FYI: 4th Cir Holds Named Defendants to be Aggregated for Purposes of CAFA's "Local Controversy" Exception

The U.S. Court of Appeals for the Fourth Circuit recently held that a district court properly aggregated various named defendants together for purposes of analyzing whether the "local controversy" exception to jurisdiction under the federal Class Action Fairness Act applied.

 

A copy of the opinion is available at:  http://www.ca4.uscourts.gov/Opinions/Published/12342.P.pdf.

 

Two borrowers sued a lender, two title companies, and a class of defendant appraisers, alleging a scheme whereby the bank would suggest an inflated value for a given property to an appraiser, who would then appraise the property at that value, resulting in a borrower obtaining a loan that was underwater from the time of origination.  The borrowers sued both individually and on behalf of a class of West Virginia citizens.  The borrowers specifically identified a handful of appraisers, and also added a class of unnamed appraisers.  

 

The lender removed the action to federal court, pursuant to the Class Action Fairness Act ("CAFA").  The borrowers moved to remand the matter to state court, under the local controversy exception to CAFA.  The district court granted the borrowers' motion, and the lender appealed. 

 

As you may recall, the local controversy exception to CAFA provides that district courts must decline to exercise jurisdiction over an action and remand it to state court where, among other factors, at least one defendant (a) is a defendant from whom members of the plaintiff class are seeking "significant relief," (b) is a defendant whose conduct "forms a significant basis for the proposed plaintiff class's claims, and (c) is a citizen of the state in which the action originally was filed.  28 U.S.C. Sec. 1332(d)(4)(A). 

 

Here, the lender argued that it was improper for the district court to aggregate the various defendant appraisers together for the purpose of satisfying the "at least one defendant" requirement described above.  The lender further argued that unidentified members of an uncertified class do not qualify as "defendants" for the purposes of CAFA. 

 

The Fourth Circuit was unconvinced by the lender's contention that the "at least one defendant" requirement must be satisfied by only one defendant -- pointing out that "the term 'at least' permits a reading that more than one defendant could satisfy the stated criteria." 

 

In addition, the Fourth Circuit examined the relevant legislative history and determined that CAFA's local controversy exception was designed to "permit actions with a truly local focus to remain in state court."  Accordingly, it rejected the lender's interpretation of CAFA as one that would produce "an outcome that is demonstrably at odds with clearly expressed congressional intent." 

 

Because all of the named defendant appraisers, all of the plaintiffs, and all of the alleged injuries supposedly occurred in the state where the action was filed, the Fourth Circuit held that the instant matter qualified as a local controversy, such that it appropriate for the lower court to aggregate the defendants together to determine whether the local controversy exception applied. 

 

However, the Fourth Circuit ruled in favor of the lender in finding that "[a]n unnamed member of a proposed but uncertified class is not a party to the litigation."  Accordingly, the Fourth Circuit indicated that the resolution of the appeal hinged on whether the defendant appraisers named by the borrowers satisfied the "at least one defendant" requirement of the local controversy exception.   

 

Finding that the record was not sufficient to permit it to make that determination, the Fourth Circuit vacated the decision of the lower court, and remanded the matter for a determination as to whether the named defendant appraisers satisfy the "at least one defendant" requirement of the local controversy exception.   

 

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee 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@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

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FYI: Ill App Ct Holds Payment of Post-FC Sale Assessments Extinguishes HOA Liens From Before the FC Sale

The Illinois Court of Appeals for the Second District recently held that, under Section 9 of the Illinois Condominium Property Act, payment of post-foreclosure sale assessments extinguishes any liens that an association may have on the property that came due prior to the foreclosure sale.   

 

A copy of the Court's opinion is available at: http://www.illinoiscourts.gov/Opinions/AppellateCourt/2013/2ndDistrict/2130288.pdf

 

The defendant bank recorded in 2007 a first mortgage against a condominium unit by lending to the unit's owner.  On July 26, 2011, the bank filed a complaint to foreclose on the mortgage.  The next day, the plaintiff, a condominium association (CA), recorded a lien against the unit owner for unpaid association charges in the amount of $1,607.55.  On October 7, 2011 the bank received a judgment of foreclosure.  On April 13, 2012, the bank bought the unit at a sheriff's sale and the deed was recorded on April 17, 2012 conveying the property to the bank. 

 

The bank sent the plaintiff condominium association checks for the May, June, and July 2012 association charges but the plaintiff refused them.  From August 2012 on, the CA accepted the bank's payment of the charges.  On August 30, 2012, the plaintiff recorded another claim for a lien for $7,412.22 in association charges from March 2010 through July 2012. 

 

On November 27, 2012, the plaintiff condominium association filed its complaint seeking possession of the condominium unit.  The defendant bank moved to dismiss, arguing that the lien was extinguished by the plaintiff's acceptance of the association charges.  The trial court held that under the Condominium Property Act (765 ILCS 605/9) the plaintiff's lien was unenforceable.  The Illinois Court of Appeals affirmed.

