FYI: 7th Cir Rules No Diversity Jurisdiction as to Borrower's Frivolous "Sovereign Citizens" Complaint, Dismissal Still Appropriate as Sanction

The U.S. Court of Appeals for the Seventh Circuit recently ruled that: (1) federal diversity jurisdiction was lacking over a consumer's claim against a finance company because the amount in controversy was below the statutory amount; (2) the finance company's counterclaim did not fall within the court's "supplemental" jurisdiction because the original claim was not within the district court's jurisdiction; and (3) the lower court's determination that the consumer's complaint was frivolous was a determination on the merits warranting dismissal with prejudice.  

 

In so ruling, the Seventh Circuit concluded that dismissal of the consumer's complaint with prejudice was appropriate as a sanction for filing a frivolous claim, but that the finance company's counterclaim should be dismissed without prejudice.

 

A copy of the opinion is attached.

 

Plaintiff bought a used truck, financing the purchase with an installment contract through a dealer that assigned the contract to defendant finance company ("Finance Company").  The contract specified an interest rate of 23.9 percent.  After making the first payment on the loan, the plaintiff sent Finance Company a copy of the contract on which he had stamped "accepted for value and returned for value for settlement and closure," advising Finance Company to collect the balance of the loan from the U.S. Treasury.  Following default, Finance Company repossessed and sold the truck for less than what was owing on the loan, and billed the plaintiff around $11,000 for the difference. 

 

Plaintiff filed suit against Finance Company in federal court for $34 million in compensatory damages and $2.2 billion in punitive damages, basing federal jurisdiction on federal courts' admiralty and diversity jurisdictions.   Finding the complaint frivolous and remarking that the "inordinately high interest rate" in the contract might violate Illinois's usury law, the lower court dismissed the entire complaint without prejudice. 

 

Plaintiff filed an amended complaint, which the lower court dismissed with prejudice, ruling that the Plaintiff had successfully invoked diversity jurisdiction.   Finance Company filed a counterclaim, seeking the roughly $11,000 still owing on the unpaid debt plus prejudgment interest and attorneys' fees.

 

The plaintiff never answered the counterclaim, and the lower court entered a default judgment in favor of Finance Company.  Plaintiff appealed.  The Seventh Circuit vacated and remanded.

 

As you may recall, federal diversity jurisdiction requires diversity of citizenship and an amount in controversy that exceeds $75,000, exclusive of interest and costs.  28 U.S.C. § 1332.  In addition, federal district courts have "supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy . . . ."  28 U.S.C. § 1367.

 

Noting that the complaint bore the characteristics of the so-called "Sovereign Citizens" movement, the Seventh Circuit pointed out that Plaintiff based federal jurisdiction on both diversity and, mistakenly, on admiralty jurisdiction.  In so doing, the Seventh Circuit observed that dismissals for lack of federal jurisdiction are ordinarily without prejudice, and that a determination of a lack of jurisdiction precludes a court from making any determinations as to the merits of the underlying claim.   Nevertheless, the Seventh Circuit also noted that when a case over which the court has federal jurisdiction is dismissed for failure to state a claim, the dismissal is actually a merits-based determination and is thus appropriately with prejudice.  The Seventh Circuit also pointed out, moreover, that dismissal with prejudice may also be appropriate in rare circumstances as a sanction for misconduct, such as filing a frivolous lawsuit intended only to harass. 

 

Having initially stricken Finance Company's brief because it lacked an adequate jurisdictional statement, the Seventh Circuit examined the jurisdictional statement in Finance Company's amended brief, observing that it contained numerous errors.  Specifically, quoting from Finance Company's brief, the Court pointed out Finance Company's jurisdictional assertion that the suit met diversity jurisdiction requirements because the suit alleged that the matter in controversy exceeded the sum or value of $75,000" and, moreover, that the district court had "supplemental jurisdiction" over the counterclaim.  See 28 U.S.C. §§ 1332(a), 1367.  Noting that the plaintiff sought an exorbitant sum in damages and that based on the face of the pleadings, it was apparent that plaintiff was entitled to recover nothing, the Seventh Circuit stressed that a mere allegation of an amount in controversy does not establish that it is in fact the amount in controversy. 

 

Therefore, in pointing out that the plaintiff was entitled to recover nothing, the Seventh Circuit also observed that the counterclaim could not fall within the district court's "supplemental" jurisdiction, as the counterclaim was not "intimately related to claims" already within federal jurisdiction on some other basis. 

 

In noting, moreover, that because Finance Company's counterclaim was based solely on state law and failed to meet the statutory minimum for federal diversity jurisdiction, the counterclaim could not stand as an independent federal suit, the Seventh Circuit went on to state that the lower court should have dismissed the counterclaim for lack of federal jurisdiction.  This dismissal, the Court explained, however, should have been without prejudice so as to allow Finance Company to file a new suit in state court. 

