FYI: 9th Cir Holds No Private Right of Action Under Federal Protecting Tenants at Foreclosure Act

The U.S. Court of Appeals for the Ninth Circuit recently affirmed the lower court's dismissal of a tenant's post-foreclosure action for alleged violations of the Protecting Tenants at Foreclosure Act of 2009 ("PTFA"). 

 

In reaching its decision, the Court held that: (1) the voluntary dismissal of an eviction matter does not necessarily moot an action relating to alleged improprieties in the eviction;  (2) the principles of abstention first elucidated by the Supreme Court in Younger v. Harris, 401 U.S. 37 (1971), did not preclude subject matter jurisdiction for the federal courts concerning unlawful detainer actions; and  (3) the PTFA does not provide a private right of action.

 

A copy of the opinion is available at: http://cdn.ca9.uscourts.gov/datastore/opinions/2013/07/16/10-55671.pdf

 

 

Following the foreclosure of the subject property, the successor owner provided the tenant with a three-day notice of termination.  The successor owner then initiated an unlawful detainer action in state court. 

 

The tenant filed suit in federal court seeking an injunction preventing the bank's state court action based upon an alleged violation of PTFA, as well as damages.  Specifically, the tenant alleged that the successor owner violated the PTFA by failing to provide a 90 day notice of termination as required by the statute.

 

The lower court dismissed the tenant's action based upon lack of subject matter jurisdiction under the abstention principle in Younger, and because it determined that the PTFA did not provide a private right of action.  The tenant appealed.

 

The successor owner argued that the tenant's action was moot, as it had voluntarily dismissed its unlawful detainer action.

 

As a preliminary matter, the Ninth Circuit determined that the issues presented by the tenant were not mooted merely by the successor owner's voluntary dismissal of its eviction action.  The Court noted that when the basis for mootness is the defendant's voluntary conduct, the defendant bears the burden of showing that the allegedly wrongful conduct could not reasonably be expected to recur.  The Court found that the successor owner failed to meet this burden and presented no evidence which demonstrated that the successor owner would not reinitiate the unlawful detainer action.  Accordingly, the Ninth Circuit held that the tenant's action presented an actual live controversy as required by Article III.

 

Next, the Court addressed the lower court's ruling that it lacked subject matter jurisdiction.  The Court disagreed that the principles of Younger and its progeny required the federal court to abstain from exercising jurisdiction over an action which implicates an on-going unlawful detainer action filed in a state court. 

 

As you may recall, the Supreme Court in Younger held that in certain circumstances the federal courts must abstain from adjudicating issues properly brought before it where it involves a pending state criminal prosecution.  Subsequent courts expanded this principle to include limited civil matters where (1) there is an ongoing state proceeding, (2) the state proceeding implicates important state interests, (3) the state proceeding provides an adequate opportunity to raise federal questions, and (4) the federal action would enjoin the state proceeding or have the practical effect of doing so. 

 

The Ninth Circuit applied these criteria to the state court unlawful detainer action and determined that abstention was not warranted.  Specifically, the Court held that an unlawful detainer action did not implicate important state interests.  In addressing this issue, the Court noted that "important state interests" did not implicate every action based upon state law or even involving a traditional state concern; rather, the Court interpreted the phrase narrowly to include only three types of non-criminal proceedings: (1) those that bear a close relationship to criminal proceedings; (2) those necessary for the vindication of important state policies; and (3) those necessary for the functioning of state judicial system.  The Court found that unlawful detainer actions did not fall into any of these three categories, and specifically noted that "the unlawful detainer action here is simply a private dispute between two private parties over possession of a property." Thus, the Ninth Circuit held that the lower court's determination to abstain from exercising subject matter jurisdiction was in error.

 

Nevertheless, the Ninth Circuit held that dismissal was appropriate as the PTFA does not provide a private right of action.  The Court noted that the parties conceded that the PTFA did not explicitly provide a private right of action, and it determined that there was no indication that an implied right of action was intended. 

 

As you may recall, private rights of action must be created by Congress.  In determining whether or not a private remedy is implicit in a statute which does not expressly provide one, the courts focus on whether Congress intended to create a private cause of action.  See Touche Ross & Co. v. Redington, 442 U.S. 560, 575 (1979). 

 

The Court held that nothing in the language of the PTFA provided any clear and ambiguous intent to create a private right of action.  In fact, the Court pointed out that the statute's entire focus is on the regulated party, i.e. the party seeking the eviction, and not the tenant. 

 

The Ninth Circuit held that general proscriptive and regulatory statutes do not indicate an intent to provide for private rights of action. 

 

The Court also rejected the tenant's argument that the statute's title -- "Protecting Tenants at Foreclosure Act of 2009" -- evidenced a Congressional intent to allow a private right of action.  The Court held that, although a statute's title can be used to resolve ambiguity, it cannot control the plain language of the statute. 

 

 

 

 

 

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: Ill App Ct Holds Def Waived Arbitration, Rejects Def's Argument that Moving to Compel Arbitration Was Futile Prior to Concepcion

The Illinois Appellate Court, First District, recently upheld a lower court's ruling that a credit card issuer had waived its right to compel arbitration in a consolidated class action, reasoning that the card issuer's long delay in demanding arbitration and its zealous litigation of the class action over a ten-year period substantially prejudiced plaintiffs and acted as a waiver of its right to arbitration under the terms of the controlling arbitration agreement. 

