FYI: 1st Cir Holds Surrender of Real Estate in BK Does Not Require Lender to Accept Title to Property, or Foreclose or Release Its Lien

The U.S. Court of Appeals for the First Circuit recently held that a creditor with a lien on real estate surrendered by borrowers after their bankruptcy discharge was not obligated to foreclose or release its lien on the property, and thus did not violate the bankruptcy court's discharge injunction by offering foreclosure alternatives.   

 

Specifically, in so ruling, the Court reasoned that, because the property still had value and the creditor was willing to enter into a settlement or a short sale arrangement, the creditor was merely seeking to recover the value of its lien and not to enforce the borrowers' discharged personal obligation on the loan.

 

A copy of the opinion is available at:  http://www.ca1.uscourts.gov/pdf.opinions/12-9002P-01A.pdf.

 

Two borrowers ("Debtors"), having unsuccessfully attempted to refinance their mortgage loan, eventually defaulted on their obligation.  The holder of the mortgage ("Lender") later initiated foreclosure proceedings against Debtors, who then filed for Chapter 7 bankruptcy protection.  At the time of the foreclosure, the value of Debtors' home had plummeted to a level far below what they owed on the mortgage loan, and, according to their bankruptcy filings, Debtors intended to surrender the property to Lender. 

 

As a result of Debtors' bankruptcy filing, Lender voluntarily dismissed without prejudice the foreclosure proceedings, and Debtors received a bankruptcy discharge releasing them from their personal obligation on the mortgage loan. 

 

Following the discharge, however, Lender informed Debtors that, although it would not foreclose on Debtors' residence and Debtors would retain ownership of the property, Lender would no longer make any payments for taxes, insurance, or property maintenance. 

 

In response, Debtors demanded that Lender either commence foreclosure proceedings or release its lien, reminding Lender of their bankruptcy discharge and their right to a "fresh start."   Stating that it was not seeking to enforce Debtors' personal liability on the loan, Lender informed Debtors that it would not release the lien on the property, but that Lender would consider some sort of a settlement option or a short sale of the property. 

 

Debtors subsequently abandoned the property and had all the utilities turned off.  Based on Lender's alleged failure to foreclose or take possession of the property, and claiming Lender's letter was a violation of the bankruptcy discharge, Debtors filed an adversary action against Lender, seeking damages and a declaratory judgment ordering Lender to either recover possession of the property or to give them clear title to it.

 

The bankruptcy court ruled in favor of Lender, rejecting Debtors' argument that this case was factually indistinguishable from another case in which a secured creditor had refused to foreclose or release its lien.   See Pratt v. General Motors Acceptance Corp. (In re Pratt), 462 F.3d 14 (1st Cir. 2006)("Pratt")(holding that a secured creditor's refusal to foreclose or to release the lien on a worthless automobile violated the discharge injunction because as it was intended to coerce the debtor into paying the discharged debt).

 

In so doing, the bankruptcy court pointed out that Debtors' demand to either foreclose or release the lien ignored the fluctuating nature of real estate values, and that Lender did not simply demand immediate payment in full, but instead was willing to consider a voluntary settlement or a short sale of the property.   This latter fact, the bankruptcy court reasoned, indicated that Lender simply wanted to collect only the value of its lien.  The bankruptcy court additionally noted that, although bankruptcy discharge relieves debtors of personal liability, bankruptcy does not force creditors to assume ownership or take possession of collateral or discharge the owner's ongoing obligations to pay taxes and homeowner's insurance. 

 

Debtors appealed to the bankruptcy appellate panel ("BAP"), which affirmed.  Debtors then appealed to the First Circuit, again asserting that the facts of Pratt mirrored those in this case.  The Court of Appeals also affirmed.

 

As you may recall, the discharge injunction provision of the bankruptcy code broadly prohibits attempts to collects debts that have been discharged.  11 U.S.C. § 524(a).  Enforcement mechanisms employed by bankruptcy courts include sanctions for civil contempt.  See 11 U.S.C. § 105.

 

Noting that the discharge injunction does not enjoin a secured creditor from recovering on valid prepetition liens not modified or otherwise avoided, the First Circuit emphasized that such liens are enforceable in accordance with state law, but that one way debtors could eliminate the prepetition lien is to surrender the collateral as long as the secured creditor agrees to allow the debtor to do so.

