FYI: 11th Cir Holds FDCPA Allows Percentage-Based Collection Fee If Debt Agreement Allows "Reasonable Fee," But Not If Agreement Allows "All Costs of Collection"

The U.S Court of Appeals for the Eleventh Circuit recently reversed a district court's order granting summary judgment in favor of a collection company and against a consumer on a claim under 15 U.S.C. § 1692f of the Fair Debt Collection Practice Act ("FDCPA"), but affirmed the district court's summary judgment ruling against another debtor on a15 U.S.C. § 1692f claim where the same collection company assessed an additional 30% collection fee.

 

In so ruling, the Eleventh Circuit held that where a debtor's contract with a creditor provided that, in the event of collection, the debtor agreed to pay only the actual costs of collection, collecting a fee over and above the actual cost of collection violated 15 U.S.C. § 1692f(1)'s prohibition against collecting any amount that is not "expressly authorized by the agreement creating the debt or permitted by law."

 

In contrast, where another debtor's contract with a creditor agreed to pay all reasonable collection fees, the Eleventh Circuit upheld summary judgment in favor of the collection company on the debtor's 15 U.S.C. § 1692f claim despite a 30% collection fee that was added to the debt.

 

A copy of the Court's opinion is available at: http://www.ca11.uscourts.gov/opinions/ops/201312276.pdf

 

The case concerns whether a 33 ½% collection fee that was not expressly authorized by the agreement between a debtor and creditor that created the debt violates 15 U.S.C. § 1692f.

 

The debtor Appellants incurred medical debts at two health care providers. The health care providers referred the debtors' accounts to a collection company. As part of the referral, the health care providers added to debtors' accounts a charge for collection fees.

Creditor A is a healthcare institution. Creditor A contracted with a collection company to collect unpaid medical bills. Creditor A's agreement with the Collection Company involved adding a 30% collection fee to all collection accounts.

 

In 2007, Debtor A incurred a $735 bill.  Debtor A failed to pay the bill.  In response, Creditor A sent the debtor three separate statements, warning that, pursuant to their agreement, if Debtor A failed to pay, Creditor A would send the account to a collection agency. The agreement Debtor A signed with Creditor A stated, in pertinent part, "I agree that if this account is not paid when due, and the hospital should retain an attorney or collection agency for collection, I agree to pay all costs of collection including reasonable interest, reasonable attorney's fees (even if suit is filed) and reasonable collection agency fees."

 

Debtor A never paid the debt.  According to its debt collection policy, Creditor A added a 30% collection fee to the debtor's account and referred the account to the Collection Company for collection.  With the 30% added collection fee, Debtor A owed Creditor A $922.25.

 

Creditor B is a healthcare provider that also uses the Collection Company to collect unpaid medical bills. The collection contract between Creditor B and the Collection Company stated that Creditor B would add 33-and-1/3% to a debt prior to transferring the account to the Collection Company. The contract also stipulated that the Collection Company was entitled to 30% of the total collected from each debt.

 

In 2009, Debtor B received medical treatment from Creditor B and incurred a bill for $861.96. Like Debtor A, Debtor B also signed an agreement, which stated: "In the event of non-payment . . . I agree to pay all costs of collection, including a reasonable attorney's fee."  Also like Debtor A, Debtor B failed to pay the medical bill.  As a result, Creditor B added a $293.06 collection fee to Debtor B's balance.  Creditor B then sent the debtor's account to the Collection Company for collection.

 

Debtor B's new balance due to Creditor B was $1,155.02.  To avoid being sued, Debtor B paid the $1,155.02 and reserved his right to recover overcharges.

 

The debtor plaintiffs brought suit against the Collection Company alleging violations of Alabama state law, the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. §1692–1692p, and the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961–1968.1.

 

The parties filed cross-motions for summary judgment. The district court denied the debtors' motion and granted the Collection Company's motion for summary judgment. This appeal followed.

 

The Eleventh Circuit reversed the district court's decision granting summary judgment in favor of the Collection Company on Debtor B's claim under 15 U.S.C. § 1692f of the FDCPA and affirmed the district court's decision granting the Collection Company's motion for summary judgment on all remaining claims raised in the appeal.

 

At issue in the appeal was Debtor B's claim under 15 U.S.C. § 1692f.

 

As you may recall, the FDCPA prohibits debt collectors from using "any false, deceptive, or misleading representation or means in connection with the collection of any debt" as well as the use of "unfair or unconscionable" means of collection. 15 U.S.C. §§ 1692e, 1692f.

 

As you also may recall, section 1692f prohibits the "collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law." 15 U.S.C. § 1692f(1). Debtor B argued that the additional collection fee violates this section of the FDCPA because the fee was really liquidated damages rather than the actual cost of collection. The Eleventh Circuit agreed.

