FYI: 6th Cir Holds ECOA Violation May Be Raised As Aff Def in Recoupment, Allows Guarantors to Sue Under ECOA

The U.S. Court of Appeals for the Sixth Circuit recently held that an alleged violation of the federal Equal Credit Opportunity Act may be asserted as an affirmative defense of recoupment.  In so ruling, the Court also held that the broader definition of “applicant” under Regulation B allows a guarantor to sue under ECOA’s spouse-guarantor rule.

 

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

 

A borrower refinanced various loans with a lender, with both the borrower and his spouse ("spouse") executing a personal guaranty.  When the related note became due, the lender's successor filed suit, alleging among other things breach of the guarantee by the spouse.  The spouse moved for summary judgment in her favor, arguing that the guarantee was unenforceable because it allegedly violated the federal Equal Credit Opportunity Act and Regulation B, 12 C.F.R. Sec. 202.7(d), 12 C.F.R. Sec. 1002.7(d). 

 

The lower court disagreed, and found in favor of the plaintiff.  The spouse appealed. 

 

As you may recall, Regulation B prohibits a creditor from requiring an applicant's spouse to guarantee a credit instrument, even if the creditor requires someone to execute a guaranty.  See id.  Only applicants have standing to sue for ECOA violations.  15 U.S.C. Sec. 1691(e).  However, "applicant" is defined differently in the ECOA and Regulation B: the former does not explicitly include guarantors, while the latter allows guarantors to sue for violations of the spouse-guarantor rule.  See id.; 12 C.F.R. Sec. 202.2(e), 12 C.F.R. Sec. 1002.2(e).  

 

On appeal, the Sixth Circuit first considered whether Regulation B's definition of "applicant" was entitled to deference.  The Court answered this question in the affirmative.  It began by reciting the familiar rule that where Congress was silent or a statute is ambiguous as to an issue at hand, an agency's implementing regulation will be granted deference where the agency's answer is based on a permissible construction of the statute.  See Chevron, U.S.A. Inc., v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843 (1984). 

 

The Sixth Circuit then scrutinized the ECOA, noting that it defines "applicant" as "any person who applies to a creditor directly for an extension, renewal, or continuation of credit..."  15 U.S.C. Sec. 1691a(b).  Further, "credit" is defined as "the right granted by a creditor to a debtor to defer payment of debt..."  15 U.S.C. Sec. 1691a(d).   

 

The Sixth Circuit reached that conclusion because it read the above definitions to provide that, although it is an "applicant" who requests credit, it is a "debtor" who reaps the benefit - such that "the applicant and the debtor are not always the same person."  The Court therefore reasoned that if the applicant and the debtor are not always the same person, "it would be reasonable to conclude that the applicant could be a third party, such as a guarantor." 

 

The Court therefore determined that the ECOA's definition of "applicant" is ambiguous, because it "could be read to include third parties who do not initiate an application for credit..." 

 

Due to that ambiguity, the Sixth Circuit held that Regulation B's definition of "applicant" was valid, and that a guarantor can seek relief for violations of the spouse-guarantor rule. 

 

Next, the Court turned to the question of whether a spouse-guarantor can assert an affirmative defense of recoupment.  The Sixth Circuit again answered in the affirmative, noting that "[w]e see no command in ECOA or Regulation B to deny defendants the ability to assert a violation as a recoupment defense."  The Court further observed that prohibiting a recoupment defense could undermine Congressional intent to "eradicate gender and marital status based credit discrimination."

 

Accordingly, the Sixth Circuit reversed the lower court's conclusion that the spouse cannot raise an affirmative defense of recoupment, vacated the lower court’s ruling granting summary judgment to the lender's successor, and remanded the matter for further proceedings consistent with its opinion.     

 

 

 

 

 

 

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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                                www.mwbllp.com

 

 

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FYI: 6th Cir Holds ECOA Violation May Be Raised As Aff Def in Recoupment, Allows Guarantors to Sue Under ECOA

The U.S. Court of Appeals for the Sixth Circuit recently held that an alleged violation of the federal Equal Credit Opportunity Act may be asserted as an affirmative defense of recoupment.  In so ruling, the Court also held that the broader definition of “applicant” under Regulation B allows a guarantor to sue under ECOA’s spouse-guarantor rule.

