FYI: Chicago City Council Passes Ordinance Affecting Tenants in Foreclosed Properties

The City Council of the City of Chicago enacted a new "Keep Chicago Renting" Ordinance that, among other things:

 

(1) Requires a new notice provided in 4 different languages to tenants in foreclosed properties; and

 

(2) Requires that a $10,600 "relocation fee" be paid to tenants in foreclosed properties, unless the foreclosure buyer renews or extends the tenant's current rental agreement at no more than 102%of the existing lease rate; and

 

(3)  Requires registration requirements as to foreclosed rental property, with a $250 registration fee per property;

 

(4) Provides a private right of action for violation of the notice and "relocation fee" provisions, with attorneys fees to the "prevailing plaintiff;" and

 

(5) Additional penalties to be enforced by the City.

 

The new Ordinance takes effect "90 days after its passage and publication," which should be September 5, 2013.

 

 

A copy of the text of Ordinance is available at:  Ordinance Text

 

The Chicago Mayor's press release as to the new Ordinance is available at:  Press Release

 

 

The new Ordinance does not apply, among other things, to:

 

(a)  Pre-existing REO owners; or

 

(b)  Purchasers who are not the mortgagee, or a "subsidiary, parent, trustee, nominee, agent or assignee" of the mortgagee; or

 

(c) Leases that are with the mortgagor or an immediate family member of the mortgagor, and leases that allow "substantially less than fair market rent for the property, or the rental unit's rent is reduced or subsidized due to a government subsidy."

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

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FYI: 3rd Cir Attempts to Clarify Standards for Motions to Compel Arbitration

The U.S. Court of Appeals for the Third Circuit recently vacated and remanded a lower court's order denying arbitration to a bank and processing agent.

 

In so ruling, the Court held that: (1) when it is apparent on the face of the complaint that a party's claims are subject to an enforceable arbitration clause, a motion to compel arbitration should be considered under a Rule 12(b)(6) standard without discovery's delay; (2) alternatively, if the complaint is unclear or the opposing party has placed the agreement to arbitrate at issue, the parties are entitled to "limited discovery," after which time the court should apply a Rule 56 standard.

 

A copy of the opinion is available at: http://www.ca3.uscourts.gov/opinarch/121170p.pdf.

 

Plaintiff-debtor ("Debtor") filed a putative class action against twenty-two defendants (collectively, "Defendants"), alleging that they conspired to defraud her while leading her to believe that they were negotiating a settlement of her consumer debt.  Thirteen defendants, including Rocky Mountain Bank and Trust and Global Client Solutions (collectively, "Appellants"), filed motions to compel arbitration.  All were granted except as to Appellants.

 

The dispositive issue before the lower court was whether the agreement with Appellants ("Account Agreement") was received before or after Debtor executed the Special Purpose Account Application ("SPAA") which expressly incorporated the Account Agreement.  Notably, although other agreements, including the SPAA, had a "DocuSign" header, the Account Agreement did not.

 

Hoping to clarify the standards to be applied to motions to compel, the Third Circuit identified the circumstances under which lower courts should apply a "motion to dismiss" standard and those under which they should apply a "summary judgment" standard.  In reviewing a motion to dismiss under Rule 12(b)(6), courts determine whether, under any "plausible" reading of the pleadings, plaintiff is entitled to relief.  See Fed. R. Civ. P. 12(b)(6); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007).  In doing so, the courts consider "only the complaint, exhibits attached to the complaint, matters of public record, as well as undisputedly authentic documents if the complainant's claims are based upon these documents."  See Mayer v. Belichick, 605 F.3d 223, 230 (3d Cir. 2010).  Therefore, no discovery is required under the Rule 12(b)(6) standard.

 

By contrast, a court grants a motion for summary judgment, under Rule 56, if "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."  See Fed. R. Civ. P. 56(a).  Because summary judgment can be supported or defeated by citing a developed record, courts must give the parties "adequate time for discovery."  See Celotex Corp. v. Caltrett, 477 U.S. 317, 322 (1986).

 

Recognizing that both standards have been used in motions to compel arbitration, the Third Circuit determined that the split pronouncements on the standard for deciding a motion to compel arbitration are reconcilable.  Where the affirmative defense of arbitration of a claim is "apparent on the face of a complaint (or…documents relied upon in the complaint)" then the courts should resolve a motion to compel arbitration under a Rule 12(b)(6) standard.  See Somerset Consulting, LLC v. United Capital Lenders, LLC, 832 F. Supp. 2d 474, 481 (E.D. Pa. 2011). 