 

Nevertheless, the First Circuit observed that a creditor's decision in this regard must not serve as a means to coerce payment of a discharged debt, and that the debtor bears the burden of proof with respect to allegations of violations of discharge injunction.  See Pratt, 462 F.3d at 19-20; ZiLOG, Inc. v. Corning (In re ZiLOG, Inc.), 450 F.3d 996, 1007 (9th Cir. 2006).  

 

Noting that this case lacked the exclusive "pay in full" conditional release present in Pratt, which, according to the Court, amounted to an impermissible forced reaffirmation of discharged debt, the Court explained that the minimal value of the collateral in Pratt and the unlikelihood that the collateral could ever be sold to generate attachable sale proceeds was the factually significant difference between the two cases. 

 

The First Circuit thus stressed that here the secured creditor offered to release its lien through either a settlement offer or a short sale, which according to the Court, was an indication that Lender intended to collect no more than the value secured by the underlying lien, but also a willingness to settle on terms agreeable to Debtors. 

 

Accordingly, the Court rejected Debtors' assertion that Lender's position contradicted the "fresh start" they received through their discharge, which they argued permitted them to simply abandon the property.

 

Stressing that bankruptcy law does not alter the rights of secured creditors who are in compliance with  state law, the Court, citing a lack of evidence as to why Debtors would not accept a short sale or settlement or any other indicia of coercion on Lender's part, noted that unlike in Pratt, there was a real possibility in this case that the collateral could be sold.

 

Finally, the Court also emphasized that its ruling should not be relied on as a basis for secured creditors to refuse to negotiate in good faith, reiterating that, given the difficulty in seeing the distinction between forceful negotiation and improper coercion to collect on a discharged debt, each case should be evaluated on its unique facts.

 

Accordingly, the First Circuit affirmed in all respects.

 

 

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
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FYI: 3rd Cir Holds Demand for TILA Rescission w/in 3 Years Preserves Claim for Later Lawsuit

Reversing the ruling of the lower court, the U.S. Court of Appeals for the Third Circuit recently held that a borrower need only send a written notice of rescission within three years of a loan transaction to exercise his rescission right under TILA, concluding that a borrower is not additionally required to file a law suit within that period to rescind the loan transaction.

 

In so ruling, however, the Court also noted in part that: (1) beyond the initial absolute three-day right-to-cancel period, "notice-only" rescission is effective only if a borrower has a "valid" TILA claim for rescission, but a lender may file suit to resolve any uncertainty in that regard; and  (2) consistent with section 1635's purpose to restore parties to their pre-loan positions, in order to protect the creditor after rescission, a court may condition the release of the lender's security interest on the borrower's tender of any loan proceeds. 

 

A copy of the opinion is available at:  http://www.ca3.uscourts.gov/opinarch/114254p.pdf.

 

Plaintiffs-borrowers ("Borrowers") obtained two separate loans that were secured by mortgages on their residence.  Within three years of the loan closing, Borrowers notified the original lender and the current loan owner (collectively, "Lenders") that they were exercising their right to rescind the loan agreements under the federal Truth in Lending Act ("TILA"), asserting that the original lender failed to provide all the disclosures required under TILA. 

 

The loan owner agreed to rescind the smaller of the two loans, but refused to allow rescission as to the other loan, claiming that the original lender had not materially violated TILA's disclosure requirements.

 

Borrowers then filed suit against Lenders over three years after their loan closing date, seeking among other things damages and a declaration of rescission.  In response, Lenders filed a motion for judgment on the pleadings, arguing that suits for rescission filed more than three years after a loan's closing were time-barred, even if the borrower had sent notice of rescission within that three-year period.

 

Borrowers argued that they had already exercised their right to rescind by mailing Lenders a written notice and that they were not required to also file suit within the three-year rescission period.  The lower court agreed with Lenders, granted the motion on the pleadings, and dismissed the case.  Borrowers appealed.

 

The Third Circuit reversed, reasoning in part that written notice alone is sufficient to exercise the right of rescission, and that in the Court's view nothing in TILA suggests that a lawsuit must be filed within three years of a loan transaction in order to preserve the right to rescind.

