FYI: ED Va Rules Debt Collector Properly Identified Loan Servicer as "Creditor to Whom Debt Is Owed" Under FDCPA

The U.S. District Court for the Eastern District of Virginia recently dismissed all of a group of borrowers' claims against a foreclosure law firm and substitute trustees, ruling that the loan servicer was properly identified as "the creditor to whom the debt is owed" under section 1692g(a)(2) of the FDCPA in their "debt validation" or "1692g" notices, and entitled to appoint substitute trustees under the deed of trust. 

 

A copy of the opinion is attached.

 

Following the foreclosure sale of their home, Borrowers filed suit challenging the sale.  In addition to claims against the lender, Borrowers sued the Foreclosure Law Firm and Substitute trustee each for violations of the federal Fair Debt Collection Practices Act, 15 U.S.C. §1692, et seq., ("FDCPA") and breach of fiduciary duty. 

 

Borrowers asserted three counts under the FDCPA.  First Borrowers claimed that the loan servicer was improperly identified as creditor in the initial communication under Section 1692g.  Second, Borrowers claimed the amount of the debt was falsely stated in violation of Section 1692e.  Third, Borrowers claimed that that the Foreclosure Firm and Substitute Trustee committed unfair and deceptive trade practices in violation of Section 1692f(6), by claiming a right that did not exist.  Notably, Borrowers argued that the loan servicer was not the holder of the loan, and that only the owner of the loan could appoint trustees to foreclose, as opposed to the loan servicer.   

 

Likewise, Borrowers' breach of fiduciary claim alleged that the Substitute Trustee and Foreclosure Firm breached the fiduciary duty owed to Borrowers under the Deed of Trust, by failing to seek aid and direction from the court and proceeding to foreclose with knowledge that Borrowers were seeking a loan modification, and were seeking to reinstate within 5-days of the foreclosure sale, despite having no such right under the Deed of Trust.

 

As you may recall, Section 1692g(a) of the FDCPA requires, among other things, that within 5-days of a debt collector's initial communication, the debt collector identify "the name of the creditor to whom the debt is owed."  15 U.S.C. §1692g(a)(2). 

 

Section 1692e(2) prohibits a debt collector from using "any false deceptive, or misleading representation or means in connection with the collection of any debt… [including t]he false representation of… the character, amount, or legal status of any debt."  15 U.S.C. §1692e(2). 

 

Section 1692f(6) prohibits a debt collector from using "unfair or unconscionable means to collect or attempt to collect any debt… [including t]aking or threatening to take any nonjudicial action to effect dispossession or disablement of the property if… there is no present right to possession of the property claimed as collateral through an enforceable security interest."  15 U.S.C. §1692f(6).

 

Considering the identification of the "creditor" under the FDCPA, the Court determined that "[a]lthough the precise issue has apparently not been addressed by the Fourth Circuit, the overwhelming weight of persuasive authority from the other circuit courts as well as district courts in this Circuit compel the conclusion that the terms 'creditor' and 'debt collector' under the FDCPA are mutually exclusive."  Slip Op. at 16. 

 

In determining which of the two definitions applies, the Eastern District of Virginia noted that courts have looked to the status of the debt at the time it was acquired.  See id.  Under 15 U.S.C. §1692a(6)(F)(iii), the term "debt collector" does not include "any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity… concerns a debt which was not in default at the time it was obtained by such person."

 

In dismissing Borrowers' claim of misidentifying the creditor, the Court noted that the Borrowers alleged that the servicer was the originator of their loan and had retained the servicing rights to their loan.  Therefore, because the loan servicer had acquired its servicing rights before default, it is a "creditor" under the plain language of the statute and, as a matter of law, as a "creditor" it cannot also be a "debt collector."  See Slip Op. at 17. 

 

Consequently, the Court held that the notice to Borrowers identifying the loan servicer as the "creditor" to whom they owed a debt did not misidentify the party to whom the debt was owed and did not give rise to a plausible claim to relief against either Substitute Trustee or Foreclosure Firm under 15 U.S.C. §1692g(a)(2).  See id.

 

As to Borrowers' claim of falsely representing the amount of the debt, the Court determined that, to plead false representation under the FDCPA, Borrowers must show that the representations are material.  Thus, the Court determined that the Borrowers mere allegations that the statement is false was insufficient to state a claim for an alleged false representation of the amount of the debt.  See id. at 29.

 

Considering the Substitute Trustee's authority to foreclose under Section 1692f(6) of the FDCPA, the Court recognized the loan servicer's ability to appoint Substitute Trustees.  Notably, in construing Virginia Code Section 55-59(9), which affords the secured party the right and power to appoint a substitute trustee, courts have not determined it "to mean that only the secured party or noteholder itself may appoint a substitute trustee, and have instead upheld the right of loan servicing entities, acting as agents, to do so."  Slip Op. at 22. 