 

However, the Third Circuit recognized that some scenarios require a "more deliberate pace."  Where arbitrability is not apparent on the face of the complaint, a motion to compel arbitration must be denied pending further development of the factual record.  Where arbitrability has been "facially" established in the complaint, but the non-movant has come forward with enough evidence in response to the motion to compel arbitration, then the issue should be judged under a Rule 56 standard.  See Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., Ltd., 636 F.2d 51, 55 (3d Cir. 1980).  Under either scenario, the non-movant must be given the opportunity to conduct "limited discovery on the narrow issue concerning the validity of the arbitration agreement."  See Deputy v. Lehman Bros., Inc. 345 F.3d 494, 511 (7th Cir. 2003).

 

As to Appellant's motion to compel arbitration, the Third Circuit first noted that, under a Rule 12(b)(6) standard, there can be no reading of the complaint that could relieve Debtor of the arbitration provision of the Account Agreement.  However, because the complaint is not the only relevant document, the Court considered Debtor's other evidence.

 

Here, Debtor denied making an arbitration agreement with Appellants despite having signed the SPAA, which incorporated the Account Agreement by reference.  In support of her denial, Debtor pointed out that while the other agreements received by her, including the SPAA, had a specific header, the Account Agreement did not have such a header.  Appellants argued that Debtor's denial was a mere "naked assertion" that she did not intend to be bound by the arbitration agreement, and should be dismissed without further delay.  See Par-Knit Mills, 636 F.2d at 55.

 

The Third Circuit disagreed.  It noted that the Debtor's evidence regarding the headers was "not insubstantial."  Debtor had come forth with enough evidence, "even without an affidavit," in response to Appellant's arbitration motion to trigger the Rule 56 standard.  As such, the Court held that the motion should not have been ruled on "without first allowing limited discovery and then entertaining their motion under a summary judgment standard."

 

Accordingly, the Court vacated the lower court's order denying the Appellants' motion to compel arbitration, and remanded for proceedings consistent with this opinion.

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
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FYI: 3rd Cir Attempts to Clarify Standards for Motions to Compel Arbitration

The U.S. Court of Appeals for the Third Circuit recently vacated and remanded a lower court's order denying arbitration to a bank and processing agent.

 

In so ruling, the Court held that: (1) when it is apparent on the face of the complaint that a party's claims are subject to an enforceable arbitration clause, a motion to compel arbitration should be considered under a Rule 12(b)(6) standard without discovery's delay; (2) alternatively, if the complaint is unclear or the opposing party has placed the agreement to arbitrate at issue, the parties are entitled to "limited discovery," after which time the court should apply a Rule 56 standard.

 

A copy of the opinion is available at: http://www.ca3.uscourts.gov/opinarch/121170p.pdf.

 

Plaintiff-debtor ("Debtor") filed a putative class action against twenty-two defendants (collectively, "Defendants"), alleging that they conspired to defraud her while leading her to believe that they were negotiating a settlement of her consumer debt.  Thirteen defendants, including Rocky Mountain Bank and Trust and Global Client Solutions (collectively, "Appellants"), filed motions to compel arbitration.  All were granted except as to Appellants.

 

The dispositive issue before the lower court was whether the agreement with Appellants ("Account Agreement") was received before or after Debtor executed the Special Purpose Account Application ("SPAA") which expressly incorporated the Account Agreement.  Notably, although other agreements, including the SPAA, had a "DocuSign" header, the Account Agreement did not.

 

Hoping to clarify the standards to be applied to motions to compel, the Third Circuit identified the circumstances under which lower courts should apply a "motion to dismiss" standard and those under which they should apply a "summary judgment" standard.  In reviewing a motion to dismiss under Rule 12(b)(6), courts determine whether, under any "plausible" reading of the pleadings, plaintiff is entitled to relief.  See Fed. R. Civ. P. 12(b)(6); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007).  In doing so, the courts consider "only the complaint, exhibits attached to the complaint, matters of public record, as well as undisputedly authentic documents if the complainant's claims are based upon these documents."  See Mayer v. Belichick, 605 F.3d 223, 230 (3d Cir. 2010).  Therefore, no discovery is required under the Rule 12(b)(6) standard.