 

In so ruling, the Court noted in part that the card issuer previously had successfully litigated its right to arbitrate and thus had a known right to compel arbitration, and that a motion to compel arbitration at an earlier stage in the litigation, and prior to the U.S. Supreme Court's ruling in AT&T Mobility, LLC v. Concepcion, would not have been futile.     

 

A copy of the opinion is available at:  http://www.illinoiscourts.gov/Opinions/AppellateCourt/2013/1stDistrict/1120789.pdf

 

 

Various putative class action plaintiffs ("Cardholders") filed separate lawsuits against defendant credit card issuer ("Issuer") over Issuer's alleged improper disclosure of Cardholders' confidential data to third parties.  The complaints alleged various causes of action including violation of the Illinois Consumer Fraud and Deceptive Practices Act and intrusion upon seclusion.  The lawsuits were eventually consolidated. 

 

The credit card agreements provided in part that all claims of any nature arising out of the credit card agreements were to be resolved by binding arbitration at the election at any time of either Issuer or Cardholders regardless of whether litigation had already commenced, "unless . . . the other party would suffer substantial prejudice as a result of the delay in demanding arbitration."  The relevant agreements also provided that Arizona and federal law controlled. 

 

In its pleadings and motions, Issuer did not assert a right to arbitrate the claims until after the class was certified, and after Issuer unsuccessfully sought review of the certification. Then, about ten years after commencement of the litigation, Issuer moved to compel arbitration and to stay the proceedings under the Federal Arbitration Act ("FAA"), arguing that the U.S. Supreme Court's decision in AT&T Mobility, LLC v. Concepcion, ___ U.S.  ___, 131 S. Ct. 1740 (2011), established for the first time that Issuer had a known, existing right to compel arbitration of Cardholders' individual claims and avoid class arbitration. 

 

In response, Cardholders argued that Issuer had waived any right to arbitration by zealously litigating the lawsuits for a decade, and that Issuer could not demonstrate that asserting the right to arbitrate would have been futile under Illinois or Arizona law prior to the Concepcion decision.   Among other things, Cardholders also argued that the arbitration clause was unconscionable and thus unenforceable. 

 

The lower court denied Issuer's motion to compel arbitration, finding that the extensive ten-year litigation in the case involving numerous motions, affirmative defenses, class certification, and attempts at mediation, as well as the pending discovery, all acted as a waiver of any right to compel arbitration.    The lower court also rejected Issuer's assertion that it would have been futile to assert its right to arbitrate prior to the Concepcion decision, and agreed with Cardholders that arbitration of their claims would prejudice them, given the stage of the litigation.

 

The Appellate Court affirmed.

 

As you may recall, the FAA provides that courts must stay further proceedings and order arbitration if there is a valid arbitration agreement in effect and the agreement encompasses the dispute at issue.  See 9 U.S.C. § 3 (1994).  See also In re Toyota Motor Corp. Hybrid Brake Marketing, Sales, Practices & Products Liability Litigation, 828 F. Supp. 2d 1150 (C.D. Cal. 2011). 

 

In noting the different approaches federal courts have taken on the issue of purported waivers of the right to arbitrate, the Appellate Court considered whether Issuer had: (1) knowledge of an existing right to arbitrate; and (2) engaged in acts inconsistent with that right.  See Fisher v. A.G. Becker Paribas Inc. 791 F.2d 691, 694 (9th Cir. 1986).  The Court pointed out among other things that futility of an arbitration demand prior to Concepcion was not clear, citing federal appeals court decisions stating that a party must move to compel arbitration whenever the arbitration agreement "was at least arguably enforceable" and that "a motion to compel arbitration will almost never be futile" absent Supreme Court or circuit court precedent foreclosing a right to arbitrate.  See, e.g.,  Garcia v. Wachovia Corp. 699 F.3d 1273, 1278 (11th Cir. 2012); National Endowment for Cancer Research v. A.G. Edwards & Sons, Inc., 821 F.2d 772 (D.C. Cir. 1987).   

 

In light of the development of the case law on waiver of the right to arbitrate, the Appellate Court, looking to Arizona for guidance on the enforceability of class action waivers in arbitration, ultimately rejected Issuer's contention, noting that when the complaints here were filed, there was no controlling legal authority in Arizona on the waiver or enforceability issues.  The Court also noted that, because Issuer itself had successfully defended against certain prior challenges to its arbitration agreements during the early stages of this litigation, it would have been clear to Issuer that the arbitration agreements at issue in this case were at least arguably enforceable, which should have prompted Issuer to move to compel arbitration at a much earlier stage in this action.  The Court accordingly ruled that Issuer had a known right to arbitrate, and that it would not have been futile to move to compel arbitration.

 

Next, based on the language in the arbitration agreement itself that arbitration may be elected "at any time . . . unless the other party would suffer substantial prejudice as a result of delay in demanding arbitration," the Court considered whether Issuer's acts inconsistent with an existing right to arbitrate substantially prejudiced Cardholders.   

