FYI: Ill App Ct Allows Mortgagee to Vacate Erroneous Foreclosure Sale Before Motion to Confirm Sale Is Filed

The Illinois Appellate Court, Second District, recently affirmed a trial court’s order vacating an initial judicial sale due to a bidding error, which resulted in a surplus, and permitting a second sale, which resulted in a deficiency. 

 

A copy of the opinion is available at: http://www.illinoiscourts.gov/Opinions/AppellateCourt/2014/2ndDistrict/2131225.pdf

 

In September 2010, the bank filed a complaint seeking to foreclose on a mortgage.  Although he was served, the borrower did not appear within the time allowed.  In April 2011, the trial court entered a default judgment of foreclosure in the amount of $283,816.50. 

 

In July 2011, after due notice, a judicial sale was held.  The bank submitted an opening bid of $376,000.00 and was the successful bidder.  Neither the bank nor the borrower moved to confirm the July 2011 judicial sale.  In September 2011, the borrower filed bankruptcy. 

 

In January 2012, the bank moved to vacate the judicial sale.  No motion to confirm was pending.  The bank represented that it erred in its bidding instructions, resulting in an incorrect bid.  The borrower did not respond or appear at the hearing on the motion.  The trial court granted the motion and vacated the sale. 

 

In February 2012, after due notice, a second judicial sale was held.  The bank was the successful bidder again, with a bid of $286,436.00.  The bank moved to confirm this second sale. 

 

The motion to confirm the second sale was set for hearing, and the borrower appeared for the first time.  He argued: 1) the first sale should not have been vacated; and 2) the second sale should not be confirmed due to deficiencies in the Sheriff’s report of sale.  The borrower also alleged collusion between the bank and the Sheriff’s office.  The trial court granted the borrower leave to take depositions and leave for the bank to file a second amended report of sale.  The borrower failed to depose anyone during the time allowed, and after the leave period expired, the trial court determined the borrower’s allegations were unfounded.

 

Thereafter, the borrower moved to vacate the order vacating the first sale and for an order confirming the first sale.  He argued that the trial court could not vacate a properly conducted sale based on unilateral mistake.  The trial court denied borrower’s motion after a hearing, finding that no motion to confirm the first sale had been filed before the motion to vacate, and finding waiver by the borrower due to his failure to appear at the hearing on the challenged motion.  The borrower appealed.

 

On appeal, the borrower argued that the trial court erred in granting the motion to vacate the first sale.  He further argued that the trial court did not have authority to vacate the sale based on the banks “unilateral mistake” and that the trial court erred in finding he waived his rights by failing to object. 

 

The Appellate Court held that a trial court is not obligated to confirm a judicial sale until a motion to confirm the sale is filed by one of the parties.  Specifically, “[a] court *** has mandatory obligations to (a) conduct a hearing on confirmation of a judicial sale where a motion to confirm has been made and notice has been given, and, (b) following the hearing, to confirm the sale.  . .” Prior to a motion to confirm, “[t]he highest bid at a judicial sale is merely an irrevocable offer to buy the subject property, the acceptance of which does not take place until the court confirms the sale, before which there is no true sale in any legal sense.”

 

The Court held that, because neither party in this case filed a motion to confirm the first sale, the trial court’s obligation to confirm the first sale was not triggered.  See Household Bank, FSB v. Lewis, 229 Ill. 2d 173 (2008) (trial court is not obligated to confirm a judicial sale and may, instead, vacate it when the party who initiated the foreclosure decides not to pursue it). 

 

As for the borrower’s argument that it was improper for the trial court to find that he waived his right by failing to object, the Appellate Court noted that “courts routinely find that parties have intentionally relinquished known rights through their inactions.” In other words, even if the borrower was not required to do anything to claim a surplus, his silence and inaction when that surplus was jeopardized by a motion to vacate the sale resulted in a waiver of the right to object to that motion. 

