FYI: 9th Cir Reverses Class Settlement Approval Due to Improper Incentive Awards to Named Plaintiffs

Reversing the lower court, the U.S. Court of Appeals for the Ninth Circuit recently ruled that approval of a class action settlement of claims against credit reporting agencies under the federal Fair Credit Reporting Act was improper, where a settlement agreement conditioned payment of large "incentive awards" on class representatives' support for the settlement but paid class members relatively very little, thereby creating a conflict of interest between the named representatives and absent class members.   

 

The Court also reversed the lower court's award of attorneys' fees and costs, reasoning that, with the inclusion of the conditional incentive awards provision in the settlement agreement, class counsel was improperly simultaneously representing clients with conflicting interests.

 

A copy of the opinion is available at:  http://cdn.ca9.uscourts.gov/datastore/opinions/2013/04/22/11-56376.pdf.

 

Plaintiffs, consumers who had filed for bankruptcy protection, ("Consumers"), filed class-action law suits against a number of credit reporting agencies ("CRAs"), alleging that the CRAs erroneously issued consumer credit reports showing delinquent payments on debts that had been discharged in bankruptcy and that the CRAs failed to investigate the alleged reporting errors after Consumers notified them of the errors. 

 

Consumers claimed that the CRAs violated the federal Fair Credit Reporting Act and California law by failing to use reasonable procedures to assure accuracy in reporting debts discharged in bankruptcy, and to conduct a reasonable re-investigation to determine whether the disputed information was inaccurate.  See 15  U.S.C. § 1681i(a); Cal. Civ. Code §§ 1785.14(b), 1785.16; Cal. Bus. & Prof. Code § 17200.

 

The lower court consolidated the lawsuits.  After first reaching a settlement for injunctive relief, which the lower court approved, the parties reached a settlement agreement for monetary relief (the "Settlement").  Specifically, the Settlement created a fund of $45 million contributed by the CRAs and to be distributed, first, to pay "actual-damage awards" to class members who demonstrated that they were actually harmed by the CRAs conduct, followed by smaller payments to class members who were not denied employment, a mortgage, a housing rental, or credit.  About 15,000 Consumers claimed actual damage awards. 

 

Secondly, the Settlement provided "incentive awards" for class representatives and class counsel as payment for their service to the class in bringing the lawsuit.  Class representatives would receive up to $5,000 and class counsel would receive attorney fees and costs out of the Settlement fund.  

 

Finally, the balance of the fund was to go to claimants attesting that they qualified as class members and were thus entitled to receive "convenience awards" amounting to about $26 each.

 

The lower court preliminarily approved the Settlement and provisionally certified the class.   Later holding fairness hearings on the Settlement, the lower court determined that the Settlement was fair, reasonable and adequate, despite objections from certain "Objecting Plaintiffs," consisting of both former class representatives and class members.  The lower court granted final approval of the Settlement, and awarded attorneys' fees and costs to class counsel.  The Objecting Plaintiffs appealed.

 

The Ninth Circuit reversed, concluding that the lower court abused its discretion in approving the Settlement where the class representatives and class counsel did not adequately represent the interests of the class.

 

As you may recall, class representatives and class counsel must adequately represent the interests of absent class members.  See Fed. R. Civ. P.  23(a)(4), 23(g)(1)(B). 

 

In considering Objecting Plaintiffs' argument that the Settlement created a conflict of interest between the class representatives and the class by providing for incentive awards to those named plaintiffs who supported the Settlement, the Ninth Circuit observed that although incentive awards may be proper in certain circumstances, such awards should not become routine practice.  See, e.g., Staton v. Boeing Co., 327 F.3d 938, 977 (9th Cir. 2003; Rodriguez v. W. Pub. Corp., 563 F.3d 948 (9th Cir. 2009)(Rodriguez I); Rodriguez v. Disner, 688 F.3d 645 (9th Cir. 2012)(Rodriguez II).   In so doing, the Court pointed out that incentive awards to class representatives may lead them to accept suboptimal settlements at the expense of the class members, but that where a class representative supports a settlement and is treated equally by the settlement there is a high likelihood that the settlement is in the interests of the class as a whole.  