 

On appeal, there were three issues raised: (1) whether there is any legal precedent to deny the plaintiff's ability to recover association charges that came due before the bank acquired the property; (2) whether, under the Illinois Condominium Property Act, the plaintiff condominium association's acceptance of association charges after the bank acquired the property bars plaintiff's recovery for its lien; and (3) whether the condominium declaration barred plaintiff's recovery.  The Court of Appeals answered the first two issues in the affirmative and, as a result, did not address the third issue. 

 

For the first issue, the Court addressed the ruling from Newport Condominium Ass'n v. Talman Home Federal Savings & Loan Ass'n of Chicago, 188 Ill. App. 3d 1054 (1988).  In that case, the bank had a first mortgage on the property and subsequently filed an action to foreclose on the mortgage.  At the time of the lawsuit, the association had a lien on the property and it was assumed that the lien was subordinate to the mortgage.  The bank successfully bid on the property at a sheriff's sale in January of 1983 and received the certificate of purchase at that time, but because of the unit owner's bankruptcy and abandonment of the property, the bank did not receive the deed to the property until May 1985. 

 

The association filed an action asserting that the bank was responsible for association charges from the time it received the certificate of purchase until when it received the deed.  Although the trial court in that case held that the bank was responsible for the association charges during that entire time, the appellate court disagreed and reversed, holding that the certificate of purchase did not convey title in the unit to the bank because, under long-standing Illinois law, title had remained with the unit's owner until the sheriff's deed conveyed it to the bank.  "For this reason, the association could not enforce its lien against the bank insofar as it sought to recover charges that had come due before the bank obtained title.  Because the obligation to pay condominium assessments is a covenant that runs with the land and is binding only upon title holders, we conclude that the bank is not liable for the assessments which accrued from the expiration of the redemption period to the date the bank exchanged the certificate for the deed." 

 

The Court of Appeals concluded that the Newport case disposed of the plaintiff's appeal.  Even if the plaintiff condominium association's lien survived the foreclosure judgment in favor of the bank, it could not be enforced against the bank to the extent that it was based on association charges that came due before the bank obtained title to the property. 

 

The Court next analyzed the issue raised under the Illinois Condominium Property Act.  Sections 9(g)(1) and 9(g)(3) of the Act read:

 

 

(1) If any unit owner shall fail or refuse to make any payment of the common expenses or the amount of any unpaid fine when due, the amount thereof together with any interest, late charges, reasonable attorney fees incurred in enforcing the covenants of the condominium instruments *** and costs of collections shall constitute a lien on the interest of the unit owner in the property prior to all other liens and encumbrances, recorded or unrecorded, except only *** (b) encumbrances on the interest of the unit owner recorded prior to the date of such failure or refusal which by law would be a lien thereon prior to subsequently recorded encumbrances. Any action brought to extinguish the lien of the association shall include the association as a party.

***

(3) The purchaser of a condominium unit at a judicial foreclosure sale *** shall have the duty to pay the unit's proportionate share of the common expenses for the unit assessed from and after the first day of the month after the date of the judicial foreclosure sale ***.  Such payment confirms the extinguishment of any lien created pursuant to paragraph (1) *** of this subsection (g) by virtue of the failure or refusal of a prior unit owner to make payment of common expenses, where the judicial foreclosure sale has been confirmed by order of the court ***. 

 

 

In analyzing these provisions, the Court of Appeals concluded that the bank's payment of the association charges defeated the plaintiff condominium association's attempt to enforce its lien during the period in question. 

 

Under the Illinois Condominium Property Act, the purchaser of a condominium unit at a judicial foreclosure sale must pay the charges that are assessed from and after the first day of the month after the date of the judicial foreclosure sale, and, if the trial court confirms the sale, the payment extinguishes any lien created by the failure of the previous unit owner to pay the assessments that came due earlier. 

 

The bank acquired the deed to the unit in April 2012.  The plaintiff attempted to argue that the bank did not make its first payment, however, until June, 2012.  The Court rejected the plaintiff's argument because the payment made in June contained both May and June's association charges. 

 

The Court held that the bank's payment of the post-foreclosure-sale assessments extinguished any lien that the plaintiff had based on the owner's failure to pay the assessment that came due before the foreclosure sale.  To hold that plaintiff's lien survived the payment, the Court explained, would contradict the plaint language and necessary implication of the Illinois Condominium Property Act.  If the payments extinguished the lien that had been created, then plaintiff cannot enforce the lien. 

 

The Illinois Appellate Court therefore affirmed the trial court's dismissal of the complaint. 

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee 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@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.com

 

 

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FYI: 9th Cir Confirms Failure to Schedule Claim in Bankruptcy Results in Plaintiff Being Estopped from Bringing Claim

The U.S Court of Appeals for the Ninth Circuit recently affirmed the dismissal of an employment discrimination claim because the plaintiff failed to list the employment discrimination action in her Chapter 7 bankruptcy schedules.

