FYI: 2nd Cir Holds Settlement Offer of Full Amount Sought Not Equal to Offer of Judgment, Ethical Violations by Pl's Counsel Not Enough to Deny Fees

The U.S. Court of Appeals for the Second Circuit recently upheld an award of attorney's fees to the plaintiff in an action under the federal Fair Debt Collection Practices Act, where the defendant's offer to settle for the full amount of statutory damages did not include an offer of judgment and thus in the view of the Court did not resolve the case, including as to subsequent litigation of the amount of the plaintiff's attorney's fees.  

 

The Court also ruled that any alleged ethical violations on the part of plaintiff's attorney did not provide a basis for denying fees to the plaintiff, partly because the attorney's fees were reasonable for the work performed.

 

A copy of the opinion is available at:  Link to Opinion

 

In an action under the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692 ("FDCPA"), defendant attorney ("Attorney"), offered to settle for $1001, the maximum statutory damages plaintiff was entitled to under the FDCPA plus $1.   Attorney also offered, as required by the FDCPA, to pay plaintiff's attorney's fees and costs, leaving to the court the determination as to the amount of such fees.      

 

Seeking to avoid entry of judgment, Attorney later argued that the original offer mooted the action and that he would thus not be liable for any further attorney's fees accrued by plaintiff, because the offer included maximum recoverable damages for the underlying violation. 

 

In response, the plaintiff requested a lump sum settlement including attorney's fees, arguing that the settlement offer also needed to include an offer of judgment in order to render any award of attorney's fees judicially enforceable.  The plaintiff's counsel also refused to provide Attorney with her fee records but was willing to have the court determine the amount of fees if Attorney filed an offer or stipulation of judgment.

 

The parties eventually jointly stipulated for judgment in plaintiff's favor, with damages set at the $1000 statutory maximum.   The stipulation also requested the court to determine the amount of attorney's fees and costs. 

 

In the subsequent litigation over the amount of attorney's fees, Attorney argued that the settlement offer mooted further litigation and that, by failing to communicate the original settlement offer to the plaintiff, plaintiff's counsel acted unethically even though the offer did not include an offer of judgment.  

 

The lower court, noting that there was a sincere dispute over the "nature and form" of the settlement, concluded that Attorney's original offer did not moot the action and that Attorney should pay reasonable attorney's fees incurred during the continuing litigation over the amount of such fees.    The lower court ordered Attorney to pay the plaintiff the full amount of the requested fees, over $32,000.  Attorney appealed. 

 

The Second Circuit affirmed, concluding that the award for attorney's fees properly included fees for work performed after the original settlement offer.

 

As you may recall, under the FDCPA the prevailing party is entitled to reasonable attorney's fees.  See 15 U.S.C. § 1692k(a)(3).  In addition, Federal Rule 68 provides that a plaintiff who rejects an "offer of judgment" and later fails to obtain greater relief may not recover any costs accruing after the date of rejection.  See Fed. R. Civ. P. 68 ("Rule 68").

 

Noting that Attorney sought to avoid entry of judgment that would have ended the litigation, the Second Circuit rejected Attorney's assertions that the original offer for the maximum statutory penalty (1) rendered the underlying action moot or (2) was equivalent to an offer of judgment under Rule 68.  See McCauley v. Trans Union, L.L.C., 402 F.3d 340 (2d Cir. 2005)(ruling that unaccepted offer of settlement for full amount of damages did not "moot" a case and that proper disposition was to enter judgment against the defendant for the proffered amount and to direct payment to plaintiff consistent with the offer, resolving the controversy).  

 

In so doing, the Court observed that Attorney never moved for dismissal of the case or challenged the judgment of FDCPA liability and that, because the parties continued to dispute the extent of the attorney's fees plaintiff was entitled to, the case never became moot. 

 

Turning to the question as to the propriety of litigating the case after the original settlement offer, the Second Circuit noted the lower court's conclusion that there remained a substantive dispute over the "nature and form" of the settlement and that the amount of attorney's fees was reasonable.  

 

Specifically, the Appellate Court pointed out that had Attorney made an offer of judgment in accordance with Rule 68, the plaintiff would have had to bear the costs of additional litigation if plaintiff had failed to win more than what Attorney had offered.  Cf. Doyle v. Midland Credit Management, Inc., 722 F.3d 78, 80-81 (2d Cir. 2013)(ruling that an offer of judgment that satisfied an FDCPA claim left no conflict over the nature and form of settlement).  Without an offer of judgment, the Court explained, a settlement agreement by which the defendant agrees to pay in exchange for dismissal of the plaintiff's action only creates a contract between the parties, whereas a judgment provides a judgment creditor with enforcement mechanisms.  Accordingly, the Court declined to rule that Attorney's offer of settlement without judgment was equivalent to a Rule 68 offer of judgment.

