FYI: 9th Cir Issues Mixed Ruling in MERS Multidistrict Litigation Appeal, Upholds Dismissal of Most of Claims

The U.S. Court of Appeals for the Ninth Circuit recently dismissed in part, reversed in part, and affirmed in part, an appeal from the dismissal of numerous allegations in multidistrict litigation challenging the role of MERS in the foreclosure process.  The Ninth Circuit reversed the dismissal of a claim alleging violations of Arizona's false documents statute, but otherwise upheld the dismissal of the remaining claims.

 

A copy of the opinion is available at:  http://cdn.ca9.uscourts.gov/datastore/opinions/2014/06/12/11-17615.pdf.

 

Various borrowers residing in several states sued various financial institutes who used Mortgage Electronic Registration Systems, Inc. ("MERS") to process the notes and deeds of trust executed by the borrowers. 

 

These lawsuits were consolidated by the Judicial Panel on Multidistrict Litigation and transferred to a Multidistrict Litigation Court ("MDL Court") in Arizona.  After the MDL Court dismissed several of the actions transferred to it, plaintiffs in the remaining actions filed a single Consolidated Amended Complaint ("CAC").  The MDL Court dismissed the CAC with prejudice, and the borrowers appealed. 

 

On appeal, the Ninth Circuit considered allegations of: (1) violation of Arizona's false documents statute, in connection with allegations of "robosigning"; (2) wrongful foreclosure in violation of Arizona, California and Nevada law, in connection with allegations that MERS impermissibly "splits" ownership of the note from ownership of the deed of trust; (3) allegations of improper nonjudicial foreclosures in violation of Nevada law; (4) allegations of aiding and abetting wrongful foreclosure under Arizona, California and Nevada law; and (5) allegations of aiding and abetting predatory lending under Arizona, California and Nevada law.

 

The Ninth Circuit considered each in turn, beginning with the plaintiffs' claim that alleged "robosigned" documents violated Arizona's false documents statute, Ariz. Rev. Stat. Sec. 33-420. 

 

Among other reasons, the MDL Court dismissed this count based on its holding that Ariz. Rev. Stat. Sec. 33-420 does not apply to the documents alleged to be false - including an assignment of a deed of trust, and a notice of substitution of trustee - and that  because the plaintiffs did not dispute their default, they had not suffered a concrete and particularized inquiry. 

 

The Ninth Circuit reversed the MDL Court's dismissal based on a change in law, noting that in a recent decision, the Arizona Court of Appeals determined that a damages claim is available under Arizona's false documents statute where a borrower alleges that a notice of substitution of trustee and assignment of deed of trust are false. See Stauffer v. U.S. Bank National Ass'n, 308 P.3d 1173, 1175 (Ariz. Ct. App. 2013).  The Stauffer decision also provided that borrowers in default did have standing to bring allegations under Sec. 33-420.  Because the allegations at issue in Stauffer closely resembled the borrowers' allegations here, the Ninth Circuit reversed the MDL Court's dismissal.   

 

The Ninth Circuit affirmed the MDL's dismissal of the remaining causes of action. 

 

As to the count alleging wrongful foreclosure in connection with "note-splitting" - allegedly in violation of Nevada, California and Arizona law - the Ninth Circuit found that claims failed because "none of the [borrowers] has shown a lack of default, tender, or an excuse from the tender requirement, [borrowers'] wrongful foreclosure claims cannot succeed." 

 

Next, the Ninth Circuit considered the borrowers' allegations of improper nonjudicial foreclosures in violation of Nev. Rev. Stat. Sec. 107.080.  Specifically, the borrowers alleged that MERS was not the "true beneficiary" under the deed of trust, because it disclaimed any right to an interest in the property or proceeds of the loan.  Thus, the borrowers argued that the parties issuing the notices of default or trustee's sale were neither the beneficiary nor the trustee appointed by the lender, in alleged violation of Nevada law. 

 

The Ninth Circuit again disagreed with the plaintiffs, ruling that Edelstein v. Bank of New York Mellon, 286 P.3d 249 (Nev. 2012) "makes clear that MERS does have the authority, for the purposes of Nev. Rev. Stat. Sec. 107.080, to make valid assignments of the deed of trust to a successor beneficiary..." 