 

In so ruling, the Ninth Circuit held that the plaintiff was estopped from bringing an employment discrimination case where the plaintiff failed to disclose the employment discrimination action as an asset in her Chapter 7 bankruptcy schedules and the omission was neither inadvertent nor mistaken.

 

A copy of the Court's opinion is available at: http://cdn.ca9.uscourts.gov/datastore/opinions/2013/12/11/11-16404.pdf

 

The case concerns whether a plaintiff's failure to list her claim in her Chapter 7 bankruptcy schedule and failure to provide any explanation for the omission estopped the plaintiff's employment discrimination action as a matter of law.

 

The plaintiff brought suit against her employer alleging discrimination. The plaintiff also filed for Chapter 7 bankruptcy protection. The plaintiff failed to list the employment discrimination action as an asset in her bankruptcy schedules. The defendant moved to dismiss the employment discrimination case on judicial estoppel grounds. Only after defendant moved to dismiss did the plaintiff amend her bankruptcy schedule to list the employment discrimination case as a potential asset.

 

The district court dismissed the plaintiff's employment discrimination case finding that no evidence suggested that plaintiff's original omission had been inadvertent or mistaken and, weighing the factors set forth in New Hampshire v. Maine, 532 U.S. 742, 750-51 (2001), judicial estoppel barred this action.

 

At issue in the appeal was whether the district court's dismissal was at odds with the Ninth Circuit's recent decision Ah Quin v. County of Kauai Department of Transportation, 733 F.3d 267 (9th Cir. 2013). The Ninth Circuit determined that the district court's dismissal was consistent with Ah Quin and affirmed the district court decision.

 

In Ah Quin, the Ninth Circuit reversed the district court's dismissal of a plaintiff's case on judicial estoppel grounds where the plaintiff failed to list the case as an asset in her bankruptcy schedule. The evidence in the case was disputed and supported a conclusion of either mistake and inadvertence or deceit.

 

The Ninth Circuit began by addressing the factual similarities and differences between Ah Quin and this case.  As in Ah Quin, the plaintiff here filed false bankruptcy schedules and failed to amend those schedules until defendant filed a motion to dismiss. The plaintiff's inaction suggested that the omission had not been inadvertent. However, unlike in Ah Quin, the plaintiff presented no evidence, by affidavit or otherwise, explaining the initial failure to include the employment discrimination action in the bankruptcy schedules. Even after the district court dismissed this case, the plaintiff did not seek reconsideration or attempt to supplement the record with a declaration or any other evidence to contradict the district court's finding that omitting the employment action from the bankruptcy schedules was not inadvertent.

 

Instead, plaintiff argued that Ah Quin mandates an evidentiary hearing every time a debtor omits a claim on her bankruptcy schedules and later amends those schedules. The Ninth Circuit disagreed. Instead, Ah Quin remanded for further factual development because, viewing the evidence in a light most favorable to the plaintiff, a reasonable fact finder could conclude that the debtor's omission of a potential claim on their bankrupt schedule was inadvertent. In this case, no reasonable fact finder could conclude that the plaintiff's omission was inadvertent or mistaken given the timing of the plaintiff's amendment and her decision not to file a declaration providing an explanation for her initial failure to list the potential claim. As such, the district court correctly dismissed the case and no evidentiary hearing was required.

 

The Plaintiff also argued that the district court abused its discretion in addressing the three main New Hampshire factors. See New Hampshire v. Maine, 532 U.S. 742, 149 L. Ed 2d 968, 121 S. Ct. 1808, 1815 (2001). As you may recall, the three primary New Hampshire factors are: (1) a party's later position must be clearly inconsistent with its earlier position; (2) whether the prior court accepted the party's earlier position; and (3) whether the party asserting the inconsistent opinion would derive an unfair advantage if not estopped.

 

Regarding the first factor, the district court in this case concluded that, by failing to list the claim while simultaneously pursuing the claim, Plaintiff clearly asserted inconsistent positions. Concerning the second factor, the district court found that the bankruptcy court was misled by Plaintiff's omission. As to the third factor, the district court determined that the Plaintiff received an unfair advantage in bankruptcy court by failing to list the claim. The Ninth Circuit found no error in the district court's New Hampshire analysis.

 

The Ninth Circuit held that the district court did not abuse its discretion in dismissing the plaintiff's employment discrimination claim because: (1) the plaintiff failed to list the claim as an asset in the plaintiff's Chapter 7 bankruptcy schedules; and (2) the plaintiff presented no evidence to demonstrate that this omission was inadvertent or mistaken.

 

Accordingly, the Ninth Circuit affirmed the district court's dismissal, based on judicial estoppel of the plaintiff's employment discrimination claim. 

 

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee 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@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.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:
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FYI: 9th Cir Confirms Failure to Schedule Claim in Bankruptcy Results in Plaintiff Being Estopped from Bringing Claim

The U.S Court of Appeals for the Ninth Circuit recently affirmed the dismissal of an employment discrimination claim because the plaintiff failed to list the employment discrimination action in her Chapter 7 bankruptcy schedules.