 

As you may recall, section 1635 of TILA provides in part:  "the obligor shall have the right to rescind the transaction . . . by notifying the creditor, in accordance with regulations . . . of his intention to do so."  15 U.S.C. § 1635(a).  TILA's implementing regulation, Regulation Z, in turn, provides that such notice must be sent "by mail, telegram, or other means of written communication."   12 C.F.R. §§ 1026.15(a)(2), 1026.23(a)(2).

 

In addition, TILA further provides that: (1) after the borrower "exercises his right to rescind," the lender must return within 20 days of receiving notice of rescission any money or property that it received as earnest money or downpayment, "and shall take any action necessary . . . to reflect the termination of any security interest created under the transaction" ; and (2) the obligor becomes obliged to tender any property  he has received from the lender "[u]pon the performance of the creditor's obligations."  15 U.S.C. § 1635(b).  

 

Finally, TILA's Section 1635(f) provides that [a]n obligor's right of rescission shall expire three years after the date of [the loan] transaction or upon the sale of the property, whichever occurs first . . . ."  15 U.S.C. § 1635(f).

 

Disagreeing with Lender's position that a borrower must file a complaint within three years of a loan closing in order to rescind, the Third Circuit relied on what it viewed as TILA's plain language in concluding that Borrowers exercised their right to rescind when they sent the rescission notice to the lender.   

 

In so doing, the Court rejected the reasoning adopted by numerous other courts, opining that Lenders' reliance on the U.S. Supreme Court's opinion in Beach v. Ocwen was misplaced, given that the Supreme Court did not address specifically whether a borrower must send both written notice and file suit within three years of the closing date.  See Beach v. Ocwen Fed. Bank, 523 U.S. 410, 411-13 (1998)(addressing question whether borrowers who failed to provide notice of rescission within the three-year period may later assert rescission as an affirmative defense in  foreclosure proceedings).  See also, e.g., Rosenfield v. HSBC Bank, USA, 681 F.3d 1172, 1188 (10th Cir. 2012)(rejecting notice-only view); Yamamoto v. Bank of New York, 329 F.3d 1167, 1172 (9th Cir. 2003); Large v. Conseco Fin. Servicing Corp., 292 F.3d 49, 54-55 (1st Cir. 2002).  But see Williams v. Homestake Mortgage Co., 968 F.2d 1137, 1139-40 (11th Cir. 1992)(rescission occurs automatically upon notice); Gilbert v. Residential Funding LLC, 678 F.3d 271, 277-78 (4th Cir. 2012)(ruling that notice within three years of the closing is sufficient for rescission).

 

Noting among other things the absence of any specific references in section 1635 to "causes of action" or "commencement of suits" and agreeing with the position of the Consumer Financial Protection Bureau, which filed an amicus brief in this case, that mere written notice suffices to accomplish rescission, the Court explained that any subsequent legal action would be limited to an examination of whether a valid rescission had occurred and, if so, enforcement of the parties' respective obligations post-rescission.

 

Further finding support for its interpretation, the Court noted that section 1635(b) provides that the creditor must return money or property to the borrower "'[w]ithin 20 days after receipt of a notice of rescission' – not within twenty days of a court order stating that the obligor is entitled to rescind."   

 

Moreover, stressing TILA's remedial nature, and thus liberally construing its provisions, the Third Circuit addressed Lenders' various concerns, including Lenders' assertion that it would be "problematic" for a court to conclude that rescission occurred after the three-year period because there would be no "right to rescission" to enforce at the time of the lawsuit.   In so doing, the Court noted that "while the obligor no longer has the right to rescission after the three-year period has passed, he does have the right to the return of his property and to clear title – the rights flowing from rescission – and it is these rights that permit him to bring suit."  Thus, comparing the operation of the three-year period to the three-day absolute right of rescission, the Court explained that borrowers who "have exercised" their right to rescind may file suit after the three-year period has passed. 

 

The Third Circuit also gave only passing attention to Lenders' assertions that the court's "notice-only" interpretation:  (1) allowed borrowers to unilaterally and instantly void a lender's security interest, even in instances where the borrower has received all required disclosures; (2) increased uncertainty with respect to title to collateral, particularly in foreclosure situations;  and (3) would increase costs for both consumers and lenders generally.  In doing so, the court stressed that its interpretation hinged on obligors having only "valid" TILA claims against lenders for disclosure violations.    

