FYI: WA Sup Ct Upholds UDAP Jury Award Against Foreclosure Trustee for Alleged "Robo-signing"

The Washington Supreme Court recently held that a borrower could sue under Washington's Consumer Protection Act for a foreclosure trustee's failure to exercise impartial judgment as to whether to postpone a foreclosure sale, and for falsely notarizing a notice of sale and pre-dating foreclosure documents.

 

The Court also ruled that, in the context of a non-judicial foreclosure: (1) a trustee under a trust deed is not merely a lender's agent, but a fiduciary to both the mortgagor and mortgagee owing a duty to act impartially toward each; (2) as an equitable remedy, the right to enjoin a foreclosure sale does not operate to waive claims based on the foreclosure process; and  (3) waiver applies only to actions to vacate a trustee's sale but does not apply to damages actions.

 

A copy of the opinion is available at:  https://www.courts.wa.gov/index.cfm?fa=controller.managefiles&filePath=Opinions&fileName=871051.pdf

 

An elderly woman, confined to a nursing home and under the guardianship of a court-appointed guardian ("Guardian"), was unable to make the payments on her home mortgage loan to her lender ("Bank").  She defaulted on the loan.  The property, subject to a deed of trust, was appraised at almost four times the amount the borrower owed on the loan.  

 

After the borrower's default, the trustee ("Trustee") under the trust deed executed a notice of trustee sale that was allegedly improperly pre-dated using a supposedly false notarization.  The alleged false notarization supposedly allowed the trustee's sale to occur earlier than would have otherwise.  The notice of sale in this case was allegedly one of many such foreclosure documents that Trustee falsely notarized in a supposed "robo-signing" operation in order to expedite the foreclosure process. 

 

Ten days before the scheduled trustee's sale, and having received permission from the court to sell the borrower's property to help pay for her health care, Guardian secured a contract for the sale of the house to a buyer willing to pay full value.  Nevertheless, despite repeated attempts to work with Trustee in an effort to postpone the foreclosure sale, Trustee allegedly refused to cooperate with Guardian, citing its agreement with Bank not to delay trustee's sales without Bank's express authorization to do so. 

 

On the scheduled sale date, Trustee sold the property to a third party for just a dollar more than what was owed on the borrower's loan.   The property subsequently was re-sold for almost the full appraised value.

 

Guardian sued Trustee for damages based on negligence, breach of contract, and violations of the Washington Consumer Protection Act ("CPA"), contending that Trustee's alleged acts and practices of deferring to Bank and falsifying dates on notarized documents were unfair and deceptive, and that Trustee was negligent in failing to delay the sale. 

 

In response, Trustee argued that Guardian's causes of action were barred because Guardian had failed to seek to enjoin the sale.  Although the lower court dismissed certain claims based on Guardian's failure to seek an injunction, the lower court allowed the negligence, breach of contract, and CPA claims to go forward.

 

After a jury determined that both parties were 50% negligent, and that Trustee violated the CPA and breached its contractual obligations, the court awarded damages against Trustee for over $150,000 (the difference between the foreclosure sale price and the price at which the property ultimately re-sold).   The lower court also awarded attorney's fees on the CPA claim.

 

The parties each challenged the trial court's decision, appealing to the Court of Appeals, which reversed all but the negligence claim. Guardian sought review by the Supreme Court of Washington, which affirmed in part and reversed in part.

 

As you may recall, to prevail on a Washington state CPA action, the plaintiff must prove an:  (1) unfair or deceptive act or practice; (2) occurring in trade or commerce; (3) public interest impact; (4) injury to plaintiff in his or her business or property; (5) causation.  Hangman Ridge Training Stables, Inc. v. Safeco Title Ins. Co., 105 Wn.2d 778, 780, 719 P.2d 531 (1986).  See also RCW 19.86.020 ("[U]nfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful); and RCW 19.86.090 ("any person who is injured in his or her business or property by a violation of RCW 19.86.020 . . . may bring a civil action in superior court.").

 

In addition, certain violations of Washington's Deed of Trust Act are unfair or deceptive acts or practices for purposes of the CPA, such as paying someone not to bid or to reduce a bid at a trustee's sale.  See RCW 61.24.135 (1998).