 

In so ruling, the Ninth Circuit held that the plaintiff was estopped from bringing an employment discrimination case where the plaintiff failed to disclose the employment discrimination action as an asset in her Chapter 7 bankruptcy schedules and the omission was neither inadvertent nor mistaken.

 

A copy of the Court's opinion is available at: http://cdn.ca9.uscourts.gov/datastore/opinions/2013/12/11/11-16404.pdf

 

The case concerns whether a plaintiff's failure to list her claim in her Chapter 7 bankruptcy schedule and failure to provide any explanation for the omission estopped the plaintiff's employment discrimination action as a matter of law.

 

The plaintiff brought suit against her employer alleging discrimination. The plaintiff also filed for Chapter 7 bankruptcy protection. The plaintiff failed to list the employment discrimination action as an asset in her bankruptcy schedules. The defendant moved to dismiss the employment discrimination case on judicial estoppel grounds. Only after defendant moved to dismiss did the plaintiff amend her bankruptcy schedule to list the employment discrimination case as a potential asset.

 

The district court dismissed the plaintiff's employment discrimination case finding that no evidence suggested that plaintiff's original omission had been inadvertent or mistaken and, weighing the factors set forth in New Hampshire v. Maine, 532 U.S. 742, 750-51 (2001), judicial estoppel barred this action.

 

At issue in the appeal was whether the district court's dismissal was at odds with the Ninth Circuit's recent decision Ah Quin v. County of Kauai Department of Transportation, 733 F.3d 267 (9th Cir. 2013). The Ninth Circuit determined that the district court's dismissal was consistent with Ah Quin and affirmed the district court decision.

 

In Ah Quin, the Ninth Circuit reversed the district court's dismissal of a plaintiff's case on judicial estoppel grounds where the plaintiff failed to list the case as an asset in her bankruptcy schedule. The evidence in the case was disputed and supported a conclusion of either mistake and inadvertence or deceit.

 

The Ninth Circuit began by addressing the factual similarities and differences between Ah Quin and this case.  As in Ah Quin, the plaintiff here filed false bankruptcy schedules and failed to amend those schedules until defendant filed a motion to dismiss. The plaintiff's inaction suggested that the omission had not been inadvertent. However, unlike in Ah Quin, the plaintiff presented no evidence, by affidavit or otherwise, explaining the initial failure to include the employment discrimination action in the bankruptcy schedules. Even after the district court dismissed this case, the plaintiff did not seek reconsideration or attempt to supplement the record with a declaration or any other evidence to contradict the district court's finding that omitting the employment action from the bankruptcy schedules was not inadvertent.

 

Instead, plaintiff argued that Ah Quin mandates an evidentiary hearing every time a debtor omits a claim on her bankruptcy schedules and later amends those schedules. The Ninth Circuit disagreed. Instead, Ah Quin remanded for further factual development because, viewing the evidence in a light most favorable to the plaintiff, a reasonable fact finder could conclude that the debtor's omission of a potential claim on their bankrupt schedule was inadvertent. In this case, no reasonable fact finder could conclude that the plaintiff's omission was inadvertent or mistaken given the timing of the plaintiff's amendment and her decision not to file a declaration providing an explanation for her initial failure to list the potential claim. As such, the district court correctly dismissed the case and no evidentiary hearing was required.

 

The Plaintiff also argued that the district court abused its discretion in addressing the three main New Hampshire factors. See New Hampshire v. Maine, 532 U.S. 742, 149 L. Ed 2d 968, 121 S. Ct. 1808, 1815 (2001). As you may recall, the three primary New Hampshire factors are: (1) a party's later position must be clearly inconsistent with its earlier position; (2) whether the prior court accepted the party's earlier position; and (3) whether the party asserting the inconsistent opinion would derive an unfair advantage if not estopped.

 

Regarding the first factor, the district court in this case concluded that, by failing to list the claim while simultaneously pursuing the claim, Plaintiff clearly asserted inconsistent positions. Concerning the second factor, the district court found that the bankruptcy court was misled by Plaintiff's omission. As to the third factor, the district court determined that the Plaintiff received an unfair advantage in bankruptcy court by failing to list the claim. The Ninth Circuit found no error in the district court's New Hampshire analysis.

 

The Ninth Circuit held that the district court did not abuse its discretion in dismissing the plaintiff's employment discrimination claim because: (1) the plaintiff failed to list the claim as an asset in the plaintiff's Chapter 7 bankruptcy schedules; and (2) the plaintiff presented no evidence to demonstrate that this omission was inadvertent or mistaken.

 

Accordingly, the Ninth Circuit affirmed the district court's dismissal, based on judicial estoppel of the plaintiff's employment discrimination claim. 