 

Although the Eleventh Circuit had not previously addressed this issue, it found the Eighth Circuit's reasoning in Kojetin v. CU Recovery, Inc., 212 F.3d 1318, 1318 (8th Cir. 2000) (per curiam) persuasive. There, the Eighth Circuit held that the debt collector violated the FDCPA when it charged the debtor a collection fee based on a percentage of the principal balance of the debt due rather than the actual cost of collection.  The Eleventh Circuit found that this is what happened here.

 

When Debtor B signed Creditor B's patient registration form, the debtor only agreed to pay "all costs of collection." In other words, Debtor B agreed to pay the actual costs of collection; his contractual agreement with Creditor B did not require him to pay a collection agency's percentage-based fee where that fee did not correlate to the actual costs of collection.

 

Before Creditor B handed over Debtor B's delinquent account to the Collection Company, it added a 33-and-1/3% "collection fee." The Collection Company presented no evidence that the 33-and-1/3% "collection fee"—which was assessed before the Collection Company attempted to collect the balance due—bears any correlation to the actual cost of collection. Consequently, the Eleventh Circuit found that the 33-and-1/3% fee breaches the agreement between Debtor B and Creditor B, because Debtor B was only contractu8ally obligated to pay the "costs of collection."

 

According to the Eleventh Circuit, Creditor B and the Collection Company cannot alter Debtor B's obligations by the terms of their subsequent agreement.  Because there was no express agreement between Creditor B and Debtor B allowing for collection of the 33-and-1/3% fee, the Court held that 1/3 additional fee violated the FDCPA. See 15 U.S.C. § 1692(e); see also Kojetin, 212 F.3d at 1318.

 

Significantly, the Eleventh Circuit did not say that Debtor B and Creditor B could not have formed an agreement allowing for the collection of the percentage-based fee.  As the Court pointed out, it is the nature of the agreement between Debtor B and Creditor B, not simply the amount of the fee that is important here.

 

For example, the Court further noted, Debtor A agreed to pay, inter alia, "reasonable collection agency fees." Based on this contractual language, Debtor A declined to argue on appeal that the agreement that he had with Creditor A did not cover the Collection Company's percentage-based collection fee.

 

Thus, according to the Eleventh Circuit, if a creditor and a collection company desired to allow for an additional percentage collection fee above and beyond the actual cost of collection, they should include this expressly and should not limit the agreement with the debtor to "actual collection costs."

 

Simply put, the Eleventh Circuit held that a percentage-based fee can be appropriate if the contracting parties agreed to it. For example, the Eleventh Circuit pointed to a Seventh Circuit case that suggested that the following contractual provision may allow the imposition of a percentage-based collection fee when a delinquent account was referred to a third-party collection agency: "You agree to reimburse us the fees of any collection agency, which may be based on a percentage at a maximum of 33% of the debt, and all costs and expenses, including reasonable attorneys' fees, we incur in such collection efforts." See Seeger v. AFNI, Inc., 548 F.3d 1107, 1110, 1113 (7th Cir. 2008).

 

Debtor B's contract with Creditor B was materially different than Debtor A's contract with Creditor A. Debtor B agreed to pay the actual costs of collection; not any percentage above the amount of his debt that was unrelated to the actual collection costs. The agreement creating the debt—the patient agreement between Creditor B and Debtor B —only allows a charge for "costs of collection." Nowhere in the agreement did Debtor B agree to an additional "collection fee."

 

Thus, the Eleventh Circuit held that the Collection Company violated the FDCPA when it collected a debt from Debtor B that included an additional "collection fee" above the actual cost of collection because the contract between Debtor B and Creditor B did not expressly authorize this additional collection fee. 

 

 

 

 

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

 

 

          McGinnis Wutscher Beiramee LLP

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FYI: 5th Cir Confirms Inability of Borrower to Challenge PSA, MERS Assignee's Right to Foreclose Under Texas Law, Holds Borrower Estopped from Notice of Servicer Challenge

In examining a borrower's challenge to the ability of a trustee's and servicer's ability to initiate a non-judicial foreclosure, the U.S. Court of Appeals for the Fifth Circuit recently held that:

 

(1)      where a party seeking injunctive and/or declaratory relief challenges the amount in controversy for the purposes of removal under diversity jurisdiction, the amount in controversy includes the value of the object that is sued for, and because the value of the outstanding mortgages exceeded the amount in controversy threshold by any reasonable measure, the district court had jurisdiction;

 