 

However, the Ninth Circuit explained that, in this case, the class representatives were provided with special incentives to encourage them to support the Settlement, which awards were hugely disproportionate to the other class members' recovery.   Thus, rejecting the named plaintiffs' various arguments, including the assertions that the Settlement should be approved because such awards are typical and common in class actions and that there was no actual conflict of interest with the class, the Court noted in part that the atypical conditional-incentive-awards provision in the Settlement made the interests of the class representatives actually different than the interests of the rest of the class and therefore undermined the adequacy of the class representatives to represent the interests of the class. 

 

The Court also pointed out that the incentive awards were not available to those named plaintiffs who did not support the Settlement and who accordingly ran the risk of getting as little as $26, making the Settlement even more egregious. 

 

Finally, the Ninth Circuit also reversed the award of attorneys' fees and costs, concluding that because class counsel owed a fiduciary duty to the class as a whole, once the conditional-incentive-awards provision divorced the interests of the class representatives from those of absent class members, class counsel was simultaneously representing clients with conflicting interests.  In so ruling, the Court noted that the conflict developed late in the course of representation and opined that the timing of the origin of the conflict may affect any attorneys' fees awards on remand.

 

 

 

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: 4th Cir Affirms Dismissal of Common Law and UDAP Claims as to Failed HAMP Mod

The U.S. Court of Appeals for the Fourth Circuit recently ruled that a bank owed no duty of care to mortgage borrowers in processing an application for a loan modification under the federal Home Affordable Modification Program, and that the bank's request for additional income documentation from the borrowers was not a "false" representation that the bank required more information to process their application. 

 

In so ruling, the Court concluded that the borrowers failed to state claims for breach of implied contract, negligence, fraud, and violation of Maryland's consumer protection law based on the bank's denial of their loan modification application.

 

A copy of the opinion is available at:  http://www.ca4.uscourts.gov/Opinions/Published/121973.P.pdf.

 

Plaintiffs borrowers ("Borrowers") refinanced their home mortgage loan and later defaulted.  Borrowers sent a "hardship letter" to defendant mortgage servicer ("Servicer"), explaining the various reasons for their financial circumstances.   Borrowers also included  an application for a loan modification under the federal government's Home Affordable Modification Program ("HAMP"), along with a statement of monthly rental income and two weekly pay stubs showing a half month's pay. 

 

Servicer responded a week later, stating that it had received Borrowers' "inquiry" regarding their mortgage loan and that in order to process their request for a loan modification, Servicer needed two additional pay stubs reflecting income for specific dates.  Servicer's letter further stated that if the information, or a request for an extension, was not received within ten days, the modification request would be considered cancelled.  Borrowers submitted the additional proof of income eleven days past the deadline.

 

Servicer subsequently sent Borrowers delinquency notices, a notice of intent to foreclose, as well as a letter denying their HAMP application, citing their failure to provide the requested documents within the specified time period.   Borrowers repeatedly applied for HAMP loan modifications, but were denied each time.   After several more missed mortgage payments, Servicer sent Borrowers a second foreclosure notice. 

 

Borrowers filed suit against Servicer in state court, alleging breach of contract, negligence, violation of Maryland's Consumer Protection Act, negligent misrepresentation, and common law fraud. Servicer removed the case to federal court, which dismissed Borrowers' complaint.  The lower court concluded in part that absent a "Trial Period Plan" agreement, Borrowers lacked a basis for challenging a HAMP application, as there was no express or implied contract and no private right of action under HAMP for alleged failure to follow HAMP guidelines.    The lower court further determined that Servicer owed no duty to Borrowers to support their negligence claim, and that Borrowers' MCPA and fraud claims failed because Servicer never made any false representations in its correspondence to Borrowers.

 

Borrowers appealed.  The Fourth Circuit affirmed.

 

As you may recall, the Maryland Consumer Protection Act ("MCPA") prohibits unfair or deceptive trade practices in connection with consumer debt.  Md. Code Ann. Com. Law § 13-103.   The MCPA defines unfair or deceptive trade practices as a "[f]alse disparaging, or misleading oral or written statement, visual description, or other representation of any kind which has the capacity, tendency, or effect of deceiving or misleading consumers."  Id. § 13-301(1).