 

Although Borrowers argued that loan servicer's obligations did not include the right to appoint a substitute trustee, the Court determined that the servicer was empowered to initiate foreclosure proceedings and therefore, had the authority to appoint the Substitute Trustee to conduct the foreclosure.  See id. at 23-24.

 

As to the breach of fiduciary duty claim against Substitute Trustee, the Court found that although a deed of trust gives rise to certain fiduciary duties, "a trustee only owes those duties listed in the deed of trust itself.  A trustee under a deed of trust has no due diligence duty. . . Further, there is no common law duty of impartiality incumbent upon a trustee."  Slip Op. at 25-26.  Rather, "[Substitute Trustee's] only affirmative duty under the Deed of Trust with respect to [Borrowers] was its duty to give them notice of the foreclosure sale."  Id. at 26. Accordingly, the Court determined that Borrowers did not assert a breach of any duty arising out of the Deed of Trust, and that no duty of impartiality is recognized at common law.

 

As to the Foreclosure Firm, the Court determined that there is no basis upon which Borrowers may allege the breach of any duty.  Because there is no privity between Borrowers and Foreclosure Firm, there can be no claim for any breach of any duty in contract.  "[Foreclosure Firm] is not the lender, the noteholder, the loan servicer, the trustee, or the substitute trustee, and no attorney-client relationship existed between it and [Borrowers]. Indeed, not even [Substitute Trustee], [Foreclosure Firm's] principal, is a party to the contract.  Accordingly, there is no basis upon which [Borrowers] may allege the breach of any duty against [Substitute Trustee's] agent, [Foreclosure Firm]."  Id. at 29.

 

Accordingly, the Court granted the motion to dismiss filed by Substitute Trustee and Foreclosure Firm, but denied the motion to dismiss filed by the lender and loan servicer, which sought dismissal on other grounds.

 

 

 

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 Sup Ct Rules in Favor of Lender/Mortgagee on Significant Illinois Foreclosure Procedure Issues

The Illinois Supreme Court recently ruled that the trial court properly denied a motion to vacate a default judgment of foreclosure, where the foreclosing lender had not yet filed a motion to confirm the sale and the borrower had ample opportunity to challenge the underlying action.   

 

In so doing, the Court concluded that once a motion to confirm the judicial sale is filed, the Illinois Mortgage Foreclosure Law ("IMFL") applies to a motion to vacate a default judgment of foreclosure, because the IMFL provides that the property interests of the borrower are terminated by judicial sale, "provided the sale is confirmed."   

 

A copy of the opinion is available at:  http://www.state.il.us/court/Opinions/SupremeCourt/2013/115469.pdf.

 

Defendant borrower ("Borrower") defaulted on the home mortgage loan she obtained from plaintiff bank ("Bank").  Bank initiated foreclosure proceedings under the Illinois Mortgage Foreclosure Law, 735 ILCS 5/15-1101 et seq. ("IMFL"), but Borrower did not answer or otherwise respond to the complaint.  

 

The trial court entered a default judgment, indicating the expiration of the redemption period and the time the property would be sold at a judicial sale.  On the date set for the judicial sale, Borrower sought to stay the sale and to vacate the default judgment.  The parties subsequently agreed to postpone the judicial sale to allow Borrower time to negotiate a loan modification agreement with Bank.  

 

Attempts at a loan modification failed, and Bank later purchased the property at the ensuing judicial sale.  Borrower filed a new motion to vacate the default judgment and to set aside the sale pursuant to Section 2-1301(e) of the Illinois Code of Civil Procedure (the "Code of Civil Procedure"), asserting that Borrower had meritorious defenses to the foreclosure. 

 

The trial court denied Borrower's motion to vacate, concluding that she had waived her objections to the default and had agreed with Bank to allow the foreclosure sale to go forward if she failed to obtain a loan modification.  The trial court also confirmed the judicial sale, finding that the foreclosure was conducted properly.  Borrower appealed.

 

The Appellate Court reversed, rejecting the reasoning in Mortgage Electronic Registration Systems, Inc. v. Barnes, 406 Ill. App. 3d 1 (2010) and ruling that the IMFL did not preclude granting relief under the Code following a judicial sale if the moving party can present a valid excuse for lack of diligence and a meritorious defense to the underlying judgment.  The Appellate Court remanded to the lower court to consider Borrower's motion pursuant to the standards under Section 2-1301(e) of the Code. 

 

Bank petitioned the Illinois Supreme Court for leave to appeal, which the Court granted. 

 

The Illinois Supreme Court reversed, concluding that once a motion to confirm the judicial sale is filed, the IMFL provides the only basis for non-confirmation of the sale, but that prior to the filing of a motion to confirm foreclosure sale, a borrower may seek to vacate under the standards set forth in the Code.  

 

Section 15-1508(b) of the IMFL provides "[u]pon motion and notice in accordance with court rules applicable to motions generally, which motion shall not be made prior to sale, the court shall conduct a hearing to confirm the sale.  Unless the court finds that (i) a notice [of the sale] . . . was not given, (ii) the terms of sale were unconscionable, (iii) the sale was conducted fraudulently or (iv) that justice was otherwise not done, the court shall then enter an order confirming the sale."  735 ILCS 5/15-1508(b) ("Section 1508(b)").   