 

Addressing Guardian's CPA claim, the Washington Supreme Court examined the role of trustees in non-judicial foreclosures.  In so doing, the Court rejected Trustee's assertion that only acts or practices statutorily deemed to be "unfair" are unfair for purposes of the CPA, ruling instead that a CPA claim may be based on a "per se" statutory violation or on "an act or practice that has the capacity to deceive substantial portions of the public, or an unfair or deceptive act or practice not regulated by statute but in violation of the public interest."

 

Pointing to numerous prior opinions, the Washington Supreme Court observed how the definitions of "unfair" and "deceptive" have evolved through case law over time and, further, that an act or practice may be "unfair" without being deceptive, thereby constituting a valid CPA claim.  See, e.g., Saunders v. Lloyd's of London, 113 Wn.2d 330, 344, 779 P.2d 249 (1989)(noting evolution of meaning  because CPA does not provide the definitions of "unfair" or "deceptive"); State v. Kaiser, 161 Wn. App. 705, 721, 254 P.3d 850 (2011)(finding that act of "falsely offer to help" avoid foreclosure was unfair and deceptive act under CPA without reference to specific CPA provision); Magney v. Lincoln Mut. Sav. Bank, 34 Wn. App. 45, 57, 659 P.2d 537 (1983)(act is unfair under CPA if it offends public policy); Panag v. Farmers Ins. Co of Wash., 166 Wn.2d 27, 48, 204 P.3d 885 (2009)(discussing both per se and "unregulated" unfair or deceptive acts, noting that it "is impossible to frame definitions which embrace all unfair practices.").     

 

Citing with approval a court ruling that the trustee under a deed of trust is a fiduciary for both the mortgagee and the mortgagor and must therefore act accordingly, the Washington Supreme Court stressed that equity and due process concerns require trustees to be "evenhanded to both sides and to strictly follow the law."  See Cox v. Helenius, 103 Wn. 2d 383, 389, 693 P.2d 683 (1985)(voiding a foreclosure because the trustee had failed to properly restrain the sale, trustee's actions, and grossly inadequate purchase price).  As the Court explained:  "An independent trustee who owes a duty of good faith to exercise a fiduciary duty to act impartially to fairly respect the interests of both the lender and the debtor is a minimum to satisfy the statute, the constitution, and equity, at the risk of having the sale voided, title quieted in the original homeowner, and subjecting itself and the beneficiary to a CPA claim." 

 

Accordingly, rejecting Trustee's assertion that it had a legal obligation to respect the instructions of the beneficiary under the deed of trust, the Washington Supreme Court concluded that Trustee was not a mere agent of the beneficiary, and had "abdicated its duty to act impartially toward both sides" in failing to exercise independent discretion.

 

Turning specifically to the predated notice of sale, the Court pointed out that while it is not a per se unfair or deceptive act for purposes of the CPA, falsely notarizing a document in the context of a non-judicial foreclosure constitutes a crime and a breach of the public trust, a practice which, according to the Court, therefore satisfies the first three elements under the CPA.

 

With respect to Guardian's request for injunctive relief, the Washington Supreme Court found unreliable Trustee's assurances that it would no longer engage in improper document notarizations and that revisions to Washington's Deed of Trust Act would prevent further improper conduct.  Instead, the case was remanded to the trial court to fashion an appropriate injunctive remedy.

 

The Washington Supreme Court thus reversed the rulings of the court of appeals with respect to the CPA and breach of contract claims, reinstated the jury's award, and affirmed as to the negligence claim. 

 

 

 

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: 3rd Cir Holds "Please Call Us" Language in Dunning Letter Stated Overshadowing Claim Under FDCPA

Reversing the lower court's judgment order, the U.S. Court of Appeals for the Third Circuit recently ruled in a putative class action suit under the federal Fair Debt Collection Practices Act that language in a debt collection letter contradicted and overshadowed the FDCPA validation notice, pointing among other things to the statements in the letter to "please call us" "if you feel you do not owe" the debt, the font, typeface and other characteristics.

 

A copy of the opinion is available at:  http://www.ca3.uscourts.gov/opinarch/121846p.pdf

 

Defendant debt collector ("Debt Collector") sent plaintiff debtor ("Debtor") a letter in an attempt to collect a debt which Debtor supposedly owed for medical services.  The letter stated in part:  "if you feel you do not owe [the debt], please call us toll free at . . . or write us at the above address. . . SEE REVERSE SIDE FOR IMPORTANT INFORMATION."  The phrase "please call" was in bold face, and the front side of the letter supposedly contained a confusing admixture of font sizes, typeface, contact phone numbers, and mailing and website addresses. 