 

Observing that Issuer had twice previously successfully asserted its right to arbitrate in other cases, including once before this Court, the Court also ruled that Cardholders were prejudiced based on the time and money spent in litigation caused by Issuer's delay in moving to compel arbitration.  In so ruling, the Court stated that the litigation expenses were not in any way a "self-inflicted wound," noting Issuer's motion to dismiss, cross-motion for summary judgment, its participation in pre-trial discovery as well as mediation and settlement conferences.

 

The Appellate Court thus concluded that the lower court: (1) did not err in ruling that Issuer had a known right to demand arbitration when Cardholders filed their complaints and failed to show it would have been futile to move to compel arbitration prior to Concepcion; and (2) did not abuse its discretion in finding that Issuer acted inconsistently with that known right by zealously litigating the class action for years and thereby prejudiced Cardholders.

 

Accordingly, the Appellate Court upheld the lower court's order denying Issuer's motion to compel arbitration.

 

 

 

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.

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FYI: Ill App Ct Holds Def Waived Arbitration, Rejects Def's Argument that Moving to Compel Arbitration Was Futile Prior to Concepcion

The Illinois Appellate Court, First District, recently upheld a lower court's ruling that a credit card issuer had waived its right to compel arbitration in a consolidated class action, reasoning that the card issuer's long delay in demanding arbitration and its zealous litigation of the class action over a ten-year period substantially prejudiced plaintiffs and acted as a waiver of its right to arbitration under the terms of the controlling arbitration agreement. 

 

In so ruling, the Court noted in part that the card issuer previously had successfully litigated its right to arbitrate and thus had a known right to compel arbitration, and that a motion to compel arbitration at an earlier stage in the litigation, and prior to the U.S. Supreme Court's ruling in AT&T Mobility, LLC v. Concepcion, would not have been futile.     

 

A copy of the opinion is available at:  http://www.illinoiscourts.gov/Opinions/AppellateCourt/2013/1stDistrict/1120789.pdf

 

 

Various putative class action plaintiffs ("Cardholders") filed separate lawsuits against defendant credit card issuer ("Issuer") over Issuer's alleged improper disclosure of Cardholders' confidential data to third parties.  The complaints alleged various causes of action including violation of the Illinois Consumer Fraud and Deceptive Practices Act and intrusion upon seclusion.  The lawsuits were eventually consolidated. 

 

The credit card agreements provided in part that all claims of any nature arising out of the credit card agreements were to be resolved by binding arbitration at the election at any time of either Issuer or Cardholders regardless of whether litigation had already commenced, "unless . . . the other party would suffer substantial prejudice as a result of the delay in demanding arbitration."  The relevant agreements also provided that Arizona and federal law controlled. 

 

In its pleadings and motions, Issuer did not assert a right to arbitrate the claims until after the class was certified, and after Issuer unsuccessfully sought review of the certification. Then, about ten years after commencement of the litigation, Issuer moved to compel arbitration and to stay the proceedings under the Federal Arbitration Act ("FAA"), arguing that the U.S. Supreme Court's decision in AT&T Mobility, LLC v. Concepcion, ___ U.S.  ___, 131 S. Ct. 1740 (2011), established for the first time that Issuer had a known, existing right to compel arbitration of Cardholders' individual claims and avoid class arbitration. 

 

In response, Cardholders argued that Issuer had waived any right to arbitration by zealously litigating the lawsuits for a decade, and that Issuer could not demonstrate that asserting the right to arbitrate would have been futile under Illinois or Arizona law prior to the Concepcion decision.   Among other things, Cardholders also argued that the arbitration clause was unconscionable and thus unenforceable. 

 

The lower court denied Issuer's motion to compel arbitration, finding that the extensive ten-year litigation in the case involving numerous motions, affirmative defenses, class certification, and attempts at mediation, as well as the pending discovery, all acted as a waiver of any right to compel arbitration.    The lower court also rejected Issuer's assertion that it would have been futile to assert its right to arbitrate prior to the Concepcion decision, and agreed with Cardholders that arbitration of their claims would prejudice them, given the stage of the litigation.

 

The Appellate Court affirmed.

 

As you may recall, the FAA provides that courts must stay further proceedings and order arbitration if there is a valid arbitration agreement in effect and the agreement encompasses the dispute at issue.  See 9 U.S.C. § 3 (1994).  See also In re Toyota Motor Corp. Hybrid Brake Marketing, Sales, Practices & Products Liability Litigation, 828 F. Supp. 2d 1150 (C.D. Cal. 2011). 

 

In noting the different approaches federal courts have taken on the issue of purported waivers of the right to arbitrate, the Appellate Court considered whether Issuer had: (1) knowledge of an existing right to arbitrate; and (2) engaged in acts inconsistent with that right.  See Fisher v. A.G. Becker Paribas Inc. 791 F.2d 691, 694 (9th Cir. 1986).  The Court pointed out among other things that futility of an arbitration demand prior to Concepcion was not clear, citing federal appeals court decisions stating that a party must move to compel arbitration whenever the arbitration agreement "was at least arguably enforceable" and that "a motion to compel arbitration will almost never be futile" absent Supreme Court or circuit court precedent foreclosing a right to arbitrate.  See, e.g.,  Garcia v. Wachovia Corp. 699 F.3d 1273, 1278 (11th Cir. 2012); National Endowment for Cancer Research v. A.G. Edwards & Sons, Inc., 821 F.2d 772 (D.C. Cir. 1987).   