 

Pointing out that the uncertainty as to the status of a security interest in a foreclosure situation is limited to those loans for which borrowers sent a notice of rescission within the three-year period, the Court stated that lenders could either sue to confirm the validity or non-validity of a purported rescission or do nothing, and thus assume the risk that a court might rule that the rescission was valid.

 

With respect to Lenders' argument that their security interest "becomes void" as of the moment of delivery of a demand for rescission, the Third Circuit pointed out that when a borrower fails to tender any loan proceeds disbursed to him, "courts are not required to treat the lender as an unsecured creditor" but may condition the release of a security interest on the return of the loan proceeds.  

 

While thus recognizing that its interpretation would likely raise costs for consumers in the long run, the Third Circuit stated that, because TILA says nothing about filing a suit within the three-year period, the "most natural reading" of the statute merely requires a borrower to send valid written notice of rescission before the end of the three-year period.

 

Accordingly, the Court reversed and remanded.

 

 

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: Cal App Ct Rules in Favor of Defendant in Putative Class Action Challenging Notary Fees in Excess of $10 Statutory Limit

The California Court of Appeal, Fifth District, recently upheld summary judgment in favor of the defendant in a putative class action alleging unlawful overcharges of notary fees in excess of the $10 limit under California's notary fees statute. 

 

Additionally, the Court ruled that an attorney's fees provision contained in escrow instructions was unconscionable and thus unenforceable, concluding that the provision was among other things oppressive, completely one-sided, and encompassed all types of claims, even claims unrelated to the escrow agreement.

 

A copy of the opinion is available at:  http://www.courts.ca.gov/opinions/documents/F063318.PDF

 

At a closing for a mortgage refinancing loan, plaintiff borrower ("Borrower") was presented with about 40 documents, most of which required Borrower's signature.  A notary public, present at the loan closing to acknowledge Borrower's signature, charged Borrower a total of $75.  The $75 fee appeared on the closing statement as a non-itemized entry but supposedly included fees for taking two signature acknowledgments, one on a deed of trust and the other on a transfer deed, and for performing other services, such as: traveling to the loan closing site; making the necessary disclosures required by the loan documents; explaining the purpose of each loan document; answering Borrower's questions about the loan closing process or loan documents; and showing where to sign each document. 

 

One of the documents Borrower signed was a set of escrow instructions that contained an attorney fee provision providing that in the event Borrower filed a lawsuit he would  pay defendant escrow company ("Escrow Company") "all costs, expenses and reasonable attorney's fees which [Escrow Company] may expend or incur in said suit. . . ."

 

Borrower filed a putative class-action against Escrow Company, alleging that the notary charged fees in excess of the fees permitted by California's Government Code section 8211 providing that a notary may charge only $10 per signature for "taking an acknowledgment."    Explicitly premised on the alleged overcharge for notary fees in violation of Section 8211, Borrower's complaint, styled as a statewide, multi-year class action, set forth causes of action for violation of California's unfair competition law, Bus. & Prof. Code § 17200 et seq. ("UCL") and unjust enrichment. 

 

Prior to class certification, Escrow Company moved for summary judgment, contending that the $75 fee was not a violation of Section 8211 because Section 8211 only limited fees for taking acknowledgments, that the notary performed other services, and that the notary was an independent contractor and not an agent of Escrow Company, which merely disbursed the funds to the notary.

 

In opposing the motion for summary judgment, Borrower argued in part that: (1) the fees charged were unlawful under Section 8211 even if other services were provided, because the only notary function performed was the taking of two signature acknowledgments; (2) even if the fees were not unlawful, they were potentially unfair or fraudulent under the UCL because Escrow Company failed to itemize or disclose the various services being provided.

 

In further support of its motion, Escrow company also argued that all of Borrower's claims were premised on a supposed violation of Section 8211 and that, because no other theories were alleged in the complaint, Borrower was precluded from pursuing theories raised in his opposition.

 

The lower court granted Escrow Company's motion for summary judgment on both grounds.  Borrower appealed. 

 

Several months after the entry of judgment in favor of Escrow Company, Escrow Company moved for attorney fees, seeking $266,801 pursuant to the attorney's fees provision in the escrow instructions Borrower signed at the loan closing, and supposedly based on the extensive discovery and time spent defending the litigation.