(2)      in applying Texas law, MERS, a book-entry system, constitutes a mortgagee, and therefore, a trustee, as MERS's assignee under two deeds of trust, could initiate non-judicial foreclosure as a mortgagee pursuant to Tex. Prop. Code § 51.0001(4) and Martin v. BAC Home Loan Servicing, L.P., 722 F.3d 249, 255 (5th Cir. 2013);

 

(3)      where a borrower challenges an assignment that purportedly violates the terms of the governing pooling and servicing agreement, if the borrower is not a party to the pooling and servicing agreement, he lacks standing to challenge the assignment, unless he can demonstrated he is an intended third-party beneficiary to that agreement pursuant to the Fifth Circuit's previous ruling in Reinagel v. Deutsche Bank Nat'l Trust Co., 12-50569, 2013 WL 5832812, at *5 (5th Cir. Oct. 29, 2013); and

 

(4)      where a borrower challenges a mortgage servicer's status and ability to initiate non-judicial foreclosure because the previous servicer rather than the current mortgagee provided notice of the succeeding servicer as required under Tex. Prop. Code § 51.0001(3), the borrower is estopped from such a challenge pursuant to Steubner Realty 19, Ltd. v. Cravens Rd. 88, Ltd., 817 S.W.2d 160, 164 (Tex. App. 1991) because the borrower received notice of the full chain of assignment of the relevant deeds of trust, and was aware that payments were to be made to the mortgage servicer and made payments to the mortgage servicer, thus constituting acquiescence.

 

In so ruling, the Fifth Circuit upheld the district court's summary judgment ruling in favor of defendant lender and the mortgage servicer of the two deeds of trust, and denied the borrower's partial summary judgment motion.

 

A copy of the opinion is available at http://www.ca5.uscourts.gov/opinions/pub/12/12-20668-CV0.pdf

 

 

The borrower ("Borrower") purchased two residential investment properties in 2006. A mortgage company ("Lender") was the lender and the mortgage servicer at the time of the origination of the loans.  The loans for each property were evidenced by a promissory note and secured by a deed of trust.  Each deed of trust named Mortgage Electronic Registration Systems, Inc. ("MERS"), its successors and assigns, as the Lender's beneficiary with the right to enforce the Lender's legal interests.

 

The Lender sold both the promissory notes in 2006 to an affiliate of another mortgage company ("Purchaser"). Later in 2006, the promissory notes for both loans were securitized and pooled with others in a trust. The deeds of trust were registered with MERS and were not conveyed with the promissory notes. MERS subsequently assigned the Claretfield Deed of Trust on May 31, 2011 and the Oakview Deed of Trust on June 17, 2010 to a trustee ("Trustee"). Each assignment was recorded.

 

The mortgage servicing rights were transferred separately from the deeds of trust and the promissory notes. The servicing rights for the Claretfield promissory note was transferred from Lender to a separate entity ("Subsequent Servicer") on July 1, 2006, who transferred it to yet another entity ("Current Servicer") on July 1, 2009. The servicing right for the Oakview promissory note was transferred from Lender to Subsequent Servicer, then to the Current Servicer.

 

The Borrower made monthly payments on each note until December 2010.  During this time, the Borrower acknowledged receiving notice of the change in mortgage servicer for both the service transfers.  In August 2010, the Borrower contacted the Current Servicer as to each loan in separate letters.

 

He asked for confirmation under the Truth in Lending Act ("TILA") that the Current Servicer was the "Rightful Holder in Due Course" and additional information establishing that the servicer is entitled to service the instrument.  The Current Servicer's responses did not provide the requested documentation proving the right to service the loans.

 

It provided the account's payment history and the basic originating documents. As to the Claretfield loan, the Current Servicer stated that the loan was registered with MERS. The response additionally said the loan had been "transferred to [the Current Servicer] for servicing on June 27, 2006," and the current owner of the loan was Trustee.  On the Oakview loan, the Current Servicer said that the "holder in due course" was the Trustee.

 

The Borrower sent the Current Servicer notice of an "Intent to Litigate" as to both mortgages in September 2010 and ceased making payments on both loans in December 2010.

 

The Current Servicer sent the Borrower notices of default and intent to accelerate payments for both notes in May 2011. At the time the Borrower suspended payment, the unpaid principal and interest on each note exceeded $80,000.00.  The Borrower brought suit in state court against the Current Servicer and Trustee (collectively "Defendants").

 

The Defendants removed the case to the United States District Court for the Southern District of Texas. The parties consented to proceed before a magistrate judge ("District Court") pursuant to 28 U.S.C. § 636(c).  The District Court granted the Defendants' motion for summary judgment, denied the Borrowers' motion for partial summary judgment, and dismissed Defendants' motion for judgment on the pleadings as moot.  The Borrower appealed.