 

Having found that the borrowers' allegations of wrongful foreclosures under Arizona, California and Nevada law were without merit, the Ninth Circuit had little difficulty in rejecting the related claim of aiding and abetting wrongful foreclosure. 

 

Finally, the Ninth Circuit affirmed the dismissal of the borrowers' claim of aiding and abetting predatory lending - finding that the MDL Court's determination that these claims did not relate to the formation and operation of the MERS system was correct. 

 

The Ninth Circuit therefore reversed and remanded the MDL's dismissal of the count concerning alleged violations of Arizona's false documents statute, and otherwise affirmed the MDL's dismissal of the remaining counts. 

  

 

 

 

 

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: Ill App Ct Reverses Foreclosure Judgment Based on Faulty Service by Publication Affidavit

The Illinois Appellate Court, First District, recently held that a foreclosing mortgagee’s affidavit supporting a motion for service by publication did not strictly comply with the relevant statutory requirements, in that the affidavit was stale as notarized fifty days prior to the filing of the motion and recited attempts at service made after the affidavit was notarized. 

 

Accordingly, the Court held that the lower court did not have personal jurisdiction over the borrower, and vacated the lower court's judgment of foreclosure and order confirming the foreclosure sale. 

 

A copy of the opinion is available at:  http://www.illinoiscourts.gov/Opinions/AppellateCourt/2014/1stDistrict/1130112.pdf.

 

A mortgagee filed a foreclosure lawsuit, and made numerous attempts to serve the borrower at various locations in Illinois and Florida.  None of the mortgagee's attempts were successful.  Accordingly, the mortgagee filed a motion to allow service by publication, which included an affidavit (the "affidavit") reciting its attempts at service. 

 

Although the affidavit's notary seal was dated September 14, 2009, it recited attempts at service that took place on September 23 and October 28 of 2009.  The affidavit was filed with the court on November 3, 2009. 

 

The lower court granted the mortgagee's motion for service by publication.  When the borrower failed to appear, the lower court entered a judgment of foreclosure and sale in favor of the mortgagee.

 

Before the sale took place, the borrower filed a motion to quash service, alleging defects in the mortgagee's affidavit.  The lower court denied the borrower's motion, and the borrower appealed. 

 

As you may recall, Illinois law provides for service by publication, where the defendant "on due inquiry cannot be found."  735 ILCS 5/2-206(a). 

 

On appeal, the Court reviewed the applicable case law, noting that although service by publication is permitted by statute, it is an "extraordinary means of serving notice" that requires "strict compliance with every requirement" of the relevant statute.  See Public Taxi Service Inc. v. Aryton, 15 Ill. App. 706, 713 (1973); Illinois Valley Bank v. Newman, 351 Ill. 380, 383 (1933). 

 

The Court next considered the borrower's various arguments, beginning with the contention that the mortgagee's affidavit improperly listed the borrower's last known address as that of the property that was the subject of the foreclosure action, rather than an alternative address where the mortgagee attempted service.        

 

The Court rejected the borrower's argument, noting that the borrower failed to provide any evidence of his correct address - or even affirmatively represent what his correct address might be.  Therefore, the Court determined that "where the borrower challenges the accuracy of the representation of his last known address but fails to provide the court with competent evidence substantiating the claimed error, he has not provided a sufficient basis for challenging service by publication." 

 

Next, the Court turned the borrower's contention that the affidavit was stale, in that it was allegedly notarized 50 days before the related motion for service by publication was filed. 

 

The Court found this argument persuasive, noting that although the statute does not provide for "time limits" to determine whether attempts to locate a defendant are sufficient, "[c]ommon sense dictates...that an affidavit that recites efforts to locate a party occurring a substantial period of time prior to the filing of the motion to serve by publication may not be sufficient to establish the diligence required." 

 

Next, the Court noted that although there was no recent authority on the issue, two cases - decided in 1933 and 1866 - indicated that a 20-day delay between the execution of the affidavit and the filing of the related motion was unreasonable.  See Illinois Valley Bank v. Newman, 351 Ill. 380 (1933); Campbell v. McCahan, 41 Ill. 45 (1866). 