 

Recognizing that the amount of Finance Company's claim might be too small to make a lawsuit worthwhile, the Court suggested that Finance Company could have sought Rule 11 sanctions against the plaintiff for filing a frivolous suit.  Another sanction available to Finance Company, was, according to the Court, dismissal of Plaintiff's complaint with prejudice in order that plaintiff would be precluded from harassing Finance Company by re-filing his suit in state court.  As the Seventh Circuit observed, although the lower court dismissed the complaint with prejudice, it was on the erroneous ground that there was federal diversity jurisdiction, as well as on the merits.  Instead, the Court opined, such dismissal should have been imposed as a sanction.

 

Accordingly, the Appellate Court vacated the lower court's judgment and remanded with specific instructions to:  (1) either dismiss the suit without prejudice, or dismiss with prejudice as a sanction for filing a frivolous suit; (2) vacate the default judgment in favor of Finance Company on its counterclaim due to lack of jurisdiction; and (3) dismiss the counterclaim without prejudice to allow Finance Company to re-file in state court.

 

 

 

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

 

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FYI: 7th Cir Rules No Diversity Jurisdiction as to Borrower's Frivolous "Sovereign Citizens" Complaint, Dismissal Still Appropriate as Sanction

The U.S. Court of Appeals for the Seventh Circuit recently ruled that: (1) federal diversity jurisdiction was lacking over a consumer's claim against a finance company because the amount in controversy was below the statutory amount; (2) the finance company's counterclaim did not fall within the court's "supplemental" jurisdiction because the original claim was not within the district court's jurisdiction; and (3) the lower court's determination that the consumer's complaint was frivolous was a determination on the merits warranting dismissal with prejudice.  

 

In so ruling, the Seventh Circuit concluded that dismissal of the consumer's complaint with prejudice was appropriate as a sanction for filing a frivolous claim, but that the finance company's counterclaim should be dismissed without prejudice.

 

A copy of the opinion is attached.

 

Plaintiff bought a used truck, financing the purchase with an installment contract through a dealer that assigned the contract to defendant finance company ("Finance Company").  The contract specified an interest rate of 23.9 percent.  After making the first payment on the loan, the plaintiff sent Finance Company a copy of the contract on which he had stamped "accepted for value and returned for value for settlement and closure," advising Finance Company to collect the balance of the loan from the U.S. Treasury.  Following default, Finance Company repossessed and sold the truck for less than what was owing on the loan, and billed the plaintiff around $11,000 for the difference. 

 

Plaintiff filed suit against Finance Company in federal court for $34 million in compensatory damages and $2.2 billion in punitive damages, basing federal jurisdiction on federal courts' admiralty and diversity jurisdictions.   Finding the complaint frivolous and remarking that the "inordinately high interest rate" in the contract might violate Illinois's usury law, the lower court dismissed the entire complaint without prejudice. 

 

Plaintiff filed an amended complaint, which the lower court dismissed with prejudice, ruling that the Plaintiff had successfully invoked diversity jurisdiction.   Finance Company filed a counterclaim, seeking the roughly $11,000 still owing on the unpaid debt plus prejudgment interest and attorneys' fees.

 

The plaintiff never answered the counterclaim, and the lower court entered a default judgment in favor of Finance Company.  Plaintiff appealed.  The Seventh Circuit vacated and remanded.

 

As you may recall, federal diversity jurisdiction requires diversity of citizenship and an amount in controversy that exceeds $75,000, exclusive of interest and costs.  28 U.S.C. § 1332.  In addition, federal district courts have "supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy . . . ."  28 U.S.C. § 1367.

 

Noting that the complaint bore the characteristics of the so-called "Sovereign Citizens" movement, the Seventh Circuit pointed out that Plaintiff based federal jurisdiction on both diversity and, mistakenly, on admiralty jurisdiction.  In so doing, the Seventh Circuit observed that dismissals for lack of federal jurisdiction are ordinarily without prejudice, and that a determination of a lack of jurisdiction precludes a court from making any determinations as to the merits of the underlying claim.   Nevertheless, the Seventh Circuit also noted that when a case over which the court has federal jurisdiction is dismissed for failure to state a claim, the dismissal is actually a merits-based determination and is thus appropriately with prejudice.  The Seventh Circuit also pointed out, moreover, that dismissal with prejudice may also be appropriate in rare circumstances as a sanction for misconduct, such as filing a frivolous lawsuit intended only to harass. 

 

Having initially stricken Finance Company's brief because it lacked an adequate jurisdictional statement, the Seventh Circuit examined the jurisdictional statement in Finance Company's amended brief, observing that it contained numerous errors.  Specifically, quoting from Finance Company's brief, the Court pointed out Finance Company's jurisdictional assertion that the suit met diversity jurisdiction requirements because the suit alleged that the matter in controversy exceeded the sum or value of $75,000" and, moreover, that the district court had "supplemental jurisdiction" over the counterclaim.  See 28 U.S.C. §§ 1332(a), 1367.  Noting that the plaintiff sought an exorbitant sum in damages and that based on the face of the pleadings, it was apparent that plaintiff was entitled to recover nothing, the Seventh Circuit stressed that a mere allegation of an amount in controversy does not establish that it is in fact the amount in controversy. 

 

Therefore, in pointing out that the plaintiff was entitled to recover nothing, the Seventh Circuit also observed that the counterclaim could not fall within the district court's "supplemental" jurisdiction, as the counterclaim was not "intimately related to claims" already within federal jurisdiction on some other basis. 