 

The lower court granted the motion and awarded Escrow Company the requested attorney fees.  Plaintiff also appealed the order awarding attorney's fees.

 

The Appellate Court affirmed in part and reversed in part, concluding that the lower court properly granted Escrow Company's motion for summary judgment but that the attorney's fees provision in the escrow instructions was unconscionable and thus unenforceable.

 

As you may recall, Section 8211 provides:  "Fees charged by a notary public for the following services shall not exceed the fees prescribed by this section. (a) For taking an acknowledgment or proof of a deed, or other instrument, to include the seal and the writing of the certificate, the sum of [$10] for each signature taken." 

 

In addition, the UCL prohibits unfair competition and defines "unfair competition" as "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising." See  Bus. & Prof. Code, § 17200; Pastoria v. Nationwide Ins. 112 Cal. App.4th 1490, 1496 (2003)(noting that the UCL prohibits practices that are either "unfair" or "unlawful" or "fraudulent").

 

Examining at length Escrow Company's motion for summary judgment, the Appellate Court focused on the function of pleadings in a motion for summary judgment, observing that "the burden of a defendant moving for summary judgment only requires that he . . . negate the plaintiff's theories of liability as alleged in the complaint" and not on other potential theories of liability not raised in the pleadings.

 

Thus, noting that Borrower never filed an amended complaint to include theories of liability for supposed UCL violations, and that his "declarations in opposition to a motion for summary judgment 'are not a substitute for amended pleadings,'" the Appellate Court repeatedly pointed out that the only theory of liability alleged in the complaint was that Escrow Company overcharged for notary fees in violation of Section 8211. 

 

Turning to the meaning of Section 8211, the Appellate Court rejected Borrower's assertion that the complaint did in fact assert a cause of action under the UCL, ultimately agreeing with the lower court that Section 8211 does not limit what may be charged for services which are not specifically listed in that statute.  In so doing, referring to Escrow Company's evidence that the fees also covered a variety of loan signing services that the notary provided, the Court noted that Section 8211 sets forth a list of notary services regulated by Section 8211, but that Section 8211 does not regulate fees for any services not mentioned in the statute, such as traveling to a loan closing or answering Borrower's questions about the loan documents.

 

Accordingly, having concluded that Borrower's entire complaint was based on the sole theory that Escrow Company engaged in unlawful conduct by supposedly violating Section 8211 fee provision, the Appellate Court ruled that Escrow Company had met its burden and that summary judgment was proper.

 

With respect to Escrow Company's motion for attorney fees, the Court looked at the specific language of the provision, its purpose, the respective bargaining positions of the parties, and the circumstances surrounding the document signing to determine whether the provision was unconscionable and thus unenforceable.

 

Pointing out that unconscionability, viewed on a so-called "sliding scale," consists of both procedural and substantive elements, the court concluded that Borrower had demonstrated both elements of unconscionability.  See Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC, 55 Cal.4th 223 (2012)("the procedural element addresses the circumstances of contract negotiation and formation, focusing on oppression or surprise due to unequal bargaining power.  . . . Substantive unconscionablity pertains to the fairness of an agreement's actual terms and to assessments of whether they are overly harsh or one sided.")

 

The Appellate Court based its conclusion as to procedural unconscionability on various factors, including:  (1) Escrow Company was in a superior bargaining position; (2) Borrower was presented with about  40 preprinted forms for his signature of which the escrow instructions was just one document; (3) the attorney's fees provision, written in a small font size and buried in the extensive verbiage of the boilerplate "general provisions," was hidden within the escrow instructions themselves;  (4) the escrow instructions were adhesive in that they were set forth in a standardized form contract "imposed on Borrower"; and (5) the unexpected attorney fees provision was neither known nor negotiated by Borrower.

 

Turning to the substantive prong of unconscionability, the court agreed that the attorney's fees provision was unfairly one-sided, well beyond the expectations of Borrower, the non-drafting party, and was not a standard attorney's fees provision providing a mutual right to attorney fees to the prevailing party.   Noting that the provision gave Escrow Company alone the right to recover attorney fees even for claims unrelated to the escrow instructions, the Appellate Court rejected Escrow Company's argument that a reciprocity provision in California's Civil Code automatically rendered the attorney's fees provision bilateral and mutual.  See Cal. Civ. Code § 1717 (allowing reasonable attorney's fees to prevailing party "[i]n any action 'on a contract,' . . . which [fees] are incurred to enforce that contract").  

