FYI: 9th Cir Reverses Lower Court's Remand of CAFA "Mass Action" Involving Numerous Banks, Servicers, and GSEs

Reversing the lower court, the U.S. Court of Appeals for the Ninth Circuit recently ruled that removal to federal court of a purported "mass action" was proper under the federal Class Action Fairness Act, and that the lower court had jurisdiction to sever the misjoined plaintiffs post-removal in order that they could pursue their claims individually, as the claims did not involve common questions of law or fact.

 

A copy of the opinion is available at:  http://cdn.ca9.uscourts.gov/datastore/opinions/2013/10/23/13-16747.pdf.

 

Over 100 named plaintiffs ("Plaintiffs"), who owned properties around the country and had loans involving different financial institutions, including banks, loan servicers and government-sponsored enterprises (collectively, "Defendants"), filed suit in California state court, alleging in part that Defendants engaged in improper lending and securitization practices.  Two of the Defendants removed the case to federal court, arguing that this case was a removable "mass action" under the Class Action Fairness Act, 28 U.S.C. § 1332(d)(11)(B)(i) ("CAFA").

 

In their post-removal amended complaint, Plaintiffs asserted state-law claims of invalid assignment, mistake, and negligence, alleging deceptive and unscrupulous lending and securitization practices and mismanagement of their loan modification applications. 

 

Defendants moved to dismiss, asserting misjoinder of parties and failure to state a claim.  Plaintiffs opposed the motion, arguing in part that Defendants had waived their right to challenge joinder when they removed the case. 

 

The lower court remanded to state court and denied as moot Defendants' motion to dismiss.  Reasoning that the case did not present common questions of law or fact for permissive joinder under Fed. R. Civ. Pro. 20(a), the lower court concluded that it lacked jurisdiction under CAFA.  Defendants appealed.

 

The Ninth Circuit reversed the lower court's order remanding the case to state court, concluding that CAFA conferred  jurisdiction over the proposed claims and that misjoinder did not deprive the lower court of federal jurisdiction.

 

As you may recall, CAFA confers federal jurisdiction over civil actions "in which monetary relief claims of 100 or more persons are proposed to be tried jointly on the ground that the plaintiffs' claims involve common questions of law or fact . . . ."  28 U.S.C. §1332(d)(11)(B)(i).  In addition, CAFA requires that a district court decline to exercise its jurisdiction "over a class action [or mass action] in which the plaintiff class and at least one defendant meet certain characteristics that . . . make the case a local controversy."  See Serrano v. 180 Connect, Inc., 478 F.3d 1018, 1022 (9th Cir. 2007); 28 U.S.C. § 1332(d)(4).

 

In ruling that the lower court misinterpreted CAFA, the Ninth Circuit pointed out that CAFA expressly contemplates the filing of putative mass action lawsuits in which claims of at least 100 persons are proposed to be tried jointly on the basis of common questions of law or fact.   Looking to the time of removal when over 100 plaintiffs were seeking a joint trial, the Court went on to explain that whether claims proceed to a joint trial is irrelevant because post-removal developments, such as a court's denial of class certification, do not defeat federal jurisdiction.  See United Steel, Paper & Forestry, Rubber, Mfg., Energy, Allied Indus. & Serv. Workers Int'l Union v. Shell Oil Co., 602 F.3d 1087, 1091-92 (9th Cir. 2010). 

 

As to Plaintiffs' argument based on the so-called "local controversy" exception (i.e., that because the original complaint concerned fewer than 100 properties the case had fewer than 100 "real" plaintiffs), the Ninth Circuit referenced CAFA's language indicating that the exception requires a court to decline to exercise the jurisdiction it already has.  In so doing, the Court pointed out that CAFA specifically refers to "persons" -- not properties -- and that the complaint in this case named 137 plaintiffs and thus satisfied CAFA's numerosity requirement for federal jurisdiction. 

 

Finally, as to joinder, the Court concluded that Plaintiffs' various claims did not satisfy the requirements of Fed. R. Civ. Pro. 20(a) for permissive joinder.  Because the claims involved over 100 loan transactions with many different lenders and the loans were secured by separate properties throughout the country, the Court pointed out that the factual dissimilarities among the transactions and claims precluded permissive joinder in this case, as they did not present questions of law or fact common to all Plaintiffs and required particularized factual analyses.  See Fed. R. Civ. P. 20(a)(1)(B). 