 

By contrast, a court grants a motion for summary judgment, under Rule 56, if "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."  See Fed. R. Civ. P. 56(a).  Because summary judgment can be supported or defeated by citing a developed record, courts must give the parties "adequate time for discovery."  See Celotex Corp. v. Caltrett, 477 U.S. 317, 322 (1986).

 

Recognizing that both standards have been used in motions to compel arbitration, the Third Circuit determined that the split pronouncements on the standard for deciding a motion to compel arbitration are reconcilable.  Where the affirmative defense of arbitration of a claim is "apparent on the face of a complaint (or…documents relied upon in the complaint)" then the courts should resolve a motion to compel arbitration under a Rule 12(b)(6) standard.  See Somerset Consulting, LLC v. United Capital Lenders, LLC, 832 F. Supp. 2d 474, 481 (E.D. Pa. 2011). 

 

However, the Third Circuit recognized that some scenarios require a "more deliberate pace."  Where arbitrability is not apparent on the face of the complaint, a motion to compel arbitration must be denied pending further development of the factual record.  Where arbitrability has been "facially" established in the complaint, but the non-movant has come forward with enough evidence in response to the motion to compel arbitration, then the issue should be judged under a Rule 56 standard.  See Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., Ltd., 636 F.2d 51, 55 (3d Cir. 1980).  Under either scenario, the non-movant must be given the opportunity to conduct "limited discovery on the narrow issue concerning the validity of the arbitration agreement."  See Deputy v. Lehman Bros., Inc. 345 F.3d 494, 511 (7th Cir. 2003).

 

As to Appellant's motion to compel arbitration, the Third Circuit first noted that, under a Rule 12(b)(6) standard, there can be no reading of the complaint that could relieve Debtor of the arbitration provision of the Account Agreement.  However, because the complaint is not the only relevant document, the Court considered Debtor's other evidence.

 

Here, Debtor denied making an arbitration agreement with Appellants despite having signed the SPAA, which incorporated the Account Agreement by reference.  In support of her denial, Debtor pointed out that while the other agreements received by her, including the SPAA, had a specific header, the Account Agreement did not have such a header.  Appellants argued that Debtor's denial was a mere "naked assertion" that she did not intend to be bound by the arbitration agreement, and should be dismissed without further delay.  See Par-Knit Mills, 636 F.2d at 55.

 

The Third Circuit disagreed.  It noted that the Debtor's evidence regarding the headers was "not insubstantial."  Debtor had come forth with enough evidence, "even without an affidavit," in response to Appellant's arbitration motion to trigger the Rule 56 standard.  As such, the Court held that the motion should not have been ruled on "without first allowing limited discovery and then entertaining their motion under a summary judgment standard."

 

Accordingly, the Court vacated the lower court's order denying the Appellants' motion to compel arbitration, and remanded for proceedings consistent with this opinion.

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
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FYI: Ill App Ct Confirms Mortgagee Whose Indorsement on Fire Insurance Proceeds Checks Was Forged Has Claim Against Payor Bank, Not Against Insurer for Non-Payment Under Policy

The Illinois Appellate Court, First District, recently held that a mortgage lender could not recover against a fire insurer under a fire insurance policy, where fire insurer paid out on a fire loss claim in connection with a property on which the lender held a mortgage, but the lender's indorsement on the checks was forged and the lender did not receive the proceeds of the insurance policy.  Instead, the Appellate Court held that the lender's recovery was properly against the payor bank of the insurance policy checks, as the lender did not show that the forger cannot be found or is not amenable to service.

 

A copy of the opinion is available at http://www.state.il.us/court/Opinions/AppellateCourt/2013/1stDistrict/1122387.pdf.

 

An insurance company issued a policy for the residence of two borrowers.  The policy also named the bank which owned the loan secured by a mortgage on the borrowers' residence (the "bank") as mortgagee.  

 

When a fire damaged the borrowers' residence, the borrowers contracted with a construction company to complete the necessary repairs.  The borrowers assigned their right to receive payment under the insurance policy to the construction company.  

 

The insurance company then issued two checks made payable to the borrowers, the bank, and the construction company.  An employee of the construction company forged the bank's indorsement on the checks, and cashed same.  The bank then demanded that the insurance company pay it the sum of those checks.  The insurance company refused.

 

The bank filed a complaint for declaratory judgment against the insurance company, alleging it was entitled to relief in the amount of the checks per the insurance policy.  The insurance company argued that the bank did not receive the checks due to the fraudulent acts of a third party, for which the insurance company should not be held liable.  Both parties moved for summary judgment, and the lower court found in favor of the insurance company.  The bank appealed. 