 

On the reverse side of the letter was the language stating in part:  "unless you notify this office within 30 days after receiving this notice that you dispute the validity of this or any portion thereof, this office will assume this debt is valid.  If you notify this office in writing within 30 days from receiving this notice that you dispute the validity of this debt . . . , this office will . . . [verify the debt]. . . .  If you request this office in writing within 30 days after receiving this notice, this office will provide you with the name and address of the original creditor . . . ."

 

Debtor filed a putative class action complaint under section 1692(e)(10) and section 1692g of the federal Fair Debt Collection Practices Act ("FDCPA"), alleging that Debt Collector's letter was a false or deceptive means of collecting on the debts in question because the least sophisticated debtor could reasonably, but incorrectly, believe that he could effectively dispute the debt by calling the phone number listed in the letter. 

 

Debt collector moved for judgment on the pleadings, which the lower court granted.  Debtor appealed.  The Third Circuit vacated the lower court's order granting the judgment on the pleadings.

 

As you may recall, the federal Fair Debt Collection Practices Act requires that a debt collector provide to a consumer:  (1) the amount of the debt; (2) the name of the creditor to whom the debt is owed; (3) a statement that the debt will be assumed valid unless the consumer disputes the debt in writing within 30 days after receipt of the notice; (4) a statement that if the consumer does so notify the debt collector in writing that the debt is disputed, the debt collector will verify the debt and send such verification to the consumer; and (5) a statement that, upon the consumer's written request within the 30-day period, the debt collector will provide the name and address of the original creditor.  15 U.S.C.  §  1692g(a). 

 

In addition, section 1692g(b) of the FDCPA provides in part that if the consumer disputes the debt in writing, the debt collector must cease collection of the debt "until the debt collector obtains verification of the debt . . . or the name and address of the original creditor, and a copy of such verification . . . or name and address of the original creditor, is mailed to the consumer by the debt collector. . . ."  That section further provides that "[a]ny collection activities and communication during the 30-day period may not overshadow or be inconsistent with the disclosure of the consumer's right to dispute the debt or request the name and address of the original creditor." 15 U.S.C. § 1692g(b).

 

Moreover, Section 1692e specifically prohibits "[t]he use of any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer."  15 U.S.C. § 1692e.

 

Addressing Debtor's claim that the validation notice was inadequate to apprise "the least sophisticated consumer" of his rights under the FDCPA, the Third Circuit observed that "more is required than the mere inclusion of the statutory debt validation notice in the debt collection letter – the required notice must also be conveyed effectively to the debtor."  See, e.g., Wilson v. Quadramed Corp., 225 F.3d 350 (3rd Cir. 2000); Graziano v. Harrison, 950 F.2d 107 (3rd Cor. 1991)(statutory notice must effectively explain a debtor's rights).

 

In so doing, the Third Circuit examined the Debt Collector's collection letter in terms of both its form and substance to determine whether the validation notice was "'overshadowed' or 'contradicted' by accompanying messages from the debt collector" that would lead the least sophisticated consumer to derive different meanings from the letter.  See Graziano, 950 F.2d at 111, 354. 

 

In reaching its conclusion that Debt Collector's letter was substantively deceptive, the Third Circuit took issue with the lower court's assessment that the "please call" language, when read in the context of the whole letter, would not be confusing to the least sophisticated debtor.  In the Court's view, the least sophisticated debtor, although charged with the responsibility of reading the letter in its entirety, could nevertheless reasonably "feel" that he did not owe the debt "if he . . . actually disputed the debt and its validity."  According to the Court, therefore, the "please call" language suggested to such a debtor that a phone call was an effective means of disputing the validity of the debt. 

 

Moreover, noting that Debt Collector's letter lacked "repeated instructions" to read the reverse side of the letter before taking any further action, the Third Circuit also concluded that the form of the letter rendered the letter similarly deceptive and confusing in light of:  (1) the fact that the "please call" words and the toll-free telephone number were printed in bold typeface; (2) the same phone number appeared again in the letterhead in an even larger font; (3) neither the instruction to "write us" nor the validation notice were in bold print or large font; (4) Debt Collector's mailing address for sending a written dispute only appeared in the letterhead and in smaller font than that used for the telephone number; and (5) the validation notice itself was relegated to the back side of the collection letter.