Thus, noting the "superficial similarity" of Plaintiffs' allegations and their choice of counsel as the only common factors, the Court reasoned that dismissal of all but the first named plaintiff was appropriate, stressing that dismissal would not prejudice the filing of individual actions.

Accordingly, ruling that misjoinder did not deprive the lower court of federal jurisdiction, the Ninth Circuit remanded the case back to the district court, instructing it to dismiss the claims of the misjoined plaintiffs, but to otherwise allow the case to proceed 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

 

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FYI: 8th Cir Rules Mere Demand For Rescission Insufficient to Exercise TILA Right to Rescind

The U.S. Court of Appeals for the Eighth Circuit recently ruled that a mere demand for rescission was insufficient to exercise the right to rescind under the federal Truth in Lending Act, and that the borrowers' right of rescission expired upon the foreclosure sale of the mortgaged property even though the borrowers demanded rescission prior to the foreclosure sale. 

 

In so ruling, the Court opined that the giving of notice was a "necessary predicate" to exercising the right of rescission, but that the filing of a rescission lawsuit prior to the foreclosure sale was required to "complete the exercise of that right." 

 

A copy of the opinion is available at:  http://media.ca8.uscourts.gov/opndir/13/08/121947P.pdf.

 

A married couple owned property that was recorded only in the name of the wife ("Wife"), who later quitclaimed the property to their daughter ("Daughter").   The husband ("Husband") did not sign the quitclaim deed.

 

While building an extension to the house he had built on the property, Husband encountered financial difficulties, but was unable to procure financing through traditional lenders.  Consequently, Wife, Husband, and Daughter (collectively, "Plaintiffs"), entered into a number of transactions with defendants lending consultants (collectively, "Lender") whereby (1) Plaintiffs transferred the property to Lender by warranty deed; (2) Lender obtained a loan from a bank and in turn loaned Plaintiffs $280,000 secured by a mortgage on the property for the same amount; (3) Plaintiffs entered into a contract for deed with Lender; and (4) Lender agreed to reconvey the property back to Wife and Daughter once Plaintiffs paid off the loan.  Under the contract for deed, Lender reserved the right to place a mortgage on the property for the amount of any future remaining loan balance. 

 

Several months later, requiring additional funds to complete the project, Plaintiffs amended the contract for deed to increase the principal amount of the loan to almost $500,000.  Having paid off the original loan and obtaining a new loan from defendant bank ("Bank"), Lender, pursuant to the original contract for deed, placed a mortgage on the property to secure the new loan from Bank.  Plaintiffs and Lender also assigned their respective interests in the contract for deed and the underlying property to Bank. 

 

Eventually, Plaintiffs increased the amount of the loan to over $650,000.  This time, Lender, and only Wife and Daughter modified the contract for deed to reflect the new amount.  Lender modified the note and mortgage with Bank, with all Plaintiffs joining in the modification as they had done previously.

 

Wife and Daughter fell behind on their payments on the contract for deed with Lender.  Lender served a statutory notice of cancellation of the contract for deed.  Shortly thereafter, Plaintiffs sent a letter to Lender and Bank, stating that they cancelled and rescinded all the loan transactions.  Bank responded that it could not rescind because it had no transactions with Plaintiffs.    Plaintiffs took no action to reinstate the contract for deed. 

 

Lender stopped making payments to Bank and Bank foreclosed.  The property was later sold at a sheriff's sale. 

 

Plaintiffs filed suit in a federal district court against Lender and Bank, seeking damages and rescission of all the transactions under the federal Truth in Lending Act, 15 U.S.C. § 1602 et seq. ("TILA"), as well as a declaratory judgment that the transactions constituted an equitable mortgage.   Bank and Lender filed answers and affirmative defenses, and Lender counterclaimed for unjust enrichment. 

 

Bank and Plaintiffs filed cross-motions for summary judgment.  Bank argued among other things that Plaintiffs' right to rescind under TILA was barred because they had not filed a timely lawsuit, the property had been sold at the foreclosure sale, and Daughter had no rescission rights because the property was not her primary residence.

 

Ruling in favor of Plaintiffs only as to the equitable mortgage issue, the lower court held that neither Husband nor Wife could rescind, as they no longer had an ownership interest in the property and Daughter was the sole owner of the property.  The lower court also concluded that Daughter had no rescission rights under TILA because the property was not her principal dwelling at the time of the transactions.  Bank and Plaintiffs moved for reconsideration, which the lower court denied.