 

In light of the development of the case law on waiver of the right to arbitrate, the Appellate Court, looking to Arizona for guidance on the enforceability of class action waivers in arbitration, ultimately rejected Issuer's contention, noting that when the complaints here were filed, there was no controlling legal authority in Arizona on the waiver or enforceability issues.  The Court also noted that, because Issuer itself had successfully defended against certain prior challenges to its arbitration agreements during the early stages of this litigation, it would have been clear to Issuer that the arbitration agreements at issue in this case were at least arguably enforceable, which should have prompted Issuer to move to compel arbitration at a much earlier stage in this action.  The Court accordingly ruled that Issuer had a known right to arbitrate, and that it would not have been futile to move to compel arbitration.

 

Next, based on the language in the arbitration agreement itself that arbitration may be elected "at any time . . . unless the other party would suffer substantial prejudice as a result of delay in demanding arbitration," the Court considered whether Issuer's acts inconsistent with an existing right to arbitrate substantially prejudiced Cardholders.   

 

Observing that Issuer had twice previously successfully asserted its right to arbitrate in other cases, including once before this Court, the Court also ruled that Cardholders were prejudiced based on the time and money spent in litigation caused by Issuer's delay in moving to compel arbitration.  In so ruling, the Court stated that the litigation expenses were not in any way a "self-inflicted wound," noting Issuer's motion to dismiss, cross-motion for summary judgment, its participation in pre-trial discovery as well as mediation and settlement conferences.

 

The Appellate Court thus concluded that the lower court: (1) did not err in ruling that Issuer had a known right to demand arbitration when Cardholders filed their complaints and failed to show it would have been futile to move to compel arbitration prior to Concepcion; and (2) did not abuse its discretion in finding that Issuer acted inconsistently with that known right by zealously litigating the class action for years and thereby prejudiced Cardholders.

 

Accordingly, the Appellate Court upheld the lower court's order denying Issuer's motion to compel arbitration.

 

 

 

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:
http://updates.mwbllp.com

 

 

 

 

FYI: Ill App Ct Holds Def Waived Arbitration, Rejects Def's Argument that Moving to Compel Arbitration Was Futile Prior to Concepcion

The Illinois Appellate Court, First District, recently upheld a lower court's ruling that a credit card issuer had waived its right to compel arbitration in a consolidated class action, reasoning that the card issuer's long delay in demanding arbitration and its zealous litigation of the class action over a ten-year period substantially prejudiced plaintiffs and acted as a waiver of its right to arbitration under the terms of the controlling arbitration agreement. 

 

In so ruling, the Court noted in part that the card issuer previously had successfully litigated its right to arbitrate and thus had a known right to compel arbitration, and that a motion to compel arbitration at an earlier stage in the litigation, and prior to the U.S. Supreme Court's ruling in AT&T Mobility, LLC v. Concepcion, would not have been futile.     

 

A copy of the opinion is available at:  http://www.illinoiscourts.gov/Opinions/AppellateCourt/2013/1stDistrict/1120789.pdf

 

 

Various putative class action plaintiffs ("Cardholders") filed separate lawsuits against defendant credit card issuer ("Issuer") over Issuer's alleged improper disclosure of Cardholders' confidential data to third parties.  The complaints alleged various causes of action including violation of the Illinois Consumer Fraud and Deceptive Practices Act and intrusion upon seclusion.  The lawsuits were eventually consolidated. 

 

The credit card agreements provided in part that all claims of any nature arising out of the credit card agreements were to be resolved by binding arbitration at the election at any time of either Issuer or Cardholders regardless of whether litigation had already commenced, "unless . . . the other party would suffer substantial prejudice as a result of the delay in demanding arbitration."  The relevant agreements also provided that Arizona and federal law controlled. 

 

In its pleadings and motions, Issuer did not assert a right to arbitrate the claims until after the class was certified, and after Issuer unsuccessfully sought review of the certification. Then, about ten years after commencement of the litigation, Issuer moved to compel arbitration and to stay the proceedings under the Federal Arbitration Act ("FAA"), arguing that the U.S. Supreme Court's decision in AT&T Mobility, LLC v. Concepcion, ___ U.S.  ___, 131 S. Ct. 1740 (2011), established for the first time that Issuer had a known, existing right to compel arbitration of Cardholders' individual claims and avoid class arbitration. 

 

In response, Cardholders argued that Issuer had waived any right to arbitration by zealously litigating the lawsuits for a decade, and that Issuer could not demonstrate that asserting the right to arbitrate would have been futile under Illinois or Arizona law prior to the Concepcion decision.   Among other things, Cardholders also argued that the arbitration clause was unconscionable and thus unenforceable. 

 

The lower court denied Issuer's motion to compel arbitration, finding that the extensive ten-year litigation in the case involving numerous motions, affirmative defenses, class certification, and attempts at mediation, as well as the pending discovery, all acted as a waiver of any right to compel arbitration.    The lower court also rejected Issuer's assertion that it would have been futile to assert its right to arbitrate prior to the Concepcion decision, and agreed with Cardholders that arbitration of their claims would prejudice them, given the stage of the litigation.

 

The Appellate Court affirmed.

