FYI: 9th Cir Holds Unaccepted Rule 68 Offer of Judgment Does Not Render Claim Moot, Even If Offer Would Fully Satisfy the Claim

Acknowledging a circuit split on the issue, the U.S. Court of Appeals for the Ninth Circuit recently held that an unaccepted Fed. R. Civ. P. 68 offer of judgment is insufficient to render the claim moot, even if the offer of judgment would fully satisfy a plaintiff's claim. 

 

A copy of the Court's opinion is available at:  http://cdn.ca9.uscourts.gov/datastore/opinions/2013/10/04/11-57239.pdf

 

 

Plaintiff, the owner of a home warranty plan, filed a class action complaint against the company providing the warranty alleging the company refused to make timely repairs, used substandard contractors and wrongfully denied claims.  Plaintiff asserted state law claims for unfair competition, misrepresentation, concealment, breach of contract and breach of the implied covenant of good faith and fair dealing. 

 

The district court dismissed Plaintiff's claims for concealment, false promise, unfair competition and violation of California consumer laws under Fed. R. Civ. P. 12(b)(6).  The district court also entered an order denying class certification.  Thereafter, the company made a Rule 68 offer of judgment on Plaintiff's remaining individual claims – misrepresentation, breach of contract and breach of the implied covenant of good faith and fair dealing.  The company offered to allow judgment entered against it and in favor of Plaintiff in the total amount of $7,019.21 plus costs. 

 

When Plaintiff did not accept the offer, the company moved to dismiss those claims for lack of subject matter jurisdiction.  The company argued that the matter should be dismissed as moot because Plaintiff refused to accept an offer for full satisfaction of the amount she could possibly recover at trial. The company cited to opinions from the Seventh and Fourth Circuits where those courts held that "once a defendant offers to satisfy the plaintiff's entire demand, there is no dispute over which to litigate, and a plaintiff who refuses to acknowledge this loses outright, under Rule 12(b)(1), because he has no remaining stake." 

 

The district court agreed with the company that the unaccepted Rule 68 offer rendered Plaintiff's remaining claims moot because the offer would have fully satisfied Plaintiff's remaining claims.  The district court acknowledged that Plaintiff also sought declaratory and injunctive relief, which was not covered in the Rule 68 offer, but determined that she was not entitled to such relief.  Having determined that the company's offer would have given Plaintiff "complete relief," and relying on the rulings from the Seventh and Fourth Circuits, the district court dismissed Plaintiff's claims pursuant to Rule 12(b)(1).

 

On appeal, the Ninth Circuit clarified the issue: whether an unaccepted Rule 68 offer that would have fully satisfied a plaintiff's claim is sufficient to render the claim moot. 

 

The Ninth Circuit observed that neither it nor the United States Supreme Court had previously addressed the issue. Although the Ninth Circuit had addressed the application of an unaccepted Rule 68 offer in class actions, and an agreement to accept everything the other party has demanded, it deemed the issue in this appeal "an open question in this circuit."  The Ninth Circuit concluded that although a majority of courts and commentators appear to agree with the Seventh Circuit that an unaccepted offer will moot a plaintiff's claim, "four justices of the U.S. Supreme Court, as well as the Solicitor General of the U.S., embraced a contrary position" in Genesis Healthcare Corp. v. Symczyk, 133 S. Ct. 1523, 1528-29 (2013).  Although the majority in Genesis Healthcare did not address the issue, four justices addressed it in the dissent and concluded that "an unaccepted offer of judgment cannot moot a case." 

 

The Ninth Circuit quoted extensively from, and relied heavily on, the dissent in Genesis Healthcare:

 

"We made clear earlier this Term that [a]s long as the parties have a concrete interest, however small, in the outcome of the litigation, the case is not moot.  A case becomes moot only when it is impossible for a court to grant any effectual relief whatever to the prevailing party.  By those measures, an unaccepted offer of judgment cannot moot a case.  When a plaintiff rejects such an offer - however good the terms – her interest in the lawsuit remains just what it was before.  And so too does the court's ability to grant her relief.  An unaccepted settlement offer – like any unaccepted contract offer – is a legal nullity, with no operative effect.  As every first-year law student learns, the recipient's rejection of an offer leaves the matter as if no offer had ever been made.  Nothing in Rule 68 alters that basic principle; to the contrary, that rule specifies that an unaccepted offer is considered withdrawn.  So assuming the case was live before – because the plaintiff had a stake and the court could grant relief – the litigation carries on, unmooted."