 

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

 

A borrower refinanced various loans with a lender, with both the borrower and his spouse ("spouse") executing a personal guaranty.  When the related note became due, the lender's successor filed suit, alleging among other things breach of the guarantee by the spouse.  The spouse moved for summary judgment in her favor, arguing that the guarantee was unenforceable because it allegedly violated the federal Equal Credit Opportunity Act and Regulation B, 12 C.F.R. Sec. 202.7(d), 12 C.F.R. Sec. 1002.7(d). 

 

The lower court disagreed, and found in favor of the plaintiff.  The spouse appealed. 

 

As you may recall, Regulation B prohibits a creditor from requiring an applicant's spouse to guarantee a credit instrument, even if the creditor requires someone to execute a guaranty.  See id.  Only applicants have standing to sue for ECOA violations.  15 U.S.C. Sec. 1691(e).  However, "applicant" is defined differently in the ECOA and Regulation B: the former does not explicitly include guarantors, while the latter allows guarantors to sue for violations of the spouse-guarantor rule.  See id.; 12 C.F.R. Sec. 202.2(e), 12 C.F.R. Sec. 1002.2(e).  

 

On appeal, the Sixth Circuit first considered whether Regulation B's definition of "applicant" was entitled to deference.  The Court answered this question in the affirmative.  It began by reciting the familiar rule that where Congress was silent or a statute is ambiguous as to an issue at hand, an agency's implementing regulation will be granted deference where the agency's answer is based on a permissible construction of the statute.  See Chevron, U.S.A. Inc., v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843 (1984). 

 

The Sixth Circuit then scrutinized the ECOA, noting that it defines "applicant" as "any person who applies to a creditor directly for an extension, renewal, or continuation of credit..."  15 U.S.C. Sec. 1691a(b).  Further, "credit" is defined as "the right granted by a creditor to a debtor to defer payment of debt..."  15 U.S.C. Sec. 1691a(d).   

 

The Sixth Circuit reached that conclusion because it read the above definitions to provide that, although it is an "applicant" who requests credit, it is a "debtor" who reaps the benefit - such that "the applicant and the debtor are not always the same person."  The Court therefore reasoned that if the applicant and the debtor are not always the same person, "it would be reasonable to conclude that the applicant could be a third party, such as a guarantor." 

 

The Court therefore determined that the ECOA's definition of "applicant" is ambiguous, because it "could be read to include third parties who do not initiate an application for credit..." 

 

Due to that ambiguity, the Sixth Circuit held that Regulation B's definition of "applicant" was valid, and that a guarantor can seek relief for violations of the spouse-guarantor rule. 

 

Next, the Court turned to the question of whether a spouse-guarantor can assert an affirmative defense of recoupment.  The Sixth Circuit again answered in the affirmative, noting that "[w]e see no command in ECOA or Regulation B to deny defendants the ability to assert a violation as a recoupment defense."  The Court further observed that prohibiting a recoupment defense could undermine Congressional intent to "eradicate gender and marital status based credit discrimination."

 

Accordingly, the Sixth Circuit reversed the lower court's conclusion that the spouse cannot raise an affirmative defense of recoupment, vacated the lower court’s ruling granting summary judgment to the lender's successor, and remanded the matter for further proceedings consistent with its opinion.     

 

 

 

 

 

 

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: 9th Cir Rejects Vicarious Liability Allegations in TCPA Telemarketing Action

The U.S. Court of Appeals for the Ninth Circuit recently affirmed the dismissal of alleged violations of the federal Telephone Consumer Protection Act (“TCPA”) by a business in connection with its national marketing campaign through its ad agency that contracted with the telemarketer.  The Ninth Circuit held that, based on the evidence, the business could not be held vicariously liable for the alleged TCPA violations because it did not control the telemarketer, openly authorize the telemarketer’s actions, or ratify the telemarketer’s actions.

 

A copy of this opinion is available at:  http://cdn.ca9.uscourts.gov/datastore/memoranda/2014/07/02/12-56458.pdf

 

An association of businesses (“Association”) sponsored a local sweepstakes promotion through its advertising agency (“Advertising Agency”).  As part of the promotion, the Advertising Agency hired a separate provider of text-message based services (“Telemarketer”) which sent text messages regarding the promotion to consumers.  One consumer who received a text message sued a business-member of the Association (“Business”) under the TCPA.