 

As you may recall, the FAA provides that courts must stay further proceedings and order arbitration if there is a valid arbitration agreement in effect and the agreement encompasses the dispute at issue.  See 9 U.S.C. § 3 (1994).  See also In re Toyota Motor Corp. Hybrid Brake Marketing, Sales, Practices & Products Liability Litigation, 828 F. Supp. 2d 1150 (C.D. Cal. 2011). 

 

In noting the different approaches federal courts have taken on the issue of purported waivers of the right to arbitrate, the Appellate Court considered whether Issuer had: (1) knowledge of an existing right to arbitrate; and (2) engaged in acts inconsistent with that right.  See Fisher v. A.G. Becker Paribas Inc. 791 F.2d 691, 694 (9th Cir. 1986).  The Court pointed out among other things that futility of an arbitration demand prior to Concepcion was not clear, citing federal appeals court decisions stating that a party must move to compel arbitration whenever the arbitration agreement "was at least arguably enforceable" and that "a motion to compel arbitration will almost never be futile" absent Supreme Court or circuit court precedent foreclosing a right to arbitrate.  See, e.g.,  Garcia v. Wachovia Corp. 699 F.3d 1273, 1278 (11th Cir. 2012); National Endowment for Cancer Research v. A.G. Edwards & Sons, Inc., 821 F.2d 772 (D.C. Cir. 1987).   

 

In light of the development of the case law on waiver of the right to arbitrate, the Appellate Court, looking to Arizona for guidance on the enforceability of class action waivers in arbitration, ultimately rejected Issuer's contention, noting that when the complaints here were filed, there was no controlling legal authority in Arizona on the waiver or enforceability issues.  The Court also noted that, because Issuer itself had successfully defended against certain prior challenges to its arbitration agreements during the early stages of this litigation, it would have been clear to Issuer that the arbitration agreements at issue in this case were at least arguably enforceable, which should have prompted Issuer to move to compel arbitration at a much earlier stage in this action.  The Court accordingly ruled that Issuer had a known right to arbitrate, and that it would not have been futile to move to compel arbitration.

 

Next, based on the language in the arbitration agreement itself that arbitration may be elected "at any time . . . unless the other party would suffer substantial prejudice as a result of delay in demanding arbitration," the Court considered whether Issuer's acts inconsistent with an existing right to arbitrate substantially prejudiced Cardholders.   

 

Observing that Issuer had twice previously successfully asserted its right to arbitrate in other cases, including once before this Court, the Court also ruled that Cardholders were prejudiced based on the time and money spent in litigation caused by Issuer's delay in moving to compel arbitration.  In so ruling, the Court stated that the litigation expenses were not in any way a "self-inflicted wound," noting Issuer's motion to dismiss, cross-motion for summary judgment, its participation in pre-trial discovery as well as mediation and settlement conferences.

 

The Appellate Court thus concluded that the lower court: (1) did not err in ruling that Issuer had a known right to demand arbitration when Cardholders filed their complaints and failed to show it would have been futile to move to compel arbitration prior to Concepcion; and (2) did not abuse its discretion in finding that Issuer acted inconsistently with that known right by zealously litigating the class action for years and thereby prejudiced Cardholders.

 

Accordingly, the Appellate Court upheld the lower court's order denying Issuer's motion to compel arbitration.

 

 

 

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:
http://updates.mwbllp.com

 

 

 

 

FYI: 1st Cir Rejects Builder's Counterclaims Against Loan Assignee in Mechanics Lien Case

Affirming the lower court, the U.S. Court of Appeals for the First Circuit recently ruled that under New Hampshire law a mortgage took priority over a mechanic's lien, where the work for which the mechanic's lien was filed was not initiated until after the mortgage was recorded, and where the mortgagee paid the party asserting the mechanic's lien. 

 

The Court further affirmed the dismissal of the builder's counterclaims against the assignee of the mortgage for implied contract and promissory estoppel.  In so ruling, the Court reasoned that although any assignment of the mortgage carried with it obligations as lender/mortgagee, there was no specific assignment of an implied contract. 

 

Lastly, in affirming the lower court, the First Circuit held that where a party fails to allege a benefit, the retention of which would constitute unconscionablity, there can be no finding that such party was unjustly enriched.

 

A copy of the opinion is available at:  http://media.ca1.uscourts.gov/pdf.opinions/12-2182P-01A.pdf.

 

A construction company ("Builder") and hotel group ("Hotel Group") entered into a contract for the construction of a hotel in Tilton, New Hampshire.  Builder began construction, but stalled when Hotel Group was unable to pay its bills.  In order to continue the project, Hotel Group entered into a loan with a lender ("Construction Lender"), who agreed to provide $8,700,000 in exchange for a mortgage on the property to continue the project.

 

Work on the hotel project continued, with loan disbursements paid by Construction Lender to Builder.  Builder executed lien waivers in conjunction with the payments from Construction Lender.  When Builder submitted the waiver, it was unaware that Construction Lender would not issue any more disbursements to Builder because Hotel Group was unable to secure additional financing for the project.