 

Relying on the dissent from Genesis Healthcare and the "language, structure and purposes of Rule 68," the Ninth Circuit held that an unaccepted Rule 68 offer that would have fully satisfied a plaintiff's claim does not render that claim moot.  The Ninth Circuit vacated the district court's dismissal of Plaintiff's claims and remanded the matter to the district 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: 2nd Cir Addresses "Recurring Issue" of Whether Commercial Loan Docs Ambiguous, Finds Ambiguity Precluding Motion to Dismiss

The U.S. Court of Appeals for the Second Circuit addressed what it referred to as the "recurring issue" of whether relevant loan documents are ambiguous, thus precluding their interpretation on a motion dismiss, in the unusual context of an agreement for a loan from a lender to himself and his partner.  The trial court had granted the defendants' motion to dismiss.  The Second Circuit, concluding that the ambiguity in the documents at issue precluded dismissal of the Amended Complaint, vacated the District Court's ruling and remanded for further proceedings. 

 

A copy of the Court's opinion is available at:  Link to opinion

 

The case involves three real estate developers, two of whom (the plaintiff and one of the individual defendants) were close friends in a "family relationship of trust" for 35 years and the foreclosure by a company owned by the defendants on the plaintiff's interest in a company he owned that had entered into a business venture with the defendants. 

 

The individual plaintiff was the sole member of an LLC also named as a plaintiff.  The individual defendants were the controlling partners of the Lender, a named defendant, and the Lender was the sole member of another LLC also named as a defendant.  In 2005, the individual defendants approached the plaintiff about developing a multi-million dollar real estate portfolio.  Plaintiff agreed to act as a developer for the venture, and instead of requiring a development fee agreed to accept a percentage of the profits on each development as compensation for his services.  In 2006 plaintiff's LLC agreed with the defendants' LLC to form a joint-venture LLC (the "Company") (also a named defendant) to purchase and develop a building in New York City (the "Property").  Plaintiff's LLC contributed approximately $5 million and defendants' contributed approximately $20 million to the Company, for which they received 20% and 80% ownership interests, respectively, of the Company.

 

In September 2006, the Company created the Owner company, which purchased the Property for $113 million.  To fund the purchase and development of the Property, two loans were obtained.  The Company obtained an $85 million loan from a bank.  Plaintiff's LLC and Defendants' LLC then obtained a $20 million "mezzanine loan" from the Lender – the sole member of defendants' LLC.  A mezzanine loan is similar to a second mortgage except that it is secured by the stock of the company that owns the real estate rather than the real estate itself, which is secured by the primary loan.  Plaintiff's LLC and defendants' LLC also signed (1) as Pledgor, a Pledge Agreement with the Lender and (2) a promissory note in favor of the Lender. 

 

The mezzanine loan was senior to the equity investments of plaintiff's and defendants' LLC's in the Company, but subordinate to the bank loan.  The mezzanine loan gave the Lender, upon an "Event of Default," the remedies provided by the loan documents, which included the Pledge Agreement.  The Pledge Agreement gave the Lender the right to foreclose on the interests of either plaintiff's or defendants' LLCs in the Property upon an "Event of Default."  The mezzanine loan provided several definitions of an "Event of Default." 

 

A major issue on appeal was which of the definitions of "Event of Default" applied to non-payment of the mezzanine loan, with one of the definitions identifying non-payment of the promissory note as an Event of Default only if there was Available Net Cash Flow.

 

The Company fell behind on payments for the bank loan and the mezzanine loan.  In response to letters from the Lender that an Event of Default had occurred, plaintiff's LLC filed a complaint in New York State Supreme Court, seeking a declaratory judgment that it was not in default.  The defendants removed the matter to the District Court.  The District Court denied the plaintiffs' motion for injunction and the Lender proceeded to auction plaintiff's LLC's 20% interest in the Company. Soon thereafter, the bank declared the Company in default.  A family member of the individual defendant purchased the bank loan and the defendants' entities sold the Property for $150, realizing profits for more than $10 million, and did not provide any compensation to plaintiff or his LLC for its capital contributions or work as an Operating Member.

 

The plaintiffs then amended their complaint.  The essence of their claims was that the Lender was not entitled to foreclose on plaintiff's LLC's interest in the Company.  The District Court ruled that the language of the mezzanine loan was unambiguous and that an Event of Default had occurred under the provisions of that loan agreement. 

 

On appeal, the Second Circuit immediately observed the nature of the parties involved and unusual circumstances of a lender making a loan to itself and its partner.  "We do not doubt that an entity can make a loan to itself and its partner, but the unusual nature of such an arrangement prompts close scrutiny of the documents purporting to provide the lender with a right to foreclose on the partner's interest for an alleged default on the loan."  The Court then stated "the ultimate issue is whether the relevant documents unambiguously accord the Lender a right to foreclose on plaintiff's LLC's 20% interest in the Property for failure to pay the Promissory Note at maturity." 