 

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee 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@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.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:
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FYI: 6th Cir Holds Servicer That Is Not Also Creditor Not Liable For Failing to Identify Owner/Master Servicer Under TILA, Borrower Adequately Pled QWR Damages Causation

The U.S. Court of Appeals for the Sixth Circuit recently addressed:  (1) whether the Helping Families Save Their Homes Act of 2009 amendments to the Truth in Lending Act (TILA) created a private cause of action against a mere servicer that was not also a creditor; and  (2) whether it was proper to dismiss a claim under the Real Estate Settlement Procedures Act (RESPA) where the Plaintiff poorly pled the causation of the alleged damages. The Sixth Circuit affirmed the district court's dismissal of the TILA claim, and reversed the lower court's dismissal of the RESPA claim.

 

In so ruling, the Sixth Circuit held that a mere servicer, that was not also a creditor, was not liable for violating 15 U.S.C. § 1641(f)(2) and affirmed the dismissal of the TILA claim. The Sixth Circuit also held that, viewing the complaint's alleged facts and all inferences therefrom in the Plaintiff's favor, the Plaintiff had sufficiently pled a causal link between the RESPA violation and the Plaintiff's damages.

 

A copy of the Court's opinion is available at: http://www.ca6.uscourts.gov/opinions.pdf/13a0332p-06.pdf

 

The borrower sent a purported "Qualified Written Request" (QWR) to the servicer. The QWR requested information relating to Plaintiff's loan, including the owner of the loan, disputed all late fees and other charges, noted that the servicer failed to provide a loan modification, and reiterated a prior request for a copy of the note. The borrower requested receipt of all documents and information with sixty days as required by RESPA. 12 U.S.C. § 2605(e). The servicer allegedly failed to provide all of the requested information and documentation within sixty days.

 

The complaint also alleged that the borrower made additional payments totaling approximately $574.89, over and above the regular scheduled payments due on the loan, which the servicer allegedly failed to credit to the principal balance. The borrower further alleged that the servicer received $221.21 for the borrower's account that was not credited to the principal balance. Instead, the borrower alleged that the servicer kept these payments for its benefit.

 

The servicer first identified the owner of the loan after the borrower field suit and responded to the servicer's motion for judgment on the pleadings. The district court granted the servicer's motion for judgment on the pleadings. The district court found that a mere servicer, that is not also a creditor, cannot be liable for violating 15 U.S.C. § 1641(f)(2).  The district court also found that the borrower's RESPA claim failed because the complaint did not allege a sufficient link between the servicer's deficient response to the borrower's QWR and the alleged actual damages.

 

The Sixth Circuit began by addressing the TILA claim. As you may recall, Congress amended TILA's civil liability provision and liability of assignees provision as part of the Helping Families Save Their Homes Act of 2009, Pub. L. No. 111-22, § 404(g), 123 Stat. 1632, 1658. The Helping Families Save Their Homes Act of 2009 amended TILA in two ways. First, it added subsection (g) to 15 U.S.C. § 1641, requiring that new loan owners notify the borrower of certain information about the assignment.  Second, and directly at issue here, it added the phrase "subsection (f) or (g) of section 1641" to the civil liability provision, 15 U.S.C. § 1640.  Subsection (f) exempts servicers from liability unless the servicer also is or was the creditor or assignee of the obligation. 15 U.S.C. § 1641(f).

 

The borrower argued that by adding to the civil liability provisions of 15 U.S.C. § 1640(a) a reference to the failure to meet a requirement under subsection (f) or (g) of 15 U.S.C. § 1641, Congress created a private cause of action for violation of those sections. In other words, according to the borrower, liability under TILA's civil liability provision does not depend on being a creditor.  Further, the borrower argued that, because only servicers can violate 15 U.S.C. § 1641(f), Congress created a cause of action against servicers for failure to comply with 15 U.S.C. § 1641(f)(2), notwithstanding that the 15 U.S.C. § 1640 introductory language refers only to creditors. Congress, the borrower argued, would not have created civil liability against a creditor for violation of a provision under which the creditor has no obligation.

 

Whether a non-creditor servicer may be liable for an alleged 15 U.S.C. § 1641(f)(2) violation was a matter of first impression for the Sixth Circuit, but the court has twice held that a TILA action may not be maintained against a mere servicer.

 

The Sixth Circuit concluded that the district court properly dismissed the borrower's TILA claim because the servicer defendant was only a servicer of the loan, and TILA exempts servicers from liability unless the servicer was also a creditor or an assignee. In so ruling, the Sixth Circuit rejected the borrower's argument that Congress intended the Helping Families Save Their Homes Act 2009 amendments to impose liability on mere servicers. Had Congress wanted to make servicers liable for violations under 15 U.S.C. § 1641(f)(2), then it would have included the word servicer in 15 U.S.C. § 1640(a). This interpretation is consistent with TILA's purpose requiring creditors, not servicers, to provide borrowers with clear and accurate disclosures. The Sixth Circuit also observed that its holding was consistent with the majority of courts finding that servicers are not liable for TILA violations. The Sixth Circuit thus concluded that the district court did not err by holding that the servicer, as a mere servicer, cannot be liable for violating TILA, 15 U.S.C. § 1641(f)(2). Subsection (f) exempts servicers from liability unless the servicer also is or was the creditor of the obligation. 15 U.S.C. §1641(f)(2).