 

On appeal, the Court looked to the provisions of Illinois' Uniform Commercial Code (the "UCC").  Specifically, the UCC provides that where a check is made payable jointly to multiple persons, the check may only be enforced by all of them.  Further, if a payor bank pays a person not entitled to enforce the check, the underlying obligation is suspended.  See 810 ILCS Ann. 5/3-310, Uniform Commercial Code Comment 4, at 180-81 (Smith-Hurd 1993). 

 

In that circumstance, the co-payee may sue the payor bank for conversion, or the drawer for enforcement of a lost, destroyed or stolen instrument.  However, the co-payee may not sue the drawer under the underlying contract.  Id. 

 

Here, the Court explained that the insurance company is the drawer, and the borrowers, the bank and the construction company are joint payees who are collectively entitled to enforce the checks written to them by the insurance company. 

 

Because neither party disputed that the construction company was not entitled to endorse and cash the check, the Court indicated that the insurance company's obligation to pay was suspended.  Therefore, the bank's "only possible recourse is to sue [the payor bank] for conversion of the checks...or to sue [the insurance company]...if it can show that the checks were lost, destroyed, or stolen." 

 

However, because the bank's action "improperly seeks to recover from [the insurance company] on the underlying contract," the Court held that the lower court properly granted summary judgment in favor of the insurance company.  

 

The Court also considered the insurance company's argument that the bank's only remedy was against the payor bank. Specifically, the Court noted that the UCC provides that where an instrument is lost, destroyed or stolen, a person not in possession of that instrument is nevertheless entitled to enforce that interest where, among other things, the instrument is "is in the wrongful possession of an unknown person that cannot be found or is not amenable to service."  810 ILCS 5/3-309 (West 2010). 

 

Here, however, the Court noted that the bank did not show that the construction company could not be found, or was not amenable to service.  Accordingly, the Court held that the bank's "only remedy" was against the payor bank for conversion. 

   

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
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FYI: 9th Cir Holds Plaintiff in Alleged Falsely "Discounted Price" Case Properly Alleged Actual Injury, Reversing Lower Court

Reversing the lower court, the U.S. Court of Appeals for the Ninth Circuit recently ruled that the plaintiff in a putative class action properly alleged he suffered economic injury, and thus had standing to sue under California's Unfair Competition Law, Fair Advertising Law, and the Consumer Legal Remedies Act, where the plaintiff alleged that he purchased merchandise on the basis of false discounted-price information and would not have made the purchase but for the misrepresentation. 

 

The Court also denied the defendant retailer's motion for certification to the California Supreme Court, ruling that the motion was untimely as raised after the submission of briefs and the conclusion of oral argument, and opining that the request for certification may have been part of an attempt to find a favorable forum.

 

A copy of the opinion is available at:  http://cdn.ca9.uscourts.gov/datastore/opinions/2013/05/21/11-55793.pdf.

 

Plaintiff ("Purchaser") purchased a number of items at a retail department store ("Retailer") that operates a national chain of stores.  Purchaser bought the items supposedly in reliance on allegedly deceptive advertisements indicating that the items were substantially reduced from their "original" or "regular" prices when in fact Retailer allegedly routinely sold the items at the advertised "sale" prices rather than at the purported "regular" prices. 

 

Purchaser filed a putative class action complaint against Retailer in California Superior Court asserting causes of action under California's Unfair Competition Law ("UCL"), Fair Advertising Law ("FAL"), and Consumer Legal Remedies Act ("CLRA"). 

 

Retailer removed the action to federal court under the federal Class Action Fairness Act.  The federal district court dismissed the UCL and FAL claims, reasoning that Purchaser lacked standing under those statutes, as they require a plaintiff to have "lost money or property" as a result of a defendant's false advertising, and Purchaser had bought the merchandise he wanted at the advertised price thus obtaining the "benefit of the bargain."

 

After the California Supreme Court issued its opinion in California Supreme Court in Kwikset Corp. v. Superior Court, 246 P.3d 877 (Cal. 2011), a case involving false advertising and a plaintiff's standing as having suffered actual injury, the lower court denied Purchaser's motion for reconsideration, later granted Retailer's motion for judgment on the pleadings, and dismissed Purchaser's remaining CLRA claim, concluding that Purchaser lacked standing because he was unable to show that he had suffered "any damage" as a result of Retailer's false advertising.

 

Purchaser appealed.  The Ninth Circuit reversed and remanded.