 

In noting, moreover, that because Finance Company's counterclaim was based solely on state law and failed to meet the statutory minimum for federal diversity jurisdiction, the counterclaim could not stand as an independent federal suit, the Seventh Circuit went on to state that the lower court should have dismissed the counterclaim for lack of federal jurisdiction.  This dismissal, the Court explained, however, should have been without prejudice so as to allow Finance Company to file a new suit in state court. 

 

Recognizing that the amount of Finance Company's claim might be too small to make a lawsuit worthwhile, the Court suggested that Finance Company could have sought Rule 11 sanctions against the plaintiff for filing a frivolous suit.  Another sanction available to Finance Company, was, according to the Court, dismissal of Plaintiff's complaint with prejudice in order that plaintiff would be precluded from harassing Finance Company by re-filing his suit in state court.  As the Seventh Circuit observed, although the lower court dismissed the complaint with prejudice, it was on the erroneous ground that there was federal diversity jurisdiction, as well as on the merits.  Instead, the Court opined, such dismissal should have been imposed as a sanction.

 

Accordingly, the Appellate Court vacated the lower court's judgment and remanded with specific instructions to:  (1) either dismiss the suit without prejudice, or dismiss with prejudice as a sanction for filing a frivolous suit; (2) vacate the default judgment in favor of Finance Company on its counterclaim due to lack of jurisdiction; and (3) dismiss the counterclaim without prejudice to allow Finance Company to re-file in state court.

 

 

 

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

 

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FYI: Ill App Ct Rules Forged Release of Mortgage Did Not Negate Lis Pendens as to Same Mortgage

The Illinois Appellate Court, Second District, recently held that a notice of foreclosure and lis pendens, recorded prior to the extension of a loan by another bank that was secured by the same property, gave constructive notice to any subsequent lien holders of an adverse interest in the property, despite the existence of a recorded "release" of the mortgage. 

 

Explaining in part that under Illinois law, property owners are not required to record a correction to a purported release in order to continue to assert a lien interest in real property, the Court ruled that the first bank's lien was superior in light of its recorded notice of foreclosure, even though the later bank had foreclosed on its own lien and obtained a judgment of foreclosure in its favor shortly before first bank obtained a competing foreclosure judgment against the same property in another proceeding.  

 

Given the historical procedural and factual complexity of this case, the Court included a chronological "flow chart" for the readers' reference.  

 

A copy of the opinion is available at:  http://www.state.il.us/court/Opinions/AppellateCourt/2013/2ndDistrict/2120609.pdf.

 

Defendant borrower ("Borrower") obtained a home mortgage loan, secured by a first lien against his property (the "Property"), from a mortgage company that sold the loan to plaintiff bank ("First Bank").  About a year later, a forged release of the mortgage was recorded, but Borrower continued making payments on his loan, now owned by First Bank, for another two years.  Meanwhile, Borrower obtained another mortgage loan that was also purportedly secured by a first lien on the Property.  The second mortgage loan was later sold to a different bank ("Second Bank").  Borrower later defaulted on Second Bank's loan.  Accordingly, Second Bank commenced a foreclosure action against the Property, but failed to name First Bank as a party to its foreclosure action.  Second Bank obtained a foreclosure judgment against Borrower, and sold the Property to third parties ("Property Purchasers") who also obtained a mortgage against the Property. 

 

In the interim, Borrower also defaulted on First Bank's loan.  Almost three years after Borrower's default, First Bank learned of the existence of the forged release, obtained an affidavit from the original mortgage lender to the effect that the release was in fact forged.  First Bank filed its complaint for foreclosure against the Property and, a few days later, recorded a notice of foreclosure lis pendens.

 

Several weeks after First Bank filed its foreclosure action and recorded its notice of foreclosure, the Property Purchasers obtained a line of credit from a bank that subsequently assigned the line of credit loan to another bank, the intervenor in this case ("Intervenor Bank").  The line of credit was similarly secured by a mortgage against the Property.  Property Purchasers later defaulted on their line of credit and, almost two years after First Bank filed its notice of foreclosure, Intervenor Bank obtained a judgment of foreclosure and order of sale against Property Purchasers.

 

Following extensive litigation in First Bank's foreclosure proceeding over the state of title to the Property, the lower court ultimately entered a judgment of foreclosure and sale in favor of First Bank, ruling in part that the purported release was a forgery and that First Bank's notice of foreclosure obviated the need to name Intervenor Bank's assignor as a necessary party to the foreclosure proceeding.    Neither First Bank nor the original mortgage lender recorded a correction to the forged mortgage release and the forged release was never mentioned in First Bank's foreclosure action or its notice of foreclosure.

 

A few days before the expiration of the redemption expired in First Bank's foreclosure action, Intervenor Bank, having obtained a judgment of foreclosure and sale involving the Property in its favor about eight months earlier, intervened in First Bank's foreclosure proceeding, seeking a determination that its mortgage was prior and superior to First Bank's mortgage.  Initially denying Intervenor Bank's motion for a determination that its mortgage was superior to First Bank's, the lower court ultimately concluded that First Bank's mortgage had priority over Intervenor Bank's mortgage.   