 

As an initial matter, the court addressed the Borrower's argument that his claim did not meet the minimum amount in controversy for removal to federal court. As you may recall, federal courts have original jurisdiction over civil actions where the parties are diverse and the amount in controversy exceeds $75,000. 28 U.S.C. 1332(a).

 

In his initial claim, the Borrower sought damages "not to exceed $60,000," a temporary restraining order, declaratory judgment, and a permanent injunction to stop the foreclosure actions on both properties. "In actions seeking declaratory or injunctive relief, it is well established that the amount in controversy is measured by the value of the object of the litigation." Hunt v. Wash. State Apple Adver. Comm'n, 432 U.S. 333, 347 (1977).

 

The Fifth Circuit recognized that the purpose of the injunctive and declaratory relief, to stop the foreclosure sale of the properties by Defendants, establishes the properties as the object of the present litigation. As the Fifth Circuit previously explained, "the amount in controversy, in an action for declaratory or injunctive relief, is the value of the right to be protected or the extent of the injury to be prevented." Leininger v. Leininger, 705 F.2d 727, 729 (5th Cir. 1983).

 

The Borrower's claimed injury was the potential loss of use and ownership of the properties. In actions enjoining a lender from transferring property and preserving an individual's ownership interest, it is the property itself that is the object of the litigation; the value of that property represents the amount in controversy. Garfinkle v. Wells Fargo Bank, 483 F.2d 1074, 1076 (9th Cir. 1973).

 

Because under any reasonable basis in valuing the properties, the amount in controversy threshold was exceeded and therefore, the Fifth Circuit concluded federal subject-matter jurisdiction existed.

 

Next the Fifth Circuit examined the Borrower's challenge to the validity of the foreclosure action initiated by the Defendants.  The Borrower argued that the Trustee was not a proper grantee, beneficiary, owner, or holder of the deeds of trust; that the transfer of the notes to the Trustee was improper under the Pooling & Services Agreement ("PSA"); that the Current Servicer was not a proper servicer; and that no evidence supports the Current Servicer's continued role as servicer after assignment to the Trustee.

 

In determining whether the Trustee was a mortgagee, the Fifth Circuit applied Texas state law, which provides that a non-judicial foreclosure may be initiated by the current mortgagee including: "the grantee, beneficiary, owner, or holder of a security instrument;" a "book entry system;" or "the last person to whom the security interest has been assigned of record." Tex. Prop. Code § 51.0001(4).

 

In examining the record, the Fifth Circuit recognized that the deeds of trust named MERS the beneficiary of the Subsequent Servicer and MERS later assigned the deeds of trust to the Trustee.  The Fifth Circuit pointed to a previous ruling that provided, "[b]ecause MERS is a book-entry system, it qualifies as a mortgagee." Martins v. BAC Home Loan Servicing, L.P., 722 F.3d 249, 255 (5th Cir. 2013). The Martins decision permitted MERS and its assigns to bring foreclosure actions under the Texas Property Code. The Trustee became the mortgagee as defined under Section 51.0001(4) after recorded transfer of the deeds of trust and therefore was an appropriate party to initiate non-judicial foreclosure actions.

 

Accordingly, the Fifth Circuit concluded that the district court was correct in its determination that the Trustee was a mortgagee and could proceed with foreclosure.

 

The Fifth Circuit next addressed the Borrower's challenge to assignment of the notes to the Trustee. The Borrower argued that the assignments were void because they were in violation of the PSA governing the trust. He argues that the improper assignment precludes the Trustee from properly assuming the status of mortgagee and foreclosing on the properties.  However, the Borrower conceded that he was not a party to the governing PSA, which he sought to enforce.

 

The Fifth Circuit noted that it previously addressed similar challenges to a foreclosure action based on the violation of the terms of a PSA and found that borrowers lacked standing to challenge the transfer of a note in violation of the terms of the PSA. Reinagel, 2013 WL 5832812, at *5.  As the Fifth Circuit previously ruled, borrowers as non-parties to the PSA, "have no right to enforce its terms unless they are its intended third-party beneficiaries." Id. Further, the Texas Supreme Court established that there is a presumption that parties contract for themselves, unless they clearly intended a third party to benefit from the contract.  Accordingly, the Borrower failed to provide any evidence that he was a party to the PSA or that he was an intended third-party beneficiary of the PSA, therefore he had no standing to challenge the assignment to the Trustee.

 

Finally, the Fifth Circuit examined the Borrower's challenge to the District Court's ruling that the Current Servicer was a mortgage servicer under Tex. Prop. Code § 51.0025.  The Borrower argued that the Current Servicer could not initiate the foreclosure of the deeds of trust because the Borrower was never notified that the Current Servicer was the mortgage servicer of his loans.  The Fifth Circuit rejected the Borrower's argument, recognizing that the record established in each case of the previous service transfers, the previous servicer, not the current mortgage, notified the Borrower of the identity of the succeeding mortgage servicer.