 

With respect to Debtor's section 1692e(10) claim, the Third Circuit referred to its analysis of the Section 1692g claim in concluding that the lower court erred in granting judgment on the pleadings in favor of Debt Collector.

 

Accordingly, the Court concluded that the least sophisticated consumer would likely take the legally ineffective alternative of calling in an attempt to dispute the debt.   The Court thus ruled that the collection letter was deceptive, as the validation notice was overshadowed and contradicted in that the letter could "be reasonably read to have two or more different meanings, one of which is inaccurate."  See Russell v. Equifax A.R.S., 74 F.3d 30, 35 (2d Cir. 1996).

 

For these reasons, the Third Circuit reversed the lower court's order granting judgment in Debt Collector's favor 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: 1st Cir Upholds Dismissal of UDAP and "Breach of Good Faith and Fair Dealing" Allegations

The U.S. Court of Appeals for the First Circuit recently upheld the dismissal of borrowers' claims against a mortgage lender under Chapter 93A of the Massachusetts consumer protection statute, and for breach of the implied covenant of good faith and fair dealing. 

 

In so doing, the Court ruled that: (1) because borrowers sent the lender a demand letter under Chapter 93A five years after they obtained their mortgages, the four-year statute of limitations under the consumer protection statute barred their consumer protection claim; and (2) because borrowers' complaint alleged only that lender's wrongful conduct supposedly occurred prior to borrowers' execution of their mortgage loans, the implied covenant of good faith and fair dealing did not apply to their claims.   

 

A copy of the opinion is available at:  http://www.ca1.uscourts.gov/pdf.opinions/12-1462P-01A.pdf

 

Plaintiffs borrowers ("Borrowers") took out two mortgages from defendant mortgage lender ("Lender") to purchase a residence in Massachusetts.  The first lien was an ARM with a starting interest rate of 6.75%.  The second mortgage was a fixed rate loan.  Over five years after the loan transaction closed, and citing Chapter 93A of the Massachusetts consumer protection statute, Borrowers sent Lender a demand letter alleging that Lender had failed to adequately disclose the terms of the loans before they signed the loan papers.  Borrower sought damages of "at least $100,000" plus interest, costs and attorney's fees.  Lender rejected the claims.  Borrowers filed suit in federal court.

 

Borrowers' complaint alleged that Lender had breached the implied covenant of good faith and fair dealing under Massachusetts law, and had violated Chapter 93A of the Massachusetts consumer protection statute.  See Mass. Gen. Laws ch. 93A, §§ 2, 9 ("Chapter 93A").  Their injury, Borrowers claimed, consisted of the payment of too much interest on "economically unviable" loan terms. 

 

Borrowers further claimed that, prior to the loan closing Lender had failed to provide Borrowers a proper commitment letter, good-faith estimate, or other documents required by the federal Real Estate Settlement Procedures Act, and that Lender "knew or should have known" that the property appraisal was "too high."   See 12 U.S.C. §§ 2601-2617. 

 

Lender filed a motion to dismiss, arguing that Borrowers had failed to allege any acts on Lender's part that breached the covenant of good faith and fair dealing or violated Chapter 93A.  Lender also argued that the statute of limitations had run on the consumer claim. 

 

Borrowers failed to respond.  The lower court dismissed.  Borrowers later sought reconsideration, which the lower court denied.  Borrowers appealed.  The First Circuit affirmed.

 

Noting that the implied covenant of good faith and fair dealing is implicit in every contract, and provides that neither party to a contract may interfere with the right of the other party to receive the benefit of the executed contract, the First Circuit pointed out that the doctrine governs only post-contract conduct of the parties.  In so doing, the Court reiterated the common-law rule that the covenant may not be invoked to alter the terms of an existing contract.  See, e.g., Anthony's Pier Four, Inc. v. HBC Assocs., 583 N.E.2d 806, 820 (Mass. 1991); Massachusetts Eye & Ear Infirmary v. QLT Phototherapeutics, Inc., 412 F.3d 215, 230 (1st Cir. 2005); Uno Restaurants, Inc. v. Boston Kenmore Realty Corp., 805 N.E.2d 957, 964 (Mass. 2004).  