 

Finally, in rejecting Attorney's assertion that the alleged ethical violations on the part of plaintiff's counsel was a basis to deny attorney's fees, the Second Circuit noted that attorney's fees in FDCPA actions are awarded to the prevailing party, not to his attorney, and that a fee litigation proceeding was not the proper forum for addressing ethical violations. 

 

In addition, not having identified any errors in the lower court's determination as to the reasonableness of the attorney's fees for the work performed, the Second Circuit upheld the lower court's award of full attorney's fees to the plaintiff.

 

 

 

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: 7th Cir Soundly Rejects "Forced Place" Insurance Claims

The U.S. Court of Appeals for the Seventh Circuit recently rejected a borrower's assertions that a lender fraudulently placed insurance on her property and supposedly received an improper "kick-back" in connection therewith, finding that the lender's actions were provided for by contract, and therefore not fraudulent. 

 

A copy of the opinion is attached. 

 

A borrower executed a loan agreement with a lender providing that she was required to maintain property insurance on the subject property.  The agreement also provided that the lender could purchase insurance for the property should the borrower fail to do so; that such insurance could cost more, and provide less coverage, than insurance purchased by the borrower; that the costs for such insurance would be passed on to the borrower; and that the premium might include compensation for the lender.     

 

When the borrower's insurance lapsed, the lender sent her several letters requesting that she provide proof of insurance, and noting that should she fail to do so, the lender would purchase insurance for the property and charge the borrower. 

 

The borrower did not respond to the lender's letters, and the lender secured an insurance policy for the property.  The borrower then sued both the lender and the insurance company who issued the policy, alleging that their conduct was fraudulent and deceptive because among other things, they did not disclose that the lender was receiving "kickbacks" from the insurance company.  In connection with this claim, the borrower advanced claims for violations of the Illinois Consumer Fraud and Deceptive Business Practices Act (the "ICFA"), among others. 

 

The lender and the insurance company moved to dismiss for failure to state a claim, advancing several alternative grounds for dismissal.  The lower court held that the borrower's claims were preempted by regulations issued by the Office of Thrift Supervision, and the filed-rate doctrine, and granted the motion to dismiss.  The borrower appealed.

 

On appeal, the Seventh Circuit began by noting that it was not clear whether the lender's preemption and filed-rate doctrine arguments were well-taken.  However, the Court found it unnecessary to reach the issue, as it held that dismissal of the borrower's complaint was proper in that the borrower failed to state any viable claim for relief. 

 

Specifically, the Seventh Circuit held that "[t]he loan agreement and [the lender's] disclosures, notices, and correspondence conclusively defeat any claim of fraud, false promise, concealment, or misrepresentation."  Accordingly, the Court determined that there was nothing "unfair" or "deceptive" about the lender's conduct, and thus found the borrower's claims under the Act failed. 

 

The borrower argued that the lender's actions were coercive even if they were not deceptive - and thus sufficient to state a claim for "unfair" conduct under the ICFA.  The Seventh Circuit again disagreed, observing that "putting a party to the choice specified in the parties' contract...is not coercion."  In addition, the Seventh Circuit emphasized that the borrower at all relevant times had the right and the opportunity to purchase her own insurance, but failed to do so.

 

Next, the borrower argued that the commission paid to the lender by the insurance company constituted an illegal "kickback."  However, the Seventh Circuit observed that "simply calling the commission a kickback doesn't make it one."  The Court therefore reviewed the applicable case law, and determined that "the defining characteristic of a kickback is divided loyalties" - in that "an agent charged with acting for the benefit of a principal accepts something of value from a third party in return for steering the principal's business to the third party." See Johnson v. Matrix Fin. Servs. Corp., 820 N.E.2d 1094, 1100 (Ill. App. Ct. 2004). 

 

Here, however, the Seventh Circuit found no evidence of divided loyalties.  Instead, the "lender was subject to an undivided loyalty to itself, and it made this clear from the start." 

 

Accordingly, the Seventh Circuit found little merit in any of the borrower's arguments related to alleged "kickbacks" - which included claims for breach of contract and common-law fraud. 

 

As to the breach of contract allegations, the Seventh Circuit noted that "[n]othing in the loan agreement...prohibits [the lender]...from receiving a fee or commission when lender-placed insurance becomes necessary." 

 

As to the common law fraud allegations, the Court observed that the common premise among the borrower's various allegations in connection therewith was that had she known of the alleged kickbacks, she would not have paid the premiums for the lender-placed insurance.  The Seventh Circuit termed this argument "senseless," in that "[l]osing an opportunity to breach a contract cannot constitute a cognizable fraud harm." 