 

As you may recall, the UCL provides consumers with a cause of action against businesses that engage in "unfair competition," which is defined in part as:  "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising . . . . "  Cal. Bus. & Prof. Code § 17200.

 

The UCL incorporates the FAL's prohibition on unfair advertising, which in turn provides in part:  "No price shall be advertised as a former price of any advertised thing, unless the alleged former price was the prevailing market price . . . within three months next immediately preceding the publication of the advertisement or unless the date when the alleged former price did prevail is clearly, exactly and conspicuously stated in the advertisement."  Cal. Bus. & Prof. Code § 17501. 

 

Moreover, to have standing under the UCL or FAL, persons alleging UCL or FAL claims must have "suffered injury in fact and ha[ve] lost money or property as a result of unfair competition."  Cal. Bus. & Prof. Code §§ 17024, 17535. 

 

Finally, the CLRA prohibits "[m]aking false or misleading statements of fact concerning reasons for, existence of, or amounts of price reductions."  Cal. Civil code § 1770(a)(13).  See also Cal. Civil code § 1780(a)(providing a cause of action to consumers who suffer "any damage" resulting from practices prohibited under section 1770).

 

Applying the standard set forth by the California Supreme Court in Kwikset Corp. v. Superior Court, 246 P.3d 877 (Cal. 2011), the Ninth Circuit noted that there are "innumerable ways" that a consumer can show "some form of economic injury" to show injury in fact as a result of his transactions with the defendant, and explained that Purchaser had sufficiently alleged economic injury to have standing in this case. 

 

Specifically, the Ninth Circuit pointed out that Purchaser satisfied Kwikset's standing requirement by alleging that:  (1) the advertised discounts conveyed false information about the merchandise he purchased, namely that the goods were sold in the recent past at a substantially higher price at Retailer and/or in the prevailing market; and (2) Purchaser would not have bought the product but for the misrepresentation.   In so concluding, the Ninth Circuit rejected Retailer's assertion that Purchaser's complaint needed to state at what price he would have purchased the goods had their "original" or "regular" price not been misrepresented, noting that Kwikset explicitly rejected that argument.

 

Criticizing the lower court for limiting Kwikset to "factual misrepresentations about the composition, effects, origins, and substance of advertised products," the Ninth Circuit pointed out that misrepresenting the "regular" price of merchandise often creates an impression of savings and enhances a customer's perceived value and willingness to purchase a product.   In so doing, the Ninth Circuit explained that the lower court's standing test would preclude consumers from bringing UCL and FAL actions based on false marketing claims that have nothing to do with a product's "composition, effects, origin, and substance,"  including claims such as: "available for a limited time only"; and "not available in stores." 

 

The Ninth Circuit similarly rejected the lower court's "benefit of the bargain" argument that Purchaser had suffered no economic injury, pointing out that such a defense is only permissible if the misrepresentation that the consumer relied on was not material.  While noting that the test for a representation's materiality is whether a "reasonable consumer would attach importance to it or if the maker of the representation knows or has reason to know that its recipient regards or is likely to regard the matter as important in determining his choice of action," the Court also pointed out that both state and federal law specifically prohibit retailers from advertising false "sales" as Retailer allegedly did here.  

 

With regard to Purchaser's CLRA claim, the Ninth Circuit employed the same reasoning in rejecting the lower court's determination that Purchaser had not suffered "any damage" as a result of Retailer's false advertising.  See Meyer v. Sprint Spectrum L.P., 200 P.3d 295, 299, 302-03 (Cal. 2009)(ruling that the CLRA's "any damage" requirement includes pecuniary damage and opportunity and transaction costs resulting from deceptive marketing). 

 

The Court thus ruled that Purchaser had satisfied the standing test articulated in Kwikset as to his UCL, FAL, and CLRA claims.

 

Notably, the Ninth Circuit also denied Retailer's motion to certify the questions in this matter to the California Supreme Court, reasoning that Retailer's request was untimely.  In so doing, the Court raised questions as to Retailer's motives for raising the possibility of certification after the submission of briefs and the conclusion of oral argument.  As the Ninth Circuit stated, "we strongly disfavor a party that prevailed below requesting certification for the first time after it becomes apparent at oral argument that it is not likely to prevail in federal 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

 

Admitted to practice law in Illinois

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
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FYI: Cal Sup Ct Rules Foreclosure Sale Properly Voided, When Trustee Submitted Incorrect Bid and Voided Sale Before Issuing Deed

Reversing the appellate court, the California Supreme Court recently ruled that a foreclosure trustee properly declared a non-judicial foreclosure sale void where, prior to issuing the foreclosure deed to the purported successful bidder, the trustee discovered that it had erroneously provided incorrect information to the auctioneer as to the opening bid amount and informed the bidder of its error.  