 

The court then clarified the issue on appeal: "The ultimate issue is whether the relevant documents unambiguously accord the Lender a right to foreclose on plaintiff's LLC's 20% interest in the Property for failure to pay the Promissory Note at maturity."  "Our concern at this preliminary state of the litigation is only whether there is sufficient ambiguity, either in the phrases of any one document or between conflicting language in any of the documents, to preclude granting a motion to dismiss the Amended Complaint."  In analyzing the language of the relevant loan documents, the Second Circuit focused its attention on the 2 provisions in the mezzanine loan that the District Court relied on to dismiss the Amended Complaint.  One of the provisions defined an Event of Default as when the borrower failed to make required payments and there was Available Net Cash Flow available.  The other provision at issue defined an Event of Default as when the borrower failed to perform any obligation under the loan documents.  The plaintiffs argued that because net cash flow was not available, there was no "Event of Default."  The defendants argued that the second definition applied and the net cash flow analysis was not required.

 

The Second Circuit conducted a thorough analysis of the 2 provisions, including assessing the grammatical effect of a preceding adjective and whether that adjective modifies only the first word of a series of words or the adjective modifies all of the words in the series.  The issue was critical because the definition that required Available Net Cash Flow available for an Event of Default contained the following language: "the failure of the borrower to pay any installment of principal, interest, or other payments required under the Note."  The issue was whether the term "installment" applied only to the term "principal" or it applied to "principal, interest, or other payments required under the Note."  Relying on a Delaware District Court decision, the Second Circuit ultimately concluded that the term "installment" only applied to the first word of the series, in this case "principal."  Although the District Court felt that the "Available Net Cash Flow" limitation in the definition would present the potential that the loan agreement might never be paid, the Second Circuit concluded that given the relationship between the individual plaintiff and defendant it was plausible that the parties were willing to defer foreclosure until cash flow from their development project was available. 

 

The final analysis the Second Circuit conducted in concluding that there was sufficient ambiguity in the loan documents was to address the intent of the parties.  "The most persuasive evidence of the agreed intention of the parties in those circumstances (where agreements are not clear) is what the parties did when the circumstances arose."  The Court then noted that after the date the defendants claimed an "Event of Default" occurred, the defendants continued to deal with plaintiff as an operating member of the partnership, insisted that he help obtain extensions on the bank loan, the he make additional capital contributions, and that he extend his $10 million personal guarantee to the bank loan. 

 

Because all of those events occurred after the supposed Event of Default, the Second Circuit held that there was sufficient ambiguity as to whether the Lender could foreclose on plaintiff's interests if there was no net cash flow available. 

 

Accordingly, the Second Circuit vacated the district court's finding and remanded the case for further proceedings because it felt there was sufficient ambiguity in the definitions for Event of Default that rendered it inappropriate to grant the defendants' motion to dismiss plaintiffs' Amended Complaint.

 

 

 

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: Third Cir Holds Bankruptcy Code Precludes FDCPA "No Mini-Miranda" Claim, But Does Not Preclude "Threat of Action Not Intended" and "Deceptive Legal Process Documents" Claims

The U.S. Court of Appeals for the Third Circuit recently held that the federal Bankruptcy Code precludes § 1692e(11) "mini-Miranda" claims, but does not preclude § 1692e(5)  and § 1692e(13) claims under the federal Fair Debt Collection Practices Act ("FDCPA"). 

 

A copy of the opinion is available at:  http://www2.ca3.uscourts.gov/opinarch/123293p.pdf

 

At issue in the case is whether a debt collector's letter and notice requesting an examination under Federal Rule of Bankruptcy Procedure 2004 and offering to settle a debt, sent in a pending bankruptcy in contemplation of an adversary proceeding to challenge dischargeability, can be the basis for liability under the FDCPA.  A creditor and its law firm sent such a letter and attached notice on its behalf to the bankruptcy debtors, through their bankruptcy counsel.

 

The District Court dismissed the debtors' FDCPA suit arising out of the letter and notice under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted. The District Court held that the Bankruptcy Code provided the exclusive remedy for the alleged violations, and thus precluded the FDCPA claims. The District Court also held that even if the FDCPA claims were not precluded, the debtors' complaint did not allege sufficient facts to state a claim. The debtors appealed. 

 

The debtors filed for Chapter 7 bankruptcy protection. The schedules that the debtors' submitted to the Bankruptcy Court identified an unsecured, non-priority claim credit-card debt owed to the creditor at issue.

 

The creditor's law firm sent the letter and attached notice to both debtors through their bankruptcy counsel. The letter stated that the creditor was considering filing an adversary proceeding under 11 U.S.C. § 523 to challenge the dischargeability of the debt.

 

The letter included an offer to avoid an adversary proceeding if the debtors agreed that the debt was non-dischargeable or if they agreed to pay a reduced amount to settle the debt. The letter stated that a Rule 2004 examination to gather information for filing an adversary proceeding was scheduled, but that the creditor was open to "discuss[ing] with your client whether the matter can be resolved without conducting the examination and/or to reschedule it for an informal telephone conference at a mutually agreeable time prior to the bar date."