 

Pointing out that Borrowers had received the "fruits" of the loan transactions, and that the supposedly improper conduct occurred before the contracts existed rather than in the performance of the terms of the contracts, the Firs Circuit upheld the lower court's dismissal of the good faith and fair dealing claim.

 

The Court next addressed the Chapter 93A claim that Lender had engaged in unfair or deceptive acts or practices causing Borrowers economic injury.  Although the First Circuit noted that the lower court's dismissal was based on Borrowers' failure to plead acts that were unfair or deceptive, and on the absence of a causal connection between Lender's supposed acts and Borrowers' alleged damages, the Court upheld the dismissal because the four-year statute of limitations period under the Massachusetts consumer protection statute had run before Borrowers filed suit.   

 

In reaching this conclusion, the First Circuit pointed out that the period started running on the date Borrowers signed their loan agreements, that they sent the required Chapter 93A demand letter more than a year after the limitations period had expired, and that in their motion for reconsideration Borrowers never provided a basis for tolling the limitations period under the so-called discovery rule or the fraud exception.

 

With respect to the potential bases for tolling the limitations period, the First Circuit noted, first, that the discovery rule applies only in situations where the injuries are "inherently unknowable" at the time of the occurrence, which was not the case here as the interest terms were readily apparent at the time Borrowers signed their loan contracts.   Second, the Court noted that nothing in Borrowers' pleadings suggested that Lender engaged in fraud of any sort to justify applying the fraud exception.  Accordingly, the First Circuit also upheld the lower court's dismissal of the Chapter 93A claim, but on different grounds.

 

 

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 Reverses Class Settlement Approval in FDCPA Faulty Affidavit Case

Reversing the lower court's ruling approving a putative class action settlement, the U.S. Court of Appeals for the Sixth Circuit recently held that:  (1) certification of a nationwide settlement class was improper;  and (2) the nationwide settlement agreement involving claims under the federal Fair Debt Collection Practices Act was unfair, unreasonable and inadequate. 

 

In so ruling, the Court noted, among other things:  (1) the great disparity under the settlement agreement between the monetary relief for the named plaintiffs, and the relief available to unnamed class members;  (2) the interests of class representatives were actually antagonistic to those of the unnamed class members; and  (3) the notice to class members did not satisfy due process requirements, because the notice failed to explain the significance of the release of unnamed class members' claims against the defendants debt collectors.

 

A copy of the opinion is available at:  http://www.ca6.uscourts.gov/opinions.pdf/13a0050p-06.pdf

 

Defendants debt collection agencies ("Debt Collectors") and several plaintiffs debtors ("Debtors") sought approval in federal district court of a nationwide class settlement that settled three related class-action lawsuits alleging violations of the federal Fair Debt Collection Practices Act and state law.  In those lawsuits, one of which was originally filed in federal court and two of which were removed, Debtors asserted claims against the defendant Debt Collectors based in large part on the alleged use of affidavits incorrectly claiming that the affiant had personal knowledge of the debt owed by each Debtor.  In certain instances, the use of these affidavits resulted in state-court judgments against some of the Debtors.

 

The parties in the three actions eventually reached a settlement agreement and presented it to the lower court.  Providing for both monetary and injunctive relief, the settlement included a stipulation as to certification of a class roughly defined as those persons who were sued by the Debt Collectors, in actions in which the alleged false affidavits were used in connection with the debt collection lawsuits.  In addition, the settlement included a class-wide release whereby those class members who did not opt out would release Debt Collectors "from all causes of action . . . which the class now has . . . against the Released Parties, arising out of or relating to the Released Parties' use of affidavits in debt collection lawsuits."  This provision essentially precluded the unnamed class members from using the false affidavits against the Debt Collectors to contest their debts in state court.  

 

The settlement also provided that the four named plaintiffs were to receive $8,000 among them, and that Debt Collectors would pay $5.2 million into a settlement fund.  Out of this fund, eligible unnamed class members who filed claims received just over $17.00 each.

 

In addition, the Debt Collectors also agreed to release the debts owed by the named plaintiffs, but reserved the right to continue pursuing the unnamed class members for their allegedly unpaid debts. 

 

As for injunctive relief, the Debt Collectors agreed to implement procedures for one year to prevent the use of improper affidavits, a process to be overseen by a retired federal judge. 