 

After providing an overview of the origin and operational aspects of the HAMP program, the Fourth Circuit pointed out among other things that a contract requires a meeting of the minds, thus rejecting Borrowers' assertion that they created an implied-in-fact contract because Bank and Borrowers "shared a tacit understanding that the application was to be processed [and approved] under HAMP."  In so doing, the Court also rejected Borrowers' assertions that they provided consideration for the agreement in the form of taking time to complete and submit their application, and that Servicer bound itself to comply with some allegedly applicable "standard of care" by, among other things, entering into an agreement with the federal government to participate in HAMP and by stating in its foreclosure notice that "[i]f you are eligible [for HAMP], we will look at your monthly income and housing costs . . . and then determine an affordable mortgage payment."

 

Noting that none of this conduct amounted to a "meeting of the minds," the Fourth Circuit further observed that:  (1) Borrowers were not a party to the "Servicer Participation Agreement" between Servicer and the federal government and thus had no authority to enforce it;  (2) the foreclosure notice and HAMP application contained clear language stating that further action was required on the part of Servicer before an offer would be extended;  and  (3) Servicer "processed" the loan application under HAMP partly by reviewing it and determining that additional income information was required in order to evaluate borrowers' eligibility. 

 

Repeatedly pointing out Borrowers' "counterfactual mantra" constituting mere legal conclusions that they had provided Servicer with all the documentation "required" under HAMP guidelines, the Fourth Circuit agreed with the lower court that Borrowers failed to state a plausible breach of contract claim.

 

Turning to Borrowers' negligence, fraud, consumer protection, and misrepresentation claims, the Fourth Circuit similarly concluded that Borrowers failed to state claims.  First, the Court pointed out that Bank owed Borrowers no duty of care on which to base a negligence claim, and, contrary to Borrowers' assertion that Bank deviated from the applicable "standard of care" to process their loan modification, there was no contractual privity here to establish the requisite "intimate nexus between the parties as a condition to the imposition of tort liability."  See Jacques v First Nat'l Bank of Maryland, 515 A.2d 756, 758-59 (Md. 1986)(relationship between bank and borrower is contractual in nature, not fiduciary, but special circumstances may give rise to a duty of care in processing a loan application).  

 

The Fourth Circuit also rejected Borrowers' assertions that Bank violated the MCPA and committed fraud by supposedly "falsely" stating in a letter that it needed additional income information because, according to Borrowers, Bank already had all the information "required" under HAMP.  Concluding that Bank made no false representation in its letter, that Borrowers failed to submit the requested information in a timely manner, and moreover, that Borrowers failed to meet the heightened pleading standards for claims sounding in fraud, the Court held that the MCPA and common-law fraud claims were properly dismissed.

 

Finally, the Court also determined that Borrowers failed to establish all the elements necessary to state a claim for negligent misrepresentation, finding that:  (1) Bank's statements that it needed more documentation to process the HAMP application and that Borrowers failed to provide Bank with the requested documents were not false; and  (2) Bank owed them no duty of care; and (3)  Borrowers failed to allege that they justifiably took action in reliance on Bank's allegedly false statements or suffered damages caused by those statements.

 

Accordingly, the Fourth Circuit affirmed the judgment of the lower court in all respects.

 

 

 

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 Against Bank on "On Premises" Requirement in Fidelity Bond

The U.S. Court of Appeals for the Seventh Circuit recently upheld a judgment in favor of an insurance company against a bank in an action seeking a declaration that a clause in a fidelity insurance policy required the insurer to defend and indemnify the bank in the underlying action, where the employee perpetrator of an embezzlement scheme sent instructions via phone and never entered the bank's premises to carry out the crime.   A copy of the opinion is attached.

 

An officer ("Officer") of a corporation ("Corporation") in charge of accounting at Corporation embezzled over $17 million from Corporation by instructing plaintiff bank ("Bank") to prepare more than 570 cashier's checks to pay her personal debts from Corporation's account at Bank.   After Officer was sentenced to prison, Corporation and Bank began litigating the issue of which of them should bear the loss.  Bank separately filed suit against defendant insurance company ("Insurer") in federal court, seeking a declaration that Insurer was required under Bank's insurance policy ("Policy") to defend and indemnify Bank against any losses resulting from the embezzlement.   