 

The letter set out additional information about how to challenge the debt "[i]n the event that this letter is governed by the FDCPA." The letter also attached a subpoena and a Rule 2004 Notice of Examination. The debtors alleged, and the appellees conceded, that the notice was subject to the requirements for a subpoena under Federal Rule of Bankruptcy Procedure 9016 and Federal Rule of Civil Procedure 45.

 

At the bottom of the subpoena was a certificate signed by the appellee's counsel.  The certificate stated that "a true and correct copy of the foregoing has been mailed on January 28, 2011 to the above address."  Two addresses were listed: the debtors' home in New Jersey and their bankruptcy counsel's office. The debtors allege that they did not receive a copy at their home, but the debtors' bankruptcy counsel received the copies.

 

The debtors filed a motion in the Bankruptcy Court to quash the Rule 2004 examination notices on the ground that they failed to comply with the Bankruptcy Rule 9016 and Civil Rule 45 subpoena requirements. The Bankruptcy Court quashed the Rule 2004 examination notices. 

 

The debtors then filed an adversary proceeding asserting FDCPA claims against the creditor and its law firm. The Bankruptcy Court ruled that it lacked subject-matter jurisdiction over the FDCPA claims and dismissed them without prejudice.

 

The debtors next sued the creditor and law firm in the federal District Court. They alleged that the letters and subpoenas violated the FDCPA prohibition on false, deceptive, and misleading debt-collection practices under 15 U.S.C. § 1692e (5), (11), and (13).

 

The appellees moved to dismiss on three grounds: (1) the FDCPA claim was precluded by the Bankruptcy Court's earlier dismissal of the adversary proceeding the debtors had filed; (2) the complaint did not state a claim; and (3) the allegations from which the FDCPA claims arose were governed exclusively by the Bankruptcy Code.

 

The District Court dismissed the FDCPA suit with prejudice, holding that the Bankruptcy Code precluded all the FDCPA claims and that the complaint "does not appear to set forth sufficient factual allegations to state a claim" under the FDCPA and this appeal followed.

 

On appeal, the Third Circuit noted initially that § 1692e of the FDCPA prohibits debt collectors from using "any false, deceptive, or misleading representation or means in connection with the collection of any debt." The debtors alleged that the letter and notice violated § 1692e (5), (11), and (13). Section 1692e(5) states that a debt collector may not make a "threat to take any action that cannot legally be taken or  that is not intended to be  taken."  Section 1692e(11) contains the requirement of the FDCPA "mini-Miranda" statement.  Section 1692e(13) prohibits a debt collector from making a "false representation or implication that documents are legal process."

 

The debtors alleged that by sending the letter and attached notice, the law firm and creditor violated  § 1692e(5) and (13) in four ways: (1) by intentionally failing to send the letter and subpoena to the debtors and instead sending the documents to their attorney, violating Civil Rule 45(b)(1)'s requirement that subpoenas be served directly on the individuals subpoenaed; (2) by specifying   the   location   for   the   Rule   2004 examinations as the law firm's office in New York, rather than in New Jersey.  The debtors alleged that this violated Civil Rule 45(a)(2)(B)'s requirement that  a  subpoena  be  issued  "from  the  court  for  the district where the deposition is to be taken"; (3) by failing to include in the subpoena the text of Civil Rule 45(c) and (d), as Civil Rule 45(a)(1)(A)(iv) requires; and (4) by failing to include in the subpoena the method of recording the Rule 2004 examinations.

 

The debtors also allege that the law firm violated the FDCPA by failing to include the § 1692e(11) "mini-Miranda" warning. Section 1692e(11) requires a debt collector to disclose in the initial communication with the debtor that "the debt collector is attempting to collect a debt and that any information obtained will be used for that purpose." 15 U.S.C. § 1692e(11).

 

The Third Circuit held as follows:

 

(1) the letter and notice sent by the law firm constituted a communication and an attempt to collect a debt under the FDCPA;

 

(2) the subpoenas failure to disclose the method of the Rule 2004 examinations did not violate the Bankruptcy Rules or Federal Rules;

 

(3) the Bankruptcy Code did not preclude the debtors' allegations that the defendants' failure to comply with subpoena rules violated FDCPA § 1692e(5), (11), and (13) concerning making a threat to take action that cannot legally be taken and prohibiting a debt collector from making a false representations that documents are legal process; and

 

(4) that the Bankruptcy Code did preclude the debtors' allegations that the defendants' failed to comply with the FDCPA's § 1692e(11) "mini-Miranda" warning requirement.

 

The Third Circuit remanded the case for 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.

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