 

Accordingly, the Seventh Circuit affirmed the decision of the lower court, on the grounds that the borrower failed to state a viable claim for relief.    

 

 

 

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: Cal App Ct Holds GSE Forbearance Agreement Imposed "Good Faith" Duty to Evaluate for Foreclosure Alternatives

The California Court of Appeal, Fourth District, recently ruled that a GSE forbearance agreement provided incident to a HAMP loan modification application imposed a duty on a loan servicer to act in good faith to evaluate the borrower for a loan modification or other foreclosure alternatives, and therefore that the borrower should be granted leave to amend his complaint to allege causes of action for negligence, fraud/misrepresentation, breach of contract, and unfair business practices in violation of the California Business and Professions Code.    

 

In so ruling, the Court concluded in part that, although there was no requirement in the forbearance agreement to offer or approve a loan modification, the good faith duty required the servicer to evaluate options to foreclosure, and that the servicer improperly foreclosed after informing the borrower that no foreclosure would occur while he was being considered for a loan modification or other non-foreclosure options.

 

A copy of the opinion is available at:  http://www.courts.ca.gov/opinions/documents/G046799.PDF.

 

Plaintiff borrower ("Borrower") obtained a home mortgage refinancing loan that was secured by a trust deed against Borrower's property.   About two years after the refinancing, Borrower requested a loan modification under the Home Affordable Modification Program ("HAMP").  Instead of a loan modification, defendant loan servicer ("Servicer") and Borrower entered into a forbearance agreement whereby Borrower would make reduced mortgage payments for a period of up to six months.  The forbearance agreement, part of a broader program instituted by a federal government-sponsored enterprise ("GSE"), expressly stated that Servicer would suspend any scheduled foreclosure sale as long as Borrower continued to meet his payment obligation under the forbearance agreement. 

 

The forbearance agreement further provided among other things that at the end of the forbearance period, Borrower would have to either resume regularly scheduled loan payments or reinstate his loan in full, that Servicer would offer to modify the loan or, if no foreclosure alternative could be identified, Servicer could foreclose in accordance with the original loan agreement.

 

As guidance to loan servicers, the GSE issued an announcement (the "Announcement") stating in part that loan servicers (1) "should offer" the forbearance program if borrowers have a willingness and ability to make the reduced monthly payments, (2) "should work" with borrowers during the six-month period of forbearance to identify the feasibility of, and implement, a more permanent foreclosure prevention alternative, (3) "should evaluate and identify" a permanent solution during the first three months of the forbearance period, and (4) "should implement" the alternative by the end of the sixth month.

 

Borrower made the requisite payments under the forbearance agreement, but Servicer allegedly did not work with Borrower to evaluate him for a more permanent solution.  Meanwhile, however, Borrower submitted the information and documentation needed to apply for a HAMP loan modification.  Nevertheless, while waiting for Servicer's determination, he received a notice of default and, several months later, received a notice of trustee's sale.   

 

Servicer eventually orally offered Borrower a HAMP loan modification, which he allegedly accepted, but  also sent Borrower inconsistent communications stating that he was not eligible for HAMP but was being considered for other foreclosure alternatives, that his home would not be sold during the review period, and that he was being considered for a HAMP modification.  After being informed that the communications had been sent in error, Borrower followed up with Servicer, GSE, and the California Attorney General's Office, to find out whether a foreclosure sale would occur and whether he was eligible for a loan modification.  The foreclosure sale nevertheless took place about three months after the date of the notice of trustee's sale.

 

Borrower filed suit, alleging negligence, breach of contract, fraud/misrepresentation, violation of California Code section 2923.5 for improper foreclosure procedures, and violation of California's unfair competition law ("UCL").  The complaint also sought to quiet title.  Servicer and GSE demurred.  The lower court sustained the demurrer without leave to amend and dismissed with prejudice.  Borrower appealed. 

 

The Court of Appeal affirmed in part and reversed in part.

 

In reviewing Borrower's negligence claim that Servicer breached a duty of care in mishandling his application for a loan modification, refusing to offer him a loan modification, and foreclosing his property, the Appellate Court noted that lenders generally do not owe a duty of care to borrowers.  However, the Court examined six factors that may affect a court's determination as to whether a lender owes such a duty to a borrower.  Those factors are:  (1) the extent to which the transaction was intended to affect the plaintiff; (2) the foreseeability of harm to the plaintiff; (3) the degree of certainty that the plaintiff suffered injury; (4) the closeness of the connection between the defendant's conduct and the injury suffered; (5) the moral blame attached to the defendant's conduct; and (6) the policy of preventing future harm.  See Biakanja v. Irving, 49 Cal.2d 647 (1958); Nymark v. Heart Fed. Sav. & Loan Assn., 231 Cal.App.3d 1089, 1098 (1991).