 

In so ruling, the Court reasoned that a grossly inadequate sales price, coupled with irregularity in the foreclosure sale process, was a sufficient basis to set aside the foreclosure sale, and that the bidder was not meaningfully prejudiced by the trustee's rescission as he could still participate in a proper sale of the property at a later date.

 

A copy of the opinion is available at:  http://www.courts.ca.gov/opinions/documents/S198562.PDF.

 

After a residential mortgage loan went into default, the foreclosure trustee ("Trustee") scheduled a foreclosure sale of the property that secured the loan.  The notice of trustee's sale stated that the property would be sold at public auction to the highest bidder and that the total indebtedness was roughly $435,000.00.  The notice also indicated that the opening bid at the foreclosure sale could be less than the total indebtedness due.  Prior to the sale, the beneficiary under the deed of trust ("Beneficiary") submitted a credit bid of almost $220,000, which Trustee accepted. 

 

In addition, the buyer at the sale previously called Trustee to learn the expected opening bid, and was informed that the opening bid on the property would be almost $22,000.00, despite the credit bid submitted for almost ten times that amount.  After confirming with Trustee the amount of the opening bid, the buyer obtained a cashier's check for $22,000.00 and attended the auction the next day.

 

On the morning of the foreclosure sale, Trustee's auctioneer verified with Trustee that the amount of the opening bid was almost $22,000 and later opened the bidding based on that number.  Trustee, however, had incorrectly informed the auctioneer that the opening bid was the amount of the delinquency, rather than the actual credit bid Trustee had accepted.  With the buyer's bid supposedly the highest, the auctioneer announced the buyer as the purchaser of the property and accepted the buyer's cashier's check. 

 

Two days later, after discovering its mistake, Trustee informed the buyer that the sale was void because the buyer's bid was in fact not high enough.  Trustee returned the buyer's cashier's check to him.  The buyer responded by demanding the deed to the property.  Trustee refused.  The buyer then filed a quiet title action.

 

Trustee moved for summary judgment, arguing that it had properly set aside the foreclosure sale. The trial court ultimately granted summary judgment in favor of Trustee.  The buyer then appealed.  The Court of Appeal reversed, ruling that Trustee's error was not a procedural irregularity in the foreclosure process and that Trustee thus lacked discretion to void the foreclosure sale.   Trustee petitioned the California Supreme Court, which reversed the judgment of the Appellate Court.

 

As you may recall, California's Civil Code Sections 2924-2924k define a trustee's duties in carrying out non-judicial foreclosures, and courts interpreting California's non-judicial foreclosure scheme have ruled in part that a trustee has a duty to secure the best price for the benefit of the trustor-debtor.  See Cal. Civ. Code § 2924-2924k; Bank of Seoul & Trust Co. v. Marcione, 198 Cal. App. 3d 113, 118 ((1988); Residential Capital v. Cal-Western Reconveyance Corp., 108 Cal.App. 4th 807, 825 (2003); Baron v. Colonial Mortgage Service Co., 111 Cal.App.3d 316, 322 (1980).

 

In addition, a rebuttable presumption arises that a foreclosure sale has been conducted regularly and properly if the trustee's deed recites all statutory notice requirements, and the procedures for the conduct of the foreclosure have been satisfied.  Moeller v. Lien, 25 Cal. App.4th 822, 830 (1994).   This presumption becomes conclusive as to a bona fide purchaser, but the conclusive presumption does not apply until the trustee's deed is actually delivered.  Moreover, if the trustee discovers a defect in the procedure after accepting the bid but before delivery of the trustee's deed, the trustee may cancel the sale to the bona fide purchaser, return the purchase price, and start the foreclosure process over.  Id. at 832.

 

Pointing out that in this case the conclusive presumption did not apply because Trustee discovered its error before the delivery of the deed, the California Supreme Court concluded that Trustee properly declared the foreclosure sale void.  See, e.g., Bank of Seoul, 198 Cal. App. 3d at 119.   In so ruling, the Court applied the common law rule that gross inadequacy of price, coupled with irregularity in the foreclosure process, was sufficient grounds for setting aside a foreclosure sale.