 

Builder claimed $2,487,411.94 for work under the agreement, which was secured by a mechanic's lien.  After the hotel construction was completed, both Hotel Group and Construction Lender found themselves in financial trouble.  Construction Lender's parent company failed, and the construction mortgage was assigned to FDIC as receiver.  The mortgage was ultimately assigned to another entity ("Assignee").  After the assignment, Hotel Group filed for Chapter 11 bankruptcy.

 

Assignee initiated an adversary proceeding stemming from the Chapter 11 bankruptcy, seeking a declaration that $6,434,074.40 of the construction mortgage - the amount disbursed by Construction Lender to Builder for work performed on the hotel project - was senior to Builder's lien.  Builder filed a counterclaim for a declaration that Builder's lien was senior to Assignee's mortgage, and ten counterclaims arising in tort, contract and equity.

 

The bankruptcy court dismissed 10 of the 12 counterclaims, and awarded summary judgment in Assignee's favor.  Builder appealed to the U.S. District Court, which affirmed.  On appeal to the First Circuit, Builder argued that the grant of summary judgment in Assignee's favor was improper, as well as dismissal of three of Builder's counterclaims for breach of implied contract, promissory estoppel and unjust enrichment.  The First Circuit affirmed the lower court's ruling.

 

On appeal, the First Circuit first analyzed the completing lien claims.  As you may recall, New Hampshire is a "race-notice" jurisdiction with respect to recording.  A purchaser with a senior claim in real estate must record its interest in order to prevail over a bona fide purchaser for value.  N.H. Rev. Stat. Ann. 477:3-a; Mansur v. Muskopf, 977 A.2d 1041, 1046 (N.H. 2009). 

 

Affirming the district court's ruling, the First Circuit noted that the mortgage was recorded by Construction Lender before the work for which the lien is claimed was performed.  Although the Court also recognized that a mechanic's lien "shall have precedence and priority over any construction mortgage," this is not the case where "the mortgagee shows that the proceeds of the mortgage loan were disbursed... towards payment of invoices from or claims due subcontractors and suppliers of materials or labor for the work on the mortgaged premises." N.H. Rev. Stat. Ann. 447:12-a.

 

In this instance, Builder did not contest that Construction Lender made $6,434,074.40 in payments to Builder, and therefore, the mechanic's lien was not senior to the mortgage.  Builder presented authority in support of its position that an alternative source of priority for mechanic's liens exists.  The Court was not persuaded by this argument, pointing out that in neither case cited by Builder did the mortgagee pay the mechanic for any work.  Because the mortgage was recorded before the work for which the lien was claimed was performed, and because Construction Lender paid Builder, the First Circuit affirmed the lower court's ruling regarding Assignee's priority of claim.

 

The First Circuit also affirmed judgment in favor Assignee with respect to Builder's counterclaims for breach of implied contract, promissory estoppel and unjust enrichment.  Builder argued that in realizing the value of a completed hotel, Construction Lender misled Builder in believing that Builder would be paid for completion of the project. 

 

Taking Builder's claims for breach of implied contract and promissory estoppel together, the Court ruled that there was no basis for holding Assignee liable for the actions of Construction Lender.  As you may recall, an implied contract is an enforceable agreement that arises from the conduct of the parties, apart from oral and written words.  Durgin v. Pillsbury Lake Water Dist., 903 A.2d 1003, 1006 (N.H. 2006).  On the other hand, promissory estoppel is a basis by which recovery may be had where no contract exists.  Great Lakes Aircraft Co. v. City of Claremont, 608 A.2d 840, 853 (N.H. 1992); Panto v. Moore Bus. Forms, Inc., 547 A.2d 260, 266 (N.H. 1988); Restatement (Second) of Contracts, section 90 (1981).

 

The First Circuit agreed with the bankruptcy court's ruling, holding that because there is no language in the assignment of the mortgage that purports to transfer these liabilities to Assignee, Assignee could not be held liable under these theories.  The Court was not persuaded by Builder's arguments.  Builder relied on section 328 of Restatement (Second) of Contracts, which provides that a general assignment of all rights under a contract as a delegation of unperformed duties under the same contract is enforceable against an assignee by an obligor of the assigned rights.

 

The First Circuit rejected Builder's assertion because any obligations assumed by Assignee were under the mortgage contract, as lender/mortgagee.  Builder sought to impose liability from an alleged implied contract between Builder and Construction Lender.  However, Assignee did not receive any assignment of rights under this implied contract.

 

The First Circuit also affirmed the lower court's ruling with respect to the counterclaim for unjust enrichment.  As you may recall, unjust enrichment is an equitable remedy that entitles a party to restitution from one that has received an unconscionable benefit, if the benefit were retained.  Clapp v. Goffstown Sch. Dist., 977 A.2d 1021, 1024-25 (N.H. 2009).  Builder, however, failed to establish any allegation that would support a finding that Assignee received a benefit, the retention of which would constitute unconscionablity.  The Court noted that Assignee simply purchased a mortgage for a completed hotel.  Builder failed to allege any facts indicating that this was not an arm's length transaction.  Accordingly, the First Circuit affirmed dismissal of Builder's counterclaim for unjust enrichment.

 

 

 

 

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: South Carolina Sup Ct Holds Loan Mods Not "Unauthorized Practice of Law"

The South Carolina Supreme Court recently held that extensions of loan modifications without attorney involvement did not constitute the "unauthorized practice of law."   In reaching this conclusion, the Court distinguished a loan modification from a refinancing or purchase loan, which the Court determined was the issuance of an entirely new loan and thus required attorney oversight and review.