 

In so ruling, the lower court concluded that Intervenor Bank would have discovered First Bank's adverse interest in the Property if it had conducted a reasonable inquiry.  Intervenor Bank appealed.  The Appellate Court affirmed.

 

The Appellate Court rejected Intervenor Bank's various assertions, including its arguments that: (1) Property Purchasers were bona fide purchasers who took title free of First Bank's lien when they took out a mortgage with Intervenor Bank's assignor, because each party in the chain of title, being unaware that the mortgage release was a forgery, received title free and clear of First Bank's mortgage; and (2) First Bank was equitably estopped from asserting its lien interest because it failed to record a correction to the forged mortgage release. 

 

In so doing, the Appellate Court disagreed with a number of First Bank's assertions as to the applicability of the bona fide purchaser doctrine to this case, instead ruling that because the other parties had notice, actual or constructive, of First Bank's adverse interest in the Property by virtue of the recorded notice of foreclosure, Intervenor Bank, as assignee of the line of credit loan to Property Purchasers, similarly had notice of First Bank's adverse interest.   

 

The Appellate Court stressed that First Bank's lien would take priority over any subsequent purchaser with notice or anything to put that purchaser on inquiry, because under Illinois law, every proceeding involving real property serves, as of the date of filing of the lis pendens, as constructive notice to every person subsequently acquiring an interest in or lien on the property.  See 735 ILCS 5/2-1901; Security Savings & Loan Ass'n v. Hofmann, 181 Ill. App.3d 419, 422 (1989).   Further, the Court explained that Second Bank's foreclosure action did not completely extinguish First Bank's mortgage as against subsequent lienholders with constructive notice of the adverse lien, in part because First Bank was not made a party to Second Bank's foreclosure action. 

 

Moreover, the Appellate Court rejected Intervenor Bank's equitable estoppel argument, because both Intervenor Bank and its assignor ignored obvious facts available through First Bank's notice of foreclosure, the recorded release notwithstanding.   In the Court's view, reliance on the forged release was unreasonable in light of the constructive notice provided by the lis pendens filing.

 

The Appellate Court affirmed the lower court's ruling that First Bank's mortgage was superior.

 

 

 

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

 

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FYI: Cal App Ct Reverses Dismissal of Numerous Claims Relating to Alleged Improper HAMP Denial

The California Court of Appeal, Fourth District, recently held that a borrower sufficiently alleged causes of action for breach of written contract, negligent misrepresentation, fraud, promissory estoppel, and unfair business practices under California law, ruling that because the borrower had complied with the terms of a "Trial Period Plan" under the federal Home Affordable Mortgage Program, defendant bank had to offer her a permanent loan modification.  

 

In reaching this conclusion, the Court reasoned in part that HAMP's requirements, implemented through U.S Department of the Treasury directives, were "imposed" on the trial repayment agreement between the borrower and bank, thus mandating a permanent loan modification if the borrower complied with the terms of the trial payment plan.

 

The Court also ruled, however, that the borrower failed to state causes of action to set aside the foreclosure sale of her property, to quiet title, and for conversion and slander of title.   

 

A copy of the opinion is available at:  http://www.courts.ca.gov/opinions/documents/G046516.PDF

 

Following the default on her home mortgage loan, plaintiff borrower ("Borrower") agreed to a trial period plan ("TPP") under the federal Home Affordable Mortgage Program ("HAMP") implemented by the U.S. Department of the Treasury ("Treasury") with defendant loan owner ("Loan Owner").  The TPP approval letter informed Borrower in part that "[i]f  you comply with all the terms of this Agreement, we'll consider a permanent workout solution for your loan once the [TPP] has been completed."  Borrower entered into the TPP with Loan Owner, complying with its terms and making all the required payments in a timely manner. 

 

Roughly four months after Borrower made the last of the required trial period payments under the TPP, Loan Owner allegedly sent Borrower letters confirming receipt of Borrower's documentation in support of a permanent HAMP modification and advising Borrower to "continue to make your trial period payments on time."  Borrower allegedly continued to make the payments according to the terms of the TPP.

 

Shortly thereafter, Loan Owner notified Borrower by letter ("Denial Letter") that it had determined that Borrower did not qualify for a permanent loan modification, stating in part that its determination was based on its so-called "Net Present Value" ("NPV") analysis and that "If we receive a request from you within thirty days . . . we will provide you with the . . . input values [used].  If . . . you provide us with evidence that any of these input values are inaccurate, and those inaccuracies are material . . . we will conduct a new NPV evaluation."

 

On two occasions, Borrow informed Loan Owner that it had allegedly used outdated financial information, and requested a re-evaluation using updated financial information.  Loan Owner supposedly did not respond to her requests for the NPV inputs or a re-evaluation, but informed her that no foreclosure sale date had been scheduled.  Borrower continued making payments according to the terms of the TPP, and ultimately made a tenth payment under the TPP, but Loan Owner allegedly rejected that payment.  Two days after the latest communication with Loan Owner, Borrower's home was sold to a third party at a trustee's sale. 