 

The Fifth Circuit further agreed with the District Court's ruling that because the Borrower acknowledged that payments were to be made to the Current Servicer, notice of the full chain of assignments was provided to the Borrower and the absence of evidence that the mortgage servicer was anyone other than the Current Servicer, the Borrower's challenge failed.

 

Moreover, the Fifth Circuit addressed Defendants' argument that estoppel barred the Borrower from challenging the Current Servicer's ability to conduct non-judicial foreclosure.  Although the District Court did not address this argument, the Fifth Circuit found that the Borrower could have raised the issue that only the current mortgagee could provide effective notice of the servicer pursuant to Tex. Prop. Code. § 51.0001(3) at any time after origination in 2006. 

 

As you may recall, "quasi estoppel" applies to legal bars such as ratification, election, acquiescence, waiver or acceptance of benefits.  Steubner Realty 19, Ltd., 817 S.W.2d  at 164.  Because the Borrower only first raised this issue during the pending litigation, and the Borrower made payments to the Current Servicer for over a year, the Borrower acquiescenced to the validity of the notice of transfer from one mortgage servicer to the next.  Although the Fifth Circuit noted that a defect in providing notice existing in the form of the previous mortgage servicer providing notice of the new servicer, rather than the current mortgagee, such a defect could not be challenged for the first time in this appeal. 

 

As to the Claretfield loan, the preceding mortgage servicer provided notice of the succeeding servicer each time a service transfer occurred.  The mortgagee of the Claretfield property did not change until after the Borrower defaulted.  As to the Oakfield loan, MERS transferred its interest to the Trustee in 2010 and the Current Servicer remained the servicer.  The Current Servicer provided notice via correspondence that it was the servicer.  While the statutory violation was the Trustee's failure to provide notice of the servicer, the Borrower could not first challenge the violation of the Texas Property Code after the previously discussed acquiescence.

 

Therefore, quasi-estoppel applied because the Borrower's position was inconsistent with his previous position and would disadvantage the Current Servicer.

 

Accordingly, the Fifth Circuit affirmed the District Court's ruling granting summary judgment in favor of the defendants, denied the Borrower's partial motion for summary judgment and denying as moot the Borrower's motion for judgment on the pleadings.

 

 

 

 

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

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.com

 

 

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: 1st Cir Affirms Dismissal of Multiple Claims Relating to Alleged HAMP Mod Denial

The U.S. Court of Appeals for the First Circuit recently affirmed the dismissal of multiple claims for violations of Massachusetts state law against a bank for allegedly denying the borrowers a loan modification under the Home Affordable Modification Program ("HAMP") and foreclosing on the borrowers' residence. 

 

A copy of the opinion is available at:  http://media.ca1.uscourts.gov/pdf.opinions/13-1236P-01A.pdf

 

Following the assignment of the subject loan to the defendant bank, the bank entered into a Servicer Participation Agreement ("SPA") with Fannie Mae.  The SPA required loan servicers to offer loan modifications and foreclosure prevention services pursuant to HAMP.  Subsequently, the bank and the borrowers entered into a loan modification agreement reducing the interest rate, extending the maturity date, and capitalizing unpaid interest (the "Modification Agreement"). 

 

The borrowers applied for additional loan modifications after the execution of the Modification Agreement.  As noted by the Court, the bank allegedly began pursuing two contradictory courses of action by both pursuing a foreclosure sale on the borrowers' residence, and simultaneously, considering the borrowers for another loan modification and determining that the borrowers were eligible pursuant to the HAMP guidelines.

 

The borrowers then filed their complaint with the Massachusetts Superior Court seeking injunctive relief to prevent the foreclosure.  Subsequently, the bank sent the borrowers an offer on a loan modification, but it appears that the borrowers ultimately rejected that offer.  Following the removal of the action to the federal court, the borrowers filed an amended complaint raising eleven state law claims. 

 

The bank filed a motion to dismiss which the lower court granted.  The borrowers appealed the dismissal as to only five of their eleven counts:  breach of contract, based on violations of the implied covenant of good faith and fair dealing; violation of the Massachusetts Consumer Credit Cost Disclosure Act ("MCCCDA"); rescission; negligence; and promissory estoppel. 

 

In affirming the dismissal of the borrowers' count for breach of contract, the Court determined that bank did not breach any implied covenant of good faith under either the SPA or as the mortgagee. 