 

Reasoning that Borrower's action was not "on the contract" but rather based entirely on enforcement of a specific statutory regulation of notary fees, the court concluded that Section 1717 did not apply to this case, as the contractual relationship formed between the parties as a result of the escrow agreement was merely incidental to Borrower's claims.

 

Accordingly, the Appellate Court upheld the lower court's order granting Escrow Company's motion for summary judgment, but reversed the award of attorney's fees.

 

 

 

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: MA SJC Vacates SCRA-Related Judgment in Favor of Loan Owner for Lack of Standing

The Massachusetts Supreme Judicial Court recently held that, in order to establish standing in a servicemember proceeding under Massachusetts law to determine whether a borrower in default on a home mortgage loan was entitled to the protections of the federal Servicemembers Civil Relief Act, a plaintiff loan owner was required to present evidence showing its status as either the mortgagee or as an agent of the mortgagee.  A copy of the opinion is attached.

 

Plaintiff bank, the trustee of a pool of securitized mortgages ("Loan Owner"), filed a complaint in equity under the Massachusetts Soldiers' and Sailors' Civil Relief Act ("Massachusetts Act") to determine whether defendant borrower ("Borrower") was entitled to foreclosure protections under the federal Servicemembers Civil Relief Act ("SCRA").  In its "servicemember complaint," Loan Owner asserted that it was the assignee and holder of Borrower's mortgage, supporting its assertion with a mortgagee's affidavit signed by the loan servicer ("Servicer").  Servicer averred that it had provided the Borrower with notice advising her of her right to cure her loan default, and that it was authorized to act on behalf of either the "Mortgagee or one holding under the Mortgagee." 

 

Borrower conceded that she was not entitled to foreclosure protection under the SCRA, but nevertheless moved to dismiss Loan Owner's complaint, arguing that Loan Owner lacked standing to bring a servicemember proceeding because it was unclear whether Loan Owner was in fact the holder of her mortgage loan. 

 

Following discovery, the lower court denied Borrower's motion to dismiss, concluding that Loan Owner had standing because Loan Owner had the contractual right to purchase Borrower's mortgage.  Concluding that "it is sufficient if the plaintiff satisfies the general requirements of standing," the lower court determined that the plaintiff in a servicemember proceeding "need not be the current holder of the note or the mortgage to have standing. . . ."

 

Borrower moved for reconsideration, which the lower court denied.   The lower court later entered judgment allowing Loan Owner to enter and to foreclose on Borrower's property in accordance with the terms of Borrower's mortgage.  Borrower appealed and, on its own motion, the Massachusetts Supreme Judicial Court ("SJC") transferred the case to itself.

 

The SJC vacated the judgment for entry and sale, and remanded, ruling that plaintiffs in servicemember proceedings must establish standing by presenting evidence as to their status as mortgagees or as the agents of such mortgagees.

 

As you may recall, the SCRA "provides for the temporary suspension of judicial and administrative proceedings and transactions that may adversely affect the civil rights of servicemembers during their military service."  50 U.S.C. § 502.  To that end, the SCRA provides that a "sale, foreclosure, or seizure of property for a breach of a [loan] obligation" conducted while a party is in the military "shall not be valid" unless done pursuant to court order or agreement between the parties.  50 U.S.C. § 533.

 

In addition, the Massachusetts Act sets forth jurisdictional limitations, and expressly permits only those defendant mortgagors who assert entitlement to protection under the SCRA to appear in proceedings brought pursuant to the SCRA.  See St. 1943, c. 57, § 1 (1943), as amended ("Such proceedings shall be limited to the issues of the existence of such persons and their rights if any.").  Further, the Massachusetts Act limits the relief granted where a defendant mortgagor is not entitled to SCRA protections to a decree by the court stating that the mortgagor is not entitled to such protections, which decree bars the named defendant from later challenging the foreclosure or seizure under the SCRA. 