 

Specifically, Bank relied on Clause 2 of the Policy, which provided that Insurer would indemnify Bank for "Loss of Property resulting directly from . . . false pretenses, or common law or statutory larceny, committed by a natural person while on the premises of" Bank.  The parties agreed that the embezzlement was accomplished by phone rather than "on the premises" and that Officer sent an employee of Corporation to Bank to pick up the checks.

 

The lower court concluded that the fact that Officer carried out the scheme by phone, and did not enter Bank's premises rendered Clause 2 inapplicable, and entered judgment in Insurer's favor.   Bank appealed.  The Seventh Circuit affirmed.

 

After addressing an issue involving alignment of the parties for purposes of diversity jurisdiction, the Seventh Circuit noted that federal courts have uniformly held that a fraud orchestrated from outside a financial institution's premises is not covered by Clause 2, an industry-wide provision in fidelity-type insurance policies.  The Court further observed that the purpose of an "on premises" clause is to exclude from coverage the type of fraud that was perpetrated here.   

 

In rejecting Bank's assertion that the opinions relied on were irrelevant because Officer committed larceny rather than fraud, the Seventh Circuit pointed out that the distinction Bank sought to draw did not alter the so-called "on-premises" requirement.  In so doing, the Court stressed that in order for Clause 2 to be applicable here, a person entering Bank's premises would have to be capable of being convicted of larceny even though under the facts in this case, that person lacked the mental state required for conviction of larceny. 

 

Finding Bank unable to explain the relevance of the distinction between larceny and fraud with respect to the applicability of the on-premises requirement in Clause 2, the Seventh Circuit concluded that Clause 2 did not apply here because Officer never entered the Bank's premises to commit the crime, and Insurer was thus not required to indemnify or defend Bank in its litigation with Corporation.

 

Accordingly, the Seventh Circuit affirmed the lower court's judgment.

 

 

 

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 Upholds Summary Judgment in Favor of Bank as to Illinois Credit Agreements Act and Other Issues, Sanctions Guarantor for Frivolous Arguments

The U.S. Court of Appeals for the Seventh Circuit recently upheld summary judgment in favor of a bank on a loan guaranty, ruling that the loan guarantor, an attorney and sophisticated investor, lacked any defense to liability and that a purported promise on the part of the bank to purchase assets from the borrowing company did not satisfy the Illinois Credit Agreement Act's requirement that a modification to a written credit agreement be in writing and signed by both parties.  The Court also imposed sanctions on the guarantor under Federal Rule of Appellate Procedure 38  for filing a frivolous appeal.  A copy of the opinion is attached.

 

An investment company ("Company") obtained a $12.5 million revolving line of credit from plaintiff bank ("Bank") that was personally guaranteed by defendant ("Guarantor"), a managing member of Company.   The amount of the loan eventually increased to over $15 million, which amount was similarly guaranteed by Guarantor.  The agreement increasing the loan amount required Company to reduce its principal debt to Bank to less than 35% of the value of Company's assets by the end of each quarter and to make a principal payment of $3 million by a specified date.

 

The loan went into default, and the parties entered into a forbearance agreement that required Company to make the $3 million dollar principal payment several months later.   Bank also refused to accept several relatively small interest-only payments from Company. 

 

Company failed to make the principal payment, and Bank filed suit to collect the debt from Company and to enforce the guaranty.  Guarantor asserted defenses of fraud in the inducement, duress, and violation of the duty of good faith and fair dealing.

 

The lower court granted summary judgment in favor of Bank on all issues, except the calculation of prejudgment interest.  The parties subsequently stipulated as to the prejudgment interest, and a final judgment was entered in favor of Bank and against both Company and Guarantor in the principal amount of $15.5 million, plus almost $1 million in prejudgment interest.  Company and Guarantor filed separate appeals, which were consolidated.   

 

The Seventh Circuit affirmed, addressing only Guarantor's appeal due to Company's bankruptcy filing.  The Court also imposed sanctions on Guarantor for filing a frivolous appeal completely lacking in valid arguments.

 

Rejecting Guarantor's various assertions as meritless, the Appellate Court first addressed Guarantor's contention that the forbearance agreement was unenforceable because Bank fraudulently induced Company to execute the agreement by promising to help Company sell investments to pay its debt.  To show such a "promise" from Bank, Guarantor produced an email from a Bank employee to Guarantor stating the amount that Bank "would offer" to purchase certain assets from Company that day.  The Court found such evidence to be completely inadequate, partly because the email was not a promise to buy anything or an offer to help Company sells its assets, and Guarantor produced no evidence that Company or Guarantor had accepted the offer.