 

The Court concluded that the borrowers were not third-party beneficiaries under the SPA between the bank and Fannie Mae.  The Court noted that it is a well-established principle that "government contracts often benefit the public, but individual members of the public are treated as incidental beneficiaries [who may not enforce a contract] unless a different intention is manifested." Quoting Restatement (Second) of Contracts § 313 cmt. a (1981).

 

Additionally, the Court looked favorably upon district court opinions applying this general principle in the context of disputes over HAMP modifications and concluding that borrowers are not third-party beneficiaries of agreements between mortgage lenders and the government.  Applying the general principle to the SPA, the Court determined that the bank and Fannie Mae did not intend to make the borrowers third-party beneficiaries, and accordingly, the borrowers could not raise a breach of contract claim under the SPA. 

 

The Court also determined that the bank had no duty as mortgagee to consider the borrowers for a loan modification prior to foreclosure in the event of a default.  In reaching this decision, the Court noted that "the concept of good faith 'is shaped by the nature of the contractual relationship from which the implied covenant derives,' and the 'scope of the covenant is only as broad as the contract that governs the particular relationship.'"  Young v. Wells Fargo Bank, N.A., 717 F.3d 224, 238 (1st Cir. 2013).  Under this framework, the Court concluded that nothing in the mortgage imposes a duty on the bank to consider a loan modification. 

 

The borrowers argued in support of their MCCCDA and rescission claims that the bank was required to including make certain disclosures provided for refinancing agreements under the MCCCDA, and that the bank's failure to do so was grounds for rescission.  

 

As you may recall, like TILA, the MCCCDA provides borrowers in certain refinance transactions with a right of rescission and requires lenders to make certain mandatory disclosures.  See Mass. Gen. Laws ch. 140D, § 10.  Section 10(f) of the statute extends the borrower's right of rescission to a period of four years in the event that the lender fails to make the required disclosures.

 

In rejecting the borrowers arguments, the Court relied upon Section 32.20 of title 209 of the Code of Massachusetts Regulations, which excludes certain agreements from being treated as refinancing, including: "A reduction in the annual percentage rate with a corresponding change in the payment schedule" and "A change in the payment schedule or a change in collateral requirements as a result of the consumer's default or delinquency." 

 

The Court concluded that the Modification Agreement was not a refinancing agreement. Thus, it was not subject to the disclosure requirements of the MCCCDA, and the borrowers have no right to rescind it under that statute. 

 

For their negligence claim, the borrowers alleged that the bank owed them a duty as third-party beneficiaries under the SPA, and that the bank breached their obligations under HAMP as incorporated by the SPA.

 

In Massachusetts, to state a claim for negligence the plaintiff must allege "(1) a legal duty owed by defendant to plaintiff; (2) a breach of that duty; (3) proximate or legal cause; and (4) actual damage or injury."  Primus v. Galgano, 329 F.3d 236, 241 (1st Cir. 2003). 

 

The First Circuit quickly rejected any argument that the bank owed any duty to the borrowers under the SPA, as it already determined that the borrowers were not third-party beneficiaries under that agreement between the bank and Fannie Mae. 

 

Additionally, the Court rejected the borrowers' argument that a violation of HAMP gave rise to a claim for negligence per se.  First, the Court noted that the relationship between a borrower and lender does not give rise to a duty of care under Massachusetts law, and second, that statutory or regulator violations cannot give rise to a negligence claim when there is no independent duty of care between the parties.  Thus, the Court concluded, that the district court properly dismissed the borrowers' negligence claim because the bank did not owe any legal duty to the borrowers. 

 

In considering the final claim on appeal, promissory estoppel, the Court determined that the borrowers' allegations in the complaint were a textbook illustration of "formulaic recitation of the elements of a cause of action" that falls below the standard of Federal Rule of Civil Procedure 8(a)(2).  See Ashcroft v. Igbal, 556 U.S. 662, 678 (2009). 

 

However, the borrowers argued on appeal that the bank engaged in a course of conduct which led the borrowers to believe that a HAMP modification would result, and that they relied upon these promises to their detriment by foregoing alternatives to foreclosure.  The Court begrudgingly dealt with the borrowers' arguments even though it noted that as a rule a party may not advance for the first time on appeal a new argument or an old argument that depends on a new factual predicate.  Nevertheless, the Court determined even under these new arguments the borrowers failed to state a claim for promissory estoppel. 

 

Under Massachusetts law, to state a claim for promissory estoppel, a plaintiff must allege that (1) a promisor makes a promise which he should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promise, (2) the promise does induce such action or forbearance, and (3) injustice can be avoided only by enforcement of the promise.