 

The Court reasoned that if a 20-day delay "defeated the showing of due diligence required to justify service by publication, it would seem obvious that a 50-day delay nearly 150 years later in the age of instant information should suffer the same fate." 

 

The mortgagee argued that the affidavit reflected attempts to serve the borrower as late as October 28, 2009 - or only six days from the date the affidavit was filed.

 

However, the Court found this argument unpersuasive in light of the fact that the affidavit was notarized in September of 2009.  Because "on this record, we have no way of knowing the correct date the affidavit was executed and notarized," the Court held that the mortgagee had not strictly complied with every element of the statute. 

 

Accordingly, the Court held that the publication notice did not confer personal jurisdiction over the borrower, and that subsequent orders based on that service were void.  The Court therefore reversed the lower court's denial of the borrower's motion to quash and vacated the judgment of foreclosure.  

 

 

 

 

 

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

 

 

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FYI: 6th Cir Confirms Verifying Identity and Eligibility for Service is "Permissible Purpose" Under FCRA

The U.S. Court of Appeals for the Sixth Circuit recently held that using or obtaining a credit report to verify the identity of a consumer and assess his eligibility for a service is a “permissible purpose” under the federal Fair Credit Reporting Act (FCRA).  The Court noted that, when dealing with an imposter purporting to be the consumer, a company’s good faith effort to protect a consumer from identity theft while providing a service is perfectly consonant with the underlying purpose of FCRA.

 

A copy of the opinion is available at: http://www.ca6.uscourts.gov/opinions.pdf/14a0098p-06.pdf

 

An independent, third-party retailer (Retailer) of defendant satellite television service provider (Company) received a call from a potential identity thief (Identity Thief).  Identity Thief presented herself as a potential consumer, providing the correct social security but incorrect name of her target victim (Consumer).

 

Subsequently, Retailer entered the name and social security number provided into an interface that connects to three credit reporting agencies.  Using a waterfall process, wherein each credit reporting agency attempts to match the data in turn, Retailer discovered that the credit agencies had been unable to find a match based on the information provided.  It then informed Identity Thief that her attempt to open a new account had been declined.

 

Thereafter, Consumer received a credit report indicating that Company – not Retailer – had made a credit inquiry in Consumer’s name.  Almost a year later, and despite knowing that the credit inquiry prevented the theft of his identity, Consumer filed suit in federal court alleging that Company wilfully and negligently violated the FCRA, by requesting and using his credit report without a “permissible purpose,” and claiming emotional distress.  However, his allegations failed to mention the attempted identity theft.

 

Following the Complaint, Company filed a counterclaim for abuse of process, and moved for summary judgment on all claims.  Consumer then moved for judgment on the pleadings with respect to the counterclaim.

 

The U.S. District Court for the District Court for the Western District of Kentucky granted Consumer’s motion with regard to the abuse of process counterclaim, but also granted summary judgment in favor of Company on the FCRA allegations.  Both parties appealed.

 

As you may recall, the FCRA regulates the permissible uses of “consumer reports,” which summarize credit history and credit worthiness, see 15 U.S.C. § 1681b, and creates a private right of action allowing injured consumers to recover for negligent and willful violations of the Fair Credit Act.  See 15 U.S.C. § 1681n (willful violations); 15 U.S.C. § 1681o (negligent violations).  To assert such actions, a plaintiff must also show three elements: “(i) that there was a ‘consumer report’ within the meaning of the statute; (ii) that the defendant used or obtained it; and (iii) that the defendant did so without a permissible statutory purpose.”  Godby v. Wells Fargo Bank, N.A., 599 F. Supp. 2d 934, 937 (S.D. Ohio 2008). 

 

One such permissible purpose arises when the person “otherwise has a legitimate business need for the information . . . in connection with a business transaction that is initiated by the consumer.”  15 U.S.C. § 1681b(a)(3)(F)(i).

 

Addressing each element of the FCRA claims, the Sixth Circuit affirmed the district court’s grant of summary judgment in favor of Company.