 

Second, the Seventh Circuit also ruled that in failing to produce a writing signed by both parties reflecting any promise by Bank that might defeat the guaranty, Guarantor was unable to meet the writing requirement under the Illinois Credit Agreement Act, 815 Ill. Comp. Stat. 160/1 et. seq. (the "Act").  Rejecting Guarantor's argument that the loan to Company was primarily for "personal, family or household purposes" and that the Act was thus inapplicable, the Court pointed out that Guarantor and Bank admitted before the lower court that the loan was not primarily for such purposes and that the original credit agreement expressly provided that the loan was primarily for the purpose of purchasing limited partnership equity interests in certain investment funds and for refinancing other assets. 

 

The Seventh Circuit also rejected Guarantor's other assertions that it was commercially unreasonable for Bank to accelerate the loan, because Bank rejected the interest-only payments Company attempted to make and because Company's tax returns showed it as having sufficient assets to satisfy the terms of the loan, finding these arguments to be meritless, particularly in light of Company's prior default and the poor economy.

 

Notably, the Seventh Circuit also imposed sanctions under Federal Rule of Appellate Procedure 38 on Guarantor for filing a frivolous appeal, explaining in detail the reasons for so doing.  Among those reasons were that Guarantor was an attorney and a sophisticated borrower and investor who clearly understood his obligations.

 

The Court further noted among other things that:  (1) the original credit agreement and guaranty were all undisputed;  (2) Guarantor conceded that the forbearance agreement required the principal payment and that Company was in default;  (3) Guarantor failed to present a coherent argument and a reasonable view of applicable law to support reversal of the lower court's judgment; and  (4) Guarantor attempted to dispute stipulated facts, to misrepresent the nature of Bank's email, and to get credit for a prejudgment interest payment that he apparently did not make.

 

The Seventh Circuit accordingly affirmed.

 

 

 

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: 10th Cir Rules Borrower's Affidavit of Emotional Distress Sufficient Under FCRA, Debt Collector Had No Duty to Notify CRAs of Credit Dispute

The U.S. Court of Appeals for the Tenth Circuit recently ruled that: 

 

(1) a borrower's affidavit created a genuine issue of material fact as to whether he had suffered emotional damages as a result of a loan servicer's alleged violation of the federal Fair Credit Reporting Act; 

(2) summary judgment in favor of a loan servicer that was a furnisher of credit information was not appropriate, where the servicer took almost four months to correct its reporting after being notified about a disputed debt by a credit reporting agency;  

(3) a debt collector had no affirmative duty under the federal Fair Debt Collection Practices Act to notify credit reporting agencies of a dispute unless the debt collector knew of the dispute and elected to report to credit reporting agencies; and

(4) absent an agency relationship with the servicer of a borrower's loan after it went into default, a prior loan servicer was not a "debt collector" for purposes of the FDCPA where it acquired the loan before the loan went into default. 

 

A copy of the opinion is available at:  http://www.ca10.uscourts.gov/opinions/11/11-1340.pdf.
 
Plaintiff borrower ("Borrower") purchased property with a loan from defendant mortgage lender ("Lender").  Borrower made his first payment in a timely manner.  Shortly thereafter, Lender sold the note on the secondary mortgage market to defendant loan owner ("Loan Owner"), and the servicing of the loan was transferred to defendant loan servicer ("Servicer").  At that point, Borrower's loan was current.   Just before the service transfer, however, Borrower began the process of refinancing the loan on the property, but did not advise the refinance closing agent that the servicing had transferred to Servicer. 

 

Several days later, Borrower informed Servicer that the loan had been refinanced, even though he had not yet delivered the required funds to the closing agent.   When Borrower delivered the payoff funds needed to refinance the purchase loan to the closing agent, he again failed to mention the transfer of servicing of the purchase loan to Servicer. 

 

The closing agent on the refinancing loan then wired the payoff funds on the purchase loan to the original servicer, which in turn wired the funds to Lender.  Neither Servicer nor Loan Owner ever received the payoff funds.   Servicer, not having received the funds that Borrower purportedly believed to have been paid, sent Borrower a past-due notice and a letter explaining foreclosure and loss mitigation options. Servicer also reported negative credit information on Borrower to a credit reporting agency ("CRA").  