 

Seeking to set aside the foreclosure sale, Borrower filed suit, asserting various causes of action, including fraud, negligent misrepresentation, breach of contract, promissory estoppel, unfair business practices under California's Unfair Competition Law, and wrongful foreclosure.  Loan Owner demurred on the ground that the complaint failed to plead sufficient facts to state any causes of action. 

 

The lower court sustained Loan Owner's demurrer without leave to amend, entering judgment in favor of Loan Owner.    Borrower appealed.  The appellate court reversed as to the causes of action for fraud, negligent misrepresentation, breach of written contract, promissory estoppel, and unfair business practices, but affirmed as to the other causes of action. 

 

As you may recall, under HAMP, mortgage servicers that had entered "Servicer Participation Agreements"("SPAs") with Treasury agreed to permanently modify homeowners' mortgage loans where the homeowners, having satisfied the initial eligibility requirements for a HAMP loan modification, also satisfied the terms of the TPP.  Specifically, the SPAs, together with applicable supplemental Treasury guidelines, provide that "[i]f the borrower complies with all the terms and conditions of the [TPP], the loan modification will become effective on the fourth day of the month following the trial period. . . ."  U.S. Dept. Treasury, Supp. Dir. 09-01 ("Treasury Directive"). 

 

In addition, Treasury guidelines require servicers to undertake a three-step process as part of the analysis to determine a borrower's eligibility for a HAMP loan modification.  One such step requires servicers to apply a "Net Present Value" ("NPV") test to determine whether a modified mortgage's value to a servicer would be greater than the return on the mortgage if left unmodified.  Under Treasury guidelines, a negative NPV result, indicating that the modified mortgage would be lower than the servicer's expected return on a foreclosure, would allow a servicer to decline to modify a mortgage loan and thus to initiate a foreclosure action.  For a positive NPV result, however, the Treasury Directive mandates that "the servicer MUST offer the modification."  U.S. Dept. Treasury, Supp. Dir. 09-01.

 

Finally, California's Unfair Competition Law ("UCL") prohibits "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising . . . ."  Bus. & Prof. Code § 17200. 

 

Relying extensively on a factually-similar Seventh Circuit case, the appellate court analyzed Borrower's complaint to determine whether it stated facts sufficient to withstand Loan Owners' demurrer.  See Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012) ("Wigod"). 

 

Concluding that Borrower sufficiently stated causes of action for fraud and negligent misrepresentation, the California Appellate Court determined that Borrower's complaint pleaded facts with the required specificity, demonstrated justifiable reliance on Loan Owner's representations, and sufficiently alleged that she had suffered damages by foregoing taking legal action to stop the foreclosure.  In so doing, the Court rejected Loan Owner's assertion that Borrower's allegations failed to satisfy the "justifiable reliance" requirement because the TPP made no promise of a permanent loan modification and the Denial Letter informed Borrower that she did not qualify for a permanent loan modification, pointing out in part that Loan Owner allegedly failed to respond to Borrower's requests for NPV data and a re-evaluation.

 

Notably, with regard to Borrower's breach of written contract claim, the Appellate Court stressed that, although the TPP itself did not expressly include a promise of a permanent loan modification if Borrower complied with all the terms of the TPP, the Treasury Directive mandated the inclusion of such a proviso and, in order to be a lawful contract in compliance with HAMP, the TPP had to include the proviso "imposed by" the Treasury Directive.   See Wigod, supra, 673 F.3d at 565 ("[a]lthough [Loan Owner] may have had some limited discretion to set the precise terms of an offered permanent modification, it was certainly required to offer some sort of good-faith permanent modification to [Borrower] consistent with HAMP guidelines.  It has offered none.").

 

The Appellate Court thus interpreted the TPP in this case as limiting Loan Owner's re-evaluation of Borrower's eligibility for a loan modification at the end of the trial payment period to a determination as to whether she had complied with the terms of the TPP and whether her original representations remained true.  Moreover, the Court also concluded that the Denial Letter constituted a modification of the TPP promising Borrower an opportunity prior to any foreclosure sale to challenge Loan Owner's decision to deny her a permanent loan modification. 

 

Accordingly, the Court concluded that Borrower's complaint stated a claim for breach of written contract in that it alleged that: (1) the TPP required Loan Owner to offer her a permanent loan modification; and, (2) Borrower was entitled to challenge the decision to deny her a permanent loan modification prior to any foreclosure sale.

 

In addressing Borrower's promissory estoppel claim, the Court concluded that Borrower's complaint alleged that she relied to her detriment on promises made by Loan Owner, and thus had sufficiently stated a cause of action to withstand Loan Owner's demurrer as to the estoppel claim. 

 

As to Borrower's UCL claim, noting that the term "unfair" under the UCL includes any unlawful act or practice as well as practices that offend public policy "tethered to specific constitutional, statutory or regulatory provisions," the Appellate Court ruled that Borrower's allegations that Loan Owner: (1) engaged in a practice of making TPPs that did not comply with HAMP guidelines and Treasury directives; and (2) misrepresented Borrower's right to challenge the NPV calculation and the status of the pending foreclosure sale, among others, were sufficient to state a claim under the UCL based on unfair or fraudulent practices.  See, e.g., Daugherty v. American Honda Motor Co., Inc., 144 Cal.App.4th 824 (2006)(a fraudulent practice under the UCL "require[s] only a showing that members of the public are likely to be deceived" and "can be shown even without allegations of actual deception, reasonable reliance and damage."). 