 

Noting that other state and federal courts have concluded that a lender might owe a duty of care to a borrower under certain circumstances, the California Appellate Court ultimately concluded that a loan modification is the renegotiation of a loan and that the six factors listed did not support the imposition of a common law duty to offer or approve a loan modification.  

 

According to the Court, a lender's obligation to offer, consider, or approve a loan modification and to explore foreclosure alternatives were created by the loan documents, controlling law, and any directives and announcements from governmental or quasi-governmental entities, such as the GSE here.  As the Court explained, if Borrower's inability to repay his loan created the need for a loan modification, the harm suffered from denial of the loan modification would not be closely connected to the lender's conduct.

 

The Court further concluded that Borrower failed to state a negligence claim because he had failed to allege that Servicer did anything improper that made him unable to make the original monthly payments.  Notably, Borrower did not allege that Servicer caused his initial default by negligently servicing the loan, but rather alleged that Servicer owed him duties to "follow through on their own agreements," which, the Court pointed out, were contract-based allegations.  Nevertheless, noting that there was a "reasonable possibility" that Borrower could amend his complaint to state a cause of action for negligent misrepresentation, the Court of Appeal reversed and remanded to allow Borrower the opportunity to amend his complaint to state such negligent misrepresentation claim.

 

Turning to the breach of contract claim, the Appellate Court first rejected Borrower's argument that Servicer had an ongoing obligation to suspend the foreclosure because the deferral period had not ended.  The Court then went on to examine whether Servicer had an obligation under the forbearance agreement in light of the Announcement's guidelines.   Concluding that the duty to act in good faith in working with a borrower was imposed "expressly" in the forbearance agreement through the Announcement, the Court focused on the term "should" used repeatedly in the Announcement. 

 

In so doing, the Court rejected Servicer's assertion that "should" was entirely permissive and imposed no obligations on loan servicers.  The Court stated, "[t]he sense of moral obligation, strong recommendation, preference, or propriety imparted by the word 'should' equates with good faith; that is, although [Servicer] had no contractual duty to offer [Borrower] a loan modification or an alternative to foreclosure, it had a contractual duty to work with him to identify the feasibility of . . .  [foreclosure alternatives] and to do so in good faith." 

 

The Appellate Court thus ruled in part that Borrower should be granted leave to amend to state a claim for breach of contract in light of its interpretation of the forbearance agreement and the Announcement, noting that although the forbearance agreement did not impose an obligation on Servicer to offer Borrower a loan modification or an alternative to foreclosure, Servicer's discretion to work with Borrower should be exercised in good faith.

 

As to the alleged violation of California Code Section 2923.5's requirement to contact Borrower to assess his financial situation prior to filing a notice of default, the Court noted that the only remedy under that section is a one-time postponement of the sale.  Because Borrower never sought postponement of the sale, the Court reasoned that Borrower could not state a cause of action under Section 2923.5 and accordingly affirmed the lower court's dismissal of that claim.

 

Next, the Appellate Court turned to Servicer's assertion that Borrower lacked standing to assert a UCL claim under California's Business and Professions Code Section 17204.  The Court observed that the allegation that Borrower's home was sold at the foreclosure sale satisfied the economic injury requirement for standing but that Borrower's complaint did not satisfy the "causation" element.   See Kwikset Corp. v. Superior Court, 51 Cal.4th 310, 322 (2011)(holding that standing requires a plaintiff to show both injury in fact and that such injury was caused by the defendant's unfair business practice).  

 

With regard to the sufficiency of Borrower's UCL allegations, the Court again reasoned that, although the forbearance agreement did not require Servicer to offer Borrower a loan modification, the agreement did impose a duty to act in good faith to evaluate and try to identify a permanent foreclosure alternative.  Thus, the Court concluded that Borrower should be granted leave to amend as to the causation element and Servicer's misrepresentations that it would not proceed with the foreclosure sale.

 

With respect to the fraud/misrepresentation claim, the Appellate Court allowed Borrower to amend to show detrimental reliance on Servicer's misrepresentations as to the suspension of the foreclosure sale, noting that he already had the obligation to make loan payments and that assembling the materials needed for a loan modification constituted merely nominal damages. 

 

Finally, the Court rejected Borrower's assertion that tender of the full payment of the loan was not necessary in order to maintain a quiet title action, thus affirming the lower court's ruling on that cause of action.  With respect to the other causes of action, however, the Court of Appeal reversed and remanded with instructions to grant leave to amend.    

 

 

 

 

 

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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