 

Borrower contacted Servicer, informing Servicer that the purchase loan had been refinanced, and that the refinancing loan was being serviced by another servicer.  Servicer informed Borrower that it had not received the payoff funds, and thus advised Borrower to contact the servicer of the refinancing loan about the status of the purchase loan payoff.  Servicer eventually hired a foreclosure law firm ("Law Firm") to commence foreclosure proceedings.  As part of the foreclosure process, Law Firm sent Borrower a debt validation notice advising him of his right to contact Law Firm to dispute the debt. 

 

In response, Borrower sent a copy of the loan settlement statement showing where the payoff funds were supposed to have been sent, as well as a letter from the servicer of the refinancing loan stating that Borrower should contact the refinancing closing agent if Servicer had not received the payoff funds.  Law Firm forwarded the information to Servicer, and informed Borrower that it had received his correspondence disputing the foreclosure.  Law Firm then placed the file on hold.

 

In the meantime, Servicer transferred its servicing of the purchase loan to another servicer, received a number of payments on the purchase loan from Lender, which Servicer returned as insufficient to cure the delinquency, and provided negative credit reports regarding Borrower to CRAs.  

 

In addition, Borrower made several complaints to both Servicer and Law Firm regarding the disputed debt, and Servicer accordingly began investigating Borrower's complaints.    Law Firm also sent a letter to Borrower partly stating that its client had indicated that the loan should have been "paid-in-full," and that Borrower's "credit report will be reversed."

 

Servicer also received notice from one CRA that Borrower disputed the negative credit reports.   Almost four months after notification of the dispute from the CRA, Servicer, having sought and received a copy of the cashed payoff check, corrected the negative reporting. 

 

Borrower filed a complaint in federal court, seeking damages and alleging claims under the federal Fair Debt Collection Practices Act ("FDCPA") and the Fair Credit Reporting Act ("FCRA"), as well as a state-law claim for outrageous conduct.  Borrower alleged that Servicer and Law Firm, among others, negligently and willfully failed to investigate and to make corrections in a timely manner after being notified by a CRA that Borrower disputed the reporting.  Borrower also alleged that Servicer and Law Firm violated the FDCPA by using threats of foreclosure, among other things, to collect on a debt that Borrower no longer owed.

 

Servicer, Law Firm, and other defendants moved for summary judgment, which the lower court granted, concluding that Borrower failed to provide evidence of actual damages or willfulness to support his FCRA claim, that Servicer was not a "debt collector" under the FDCPA, and that the FDCPA claim against Law Firm was barred by the one-year statute of limitations.  Borrower appealed.

 

The Tenth Circuit reversed in part and affirmed in part, concluding that Borrower had established a genuine issue of material fact with respect to his claim of emotional damages, and with respect to whether Servicer's reporting was "incomplete or inaccurate" under section 1681s-2(b) of the FCRA. 

 

As you may recall, with respect to credit reporting under the FCRA, a furnisher of information who has received notice of a dispute from a CRA is required to:  (1) investigate the disputed information;  (2) review all relevant information provided by the CRA;  (3) report the results of the investigation to the CRA;  (4) report the results of the investigation to all other CRAs if the investigation reveals that the information is incomplete or inaccurate; and  (5) modify, delete, or permanently block the reporting of the disputed information if it is determined to be inaccurate, incomplete, or unverifiable.  15 U.S.C. § 1681s-2(b).  

 

Also, a consumer is entitled to actual damages for a negligent violation, and to statutory and even punitive damages if the violation is willful.  See 15 U.S.C.  §§ 1681o(a), 1681n(a). 

 

Moreover, the FCRA requires furnishers of information to correct information that is provided "in such a manner as to create a materially misleading impression."  See 15 U.S.C. § 1681s-2(b)(1)(D).  See also Boggio v. USAA Fed. Sav. Bank, 696 F.3d 611, 617 (6th Cir. 2012).  Furnishers are required to make any necessary corrections within 30 days from the date the furnisher receives notice of the dispute from a CRA.  15 U.S.C. §§ 1681s-2(b)(2), 1681i(a)(1).  See also Marshall v. Swift River Acad., LLC, 327 F. App'x 13, 15 (9th Cir. 2009).