 

As a preliminary issue, the Sixth Circuit determined that there was sufficient evidence of a “consumer report” within the meaning of the statute.  Of significance to the Court was that the report contained an “Echostar Risk” number which had “bearing on consumer’s credit worthiness, and therefore [was] a ‘consumer report’ as defined under 15 U.S.C. § 1681(d).”  Slip Op. at p. 7.  Also, the Court quickly disposed of the “use or obtain” element, as this was not contested on appeal.

 

As to whether Company used the “consumer report” without a permissible statutory purpose, the Sixth Circuit held that “verifying the identity of a consumer and assessing his eligibility for a service is a ‘legitimate business need,’ and therefore constitutes a permissible statutory purpose.”  Slip Op. at p. 8. 

 

In so holding, the Court rejected the contention that a company, dealing with an imposter purporting to be the consumer, should be held liable when the company attempts in good-faith to verify the consumer’s identity and eligibility for commercial services.  See id. at p. 10.  The Court also noted that it was “beyond dispute” that preventing identity theft was a “legitimate business need,” observing that, “[the FCRA] was not intended to be used as a sword against businesses protecting consumers’ identities, and we decline to grant such a weapon to a party as litigious and seemingly insensible of the benefit that he has received as [Consumer].”  Id.

 

Additionally, the Sixth Circuit held that Consumer had initiated the transaction, noting that Company believed in good faith that Identity Thief was Consumer, and that Consumer had benefitted from Company’s conduct.  According to the Court, it is reasonable to “infer the consumer’s implicit waiver or consent” where the business’ conduct “is exactly the sort of thing the Fair Credit Act seeks to promote.” TransUnion Corp. v. F.T.C., 8 F.3d 228, 234 (D.C. Cir. 1996).  As Company’s conduct was “perfectly consonant with the underlying purpose of the consumer-initiated business transaction,” Company’s attempt to protect a consumer while providing a service is permitted under the FCRA.

 

As to Company’s abuse of process counterclaim, the Sixth Circuit affirmed its dismissal in light of the formulaic and conclusory statements without supporting factual allegations.  Notably, the Court expressly stated that it was not addressing the propriety of Rule 11 sanctions.

 

Accordingly, the Sixth Circuit affirmed the district court’s grant of summary judgment in favor of Company and against Consumer on the FCRA allegations, and also affirmed judgment on the pleadings in favor of Consumer on the abuse of process counterclaim.

 

 

 

 

 

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

 

 

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FYI: Cal Sup Ct Reverses Trial Court Judgment in LO Wage and Hour Class Action, Criticizes Statistical Sampling Used to Determine Liability

The Supreme Court of California recently held that a class action trial management plan must permit the litigation of relevant affirmative defenses, even when those defenses turn on individual questions.  In so ruling, the Supreme Court criticized using a sampling of class members to determine liability.

 

A copy of this opinion is available at:  http://www.courts.ca.gov/opinions/documents/S200923.PDF

 

A group of business banking officers (BBOs) sued their bank employer (Employer) for alleged failure to pay overtime compensation, claiming they had been misclassified as exempt employees under the outside salesperson exemption. 

 

The BBOs were employed to sell bank products, including loans and lines of credit, to small business customers.  The Employer had classified the BBOs as exempt employees pursuant to the “outside salesperson” exemption.

 

As you may recall, in California, persons entitled to overtime pay include those “employed in any occupation, trade, or industry, whether compensation is measured by time, piece, or otherwise, but [do] not include any individual employed as an outside salesman …” Calif. Labor Code section 1171.  An “[o]utside salesperson” is one “who customarily and regularly works more than half the working time away from the employer’s place of business selling tangible or intangible items or obtaining orders or contracts for products, services or use of facilities.”  Calif. Industrial Wage Commission, Wage Order No. 4-2001 (Jan. 1, 2001), subd. 2(M).

 

Unlike the corresponding federal provision, the California’s wage order definition of an outside salesman “takes a purely quantitative approach” and focuses exclusively on whether the employee spends more than 50% of the workday engaged in sales activities outside the office.  Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785, 797.