 

The First Circuit concluded that the mere fact that the bank considered the borrowers for multiple loan modifications over a two-year period is not a promise, implicit or otherwise, to consider them for further loan modifications prior to foreclosure.  Moreover, the Court noted that the borrowers completely omit the fact that the bank in fact extended a loan modification offer prior to foreclosure which they apparently rejected.  In addition, the Court determined that the borrowers failed to allege any facts to support their contention that they would have successfully avoided foreclosure if they had not pursued a loan modification.  Thus, the borrowers failed to properly allege a claim for promissory estoppel. 

 

Lastly, the Court addressed the borrowers' argument alleging a defective assignment of the mortgage from MERS to the bank.  The Court noted however that these claims were not tethered to any legal claim before the Court on appeal, and thus, even if the allegations were true, the Court could not provide any relief. 

 

Accordingly, the First Circuit affirmed the lower court's dismissal of the borrowers' 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

 

 

          McGinnis Wutscher Beiramee LLP

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FYI: 8th Cir Rules Against Arkansas County Clerk in MERS Recording Fee Case

The U.S. Court of Appeals for the Eighth Circuit recently affirmed the dismissal of a county circuit clerk's putative class action against MERS and various originators and servicers of loans for recovery of assignment recording fees.  The Eighth Circuit concluded that (i) the district court had jurisdiction under the federal Class Action Fairness Act to rule on the clerk's illegal-exaction claim, (ii) the district court did not err in exercising supplemental jurisdiction over the clerk's state law claims, and (iii) the district court did not err in refusing to abstain from hearing the clerk's claims.   

 

A copy of the Court's opinion is available at:  http://media.ca8.uscourts.gov/opndir/13/12/123494P.pdf

 

A Circuit Clerk in Arkansas filed a class action suit in state court against MERS and various lenders and servicers of loans (Lenders), alleging the use of the registration system violated the Arkansas Deceptive Trade Practices Act (ADTPA), unjustly enriched the Lenders, and constituted an illegal exaction under the Arkansas Constitution.  The basis of the plaintiff's suit was that the use of the registration system made it possible for mortgagees to avoid paying recording fees for subsequent assignments of the mortgage, thus depriving all county clerks of revenue. 

 

The Lenders removed the matter to federal court under the federal Class Action Fairness Act (CAFA).  The plaintiff circuit clerk filed a first Motion to Remand, contending that the federal court did not have jurisdiction under CAFA.  The district court denied the first Motion to Remand, holding that the requirements of CAFA were met because: (1) the class contained at least 100 members because the Arkansas Supreme Court has defined an illegal-exaction suit as a class action, (2) the parties were minimally diverse, and (3) the jurisdictional damage amount was satisfied.

 

The plaintiff circuit clerk then filed a second Motion to Remand, in which the plaintiff requested the court to abstain from hearing the illegal-exaction claim, exercise comity by refusing to hear the claim, or allow the plaintiff to dismiss the claim without prejudice.  The district court denied the second Motion to Remand, finding the abstention doctrine articulated in Burford v. Sun Oil Co., 319 U.S. 315 (1943) did not apply because the illegal-exaction claim did not involve the complex regulatory schemed required for abstention.  The district court also concluded that comity did not apply because that doctrine normally applied to injunctions sought to prevent the enforcement of a tax, whereas the plaintiff was seeking to enforce a recording fee.  Finally, the court refused to allow the plaintiff circuit clerk to withdraw the illegal-exaction claim because the motive to do so was "forum-driven."

 

The district court then dismissed the plaintiff's entire complaint pursuant to Fed. R. Civ. Pro. 12(B)(6).  In doing so, the district court made two distinct findings.  First, it held that the plaintiff circuit clerk did not state an illegal-exaction claim because she brought the claim as a tax receiver against a private entity, and a proper illegal-exaction claim is brought by a taxpayer to protect against the government's enforcement of an illegal exaction.  The second finding of the district court was that the state law ADTPA and unjust enrichment claims failed because there was no duty to record mortgage assignments in Arkansas. 

 

The plaintiff filed a Motion to Alter or Amend the ruling, in which she asked the district court to alter its judgment because the court did not have jurisdiction to rule on the state law claims after dismissing the illegal-exaction claim. The district court denied the Motion to Alter, finding that the state law claims were not so novel or complex to divest the district court of its jurisdiction.

 

The Plaintiff appealed the dismissal and raised three jurisdictional arguments on appeal: (1) the district court did not have jurisdiction under CAFA because it misconstrued the type of illegal-exaction claim pled, (2) even if the court had jurisdiction under CAFA, it erred in exercising supplemental jurisdiction over the unjust enrichment and ADTPA claims, and (3) the court erred in not abstaining from hearing the claims. 

 

The Eighth Circuit thoroughly addressed each issue raised on appeal. 