 

Finally, as to debt collection, the FDCPA applies only to debt collection activities of "debt collectors," and thus specifically excludes from its scope "any person collecting or attempting to collect any debt . .  . which was not in default at the time it was obtained by such person."  15 U.S.C. § 1692a(6)(F).   See also 15 U.S.C. § 1692e(prohibiting the use of false, misleading, or deceptive means to collect debt).  The FDCPA also provides that a claim for relief under the FDCPA must be brought "within one year from the date on which the violation occurs."  15 U.S.C. 1692k(d).

 

Addressing Borrower's FCRA-related assertion that he suffered economic harm, in that Servicer's negative credit reporting ruined his credit score and prevented him from being able to obtain additional loans,  the Tenth Circuit concluded that Borrower failed to create a genuine dispute.  Noting that Borrower's credit score dropped by only three points, rather than the 100 points Borrower had claimed, and that most of the evidence Borrower presented with respect to his credit score was inadmissible hearsay, the Tenth Circuit pointed out that there was no evidence that he actually applied for and had been denied additional loans.   Stressing that Borrower failed to meet his burden of presenting evidence to support his claim of economic harm,  the Court affirmed the lower court's grant of summary judgment in favor of Servicer on this claim.

 

Turning to Borrower's claim that he suffered emotional damages as a result of Servicer's alleged FCRA violation, the Tenth Circuit rejected Servicer's argument that Borrower provided only "conclusory and uncorroborated statements" in his affidavit, and thus failed to produce any evidence to support that claim.  In so doing, the Court pointed out in part that, in relying on his own testimony, Borrower was required to "explain [his] injury in reasonable detail and not rely on conclusory statements."  See Bagby v. Experian Info. Solutions, Inc., 162 F. App'x 600, 605 (7th Cir. 2006). 

 

Viewing his affidavit in the light most favorable to Borrower, the Tenth Circuit concluded that Borrower's detailed explanation of the state of his health prior to and after the negative reporting provided sufficient evidence that he suffered emotional damages as a result of Servicer's alleged actions, even though he also experienced other stressful events during the same period.  See Robinson v. Equifax Info. Servs., LLC, 560 F.3d 235, 242 (4th Cir. 2009); Bach v. First Union Nat'l Bank, 149 F. App'x 354, 362 (6th Cir. 2005).  Thus, disagreeing with the lower court, the Tenth Circuit concluded that Borrower's affidavit alone created a genuine dispute as to whether Servicer's actions caused him to suffer emotional damages. 

 

With regard to Borrower's contention that he was entitled to punitive damages because Servicer willfully violated the FCRA, the Tenth Circuit pointed out that Servicer's actions did not rise to the level of a reckless disregard of the FCRA's requirements, and thus did not warrant awarding punitive damages.  In so doing, the Court noted among other things that Borrower failed to show that a letter to Borrower contained an admission that the negative credit reports from Servicer were in error, and that the delay in removing the negative reports was willful. 

 

The Tenth Circuit nevertheless concluded that Servicer was not entitled to summary judgment as to whether its negative reporting created a materially misleading impression, so as to render it "incomplete or inaccurate" under section 1681s-2(b), given that Servicer took almost four months after being notified by the CRA of the dispute before Servicer removed the negative reporting. 

 

With respect to Borrower's FDCPA claims, the Tenth Circuit determined that Servicer was not a "debt collector" under the FDCPA, as Servicer acquired the servicing rights to the loan when the loan was current.  In so ruling, the court rejected Borrower's argument that Servicer was an agent for the subsequent servicer to which Borrower's loan had been transferred.  As to Law Firm, the court concluded in part that a debt collector has no affirmative duty to notify CRAs that a consumer disputes a debt, unless the debt collector knows of the dispute and nevertheless elects to report to a CRA.  See Wilhelm v. Credico, Inc., 519 F.3d 416 (8th Cir. 2008)(relying on Federal Trade Commission Staff Commentary in interpretation of FDCPA reporting requirements).  