 

Rejecting the buyer's argument that the bidding price was not grossly inadequate, the California Supreme Court noted that gross inadequacy of price was demonstrated by the fact that his bid of almost $22,000 was less than 10% of the Beneficiary's credit bid of over $200,000.  See Millennium Rock Mortgage, Inc. v. T.D. Service Co., 179 Cal. App.4th 804, 810 (2009)(finding gross inadequacy of price where the accepted bid was one-seventh of the opening credit bid that should have been announced).

 

Having thus established gross inadequacy of price, the Court then focused on whether Trustee's mistake constituted a procedural error within the statutory foreclosure sale process and thus entitled Trustee to rescind the sale.   Noting that Trustee's error caused the auctioneer to announce a mistaken opening bid, the Court reasoned that even though the error occurred before the actual start of the sale, the error nevertheless constituted an irregularity within the statutory foreclosure sale process and therefore entitled Trustee to rescind the sale to the buyer.  As the Court explained, the error "was an irregularity in the trustee's discharge of its statutory 'duty to conduct the sale fairly and openly, and to secure the best price for the trustor's benefit'" and "'went to the heart of the sale' . . . because it resulted in the announcement at the sale of an opening credit bid that set an erroneously low floor for subsequent bidding." 

 

In so concluding, the California Supreme Court also rejected Plaintiff's assertions that Trustee's error should be imputed to the Beneficiary because Trustee acted as its agent, and that allowing Trustee to rescind the sale opened the door to manipulation and fraud.  Observing that there was no evidence of fraud or price manipulation, and that Trustee served as a common agent for both the debtor and Beneficiary, the Court stressed that Trustee actually deviated from Beneficiary's instructions when it mistakenly communicated incorrect information to the auctioneer.  

 

Finally, while recognizing the inconvenience in re-starting the sale process, the Court emphasized the importance of securing the best price for the trustor's (debtor's) benefit, noting that the buyer was not prejudiced in any meaningful way by Trustee's mistake since Trustee could hold a proper sale at a later date, and that allowing the buyer to keep the property under the circumstances would allow him to reap a huge windfall from Trustee's error.

 

The California Supreme Court thus reversed the judgment of the Court of Appeal 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

 

Admitted to practice law in Illinois

 

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FYI: Md. Fed Ct Rules TCPA Violated by Auto-Dialed Calls to "Pay per Minute" VOIP Line, But Non-Debtor Cannot Sue Under FDCPA for Lack of "Meaningful Disclosure" of Caller's ID

The U.S. District Court for the District of Maryland recently held that unauthorized and auto-dialed debt collection calls to a VOIP telephone number violated the federal Telephone Consumer Protection Act, 47 U.S.C. §227, et seq. ("TCPA"), as well as corresponding Maryland state law, because the recipient was charged for each call by his VOIP telephone service provider.  

 

In so ruling, the Court also held that the plaintiff, who was not the debtor, could not bring a claim under the federal Fair Debt Collection Practices Act, 15 U.S.C. §1692d(6), for placing telephone calls "without making meaningful disclosure of the caller's identity." 

 

A copy of the opinion is attached.

 

The plaintiff was the recipient of a debt collector's calls on three separate accounts.  The plaintiff was not liable on any of the three accounts -- two of the accounts were listed for the prior owner of the plaintiff's home, and one account was established by plaintiff's brother who lived at a separate residence.

 

Debt Collector began calling Plaintiff to collect on the accounts using an automatic telephone dialing system ("ATDS").  Within less than a year, Debt Collector called Plaintiff's residential line 37 times.  Prior to the calls, Plaintiff had obtained Voice over Internet Protocol ("VOIP") service, which charged Plaintiff separately for incoming call and the transmission of the caller ID information.  Three of the calls allegedly occurred after Plaintiff had called Debt Collector to inform it that calling his number cost him on a per-minute basis.  

 

Each call used the following format:

 

This is a message for (Consumer's name), if this is not (Consumer's name), please hang up or disconnect.  There will now be a 3-second pause in this message.  (Pause for 3 seconds).  By continuing to listen to this message, you acknowledge that you are (Consumer's name).  This is (Dunning name) from [company name].  This communication is from a debt collector.  This is an attempt to collect a debt, and any information obtained will be used for that purpose.  Please contact me about this matter at -800-220-0605, Ext. ___.