 

Turning to the question of the borrowers' RESPA claim, the Sixth Circuit evaluated whether the borrower had sufficiently alleged causation for damages stemming from the servicer's alleged RESPA violations. Viewing the alleged facts and inferences therefrom in the borrower's favor, the Sixth Circuit held that the district court's dismissal could not stand.

 

The complaint alleged that borrower suffered damages because the servicer deficiently responded to the QWR, continued to misapply payments of approximately $800, and that the borrower incurred actual pecuniary damages that included the amount of money the servicer converted, interest, and disgorgement interest.

 

The Sixth Circuit held that the borrower's complaint sufficiently plead damages caused by the servicer's RESPA violations. The complaint properly alleged that the borrower's alleged interest damages flowed from the servicer's supposed deficient response to the QWR, because any additional interest paid on the principal balance after the servicer supposedly deficiently responded to the QWR would flow from the deficient response.  In addition, according to the Court, the costs the borrower incurred in preparing the QWR became actual damages after the servicer deficiently responded to the QWR.  Additionally, the Court held that the borrower's allegation that the servicer engaged in a pattern or practice of non-compliance with RESPA's mortgage servicer provisions sufficiently plead statutory damages.

 

The Sixth Circuit held that RESPA claims should not be dismissed under the federal notice pleading rules, where all well pleading material allegations are taken as true, simply "on the basis of "inartfully pleaded" damages because viewing the complaint's allegations and, all inferences therefrom in the borrower's favor, the complaint sufficiently alleged damages stemming from a RESPA violation.

 

Accordingly, the Sixth Circuit affirmed the district court's dismissal of the TILA claim, reversed the district court's dismissal of the RESPA claim, and remanded the case for proceedings consistent with its ruling.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee 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@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.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:
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FYI: 6th Cir Holds HUD Policy Statement on ABAs Not Binding, Not Entitled to Deference

The U.S. Court of Appeals for the Sixth Circuit recently affirmed a district court judge's ruling holding that the 1996 Department of Housing and Urban Development ("HUD") policy statement adding a fourth prerequisite to the Real Estate Settlement Procedures Act's ("RESPA") affiliated business arrangements exception is not binding.

 

A copy of the opinion is available at:  http://www.ca6.uscourts.gov/opinions.pdf/13a0333p-06.pdf

 

This case involved a real estate agency and two title services companies ("A" and "B") respectively. The real estate agency and the two title service companies are related to one another along two dimensions: their ownership and their business. The people who own the real estate agency also own a holding company that in turn owns about half of Title Service Company A. Title Service Company B owns the other half of Title Service Company A.

 

The real estate agency often refers prospective buyers to Title Service Company A. Title Service Company A in turn contracts some of the referred work out to Title Service Company B. Title Service Company B gathers evidence relating to the title, and Title Service Company A evaluates this evidence to determine the title's validity.

 

The plaintiffs used the real estate agency as their real estate agent. The real estate agent referred the plaintiffs to Title Service Company A. Title Service Company A contracted with Title Service Company B to gather evidence relating to the title. To the plaintiffs' thinking, Title Company A was a shell corporation that improperly funneled referral fees between the real estate agency and Title Company B. The plaintiffs sued all three companies under RESPA. The district court dismissed the plaintiffs' claims and the plaintiffs appealed. The United States intervened in the appeal to defend the validity of HUD's 1996 policy statement.

 

As you may recall, RESPA prohibits giving or receiving "any fee . .  pursuant to any agreement or understanding . . . that business incident to . . . a real estate settlement service . . . shall be referred." 12 U.S.C. § 2607(a). Anyone who violates this provision commits a crime punishable with up to a year in prison. Id. § 2607(d)(1). A violator also faces civil liability through private-enforcement actions and public-enforcement actions.  12 U.S.C. § 2607(d)(2), (4).  HUD used to enforce these provisions, but this function has been transferred to the new Consumer Financial Protection Bureau. 12 U.S.C. § 2617.

 

Congress created an exception in 1983 when it added a safe harbor for "affiliated business arrangements." 12 U.S.C. § 2607(c)(4). The safe harbor provision covers arrangements where a person making a referral "has either an affiliate relationship with or a direct or beneficial ownership interest of more than 1 percent in" the settlement-service provider receiving the referral. 12 U.S.C. § 2602(7). A business arrangement qualifies for the safe harbor protection if it meets three conditions: (1) the person making the referral must disclose the arrangement to the client; (2) the client must remain free to reject the referral; and (3) the person making the referral cannot receive any "thing of value from the arrangement" other than "a return on the ownership interest or franchise relationship." 12 U.S.C. § 2607(c)(4).  

 

There was no dispute that the defendants in this case (several realty companies and title companies) satisfied the three affiliated business arrangement prerequisites.