 

Finally, as to the wrongful foreclosure and quiet title causes of action, the Court noted among other things that: (1) Borrower failed to allege that she tendered the full amount of the indebtedness; and (2) none of defendants named in the complaint had adverse claims to title to the foreclosed property.

 

 

 

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

 

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FYI: US Sup Ct Rules Named Plaintiff Cannot Stipulate to Under $5MM in Controversy to Avoid CAFA

In a unanimous decision vacating the district court's judgment, the U.S. Supreme Court recently held that a pre-class-certification stipulation that the amount in controversy was under $5 million could only bind the named plaintiff but not the proposed class members.

 

In so doing, the Court ruled that, because the plaintiff's stipulation could not legally bind the absent members of the proposed class prior to class certification for purposes of federal jurisdiction under the Class Action Fairness Act, the stipulation did not reduce the value of any of the putative member's claims, which, in the aggregate, could exceed CAFA's $5 million jurisdictional threshold.

 

A copy of the opinion is available at:  http://www.supremecourt.gov/opinions/12pdf/11-1450_9olb.pdf.

 

A plaintiff ("Named Plaintiff") filed a proposed class-action lawsuit in Arkansas state court against an insurance company ("Insurer"), claiming that the Insurer had unlawfully failed to include certain contractor fees with its payments to homeowners who had allegedly suffered losses under their insurance policies.  In seeking to certify a class of "possibly thousands" of similarly harmed Arkansas policyholders, Named Plaintiff stated in the complaint that the "Plaintiff and Class stipulate they will seek to recover total aggregate damages of less than five million dollars." 

 

Insurer removed the case to federal district court pursuant to the federal Class Action Fairness Act ("CAFA"), but Named Plaintiff sought remand on grounds that the federal court lacked jurisdiction because of the stipulation that the amount in controversy was under $5 million.  

 

Giving effect to the stipulation as to the proposed class as a whole, the district court determined that, in the absence of the stipulation, the amount in controversy would have exceeded CAFA's $5 million threshold for federal court jurisdiction.   Nevertheless, in light of Named Plaintiff's stipulation, the lower court concluded that the amount in controversy fell below CAFA's threshold and thus ordered the case remanded to state court.

 

Insurer appealed the remand order, but the Eighth Circuit declined to hear the appeal.  Accordingly, Insurer petitioned the Supreme Court for a writ of certiorari, which the Supreme Court granted in light of a conflict among the federal circuits.

 

As you may recall, CAFA confers federal jurisdiction over a civil "class action" if:  (1) the class has more than 100 members; (2) the parties are minimally diverse; and, (3) the "matter in controversy exceeds the sum or value of $5,000,0000."  28 U.S.C. §§1332(d)(2), (5)(B).  

 

In addition, CAFA includes as "class members" those "persons (named or unnamed) who fall within the definition of the proposed or certified class" and provides that to "determine whether the matter in controversy" exceeds $5 million, "the claims of the individual class members shall be aggregated"  Id. §1332(d)(1)(D),(6).

 

Noting that CAFA essentially instructs the federal district court to determine whether it has jurisdiction by adding up the value of the claim of each person who falls within the proposed class, and to determine whether the resulting sum exceeds the $5 million CAFA jurisdictional requirement, the Supreme Court observed that the district court's conclusion that it lacked jurisdiction in this case was based solely on Named Plaintiff's stipulation as to the amount in controversy. 

 

Disagreeing with the district court, the Supreme Court concluded that the stipulation in this case was of no effect as to the proposed class members, because the stipulation simply was not binding as to them.  Specifically, referencing a treatise on evidence and a number of its prior opinions, the Court explained that a stipulation, being binding and conclusive, requires an "express waiver" by a party and that, as of the time the case was filed in state court, Named Plaintiff lacked the authority to concede the amount-in-controversy issue for the absent proposed class members prior to class certification.  See, e.g., Smith v. Bayer Corp., 564 U.S. ___, ___(2011)(ruling that a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified and stating, "[n]either a proposed class action nor a rejected class action may bind nonparties")

 

Accordingly, the Court further explained that, because Named Plaintiff could not legally bind members of the proposed class prior to class certification, Named Plaintiff's stipulation related only to Named Plaintiff himself and that Named Plaintiff could therefore not use the stipulation to reduce the value of the putative class members' claims.

 

In so ruling, the Supreme Court concluded, contrary to Named Plaintiff's assertion, that the amount to which Named Plaintiff stipulated was in effect contingent.  Citing several potential scenarios, the Court noted the possibility that future events could alter the course of this class action lawsuit such that the stipulation might not survive the class certification process.   The Court stressed that this potential outcome would not, however, create a "new" case, but would allow for the creation of many "just-below-the-$5-million state-court actions simply by including nonbinding stipulations."  This result, the Court observed, would be a clear conflict with CAFA's objective of ensuring "Federal court consideration of interstate cases of national importance."  See § 2(b)(2), 119 Stat. 5.