 

The district court ultimately certified the class under Federal Rule of Civil Procedure 23(b)(3) and granted final approval of the settlement.  Eight unnamed class members appealed, arguing that the settlement was unfair, unreasonable, and inadequate, and that the notice to prospective class members did not satisfy due process. 

 

The Sixth Circuit reversed the lower court's order approving the settlement, vacated the judgment certifying the nationwide settlement class, and remanded, ruling among other things that the settlement's preferential treatment of the named plaintiffs over the unnamed class members made the settlement inherently unfair. 

 

As you may recall, to certify a class action, a court must find that the class satisfies the requirements of numerosity, commonality, typicality, and adequacy of representation.  See Federal Rule of Civil Procedure 23(a).  If certification occurs pursuant to Rule 23(b)(3), the class must satisfy the additional requirements of superiority and predominance. 

 

Noting that in order to be approved, a settlement must be "fair, reasonable, and adequate," the Sixth Circuit stressed that a federal court must apply seven factors in making that assessment:  (1) the risk of fraud or collusion; (2) the complexity, expense and likely duration of the litigation: (3) the amount of discovery engaged in by the parties; (4) the likelihood of success on the merits; (5) the opinions of class counsel and class representatives; (6) the reaction of absent class members; and (7) the public interest.  See UAW v. General Motors Corp., 497 F.3d 615, 631 (6th Cir. 2007). 

 

In addition, in evaluating the fairness of a settlement involving differing relief to named class representatives and unnamed class members,  the Sixth Circuit analyzed the settlement in terms of whether it "gives preferential treatment to the named plaintiffs while only perfunctory relief to unnamed class members," thereby rendering the settlement unfair. See Williams V. Vukovich, 720 F.2d 909, 925 n.11 (6th Cir. 1983); Holmes v. Continental Can Co., 706 F.2d 1144, 1148 (11th Cir. 1983). 

 

Thus, applying these eight factors to the settlement in this case, the Appellate Court concluded that the class settlement completely failed to satisfy the test for fairness, reasonableness, and adequacy even though the lower court had weighed the seven factors and found each satisfied.  In so ruling, the Sixth Circuit noted among other things that under the settlement agreement in this case: (1) the named plaintiffs received the primary benefit of the settlement in that their debt to the Debt Collectors was forgiven; (2) the unnamed class members were prevented from using the false affidavits against the Debt Collectors in any other lawsuit, thus assuring that there would be a collection judgment against them; (3) the named plaintiffs received an $8,000 incentive payment to be split among the four of them while the unnamed class members received about $17.00 each; (4) the injunctive relief was of little value as it was only to last one year and did not actually prohibit the Debt Collectors from using false affidavits, but merely required a change in policies.

 

As for the certification of the nationwide settlement class, the Court similarly concluded that certification was inappropriate in this case, because the representation and superiority prongs under Rule 23(a) and (b)(3) were, in the Court's view, clearly not satisfied. 

 

In reaching this determination, the Sixth Circuit looked at whether the representatives had common interests with unnamed class members and would vigorously prosecute the interests of the class through qualified counsel.  See In re American Med. Sys., Inc., 75 F.3d 1069, 1083 (6th Cir. 1996).  The Court also looked at whether class counsel were qualified to undertake the class litigation. 

 

Thus, while noting that a number of factors mitigated in favor of finding adequate representation, the Sixth Circuit ultimately concluded that two factors were dispositive on the issue:  (1) the class representatives had no interest in vigorously prosecuting the unnamed class members' ability to use the false affidavits against Debt Collectors to contest their debts in court; and  (2) class representatives actually had an interest antagonistic to the interest of the unnamed class members, specifically, the class representatives sought to have the settlement approved in order that their own debts would be forgiven.  Accordingly, the Court determined that adequacy of representation was lacking.

 

With respect to the "superiority" requirement under Rule 23(b)(3), the Court reasoned that two factors weighed against finding the superiority factor satisfied:  (1) unnamed class members had a strong interest in individually controlling the defense of the state-court judgments against them; and  (2) class members could have collected damages under state law that would have significantly exceeded the monetary relief available to them from the settlement in this case.  See Young v. Nationwide Mutual Ins. Co., 693 F.3d 532 (6th Cir. 2012) (considering the superiority factor partly in light of the economic feasibility of individual lawsuits and whether there was a threshold issue common to all class members).