 

As you may recall, the TCPA provides that “[i]t shall be unlawful for any person … to make any call … using any automatic telephone dialing system or an artificial or prerecorded voice … to any … cellular telephone service.”  47 U.S.C. § 227(b)(1)(A)(iii).  A defendant can be held liable under the TCPA either for its own actions (direct liability) and, under limited circumstances, can be held vicariously liable for the actions of others.

 

As you may also recall, a recent FCC ruling held that it is not “appropriate to limit vicarious liability to the circumstances of classical agency (involving actual seller, or right to control, of the telemarketing call) … Principles of apparent authority and ratification may also provide a basis for vicarious seller liability for violations of section 227(b).”  In re DISH Network, LLC, 28 F.C.C. Rcd. At 6574, 6590 n.124.

 

The Ninth Circuit rejected that the consumer’s argument that the Business could be directly liable under the TCPA because the text messages were sent by the Telemarketer retained by the Advertising Agency.  The Ninth Circuit noted that the consumer had “not presented any evidence … demonstrating that [the business] controlled the actions of the[] entities with respect to the campaign.” 

 

The Ninth Circuit held that the Business could be vicariously liable under the circumstances of classical agency.  However, the Ninth Circuit rejected that either the principle of apparent authority or the principle of ratification could provide a basis for vicarious liability of the Business.

 

With respect to the principle of apparent authority, the Ninth Circuit explained that apparent authority can only “be established by proof of something said or done by the [alleged principal], on which [the plaintiff] reasonably relied … Apparent authority exists only as to those whom the principal has manifested that an agent is authorized.  There is, therefore, tort liability only if such a manifestation and its execution by the apparent agent results in harm.” 

 

The Ninth Circuit held that the Business could not be vicariously liable for having extended any apparent authority because the consumer had “not shown that she had reasonably relied, much less to her detriment, on any apparent authority with which [the Business] allegedly cloaked the [Association], [the Advertising Agency], or [the Telemarketer].”

 

With respect to the principle of ratification, the Ninth Circuit noted, “[a]lthough a principal is liable when it ratifies an originally unauthorized tort, the principal-agent relationship is still a requisite, and ratification can have no meaning without it.” citing Batzel v. Smith, 333 F.3d 1018, 1036 (9th Cir. 2003) (footnote omitted).  The Ninth Circuit found that the Business could not have ratified the text messages because the Telemarketer was not an agent of the business. 

 

Accordingly, the Ninth Circuit affirmed the lower court’s dismissal of the action.

 

 

 

 

 

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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                                www.mwbllp.com

 

 

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FYI: Ill App Ct Rejects Challenge to Foreclosure Based on Alleged Alteration of Note

The Appellate Court of Illinois, First District, recently affirmed a trial court’s ruling in favor of a mortgagee, rejecting the borrower’s arguments that the note at issue had been altered because an indorsement stamp was blurred and the name of the payee was smudged. 

 

A copy of the opinion is available at: http://www.illinoiscourts.gov/Opinions/AppellateCourt/2014/1stDistrict/1130023.pdf

 

The trial apparently believed that the smudge indicated the possibility that someone had erased the name of the original payee and substituted the mortgagee’s name. 

 

However, the trial court still granted summary judgment in the mortgagee’s favor because: (1) the mortgagee produced an affidavit of its document control officer, who identified the mortgagee as the holder of the note; (2) the mortgagee produced the original note in court for examination by defense counsel; (3) it was undisputed that the mortgagee was the mortgagee of record by virtue of an assignment of the mortgage from MERS; and (4) the borrower failed to adduce any competent evidence that the endorsement on the note had been altered.

 

The Appellate Court affirmed the trial court’s ruling, and held that because the mortgagee produced the original of the note in open court, it was the holder of the note.  In addition, the Appellate Court held that any issue regarding the manner in which the mortgagee acquired the note does not affect its undisputed status as the holder. 