 

Thus, determining that the district court should have ignored Named Plaintiff's stipulation in aggregating the claims of the proposed class members, the Supreme Court vacated the district court's judgment and remanded the case for further proceedings.

 

 

 

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

 

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FYI: Ill App Ct Invalidates Assignment of Foreclosure Surplus Proceeds as Unconscionable

The Illinois Appellate Court, First District, recently ruled that an assignment of a borrower's surplus funds following the foreclosure sale of the borrower's property was unconscionable and thus unenforceable, given the extreme difference in bargaining power between the parties, the "gaping cost-price disparity," and the availability of free assistance at the courthouse to help mortgagors obtain any surplus funds they might be entitled to.

 

A copy of the opinion is available at:  http://www.state.il.us/court/Opinions/AppellateCourt/2013/1stDistrict/1122363.pdf

 

After defendant borrower ("Borrower") defaulted on her home mortgage loan, her property was sold at a foreclosure sale which yielded a surplus of over $14,000.   The borrower never claimed the funds. Appellant Company ("Company"), in the business of searching records for and procuring unclaimed surplus funds, sent Borrower a solicitation letter seeking to enter into an assignment contract according to which Borrower would give Company half of her surplus funds in exchange for $50 from Company for doing "research" on her behalf in obtaining the funds.   Borrower contacted Company, which sent a notary public to her home to obtain her signature on the assignment agreement, and, supposedly believing that Company was acting as her attorney, the Borrower signed the agreement.  

 

Company subsequently petitioned the court for turnover of the funds, informing the court that it had not given Borrower notice of the court hearing on the petition.  Declining to proceed absent such notice to Borrower, the court, admonishing Company about a potential unconscionablity issue with the assignment contract, explained that the contract appeared to exceed the allowable fees in mortgage foreclosure matters and that free help was available to assist mortgagors in obtaining their surplus funds.

 

At the subsequent hearing on the Company's petition, the Borrower testified in part that Company never told her that she could obtain the entire surplus amount without its help, and that she was to receive only $50 plus unspecified other consideration for their help.  Borrower also testified that she did not understand that she could have obtained all of the money free of charge by going through the foreclosure help desk located at the courthouse.   

 

The lower court declared the assignment contract to be unconscionable and denied Company's petition.  Company filed a motion to reconsider to which it attached a copy of the assignment contract specifying that Company would give Borrower half of the surplus funds, plus $50.  Company also attached a copy of its initial solicitation letter to Borrower explaining that it had located funds belonging to Borrower and that, with her approval, would conduct further "research" to help Borrower obtain the funds.   

 

The lower court denied the motion to reconsider.  Company appealed.  The Appellate Court affirmed, concluding that the assignment contract was unconscionable and thus unenforceable. 

 

Examining both "procedural" and "substantive" unconscionablity, the Appellate Court concluded that both aspects of unconscionablity were present in the assignment contract here, therefore invalidating the contract.  In so doing, the Appellate Court first pointed out that procedural unconscionablity existed in the formation of the contract in this case, because: (1) given Borrower's limited education and means, there was obvious inequality in the parties' ability to understand the proposed transaction and Company preyed on this disparity; and (2) Borrower's testimony demonstrated that she was offered no opportunity to modify the contract or to meaningfully negotiate its terms. 

 

This aspect of unconscionablity, combined with the substantive unconscionablity of requiring borrower to pay $7,000 for something she could have obtained for free was, in the Appellate Court's view, more than sufficient to invalidate the assignment contract.  These terms, the Court explained, epitomized the "gaping cost-price disparity" and "overall imbalance in the obligations and rights imposed by the contract" that characterize substantive unconscionablity.

 

Notably, while pointing out that the number of foreclosures resulting in a surplus is very low in light of the depressed real estate market, the concurring opinion additionally highlighted various foreclosure-related court rules and procedures, stressing that various means exist to help protect homeowners throughout the foreclosure process.   Specifically, the concurring opinion listed a number of resources governing foreclosures in Cook County designed to protect mortgagors like the Borrower in this case.  See Cook Co. Cir. Ct. Mortgage Foreclosure Courtroom Procedures (rev. July 31, 2012)(requiring lenders to advise borrowers of their right to claim a surplus); Cook Co. Cir. Ct. G.A.O. 2003-03 (requiring mortgagors with surplus funds to either present photographic identification in presenting motions to claim their surplus funds or to appear to allow the judge to question them about the circumstances of any purported "assignment" of funds); Ill. S. Ct. R. 113(f)-(h) (eff. May 1, 2013)(facilitating the ability of mortgagors to claim surplus funds).

 

In sum, the Appellate Court upheld the lower court's denial of Company's petition to turnover the surplus funds, due to the gross disparity in the parties' bargaining power, and the excessive cost to Borrower in obtaining something that she could have obtained for free.