 

Finally, the Sixth Circuit also ruled in part that the notice to class members failed to satisfy due process, because the notice did not explain the fact that the release of claims negated class members' ability to vacate the allegedly fraudulently-obtained judgments against them in state court.  Notably, the Court observed that the failure to explain the consequences of the release of claims was the principal ground on which a class member might opt out or object to the settlement in an effort to protect their greatest interest.  The Court thus concluded that class notice in this case did not "fairly apprise . . . the prospective members of the class of the terms of the proposed settlement."   UAW v. General Motors Corp., 497 F.3d 615, 630 (6th Cir. 2007). 

 

Accordingly, the Sixth Circuit reversed the district court' order approving the settlement, vacated the class certification, 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

 

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 Reverses Class Settlement Approval in FDCPA Faulty Affidavit Case

Reversing the lower court's ruling approving a putative class action settlement, the U.S. Court of Appeals for the Sixth Circuit recently held that:  (1) certification of a nationwide settlement class was improper;  and (2) the nationwide settlement agreement involving claims under the federal Fair Debt Collection Practices Act was unfair, unreasonable and inadequate. 

 

In so ruling, the Court noted, among other things:  (1) the great disparity under the settlement agreement between the monetary relief for the named plaintiffs, and the relief available to unnamed class members;  (2) the interests of class representatives were actually antagonistic to those of the unnamed class members; and  (3) the notice to class members did not satisfy due process requirements, because the notice failed to explain the significance of the release of unnamed class members' claims against the defendants debt collectors.

 

A copy of the opinion is available at:  http://www.ca6.uscourts.gov/opinions.pdf/13a0050p-06.pdf

 

Defendants debt collection agencies ("Debt Collectors") and several plaintiffs debtors ("Debtors") sought approval in federal district court of a nationwide class settlement that settled three related class-action lawsuits alleging violations of the federal Fair Debt Collection Practices Act and state law.  In those lawsuits, one of which was originally filed in federal court and two of which were removed, Debtors asserted claims against the defendant Debt Collectors based in large part on the alleged use of affidavits incorrectly claiming that the affiant had personal knowledge of the debt owed by each Debtor.  In certain instances, the use of these affidavits resulted in state-court judgments against some of the Debtors.

 

The parties in the three actions eventually reached a settlement agreement and presented it to the lower court.  Providing for both monetary and injunctive relief, the settlement included a stipulation as to certification of a class roughly defined as those persons who were sued by the Debt Collectors, in actions in which the alleged false affidavits were used in connection with the debt collection lawsuits.  In addition, the settlement included a class-wide release whereby those class members who did not opt out would release Debt Collectors "from all causes of action . . . which the class now has . . . against the Released Parties, arising out of or relating to the Released Parties' use of affidavits in debt collection lawsuits."  This provision essentially precluded the unnamed class members from using the false affidavits against the Debt Collectors to contest their debts in state court.  

 

The settlement also provided that the four named plaintiffs were to receive $8,000 among them, and that Debt Collectors would pay $5.2 million into a settlement fund.  Out of this fund, eligible unnamed class members who filed claims received just over $17.00 each.

 

In addition, the Debt Collectors also agreed to release the debts owed by the named plaintiffs, but reserved the right to continue pursuing the unnamed class members for their allegedly unpaid debts. 

 

As for injunctive relief, the Debt Collectors agreed to implement procedures for one year to prevent the use of improper affidavits, a process to be overseen by a retired federal judge. 

 

The district court ultimately certified the class under Federal Rule of Civil Procedure 23(b)(3) and granted final approval of the settlement.  Eight unnamed class members appealed, arguing that the settlement was unfair, unreasonable, and inadequate, and that the notice to prospective class members did not satisfy due process. 

 

The Sixth Circuit reversed the lower court's order approving the settlement, vacated the judgment certifying the nationwide settlement class, and remanded, ruling among other things that the settlement's preferential treatment of the named plaintiffs over the unnamed class members made the settlement inherently unfair. 

 

As you may recall, to certify a class action, a court must find that the class satisfies the requirements of numerosity, commonality, typicality, and adequacy of representation.  See Federal Rule of Civil Procedure 23(a).  If certification occurs pursuant to Rule 23(b)(3), the class must satisfy the additional requirements of superiority and predominance. 