 

Despite this, the plaintiffs (three home buyers) claimed that the defendants fell outside the safe harbor's coverage because they failed to satisfy a fourth condition announced by HUD through a policy statement. The district court held that the policy statement was invalid and unenforceable.

 

The Sixth Circuit affirmed, holding HUD's 1996 policy statement does not supplement RESPA's existing safe-harbor conditions, and instead unacceptably created an ambiguity where none existed in a statute where a violation carries potential criminal liability. As such, the Court held that the 1996 policy statement is not binding on HUD or anyone else because it is not otherwise entitled to deference.

 

The plaintiffs argued that the profits earned by the owners of the real estate agency and Title Company B constituted prohibited referral fees because of their relationship with Title Company A. The Sixth Circuit found two potential ways to look at this claim: the easy way, and the hard way.

 

The easy analysis turns on RESPA's statutory safe harbor provisions. 12 U.S.C. § 2607(c)(4). The business relationship in this case qualifies as an "affiliated business arrangement." There was no dispute that the real estate agency had an "affiliate relationship" with Title Service Company A, that the real estate agency made referrals to Title Service Company A, and that Title Service Company A in turn provided settlement services. § 2602(7). This relationship satisfied all three safe-harbor conditions. The real estate agency disclosed the arrangement to the buyers, the real estate agency allowed them to reject the referrals, and neither the real estate agency nor its owners received anything of value from the arrangement apart from a return on their ownership interests. § 2607(c)(4).  Thus, the Sixth Circuit held that the real estate agency and Title Service Company A did everything RESPA required, and therefore qualified for RESPA's affiliated business arrangement exemption.

 

The more complicated way of looking at the claim, the Sixth Circuit observed, must account for HUD's 1996 policy statement. See Statement of Policy 1996-2 Regarding Sham Controlled Business Arrangements, 61 Fed. Reg. 29,258 (1996). HUD's policy statement announced that, in addition RESPA's three clear safeguards contained in § 2607(c)(4), affiliated business arrangements must also satisfy a fourth requirement: "[T]he entity receiving the referrals of settlement service business must be a . . . bona fide provider of settlement services." Id. at 29,262.  The statement continues, "[t]he Department will consider" a series of factors "and will weigh them in light of the specific facts" when separating bona fide providers from shams. Id.  The ten factors that HUD will consider include whether the provider has "sufficient initial capital and net worth," whether it has "its own employees," and whether it is "located at the same business address as one of the parent providers." Id.

 

The Sixth Circuit took a dim view of HUD's attempt to add a fourth requirement to a safe harbor provision that exempts individuals from potential criminal penalties stating that "a statutory safe harbor is not very safe if a federal agency may add a new requirement to it through a policy statement." More specifically, the Sixth Circuit found that HUD's "policy statement is not entitled to Chevron deference or Skidmore consideration, and as a result compliance with the three conditions set out in the statute suffices to obtain the exemption"

 

A policy statement is entitled to Chevron deference "only when an agency offers a binding interpretation of a statute that it administers." Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984). The Sixth Circuit held that HUD's 1996 policy statement's ten-factor test is not a binding interpretation of the Act. Instead, the Court held, the statement merely informs the public that HUD plans to "consider" these factors when separating bona fide providers from shams. As such, the Sixth Circuit held that the 1996 policy statement offers non-binding advice about the agency's enforcement agenda, not HUD's controlling interpretation of the statute, and that this type of agency recommendation, even when it expresses policy considerations or preferences, does "not bind courts tasked with interpreting a statute."

 

The government countered this analysis by arguing that the policy statement contains two parts. The first half announces HUD's binding view that only bona fide settlement services providers qualify for the safe harbor. The second half's ten factors to consider gives non-binding advice about how to separate genuine providers from shams. The government argued that the first part of HUD"S statement deserves deference even if the second part does not.

 

The Sixth Circuit rejected the governments' interpretation for several reasons.  First, the Court noted that RESPA "already contains three conditions that protect buyers against affiliated business arrangements involving sham providers." Viewed in this light, the Court held that the bare pronouncement from the first half of the statement that the safe harbor excludes shams, shorn of the ten-factor test to distinguish the genuine from the fake, adds nothing to the statute -- RESPA already protects buyers against sham providers. The Sixth Circuit held that the defendants already met the three criteria to separate bona fide providers from shams, and that by itself, a proclamation re-affirming this does not change anything.

 

The Sixth Circuit found another problem with the government's approach:  the point of Chevron is to allow agencies to resolve statutory ambiguities.  The Court held that HUD's 1996 policy statement does not resolve any statutory ambiguity, but instead HUD's policy statement creates an ambiguity where none exist.  The Court noted that, if the first half of the policy statement requires courts to conduct a freestanding inquiry into a service provider's genuineness, and this inquiry has nothing to do with the three requirements detailed in § 2607(c)(4), then how should the courts determine if a service is bona fide?  The Court further noted that, if the ten-factor test does not guide the courts' performance of this task, then what does? According to the Sixth Circuit, the government does not provide an answer, leaving courts to figure out the answer without any binding criteria -- which unacceptably creates ambiguity, instead of resolving it.