 

The trial court also dismissed the TILA damages claim against Bank, reasoning that Bank was not an "assignee" for purposes of that claim.  After a jury trial on the remaining claims, the lower court entered judgment in favor of Bank and Lender, but ruled that Plaintiff's rescission notice was sufficient to exercise the TILA right of rescission. 

 

Plaintiffs appealed the dismissal of their various claims.  Bank cross-appealed, arguing that the lower court improperly concluded that Plaintiffs' notice was sufficient to rescind the transactions under TILA and that Plaintiffs no longer had the right to rescind because they failed to file a rescission action prior to the foreclosure sale.  

 

The Eighth Circuit reversed on the notice issue, but affirmed in all other respects, concluding that the foreclosure sale cut off Plaintiffs' right to rescind because they failed to file a rescission lawsuit prior to the sale. 

 

As you may recall, TILA provides that "in the case of any consumer credit transaction . . . in which a security interest . . . is or will be retained or acquired in any property which is used as the principal dwelling of the person to whom credit is extended, the obligor shall have the right to rescind the transaction . . . by notifying the creditor . . . of his intention to do so."  15 U.S.C. § 1635(a).  TILA further provides that a borrower's right of rescission expires three years from the date of the loan transaction or upon the sale of the property, whichever occurs first.  15 U.S.C § 1635(f).  In addition, TILA provides in pertinent part that "any civil action against a creditor for a violation of this subchapter . . .  with respect to a consumer credit transaction secured by real property may be maintained against any assignee of such creditor."  15 U.S.C. § 1641(e)(1).

 

Noting the split of authority among the federal circuits over whether filing a lawsuit is necessary to exercise rescission rights under TILA, the Eighth Circuit joined the Ninth and Tenth Circuits in concluding that while notice is necessary to exercise the right of rescission, it is not sufficient. 

 

In so ruling, the Eighth Circuit concluded that "the giving of notice is a necessary predicate act to the ultimate exercise of the right [to rescind]" but that "[g]iving notice, as the means by which one comes to 'have the right to rescind,' is not sufficient, in itself, to complete the exercise of that right."   See Rosenfeld v. HSBC Bank, 681 F.3d 1172, 1185 (10th Cir. 2012).

 

Faulting the lower court for its finding that Plaintiffs' notice was sufficient to exercise the right of rescission under section 1635, the Eighth Circuit concluded that Plaintiffs' right of rescission expired on the date of the foreclosure sale, and that their claim was barred because they had failed to file a rescission lawsuit prior to the sale.  In reaching this conclusion, the Court pointed out that the Official Staff Commentary to Regulation Z, TILA's implementing regulation, provides that a foreclosure sale would terminate an unexpired right to rescind.  See 12 C.F.R. §226.23(a)(3)(Supp. I 1195).  

 

Turning to Plaintiffs' claim against Bank for damages under TILA, the Court noted that the Plaintiffs' claim could not survive the lower court's judgment against them.  Based on the record before it, the Court determined that Plaintiffs' damages claim against Lender had no merit, and that because Bank's liability could be no greater than that of Lender Plaintiffs' claim against Bank could not be maintained.

 

The Eighth Circuit thus reversed the lower court's finding that Plaintiffs' rescission notice was sufficient to exercise the right to rescission under TILA, but affirmed the dismissal of their claims.

 

 

 

 

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

 

Admitted to practice law in Illinois

 

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FYI: 1st Cir Affirms Dismissal of Challenge to Servicer's Requirement of Flood Insurance at More than the Federal Minimum

The U.S. Court of Appeals for the First Circuit recently affirmed the dismissal of a borrower's breach of contract claim challenging a loan servicer's requirement that borrower obtain flood insurance at more than the federally mandated minimum amount. 

 

The Court held that, understood in the context of the relevant regulatory schemes from which the contract provision arose, the federal requirement for flood insurance coverage was a floor -- not a ceiling -- and that lenders may require additional insurance.