 

Section 2-1301(e) of the Code, however, is generally available to seek relief from a default judgment.  Specifically, that provision sets forth the terms under which the court may exercise its discretion to set aside any default:   "The court may in its discretion, before final order or judgment, set aside any default, and may on motion filed within 30 days after entry thereof set aside any final order or judgment upon any terms and conditions that shall be reasonable."  735 ILCS 5/2-1301(e).

 

Noting that the IMFL controls procedures in a foreclosure action where it is inconsistent with the Code, the Illinois Supreme Court undertook to determine whether the standards applicable to a motion to vacate a default judgment under the Code are "inconsistent" with the sale confirmation procedures under Section 15/1508(b) and must accordingly yield to the IMFL.  In so doing, the Court pointed out that the order confirming a judicial sale, rather than the foreclosure judgment, operates as the final and appealable order in a foreclosure case.  See EMC Mortgage Corp. v. Kemp. 2012 IL  113419, ¶ 11. 

 

The Court further observed in part that in considering whether to set aside a default judgment under the Code of Civil Procedure, "the overriding question is 'whether substantial justice is being done between the litigants,'" and that the defendant need not "show a meritorious defense and a reasonable excuse for failing to timely assert such defense." 

 

In rejecting Bank's assertion that allowing a motion to vacate a default judgment of foreclosure after the judicial sale has taken place would be inconsistent with the IMFL, the Court pointed out that only after the motion to confirm the sale is filed, the party seeking to set aside the sale must rely on the specified grounds set forth in Section 15-1508(b). 

 

Thus, ultimately concluding that, once a motion to confirm has been filed, objections to the sale confirmation cannot be based solely on a meritorious defense to the underlying foreclosure action and that the standards applicable under Section 2-1301(e) are then inconsistent with the more restrictive sale confirmation procedures under Section 15-1508(b), the Court observed that allowing Borrower to utilize the liberal standards under a Section 2-1301(e) motion to vacate at that point would unravel the underlying foreclosure judgment and would permit Borrower to circumvent the time limitations for redemption and reinstatement provided for under the IMFL. 

 

In reaching this conclusion, the Court emphasized that after a motion to confirm the sale has been filed, in order to vacate both the sale and the default judgment, a borrower must not only have a meritorious defense to the underlying judgment but must also establish that justice was not otherwise done under Section 15-1508(b)(iv).  

 

Noting that the term "justice was otherwise not done" is not expressly defined in the IMFL, the Court set forth examples of ways in which Illinois courts have interpreted the so-called "justice provision," observing that appellate courts have balanced the interests of lenders and borrowers by applying traditional equitable principles.  See, e.g., Fleet Mortgage Corp. v. Deale, 287 Ill. App.3d 385 (1997)(lender mistakenly foreclosed after borrowers had exercised right to redeem and sold the property to a third party); Commercial Credit Loans, Inc. v. Espinoza, 293 Ill. App. 3d 923 (1997)(concluding justice was not otherwise done where sales price, fair market value, and lender's conduct prevented borrower from pursuing right to redeem); Bayview Loan Servicing, LLC v. 2010 Real Estate Foreclosure, LLC, 2013 IL App (1st) 120711(intervenor did not show that justice was not done where the error complained of resulted from its own negligence).

 

The Court accordingly ruled that up until the filing of a motion to confirm the judicial sale, a borrower may seek to vacate a default foreclosure judgment under Section 2-1301(e) but that, once a motion to confirm the sale has been filed, a default judgment of foreclosure may be challenged only by filing objections to the confirmation of sale set forth under Section 15-1508(b).

 

Turning to the particular facts of the case, the Court noted that Borrower moved to vacate the foreclosure judgment before Bank had filed its motion to confirm the sale, rejecting Bank's assertion that the date of the judicial sale marked the point at which Borrower was divested of her property rights.  The Court stressed the language in the IMFL that the interests of the borrower are terminated by the judicial sale, "provided the sale is confirmed," thus reasoning that prior to the filing of a motion to confirm the sale, review of a motion to vacate according to the standards under the Code was not "inconsistent" with the IMFL. 

 

Nevertheless, the Court determined that it was proper to deny Borrower's motion to vacate in this case.  As the Court explained, Borrower had ample opportunity to raise defenses but chose not to, was properly served, was given notice of the default, notice of the judgment of foreclosure, notice of the sale, actively participated in the proceedings, and admitted that she defaulted on the loan.  The Court also noted that Borrower waited 10 months after the default judgment and after the sale to raise defenses to the foreclosure complaint.  

 

Accordingly, the Court reversed the Appellate Court but affirmed the ruling of the trial court. 

 

 

 

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

 

Admitted to practice law in Illinois

 

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

Our updates are available on the internet, in searchable format, at:
http://updates.mwbllp.com