 

The Sixth Circuit also rejected the government's interpretation because agency interpretation receives Chevron deference only if "Congress delegated authority to the agency generally to make rules carrying the force of law, and . . . the agency interpretation claiming deference was promulgated in the exercise of that authority." United States v. Mead Corp., 533 U.S. 218, 226–27 (2001). Consequently, the Court held, because policy statements do not speak with the force of law, "interpretations contained in policy statements . . . do not warrant Chevron-style deference." Christensen v. Harris County, 529 U.S. 576, 587 (2000). However, this is a norm, not an "absolute rule." Barnhart v. Walton, 535 U.S. 212, 222 (2002). Although this is a norm and not an absolute rule, the Sixth Circuit found no persuasive reason to depart from the norm.

 

The Sixth Circuit also noted that RESPA's criminal penalties reinforce application of the Mead doctrine in this case.  A statute with civil and criminal penalties receives a single interpretation. Leocal v. Ashcroft, 543 U.S. 1, 11 n.8 (2004); United States v. Thompson/Center Arms Co., 504 U.S. 505, 518 n.10 (1992).  The government must give the people fair notice of what conduct it has made a crime. McBoyle v. United States, 283 U.S. 25, 27 (1931). The Sixth Circuit held that the government's duty of fair notice of conduct that it has criminalized precluded the Court from supplementing the clear safeguards expressed on the face of the statute with a multi-factor ten part test blend never expressed in the statute.

 

The Sixth Circuit also rejected the plaintiffs' argument, pursuant to Skidmore v. Swift & Co., 322 U.S. 134 (1944), that HUD's position enjoys deference because it is persuasive for the simple reason that it is not persuasive. The Court noted that, taken alone, the first half of the statement provides courts with no guidance about how to apply the requirement it seeks to include in the statute.  Nor is this ambiguous approach compatible with the imperative to provide fair warning in the criminal context, the Court held, but rather these shortcomings "rob the policy statement of persuasive force."

 

The Sixth Circuit also disagreed with the plaintiffs "most far reaching argument" that RESPA actually contains the policy statements' fourth requirement. The Court noted that the plaintiffs "find a textual hook for this argument hidden in a dependent relative clause" in RESPA's definition section. RESPA's definition for "affiliated business arrangement" includes the phrase "provider of settlement services." 12 U.S.C. § 2602(7). The plaintiffs asserted that the phrase "provider of settlement services" means "bona fide provider of settlement services." However, the Sixth Circuit held that the most natural definition of a "provider of settlement services" is "one who provides settlement services."  The Court noted that RESPA clearly outlines the three requirements that affiliated business arrangements must satisfy to obtain an exemption from the referral fee ban (12 U.S.C. § 2607(c)(4)), and the requirements are spelled out in "painstaking detail." RESPA's express inclusion "of these precise requirements counsels against discovering an additional requirement in the implications of a phrase tucked away in a dependent relative clause elsewhere in the statute." Bruesewitz v. Wyeth LLC, 131 S. Ct. 1068, 1076 (2011).

 

The Sixth Circuit also noted that the entire statute fortifies its ruling.  RESPA establishes other safe harbors from its ban on referral fees, separate from the affiliated business safe harbor provision. Significantly, one of these other exceptions uses the phrase "bona fide" that the plaintiffs want to read into the affiliated business safe harbor provision. The exception protects "the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually rendered." 12 U.S.C. § 2607(c)(2).  RESPA uses "bona fide" in the salary or compensation exception, but omitted the phrase in the affiliated business arrangement exception.  According to the Court, this disparity confirms that the business arrangement exception does not require "courts to conduct a freestanding inquiry into a provider's bona fides unconnected to the safe-harbor test already baked into the statute." Russello v. United States, 464 U.S. 16, 23 (1983).

 

The Sixth Circuit concluded that its decision is consistent with the purpose of RESPA's safe harbor provision. The statute initially created legal uncertainty about profiting from referrals to affiliated companies. As a result, "Congress created the affiliated-business-arrangement safe harbor to eliminate this uncertainty."  According to the Court, RESPA's precision in defining this exception's boundaries reflects this objective, and a multi-factor inquiry that would require courts to distinguish bona fide providers from shams in new ways would reintroduce the uncertainty that the safe harbor exception eliminated.  As the Sixth Circuit noted, this result is particularly unacceptable where there are potential criminal penalties.

 

In sum, the Sixth Circuit held that HUD's 1996 policy statement adding a fourth requirement to the affiliated business arrangement exception is not binding, and the arrangement between the real estate agency and the title service companies qualifies for the affiliated business arrangement exception.  Accordingly, the Sixth Circuit affirmed the lower court's ruling in favor of the defendants.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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Email: RWutscher@mwbllp.com

 

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