 

A copy of the opinion is available at: http://media.ca1.uscourts.gov/pdf.opinions/11-2030P2-01A.pdf

 

Plaintiff-appellant ("Borrower") purchased a home located in an area designated as having "special flood hazards."  To purchase the property, Borrower obtained a mortgage loan guaranteed by the Federal Housing Administration ("FHA").  The mortgage agreement contained the following Uniform Covenant, which was required to be in every FHA-insured mortgage by the Department of Housing and Urban Development ("HUD"):

 

4. Fire, Flood and Other Hazard Insurance.  Borrower shall insure all improvements on the Property, whether now in existence or subsequently erected, against any hazards, casualties, and contingencies, including fire, for which Lender requires insurance.  This insurance shall be maintained in the amounts and for the periods that Lender requires.  Borrower shall also insure all improvements on the Property, whether now in existence or subsequently erected, against loss by floods to the extent required by the Secretary.

 

Although the original mortgage lender never required Borrower to maintain flood insurance in excess of the outstanding loan balance, defendant-appellee ("Servicer") required coverage up to the replacement cost of the property.  Borrower complied and purchased such insurance on his own.

 

Borrower then filed a putative class action against Servicer, claiming breach of the mortgage contract and violation of the implied covenant of good faith and fair dealing by requiring additional flood insurance.  The district court granted Servicer's motion to dismiss all claims, finding that Covenant 4 unambiguously gave Servicer the right to choose the amount of flood insurance it required.  Borrower appealed and a divided panel of the First Circuit vacated the dismissal.  Subsequently, the First Circuit granted rehearing and, in an evenly divided en banc court, vacated the panel's decision.

 

As you may recall, under the law of contracts, courts must interpret contract language in the context of the relevant commercial or regulatory schemes within which the contract is situated.  See Simonson v. Z Cranbury Assocs. P'ship, 695 A.2d 222, 224 (N.J. 1997); Restatement (Second) of Contracts §202 cmt. b.  Because uniform contracts are interpreted the same across cases whenever reasonable, extrinsic evidence about what a particular party intended or expected when signing the contract is generally irrelevant.  See, e.g., Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039, 1048 (2d Cir. 1982).

 

The Court also noted that, for homes in areas designated  as having "special flood hazards," HUD requires that flood insurance must be maintained in "an amount at least equal to either the outstanding balance of the mortgage… or the maximum amount of the NFIP insurance available with respect to the property improvements, whichever is less."  24 C.F.R. §203.16a(c).

 

Rehearing the case en banc, the First Circuit was evenly divided on the issue of whether the amount of flood insurance coverage required by HUD is a floor or ceiling.  In the First Circuit, the result of an evenly divided vote of the en banc court is to affirm the district court's dismissal of the complaint for failure to state a claim.  See Savard v. Rhode Island, 338 F.3d 23, 25 (1st Cir. 2003).

 

In an opinion by the Chief Judge Lynch, joined by two Circuit Judges, the First Circuit concluded that Borrower failed to state a claim for breach of contract. 

 

In reaching its decision, the Court held that, when dealing with uniform contract language drafted by the United States, the meaning of the United States controls.  According to the Court, although Covenant 4 appears in a contract between private parties, it derives from a duly enacted HUD regulation, in which HUD promulgated the language and mandated that private parties include such language in FHA-insured mortgage contracts.  Thus, courts must examine the text of the Covenant in light of the purposes for which the United States imposed the language and the context of the relevant regulatory scheme.

 

Turning to the text of Covenant 4, the First Circuit determined that the first two sentences allow the Lender to choose the amount of insurance for "any hazards," which includes flood insurance because floods are hazards.  The third sentence, on the other hand, adds an independent requirement that Borrower maintains HUD's minimum level of flood insurance in addition to the lender's minimum.  Understood in the context of federal housing policy, the Court observed that treating this requirement as a floor was the "only reasonable interpretation" of Covenant 4.

 

Additionally, the First Circuit held that Borrower's claim for breach of the covenant of good faith and fair dealing failed.  Specifically, the Court determined that Borrower did not suffer any harm.  Although Borrower did end up with more insurance than he would have chosen to purchase on his own, he "unquestionably" received value for the additional cost, namely sufficient insurance to rebuild his home in the event of a flood.  Moreover, Servicer did not act unreasonably in requiring greater insurance coverage.

 

In an opposing opinion, Circuit Judge Lipez, joined by two other Circuit Judges, stated that the First Circuit's decision constituted an "extraordinary intervention into the contractual dealings of two parties."  For the opposing Judges, the government's "newly announced view and policies" cannot justify the Court's decision.  Rather, applying ordinary contract principles, Borrower should be entitled to show that his understanding of the hazard insurance provision reflects the actual intent of the contracting parties at the time of execution.

 

 

 

 

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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