 

Plaintiff sued debt collector for violations of the federal TCPA, the Maryland Telephone Consumer Protection Act ("MDTCPA"), and the FDCPA.  The parties filed cross-motions for summary judgment.

 

As you may recall, under the "call charged" provision of the TCPA, 47 U.S.C. 227(b)(1)(A)(iii), absent the express consent of the called party, callers are prohibited from making any call using an ATDS to "any telephone number assigned to . . . any service for which the called party is charged for the call."  47 U.S.C. §227(b)(1)(A)(iii).  The Court determined that because Plaintiff's VOIP service charged for each incoming call received as well as for the transmission of caller ID information on incoming calls, the debt collector violated the call charged provision of the TCPA.  

 

Debt Collector argued that the VOIP service did not fundamentally change the nature of Plaintiff's residential telephone line, and that, under the "residential telephone line" provision, it was exempt from liability for certain pre-recorded information made for a commercial purposes.  See 47 U.S.C. §227(b)(2)(B); 47 C.F.R. §64.1200(a)(2)(iii).  

 

The Court rejected this argument.  Assuming that the debt collector had met the requirements for the residential telephone line provision's exemption, the Court noted that the exemption applied to a separate prohibition upon certain pre-recorded calls under Section 227(b)(1)(B).  However, Plaintiff was not asserting a claim under that section, but was instead asserting a claim under the "call charged" prohibitions of Section 227(b)(1)(A).  Thus, the Court found that the exemption under the "residential line provision" did not apply to "call charged" violations.  

 

Because the Court held that Debt Collector violated the federal TCPA, the Court also held that the debt collector's conduct violated corresponding state law, Md. Code, Comm. Law §14-3201, et seq.  ("MDTCPA"), which created a state-law cause of action for violations of Section 227(b) of the TCPA.  As to whether a plaintiff could recover statutory damages under federal law and state law for the same violation, the Court refused to certify such question to the Maryland high court, finding such question premature, given that the damages inquiry was to be determined separately.

 

In addition, the Court held that alleged violations of Section 227(d) of the TCPA's "technical standards" did not constitute a violation of the Maryland MDTCPA.  Notably, under federal law, while § 227(b) authorized a private right of action, § 227(d) did not.  Moreover, under 47 U.S.C. §227(f)(1), States are permitted to create "more restrictive standards than the federal TCPA, except with regard to subsection (d)."  Thus, the Court granted summary judgment in favor of Debt Collector in connection with Plaintiff's state law claims premised upon violations of Section 227(d) of the federal Act.  

 

The plaintiff also asserted a violation of § 1692b(3) of the FDCPA, which limits third party communications "for the purpose of acquiring location information about the consumer," by communicating with him more than once about another consumer's debt.  The plaintiff was not liable on any of the three accounts being collected -- two of the accounts were listed for the prior owner of the plaintiff's home, and one account was established by plaintiff's brother who lived at a separate residence.  On this FDCPA claim, the Court determined that a material dispute concerning the purpose of the call precluded summary judgment in favor of either party.  

 

However, the Court did grant summary judgment in favor of Debt Collector as to Plaintiff's claim under 15 U.S.C. §1692d(6), which prohibits a debt collector from placing telephone calls "without making meaningful disclosure of the caller's identity."  

 

The Court observed that "'meaningful disclosure' has been held to require the debt collector to disclose the caller's name, the debt collection company's name, and the nature of the debt collector's business." Op. at 27.  In ruling in favor of Debt Collector, the Court determined that meaningful disclosure need only be made to the consumer.    

 

The Court reasoned that, given that 15 U.S.C. §1692c(b) limits third-party communications in connection with the collection of a debt, "a debt collector confronted by a third-party gatekeeper . . . while attempting to contact the debtor, cannot both provide meaningful disclosure pursuant to § 1692d(6) and comply with the requirements of § 1692c(b) preventing the disclosure of a consumer's personal affairs to third parties." Op. at 28 (citations omitted).  Such prohibitions could only be harmonized, the Court concluded, if the meaningful disclosure only applies to the consumer debtor.

 

Accordingly, the Court granted summary judgment for Plaintiff on the violations of the "called charged" provision under the TCPA and MDTCPA; granted summary judgment for Debt Collector on the violations of the "technical standards" of Section 227(d) of the TCPA and granted in part Debt Collector's motion for summary judgment on the FDCPA violations.  Additionally, the Court denied Plaintiff's motion to certify questions to the Maryland high 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

 

Admitted to practice law in Illinois

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
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