 

The Appellate Court also held that because it was the borrower who raised an issue regarding the manner in which the borrower’s acquired the note, it was the borrower’s burden to present evidence that would raise a genuine issue of material fact that some other person or entity was the holder of the note, and because no such evidence was presented, the borrower’s argument failed. 

 

Because there was no such evidence in the record, the Appellate Court ruled that the case was not governed by Ruwaldt v. W.C. McBridge, Inc., 338 Ill. 285, 292-93 (1944), which established the rule that “[w]here an alteration in a deed is … established by inspection, the burden of proof shifts to the person claiming the benefit of the instrument, as altered, to show the alteration was made under circumstances rendering it lawful.”

 

This Appellate Court’s opinion supports the rule that a party who can produce an original note in open court is the holder of the note.  The ruling also places the burden on the borrower to present facts related to alteration, even if a cursory inspection by the trial court indicates that the note was altered in some way.  Finally, the opinion supports the rule in Illinois that proof of assignment of mortgage, combined with an affidavit identifying the holder of the note, is sufficient to establish that the mortgagee is entitled to foreclose.  

 

 

 

 

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: 11th Cir Holds Filing Proof of Claim on Time-Barred Debt Violates FDCPA

The U.S. Court of Appeals for the Eleventh Circuit recently held that filing a proof of claim in a bankruptcy action based on a debt that is time-barred under state law violates the federal Fair Debt Collection Practices Act. 

 

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

 

A consumer owed a debt to a furniture company, which sold the debt to a debt collector.  The last transaction on the account took place in October of 2001, such that under the applicable state statute of limitations, the debt became time-barred in October of 2004. 

 

The consumer filed for bankruptcy in 2008.  The debt collector filed a proof of claim in that action to collect the debt.  The borrower filed a counterclaim against the debt collector, alleging that its attempt to collect a time-barred debt violated the federal Fair Debt Collection Practices Act, 15 U.S. Sec. 1692(d)-1692(f) (2006) ("FDCPA").  

 

The bankruptcy judge dismissed the counterclaim, and the district court affirmed.  The consumer then appealed to the Eleventh Circuit. 

 

As you may recall, the FDCPA provides that debt collectors may not use false, deceptive, misleading, unconscionable or unfair means to collect a debt.  15 U.S.C. Sec. 1692(e)-(f).  Courts have adopted a "least sophisticated consumer" standard to evaluate whether a debt collection practice runs afoul of the FDCPA. See, e.g., Leblanc v. Unifund CCR Partners, 601 F.3d 1185, 1193-94, 1200-01 (11th Cir. 2010).

 

The Eleventh Circuit began its discussion of the consumer's appeal by examining the reason behind the debt collector's practice of filing time-barred proofs of claim, noting that "[a]bsent an objection...the time-barred claim is automatically allowed against the debtor" such that "the debtor must then pay the debt from his future wages as part of the Chapter 13 repayment plan." 

 

Next, the Eleventh Circuit noted that federal and district courts have "uniformly held" that attempting to collect a stale debt in state court violates the FDCPA -- and found the reasoning that supported those decisions applicable here as well.  Specifically, the Court noted that the passage of time since the debt became stale would "make it difficult for a consumer debtor to defend against the time-barred claim," and further that filing a time-barred proof of claim "creates the misleading impression to the debtor that the debt collector can legally enforce the debt." 

 

Accordingly, the Eleventh Circuit held that filing a time-barred proof of claim in bankruptcy was unfair, unconscionable, deceptive and misleading under the FDCPA. 

 

The debt collector argued that filing a proof of claim did not constitute a "debt collection activity" aimed at the consumer, and accordingly was not regulated by the FDCPA. 

 

The Eleventh Circuit disagreed, noting that its conclusion that the FDCPA regulates the debt collector's conduct here was consistent with the FDCPA's definition of debt collector to include "any person who...regularly collects or attempts to collect, directly or indirectly, debts owed..."  15 U.S.C. Sec. 1962a(6). 

 

Accordingly, the Eleventh Circuit held that "just as [the debt collector] would have violated the FDCPA by filing a lawsuit on stale claims in state court, [the debt collector] violated the FDCPA by filing a stale claim in bankruptcy 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

 

 

          McGinnis Wutscher Beiramee LLP

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

                                www.mwbllp.com

 

 

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