 

A copy of the opinion is available at:  http://www.judicial.state.sc.us/opinions/HTMLFiles/SC/27273.pdf

 

In two consolidated cases, borrowers ("Petitioners") had either a residential mortgage loan or a commercial loan, each of which was extended and closed under the supervision of a licensed attorney.  After having fallen behind on their respective payments, Petitioners sought loan modifications. 

 

In one case, the borrower eventually obtained two loan modifications, obtaining attorney advice and review on the first modification, but not on the subsequent loan modification.  Rather, in the second loan modification, the servicer prepared the loan modification agreement and the borrower simply signed a document, acknowledging receipt of the notice informing the borrower that she could hire an attorney for advice about the loan modification and its consequences, including changes in interest rate, monthly payments, and principal balance. 

 

In the second case, which involved a commercial loan, the borrower received three successive loan modifications, the agreements for which were prepared using standard modification forms containing blanks to fill in with information supplied by loan officers.  The borrower received no legal advice during the loan modification process. 

 

The borrowers re-defaulted, and the loan owners filed foreclosure actions against the Petitioners.  Petitioners in turn petitioned the South Carolina Supreme Court, seeking a ruling that the loan modification agreements – and thus the mortgages -- were void because the loan owners supposedly had engaged in the unauthorized practice of law in preparing the agreements without attorney supervision or review.

 

Recognizing that the practice of law includes "the preparation of pleadings, and other papers incident to actions and special proceedings, and the management of such actions and proceedings on behalf of clients before judges and courts," as well as other fields requiring specialized legal knowledge, the South Carolina Supreme Court refused to adopt a hard rule as to what constitutes the practice of law. 

 

Nevertheless, in discussing the four steps involved in a real estate closing (title search; preparation of loan documents; closing; and recording), the Court stressed that such transactions require attorney supervision because they involve the disbursement of funds in connection with the sale of real estate.  The Court also noted that attorney supervision is required for the refinancing of mortgages, because such refinancing entails the same four steps involved in purchasing a property. 

 

Emphasizing that its unauthorized practice of law rules are grounded in consumer-protection concerns, the South Carolina Supreme Court distinguished the loan modification situation, which, as the Court explained, adjusts an existing loan to accommodate borrowers who have defaulted, from a refinancing or purchase loan situation where a lender issues an entirely new loan.  In so doing, the Court stated that "the same public policy that requires attorney supervision for home purchases and refinancing does not apply to loan modifications." 

 

Citing cost to the consumer, a system of regulatory checks, and "competent non-attorney professionals" as means of guarding against abuses, the South Carolina Supreme Court concluded that attorney supervision was not required in the context of loan modifications. 

 

Accordingly, having ruled that the preparation of loan modification agreements and recording the documents did not constitute the unauthorized practice of law, the Court did not address whether Petitioners' mortgages were void.

 

 

 

 

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: Illinois Sup Ct Rules TCPA Damages Insurable

The Illinois Supreme Court recently held that that the liquidated damages
provision of the federal Telephone Consumer Protection Act ("TCPA"), which
awards $500 per violation, is remedial rather than punitive, and therefore
is insurable under Illinois law.

The Illinois Supreme Court also held that an insurer is not estopped from
later relying on policy coverage defenses when the insurer either defends
against a sufficiently detailed reservation of rights or files a
declaratory judgment action.

A copy of the opinion is available at:
http://www.illinoiscourts.gov/Opinions/SupremeCourt/2013/114617.pdf

A real estate agency ("Agency") and a facsimile advertising company
("Company") entered into an agreement in which the Company allegedly
transmitted advertisement messages to approximately 5,000 fax numbers with
Illinois area codes. Unknown to the Agency, individuals and entities that
received these messages did not consent to receive fax advertisements. An
underlying class action was instituted, in which plaintiffs sought the
TCPA-prescribed damages of $500 per violation and injunctive relief.
Agency tendered defense to its insurer ("Insurer"). Insurer informed
Agency that the applicable policies may not cover the conduct alleged in
the class action, including, for example, that the TCPA may constitute a
penal statute, and that the applicable policies do not provide coverage
for willful violations of penal statutes.

Insurer agreed to defend Agency in the underlying class action under a
reservation of rights. Insurer informed Agency that Agency could waive a
conflict of interest and Insurer's possible coverage defenses and accept
counsel provided by Insurer ("Appointed Counsel"), or Agency could choose
their own attorney at Plaintiff's expense. Agency executed a waiver and
accepted the attorney selected by Insurer. Subsequently, Agency hired
their own personal counsel ("Personal Counsel"). Personal Counsel
explained the conflict of interest to Appointed Counsel, and asked
Appointed Counsel to withdraw. Subsequently, Agency and Personal Counsel
agreed to settlement of the underlying class action, which the district
court approved. Pursuant to the settlement agreement, the class action
plaintiff would only seek recovery from Agency's insurance policies.
Agency assigned its claims to class action plaintiff.

After Agency accepted representation by Appointed Counsel, Insurer
instituted a complaint for declaratory relief, seeking a declaration that
Insurer had no duty to defend or indemnify Agency. In their complaint,
Insurer alleged that the TCPA-prescribed damages of $500 per violation
constitute punitive damages, not insurable under Illinois law and public
policy.