 

The SJC noted that the lower court erred in accepting Borrower's filings and allowing her to appear and be heard at all because Borrower had failed to assert in her responses that she was entitled to protections of the SCRA.  The SJC went on to explain, however, that notwithstanding the limitation on a non-servicemember's ability to raise standing as an issue, as a matter of subject matter jurisdiction, Loan Owner was required to establish that it had standing to allow the court to decide the merits of the claim.   Accordingly, the SJC ruled that a plaintiff in a servicemember proceeding is required to establish standing, even if the defendant is statutorily prohibited from appearing.  See Bevilacqua v. Rodiquez, 460 Mass. 762, 763-64 (2011). 

 

Turning to the issue whether a plaintiff in a servicemember proceeding must be a mortgagee in order to establish standing, rather than a mere holder of contractual right to purchase a mortgage, the SJC noted that to have standing a litigant must show that the challenged action caused him injury and must have a definite interest in the case such that his rights would be affected by the outcome of the case.  See Sullivan v. Chief Justice for Admin. & Mgt. of the Trial Court, 448 Mass. 15, 21 (2006); Bonan v. Boston, 398 Mass. 315, 320 (1986).

 

Applying this standard to the servicemember proceeding, the SJC, citing the purpose behind the SCRA, explained "[b]ecause nonmortgagees cannot, by law, take actions to foreclose that would trigger the protections accorded servicemember by the SCRA, extending standing in servicemember proceedings to nonmortgagees would not further the stated purpose of the SCRA."  See Eaton v. Federal Nat'l Mortg. Ass'n, 462 Mass. 569, 571 (2012).  In addition, noting that the SCRA also ensures that a foreclosure will not subsequently be deemed invalid for failure to provide SCRA protections to those so entitled, the SJC pointed out that non-mortgagees, being unable to foreclose, "could not suffer the loss that the servicemember proceeding redresses."

 

Thus, observing that plaintiffs with only the option to become a mortgage holder do not have the present authority to foreclose and that their interest in ascertaining whether a borrower is entitled to SCRA protections is limited to the SCRA's impact on the present value of their mortgage investment, the SJC concluded that such an interest does not give rise to the type of definite injury "within the area of concern" of the SCRA. 

 

Moreover, referring to the statutory notice requirements of the Massachusetts Act, the SJC pointed out that the notice form contains language identifying the plaintiff as one "claiming to be the holder of a mortgage."  Therefore, the Court reasoned, only current mortgagees may bring an action under the Massachusetts Act.  

 

Accordingly, ruling that the lower court applied the wrong standard in determining whether Loan Owner had standing in the servicemember proceeding, the SJC vacated the judgment for entry and sale, and remanded for further proceedings. 

 

 

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: 6th Cir Upholds Denial of Class Certification in Alleged Disparate Impact Lending Discrimination Case

The U.S. Court of Appeals for the Sixth Circuit recently affirmed the denial of class certification in an alleged disparate impact lending discrimination case.  In so ruling, the Court concluded that the proposed class did not satisfy the commonality requirement under Federal Rules of Civil Procedure 23(a), because the plaintiffs did not produce evidence to support a specific finding that the lender had a single company-wide policy which caused the disparate impact, or that there was a common mode of exercising discretion that pervaded the company.

 

A copy of the opinion is available at: http://www.ca6.uscourts.gov/opinions.pdf/13a0018p-06.pdf.

 

A group of eleven individuals ("Plaintiffs") obtained home loans from a mortgage lender ("Lender") that allegedly had a loan-pricing policy according to which the cost of a loan to a borrower was determined by applying an objective component as well as a subjective component.  The alleged objective component determined an annual percentage rate ("APR") based on such factors as market interest rates, borrowers' income, credit score, the loan-to-value ratio, and loan amount.  The alleged subjective component of the loan-pricing policy permitted local loan officers, mortgage brokers, or correspondent lenders (collectively, "Agents") to deviate to a certain extent from the so-called "par rate" APR to increase or decrease a borrower's interest rate or to charge a borrower loan fees. 

 

Plaintiffs alleged that the subjective component of Lender's loan-pricing policy had a disparate impact on them, as Agents supposedly had broad discretion to deviate from the par rate, as long as Agents remained within certain parameters.  Specifically, Plaintiffs contended that vesting local Agents with discretion to deviate from par rates led Lender to charge African-American and Hispanic borrowers substantially higher APRs than the rates paid by white borrowers.   Accordingly, seeking damages, injunctive, and declaratory relief for alleged violations of a number of federal consumer and civil rights statutes, Plaintiffs sought certification of a class consisting of all African-American and Hispanic borrowers who obtained a home mortgage loan from Lender during a certain periods of time reaching back to the statute of limitations under each claim. 