 

The trial court certified a class of 260 plaintiffs, and the parties later proceeded to trial.  The trial court devised a plan to determine the extent of Employer’s liability to all class members by extrapolating from a random sample.

 

Without input from either side’s statistical experts, the trial court “randomly” selected 20 of the BBOs, plus the two named plaintiffs, as a representative witness group (RWG).  The trial court instructed its clerk to randomly choose the twenty BBOs.  When several BBOs opted out of the class or failed to respond to the trial court’s order, the trial court simply replaced those RWG members with other BBOs.  At trial, the Employer was not allowed to introduce declarations or live testimony concerning the work habits of class members outside of the RWG.  The Employer was not allowed to argue that many of the class members outside of the RWG had been properly classified as “exempt” from overtime compensation requirements.

 

Based upon testimony from the RWG members, the trial court found that the Employer had misclassified the entire class of BBOs and was required to pay overtime compensation.  The trial court relied upon the Plaintiff’s statistics expert in determining damages.  It calculated the average number of unpaid overtime hours worked by the RWG members and then extrapolated that figure to cover the entire class of BBOs.  According to Plaintiff’s statistics expert, the margin of error was 43.3%.

 

This resulted in a verdict of approximately $15 million, and an average recovery of over $57,000 per person.  The Court of Appeal reversed, and the California Supreme Court granted review.

 

The California Supreme Court noted that “as a general rule if the defendant’s liability can be determined by facts common to all members of the class, a class will be certified even if the members must individually prove their damages.”  Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal.4th 1004, 1021-1022.  However, “class treatment” is not appropriate “if every member of the alleged class would be required to litigate numerous and substantial questions determining his individual right to recover following the ‘class judgment’” on common issues.  (City of San Jose v. Superior Court (1974) 12 Cal.3d 447, 459.)

 

The Supreme Court also noted that in considering whether a class action is a superior device for resolving a controversy, the manageability of individual issues is just as important as the existence of common questions uniting the proposed class.  The Court explained, “[A] defense in which liability itself is predicated on factual questions specific to individual claimants poses a much greater challenge to manageability … Only in an extraordinary situation would a class action be justified where, subsequent to the class judgment, the members would be required to individually prove not only damages but also liability.”

 

The Court rejected the trial court’s practice of barring testimony from class members outside of the RWG:  “if liability is to be established on a classwide basis, defendants must have an opportunity to present proof of their affirmative defenses within whatever method the court and the parties fashion to try these issues. If trial proceeds with a statistical model of proof, a defendant accused of misclassification must be given a chance to impeach that model or otherwise show that its liability is reduced because some plaintiffs were properly classified as exempt.”

 

The California Supreme Court also criticized the trial court’s sampling technique.  The Court found that the RWG was too small and that the trial court should have considered input from the parties’ statistical experts prior to selecting the RWG. 

 

The Supreme Court determined that the RWG was not randomly selected. “[E]ven when selection procedures appear to be random, errors may arise that undermine randomness. For instance, nonresponse bias can occur if a sample is chosen randomly from a group containing only survey respondents.”  The Court recounted that several of the RWG members who had given favorable deposition testimony for the Employer later opted out of the lawsuit.  These former class members submitted declarations stating that Plaintiff’s counsel strongly encouraged them to opt out after they were selected for the RWG.  Finally, the Court found that the margin of error of 43.3% was so large that the resulting damages award violated due process.

 

Accordingly, the California Supreme Court reversed the trial court’s judgment, holding that the “trial court’s exclusion of all evidence about the work habits of BBOs outside the sample group and its implementation of a biased sampling plan were manifestly an abuse of the court’s discretion.”  The Court instructed that, “[o]n remand, the trial court must start anew by assessing whether there is a trial plan that can properly address both common and individual issues if the case were to proceed as a class action.”

 

In so ruling, the Court noted that its “opinion properly identifies the shortcomings of the representative witness group in this case and the trial court‘s failure to give due consideration to the individualized evidence that [Employer] sought to introduce in its defense,” and “we cannot have confidence in [the trial court’s] findings because the trial court did not use a valid representative witness group or consider individualized evidence that might have presented a more complete picture of the class.” 

 

 

 

 

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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