 

The Tenth Circuit also held that, because a debt collector had no duty to report a dispute after reporting a debt, Law Firm's failure to report the dispute or to have Servicer reverse its reporting could not be considered in evaluating the timeliness of Borrower's claim against it.  Thus, because Borrower presented no evidence showing that Law Firm took any actions within the one-year statute of limitation period that supported a claim under the FDCPA, the Court ruled that Law Firm was entitled to summary judgment on this claim. 

 

Accordingly, the Tenth Circuit affirmed in part, reversed in part, and remanded.

 

 

 

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 Rejects Borrowers' Negligent Lending, Inability to Repay, Unconscionablity, and Related Quiet Title Claims

The U.S. Court of Appeals for the Seventh Circuit recently ruled that
mortgage borrowers were unable to support a quiet title action based on a
mortgagee's alleged inability to produce the original mortgage note,
rejecting the borrowers' argument of lack of standing due to a supposed
split between the mortgage and the underlying note, and reasoning that
neither theory indicated that borrowers owned the property at the
commencement of the quiet title action, as required by Indiana law.

The Court also ruled that: (1) borrowers had no negligence claim against
the lender in evaluating their ability to repay the loan, as the lender
owed them no duty; and (2) the loan was not unconscionable given that it
was a "manifestly conventional" loan, the borrowers used a mortgage broker
to procure an appropriate refinancing loan, and they were able to make
their payments for seven years before defaulting. A copy of the opinion
is attached.

Plaintiffs borrowers ("Borrowers") used a mortgage broker to obtain a
refinancing loan from a mortgage lender ("Lender") that was secured
against their property. For roughly seven years, Borrowers were able to
make the payments on the loan, but eventually went into default. No
foreclosure action was ever filed, however. Nevertheless, Borrowers
filed a quiet title action on the property and claimed that Lender and the
other defendants (collectively, "Defendants") negligently evaluated
Borrowers' ability to repay the loan, and that the loan was both
procedurally and substantively unconscionable.

Defendants removed the case to federal court, and filed a motion to
dismiss all the claims. The lower court granted the motion. Borrowers
appealed. The Seventh Circuit affirmed.

First addressing Borrowers' argument that Defendants negligently evaluated
their ability to repay the loan by relying on Borrowers' gross income
rather than on their net income, the Court easily dispensed with this
issue, pointing out that Defendants owed Borrowers no duty. Rejecting
Borrowers' assertion that Defendants specifically owed them a fiduciary
duty, as there was no relationship "of trust and confidence" between them,
the Court agreed with the lower court that Borrowers failed to state a
claim for negligence.

Turning to Borrowers' claim of unconscionability, the Seventh Circuit
stressed that Indiana courts are "unfriendly" to claims of
unconscionability generally, and pointed out that Borrowers failed to
allege facts to support either substantive or procedural
unconscionability. In so doing, the Court noted Borrowers' ability to
make payments on their loan for seven years before circumstances changed,
the fact that their loan was "manifestly conventional," that they used a
mortgage broker to assist them in securing the refinancing, and that
nothing indicated that Borrowers did not understand the terms of the loan
or that the mortgage process was somehow irregular. According to the
Court, these factors refuted Borrowers' assertion that their loan contract
was unconscionable, which the Court explained had been defined as a
contract that "no sensible man not under delusion, duress or in distress
would make. . . ." See Weaver v. American Oil Co., 276 N.E.2d 144, 146
(Ind. 1971).

Finally, with respect to Borrowers' quiet title action, the Seventh
Circuit concluded that Borrowers could not satisfy Indiana's requirement
that plaintiffs prove they owned the property at the commencement of the
quiet title action. See Kozanjieff v. Petroff, 19 N.E.2d 563, 565 (Ind.
1939). In so ruling, the Court noted Borrowers' reliance on two theories
that have been used in other jurisdictions as a means to forestall
imminent foreclosure actions, namely, lack of standing based on the
so-called split-note theory and inability to produce the original note.
The Seventh Circuit reasoned that neither theory was sufficient to support
a quiet title action, because they did not prove that Borrowers owned the
land in controversy at the time the action was filed. The Court also
found Borrowers' factual allegations that they possessed the property and
owned it in fee simple to be mere conclusory assertions which similarly
failed to support a quiet title action.

Accordingly, the Seventh Circuit affirmed the lower court's judgment as to
all three claims.




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

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:
http://updates.mwbllp.com

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