 

The lower court denied class certification, concluding that Plaintiffs' proposed class could not satisfy the commonality requirement of Federal Rule 23(a)(2) in light of the Supreme Court's decision in Wal-Mart Stores, Inc. v. Dukes, -- U.S. --, 131 S. Ct. 2541 (2011) ("Dukes").  Plaintiffs appealed.  The Sixth Circuit affirmed.

 

As you may recall, Federal Rule 23(a) sets forth the requirements for class certification:  (1) numerosity; (2) commonality; (3) typicality; and (4) adequate representation.  See Fed. R. Civ. Proc. 23(a). 

 

Relying on the "commonality" analysis set forth in Dukes, the Appellate Court focused on Plaintiffs' contention that the lower court improperly failed to distinguish their challenge to Lender's subjective loan-pricing policy from the local management practices at issue in Dukes, noting that "[t]o demonstrate 'questions of law or fact common to the class,' . . .   a plaintiff must show that the claims of the proposed class 'depend upon a common contention . . . of such a nature that it is capable of classwide resolution – which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.'"  See Dukes, 131 S. Ct. at 2551.  Thus, referring specifically to Agents' exercise of discretion, the Sixth Circuit also noted that Dukes required a showing that "some glue hold[s] the alleged reasons for all those decisions together."  Dukes, 131 S. Ct. at 2552. 

 

Accordingly, the Court noted that the plaintiffs in this case and in Dukes both challenged policies supposedly granting broad discretion to local agents, and that in neither case did the plaintiffs allege that the local actors acted outside the boundaries of their authority, or that a uniform policy or practice guided how these local actors exercised their discretion such that the corporate guidance caused or contributed to the alleged disparate impact on Plaintiffs.  The Court explained that class members must bring the various acts of discretion under a single policy or practice, or a common mode of exercising discretion, in order to establish commonality among claims.

 

The Sixth Circuit also rejected Plaintiffs' assertion that they could show that company-wide policies had a disparate impact on them, even though local managers had a certain amount of discretion, noting that the case on which Plaintiffs relied involved a single nationwide policy that actually encouraged local managers to exercise discretion in a way that had a disparate impact on minority employees.  See McReynolds v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 672 F.3d 482, 490 (7th Cir.), cert. denied, -- U.S. --, 133 S. Ct. 338 (2012)(involving national uniform policy aimed at creating teams for purposes of incentivizing and rewarding employees the implementation of which was left to local managers); Bolden v. Walsh Constr. Co., 688 F.3d 893, 898 (7th Cir. 2012)("This single national policy [in McReynolds] was the missing ingredient in [Dukes]").

 

Within this context, the Court pointed out that there was no such uniform policy at issue in this case to provide the common contention, the "glue" among the claims, to allow Plaintiffs to show that a common mode of implementing Company's policies united all the Agents' individual acts of discretion.  Thus, stressing that plaintiffs' "claim that '[t]he discretion [Lender] has given its sales force is exercised in a common way – by limited variation of the par rate" conflated range of discretion with mode of exercising that discretion, the Sixth Circuit held that the "mere presence of a range within which acts of discretion take place will not suffice to establish commonality."

 

Agreeing with Plaintiffs that the Dukes decision did not prevent a finding of commonality in all disparate impact cases involving the exercise of discretion and, further, that Dukes did not prohibit the use of statistical evidence to prove disparate impact, the Sixth Circuit nevertheless noted that "statistical correlation, no matter how robust, cannot substitute for a specific finding of class-action commonality."  Dukes, 131 S. Ct. at 2555.   As the Court explained, what is required to satisfy the commonality requirement is statistical evidence showing specifically that the practice in question caused the disparate impact.

 

Having concluded that Plaintiffs failed to establish that a uniform policy or practice, or a common mode among the Agents' various acts of discretion, caused the alleged disparate impact, the Sixth Circuit affirmed the lower court's denial of class certification.

 

 

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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Email: RWutscher@mtwllp.com

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