The class action plaintiff filed an amended answer and counter-claim in
the declaratory judgment action, seeking a declaration that the policy at
issue required Insurer to defend and indemnify Agency for its conduct in
the underlying class action, and that the policy covered Agency for the
damages awarded in the underlying class action. Insurer and the
underlying class action plaintiff filed cross motions for summary
judgment. The circuit court granted summary judgment on Plaintiff's
complaint and denied summary judgment on the underlying class action
plaintiff's counterclaim. The appellate court affirmed, holding that
Insurer was not estopped from raising policy coverage defenses, and that
the TCPA-prescribed damages of $500 per violation constitute punitive
damages, which are not insurable as a matter of Illinois law and public
policy, and therefore not recoverable from Insurer.

The underlying class action plaintiff appealed to the Illinois Supreme
Court, arguing that Insurer is estopped from asserting defenses to the
insurance policy, and that TCPA-prescribed damages are insurable. The
Illinois Supreme Court affirmed in part and reversed in part, remanding
the case to the appellate court.

As you may recall, where a complaint against an insured alleges facts
within or potentially within coverage of the applicable policy, and when
the insurer takes the position that the policy does not provide coverage,
the insurer must: (1) defend the suit under a reservation of rights; or
(2) seek a declaratory judgment that there is no coverage. If the insurer
does not take either of these actions, it will be estopped from raising
policy coverage as a defense. State Farm Fire & Cas. Co. v. Martin, 186
Ill. 2d 367, 371 (1999); Clemmons v. Travelers Ins. Co., 88 Ill. 2d 469,
475 (1981).

In addition, a bare reservation of rights is insufficient. The
reservation of rights must refer specifically to the applicable policy
defense that may be asserted and that a potential conflict of interest may
exist. See Royal Ins. Co. v. Process Design Assoc., Inc., 221 Ill. App.
3d 966, 973 (1991). However, Insurers reservation of rights letter
specifically referred to the coverage defense and potential conflict of
interest regarding violation of penal statutes. Moreover, the reservation
letter included a list of policy defenses that Insurer intended to assert.
With this information, Agency knowingly accepted representation. The
Illinois Supreme Court therefore held that because Insurer agreed to
defend Agency through a detailed reservation of rights and filed a
declaratory judgment action, Insurer was not estopped from asserting
coverage defenses.

The Illinois Supreme Court next examined underlying class action
plaintiff's contention that TCPA-prescribed damages of $500 per violation
are insurable under Illinois law. The underlying class action plaintiff
asserted three alternative arguments. But the Illinois Supreme Court held
that, although punitive damages are uninsurable under Illinois law as a
matter of public policy, the TCPA is a remedial statute, and therefore,
the associated $500 penalty is not punitive and thus insurable.

Whether the TCPA is a penal statute is a matter of statutory
interpretation. As you may recall, in examining issues of statutory
interpretation, the court is "to give effect to the will of Congress, and
where its will has been expressed in reasonably plain terms, that language
must ordinarily be regarded as conclusive." Negonsott v. Samuels, 507
U.S. 99, 104 (1993) (quoting Griffin v. Oceanic Contractors, Inc., 458
U.S. 564, 570 (1982)). Further, the court may consider the justification
for the statute, the issues sought to be remedied, and the purposes to be
achieved. United States Nat'l Bank of Oregon v. Independent Ins. Agents
of America, Inc., 508 U.S. 439, 454-455 (1993).

In analyzing the TCPA within this context, the Illinois Supreme Court
acknowledged that Congress made several important findings, one of which
is that unrestricted telemarketing is intrusive. The purpose of the TCPA
is to protect the privacy of residents by restricting unsolicited
automated telephone calls to the home, and facilitating interstate
commerce by also restricting certain uses of fax machines.

The Illinois Supreme Court disagreed with the appellate court's holding -
the $500 penalty provision is penal because the actual damages incurred by
a TCPA violation are minimal; damages are predetermined, and are not meant
to compensate for actual harm. In reversing the appellate court's ruling,
the Illinois Supreme Court recognized the congressional purpose in
enacting the TCPA: to prevent advertisers from shifting the cost of
advertising to consumers, while preventing the use of facsimile machines
for legitimate purposes.

Also, the Court recognized that Congress intended the $500 penalty per
violation of the TCPA as incentive for private parties to enforce the
statute, because otherwise, enforcement would be unlikely given the actual
losses associated with TCPA violations are typically small. Also, the
individual violations of the TCPA, while small, are compensable and
represented by the liquidated sum of $500. Therefore, the $500 penalty
serves goals beyond punishment and deterrence. Lastly, the Illinois
Supreme Court acknowledged that Congress provided for treble damages under
the TCPA, but treble damages, which serve additional goals of deterrence
and punishment, are separate from the $500 penalty. Accordingly, the
Illinois Supreme Court held that the $500 penalty provision of the TCPA
are remedial and not punitive.

The Illinois Supreme Court thus affirmed in part and reversed in part the
judgment of the appellate court, and remanded to the appellate court for
further proceedings consistent with its ruling.



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:
http://updates.mwbllp.com

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