 

First, Court held that the requirements of CAFA were satisfied.  CAFA confers federal jurisdiction over class action where (1) there is minimal diversity, (2) the proposed class contains at least 100 members and (3) the amount in controversy is at least $5 million in the aggregate.  Further, CAFA's removal provisions apply only to "class action" cases, which are defined by the statute as "any civil action filed under rule 23 of the Federal Rules of Civil Procedure or similar State statute or rule of judicial procedure authorizing an action to be brought by 1 or more representative persons as a class action."  28 U.S.C. § 1332(d)(1)(B).  The amount in controversy was not an issue on appeal.

 

The analysis of jurisdiction under CAFA focused on whether the Plaintiff's purported class met the statutory definition of "class action" and whether there were a sufficient amount of members in the class.  In analyzing whether the plaintiff's complaint satisfied the statutory definition of a class action, the Eighth Circuit focused on the illegal-exaction claim, Rule 23 of the Arkansas Rules of Civil Procedure and instruction from the Arkansas Supreme Court.  "The Arkansas Supreme Court has prescribed a judicially-created procedure to bring an illegal-exaction claim in Arkansas.  This procedure, which was promulgated prior to Rule 23 of the Arkansas Rules of Civil Procedure, provides a mechanism for plaintiffs to pursue a class action to collectively resist illegal taxation.  In bringing an illegal-exaction claim, the Arkansas Supreme Court instructs courts to use Arkansas Rule 23 as a procedural guide."  Based on these holdings, the Eighth Circuit concluded that Arkansas had a "rule of judicial procedure" to satisfy the requirement of 28 U.S.C. § 1332(d)(1)(B) for purposes of establishing a "class action." 

 

The Eighth Circuit then addressed whether the district court erred in concluding that the class contained at least 100 members.  This was a simple issue for the Court – the plaintiff's complaint alleged, and in seeking class certification the plaintiff reiterated, that the illegal-exaction claim was a class action composed of Arkansas citizen-taxpayers.  Because the court's jurisdiction is measured at the time matter is removed, and because the complaint on its face was purportedly brought on behalf of all of the taxpayers in the State of Arkansas, the proposed class easily contained at least 100 members.  The Court also disposed of the plaintiff's argument that the Court misinterpreted the type of illegal-exaction case the plaintiff circuit clerk brought.  The plaintiff argued that the Court interpreted her claim as an illegal-tax case instead of a public-fund case.  The Court, however, said the argument did not alter the analysis because public-fund cases have proceeded on a class theory that includes all Arkansas taxpayers. 

 

In addressing the second issue raised on appeal – whether the district court erred in exercising supplemental jurisdiction over the state law claims – the Eighth Circuit ruled that such a decision is reviewed for abuse of discretion.  The district court's discretion to exercise supplemental jurisdiction should consider factors such as judicial economy, convenience, fairness and comity.  The Eighth Circuit concluded that "it would have been a waste of judicial resources to remand the case" and that it was fair to the parties and a proper allocation of comity for the district court to decide the issue because the state law claims were not novel and they involved well-understood and settled principles of Arkansas law.  Thus, the district court did not err in exercising supplemental jurisdiction. 

 

The final issue raised on appeal was whether the district court should have abstained from ruling on the matter because the action should have been filed and heard in state court.  The Court characterized the plaintiff's argument as one of subject-matter jurisdiction to which Burford abstention was irrelevant and inapplicable.  Burford abstention applies when a state has established a complex regulatory scheme supervised by state courts and serving important state interests that requires specialized knowledge and the application of complicated state laws.  The Eighth Circuit concluded that the plaintiff's complaint involved a standard enforcement proceeding requiring the federal court to apply Arkansas state law in a way that had already been interpreted by Arkansas courts.

 

Even though not raised as an issue on appeal, the Eighth Circuit proceeded to address the merits of the plaintiff's complaint and concluded that dismissal under Rule 12(B)(6) was appropriate. 

 

The Court held that, because Arkansas law does not impose a duty on assignees of mortgages to record their assignments, the state law claims of unjust enrichment and ADTPA both failed.  Additionally, the Court held that, because there is no duty to record the assignment, the Lenders did not retain anything of value and there is nothing they could be required to restore to the counties, thus the Lenders were not unjustly enriched.  Further, the Court held, under ADTPA, an unconscionable, false or deceptive act is required. In the absence of a duty to record the assignment, the Eighth Circuit concluded that failing to record is not "false" or "unconscionable."  

 

Accordingly, the Eighth Circuit affirmed the district court's dismissal of the plaintiff circuit clerk's complaint with prejudice.  

 

 

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
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Chicago, Illinois 60602
Direct: (312) 551-9320
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Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

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