 

Noting that in order to be approved, a settlement must be "fair, reasonable, and adequate," the Sixth Circuit stressed that a federal court must apply seven factors in making that assessment:  (1) the risk of fraud or collusion; (2) the complexity, expense and likely duration of the litigation: (3) the amount of discovery engaged in by the parties; (4) the likelihood of success on the merits; (5) the opinions of class counsel and class representatives; (6) the reaction of absent class members; and (7) the public interest.  See UAW v. General Motors Corp., 497 F.3d 615, 631 (6th Cir. 2007). 

 

In addition, in evaluating the fairness of a settlement involving differing relief to named class representatives and unnamed class members,  the Sixth Circuit analyzed the settlement in terms of whether it "gives preferential treatment to the named plaintiffs while only perfunctory relief to unnamed class members," thereby rendering the settlement unfair. See Williams V. Vukovich, 720 F.2d 909, 925 n.11 (6th Cir. 1983); Holmes v. Continental Can Co., 706 F.2d 1144, 1148 (11th Cir. 1983). 

 

Thus, applying these eight factors to the settlement in this case, the Appellate Court concluded that the class settlement completely failed to satisfy the test for fairness, reasonableness, and adequacy even though the lower court had weighed the seven factors and found each satisfied.  In so ruling, the Sixth Circuit noted among other things that under the settlement agreement in this case: (1) the named plaintiffs received the primary benefit of the settlement in that their debt to the Debt Collectors was forgiven; (2) the unnamed class members were prevented from using the false affidavits against the Debt Collectors in any other lawsuit, thus assuring that there would be a collection judgment against them; (3) the named plaintiffs received an $8,000 incentive payment to be split among the four of them while the unnamed class members received about $17.00 each; (4) the injunctive relief was of little value as it was only to last one year and did not actually prohibit the Debt Collectors from using false affidavits, but merely required a change in policies.

 

As for the certification of the nationwide settlement class, the Court similarly concluded that certification was inappropriate in this case, because the representation and superiority prongs under Rule 23(a) and (b)(3) were, in the Court's view, clearly not satisfied. 

 

In reaching this determination, the Sixth Circuit looked at whether the representatives had common interests with unnamed class members and would vigorously prosecute the interests of the class through qualified counsel.  See In re American Med. Sys., Inc., 75 F.3d 1069, 1083 (6th Cir. 1996).  The Court also looked at whether class counsel were qualified to undertake the class litigation. 

 

Thus, while noting that a number of factors mitigated in favor of finding adequate representation, the Sixth Circuit ultimately concluded that two factors were dispositive on the issue:  (1) the class representatives had no interest in vigorously prosecuting the unnamed class members' ability to use the false affidavits against Debt Collectors to contest their debts in court; and  (2) class representatives actually had an interest antagonistic to the interest of the unnamed class members, specifically, the class representatives sought to have the settlement approved in order that their own debts would be forgiven.  Accordingly, the Court determined that adequacy of representation was lacking.

 

With respect to the "superiority" requirement under Rule 23(b)(3), the Court reasoned that two factors weighed against finding the superiority factor satisfied:  (1) unnamed class members had a strong interest in individually controlling the defense of the state-court judgments against them; and  (2) class members could have collected damages under state law that would have significantly exceeded the monetary relief available to them from the settlement in this case.  See Young v. Nationwide Mutual Ins. Co., 693 F.3d 532 (6th Cir. 2012) (considering the superiority factor partly in light of the economic feasibility of individual lawsuits and whether there was a threshold issue common to all class members).

 

Finally, the Sixth Circuit also ruled in part that the notice to class members failed to satisfy due process, because the notice did not explain the fact that the release of claims negated class members' ability to vacate the allegedly fraudulently-obtained judgments against them in state court.  Notably, the Court observed that the failure to explain the consequences of the release of claims was the principal ground on which a class member might opt out or object to the settlement in an effort to protect their greatest interest.  The Court thus concluded that class notice in this case did not "fairly apprise . . . the prospective members of the class of the terms of the proposed settlement."   UAW v. General Motors Corp., 497 F.3d 615, 630 (6th Cir. 2007). 

 

Accordingly, the Sixth Circuit reversed the district court' order approving the settlement, vacated the class certification, and remanded for further proceedings.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher LLP
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Email: RWutscher@mtwllp.com

 

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