever, in an action affecting property . . . plaintiff or his or her attorney shall file . . .  an affidavit stating that the defendant resides or has gone out of this State, or on due inquiry cannot be found . . .  so that process cannot be served upon him or her, and stating the place of residence of the defendant, if known, or that upon diligent inquiry his or her place of residence cannot be ascertained, the clerk shall cause publication to be made in some newspaper published in the county in which the action is pending."  735 ILCS 5/2-206(a). 

 

Focusing on Borrower's arguments that publication service was invalid because Plaintiff Loan Servicer had failed to conduct due inquiry in ascertaining Borrower's whereabouts, the Appellate Court noted that Section 2-206(a) requires both "diligent inquiry in ascertaining a defendant's residence and "due inquiry" in ascertaining the defendant's whereabouts and that a defendant may file his own affidavit showing that upon due inquiry, he could have been found.  See, e.g., Bell Fed. Sav. & Loan Ass'n v. Horton, 59 Ill. App 3d 923, 927-28, 376 N.E.2d 1029, 1033 (1978)(ruling that before a plaintiff may execute an affidavit stating that the defendant cannot be found both types of inquiries must be conducted); Household Fin. Corp. III v. Volpert, 227 Ill. App. 3d 453, 455, 592 N.E.2d 98, 99 (1992).

 

In so doing, the Appellate Court observed that Illinois courts have historically ruled that where the defendant has raised a significant issue as to the truthfulness of the affidavit filed by the plaintiff, the trial court should hold an evidentiary hearing to establish that due inquiry was made to locate the defendant.  See First. Fed. Sav. & Loan Ass'n v. Brown, 74 Ill. App. 3d 901, 907-08, 393 N.E.2d 574, 579 (1979).  Thus, noting that Borrower raised "sufficient factual statements which differed from the assertions of [Plaintiff] and were highly suggestive of a conflict" with the affidavits upon which the trial court relied, the Appellate Court stressed that while the trial court was not required to hold an evidentiary hearing, "the trial court could then have used a hearing to resolve the factual conflicts."  

 

Pointing out that the tests for due inquiry and due diligence differ, the Court noted that "due inquiry" consists of more than mere diligence, and requires "an honest and well-directed effort to ascertain the whereabouts of a defendant by an inquiry as full as circumstances can permit," such as checking employment records and court records.   City of Chicago v. Leakas, 6 Ill. App. 3d 20, 27, 284 N.E.2d 449, 455 (1972). 

 

Distinguishing the various cases cited by Plaintiff Loan Servicer, the Appellate Court ruled that in order "to properly execute an affidavit in support of its motion for service by publication, it must conduct both diligent inquiry in ascertaining the defendant's residence and due inquiry in ascertaining the defendant's whereabouts."  The Court further explained that although "ascertaining the defendant's residence is an important factor in determining whether due inquiry and diligent inquiry were accomplished, it is not the only factor that the court must consider."  

 

Accordingly, citing the parties' conflicting statements, including their assertions as to the property description, whether Borrower was on the property at the time of attempted service, and whether Plaintiff Loan Servicer knew where Borrower was employed, the Court noted that even though Plaintiff Loan Servicer appeared to have fulfilled the requirement to conduct diligent inquiry by attempting to serve Borrower 19 different times and speaking with a neighbor who did not know Borrower, Borrower  presented sufficient facts to challenge the process server's affidavits to conclude that an evidentiary hearing was warranted.

Significantly, the Appellate Court agreed with Borrower that as part of its due inquiry, Plaintiff Loan Servicer should have attempted to contact Borrower's attorney in order to locate him.  The Court explained that, while Plaintiff Loan Servicer was not required to attempt to serve Borrower's attorney, Plaintiff Loan Servicer "had an alternative and more reasonable vehicle for locating [Borrower] for service" and thus "certainly could have made the minimal effort to contact [Borrower's Attorney] to locate" Borrower.   See 735 ILCS 5/2-203.1 (allowing an alternative method of service upon plaintiff's motion and affidavit stating that personally serving defendant is impractical and that upon due inquiry defendant cannot be found and reasonable efforts at service have been unsuccessful). 

 

The Court thus remanded to the lower court for an evidentiary hearing as to whether Plaintiff Loan Servicer satisfied the requirement to conduct both diligent inquiry and due inquiry in attempting to locate Borrower prior to requesting service by publication.

 

Ralph T. Wutscher
McGinnis 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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