 

 

 

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

 

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Our updates are available on the internet, in searchable format, at:
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FYI: Cal App Ct Reverses Dismissal of UDAP Claim Alleging Only an "Identifiable Trifle of Injury"

Reversing the lower court, the California Court of Appeal, Fourth District, recently ruled that a plaintiff law firm sufficiently alleged an "identifiable trifle of injury," in the form of lost market share, decreased revenue, and increased advertising costs, to maintain a lawsuit against an on-line business competitor under California's Unfair Competition Law, even though the parties had no direct business dealings with each other. 

 

A copy of the opinion is available at:  http://www.courts.ca.gov/opinions/documents/G046778.PDF.

 

Plaintiff law firm ("Law Firm") filed a law suit under California's Unfair Competition Law ("UCL") against an on-line business competitor ("Company"), alleging in part that Company engaged in the unauthorized practice of law in violation of various statutes and that Company undercut Law Firm's prices, thereby causing Law Firm to lose business, market share, and to expend more money in advertising.   Seeking damages and injunctive relief, Law Firm asserted a number of causes of action, including unfair competition. 

 

Company demurred, arguing that Law Firm lacked standing to assert a UCL claim, because Law Firm had not suffered an injury in fact as a result of Company's conduct.  Agreeing with Company, the lower court in part sustained the demurrer without leave to amend, and dismissed the lawsuit.  Law Firm appealed.

 

The Court of Appeal reversed and remanded, ruling that Law Firm had alleged sufficient injury in fact by a business competitor to withstand the demurrer.

 

As you may recall, California's UCL broadly prohibits "any unlawful, unfair, or fraudulent business act or practice," but specifies that no private party has standing to prosecute a UCL action unless he or she "has suffered injury in fact and has lost money or property as a result of the unfair competition."  Bus. & Prof. Code § 17200 et. seq.; Californians for Disability Rights v. Mervyn's, LLC,   39 Cal. 4th 223 (2006).

 

Reviewing the policy behind California's UCL and that the standing requirement was changed in 2004, the Appellate Court ultimately concluded that Law Firm met the test for UCL standing.  See Kwikset Corp. v. Superior Court, 51 Cal. 4th 310, 320-21 (2011)(applying amended UCL to standing issue).  In so ruling, the Court noted that by prohibiting "any unlawful business practice, [the UCL] 'borrows' violations of other laws and treats them as unlawful practices' that the [UCL] makes independently actionable."  See, e.g., Aleksick v. 7-Eleven, Inc., 205 Cal. App. 4th 1176, 1184 (2012)(noting that UCL establishes three varieties of unfair competition); see also Stop Youth Addiction, Inc. v. Lucky Stores, Inc., 17 Cal. 4th 553 (1998). 

 

Turning to Company's argument that Law Firm had no cognizable right or interest under the unauthorized practice of law statutes to support its claim, the Court concluded that violations of statutes concerning the unauthorized practice of law could serve as the basis for Law Firm's UCL action.  See Saunders v. Superior Court, 27 Cal. App.4th 832 (1994)(holding that alleged violations of Business and Professions Code could serve as basis for UCL action).

 

The Appellate Court next addressed whether Law Firm had suffered injury in fact -- that is, an economic injury, in order to have standing to bring a UCL action against Company.  Noting that Law Firm's complaint alleged that Law Firm had been forced, as a result of Company's unlawful conduct, to lower its prices and expend more money on advertising, and that it had lost clients, revenue, and asset value, the Court disagreed with Company that a loss of market share was not sufficient to demonstrate injury in fact. 

 

Stressing that its opinion was strictly limited to the context of business competitors, the Appellate Court concluded that because Law Firm's complaint alleged some specific, "identifiable trifle of injury," it had standing to pursue a UCL claim.  See Kwikset Corp. v. Superior Court, supra, 51 Cal. 4th at 323; compare Allergan, Inc. v. Athena Cosmetics, Inc., 640 F.3d 1377 (Fed. Cir. 2011)(ruling that allegations of lost sales, revenue, market share, and asset value caused by defendant's unfair business practices are sufficient to confer standing to pursue a UCL claim) and VP Racing Fuels, Inc. v. General Petroleum Corp., 673 F. Supp.2d 1073, 1086 (E.D. Cal 2009)(loss of market share sufficient to demonstrate injury for purposes of UCL claim) with Bower v. AT&T Mobility, LLC, 196 Cal. App. 4th 1545 (2011)(ruling in a consumer case that allegation of injury was insufficient to survive a demurrer where complaint alleged a "conjectural or hypothetical injury, not an injury in fact) and Drum v. San Fernando Valley Bar Ass'n., 182 Cal. App. 4th 247 (2010)(plaintiff, seeking to acquire new market share, failed to allege that he had lost business or expended or was denied any money as a result of defendant's conduct).

 

As to whether Company's conduct was the cause of Law Firm's injury, the Appellate Court rejected Company's argument that UCL standing required the parties to have had business dealings with one another.  In so doing, the Court noted that one court's conclusion that those who have had business dealings with one another have standing to bring a UCL claim did not necessarily mean that having direct business dealings was a requirement to demonstrate UCL standing.  Nevertheless, given the procedural setting of the case, the Appellate Court refused to opine that Law Firm's causation allegation was insufficient to withstand a demurrer. 

 

Recognizing that injunctive relief might be appropriate in this case, the Appellate Court reversed and remanded.