 

Accordingly, the Illinois Appellate Court, Second District affirmed the trial court’s ruling in favor of the bank. 

 

 

 

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: 3rd Cir Upholds Denial of Class Cert on FDCPA, UDAP, and State Common Law Claims Involving Alleged Overbilling

The U.S. Court of Appeals for the Third Circuit recently affirmed a district court’s denial of class certification on several consumer fraud claims asserted by putative class plaintiffs. 

 

Among its reasoning, the Third Circuit held that the laws of the individual plaintiffs’ home state would apply, and that application of such laws to each plaintiff was impractical for class certification. 

 

The Court also affirmed the denial of class certification relating to claims under the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. (“FDCPA”), because, although the proposed class included those who had received written communications from a debt collector, the representative plaintiff did not receive any communication, and was therefore inadequate as a class representative.

 

A copy of the opinion is available at: http://www.gpo.gov/fdsys/pkg/USCOURTS-ca3-13-04329/pdf/USCOURTS-ca3-13-04329-0.pdf.

 

Appellants (“Debtors”) filed a class action lawsuit, wherein they alleged that the appellees, which consisted of a nationwide provider of diagnostic and clinical testing, as well as multiple collection agencies (for convenience, “Appellees”), supposedly overbilled for certain diagnostic services.  Specifically, the Debtors alleged that their insurance providers notified Appellees of how much Debtors were responsible for paying, and Appellees then allegedly billed Debtors for an amount greater than the insurance providers authorized.

 

Regarding their overbilling allegations, Debtors sought to certify several classes, two of which were considered at length in this appeal.

 

First, Debtors proposed a class of all persons who were billed by Appellees and who paid an amount in excess of that stated on the notices from Debtors’ insurance providers, sent prior to the date of the bill (“Overbilling Class”).  Although multiple causes of action were asserted against this class, Debtors urged state law consumer fraud and unjust enrichment claims.

 

Regarding the state consumer fraud claim, following a choice of law analysis, the district court determined that the law of the class members’ home states would apply.  Concluding that so many different fraud statutes would be unwieldy and inappropriate for class treatment at trial, the trial court denied certification of the Overbilling Class as to the state consumer fraud claims.

 

Likewise, regarding the unjust enrichment claims, the district court also denied certification of the Overbilling Class.  The lower court found that, because there were numerous explanations for overbilling, evidence would be highly individualized and no common issue of fact would predominate between class members.  Further, the lower court determined that, because the class definition implicitly included a requirement that such billing was “wrongful,” the class was not reasonably ascertainable.

 

Second, Debtors proposed a class of all persons who received written demands from the debt collector defendants (“FDCPA Class”).  However, again, the district court denied certification.  On this issue, the court found that the proposed representative plaintiff had never received a written demand from any of the defendant debt collectors.

 

Following these rulings, and the district court’s granting of summary judgment in favor of Appellees against one plaintiff, Debtors appealed, challenging several of the district court’s rulings.  Ultimately, the Third Circuit affirmed the district court’s rulings.

 

As you may recall, class certification is permissible if: “(1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.” See Fed. R. Civ. P. 23(a).  Further, a class action can be maintained if all above requirements are satisfied, and, as relevant to this case, “the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.”  Fed. R. Civ. P. 23(b)(3).

 

Considering Debtors’ challenges in turn, the Third Circuit first addressed Debtors’ argument that the district court’s engaging in state choice of law analysis was premature.  The Court disagreed, holding that it was reasonable for the district court to conduct state choice of law analysis to assess whether the proposed classes created “intractable management problems” for trial.  See Slip. Op. at p. 10; Sullivan v. DB Investments, Inc., 667 F.3d 273, 304 (3d Cir. 2011) (en banc).

 

Nor was the district court’s conclusion – that the laws of the putative class members’ home states controlled their state law claims – incorrect, according to the Third Circuit.  Applying the “most significant relationship” test set out in the Restatement (Second) of Conflict of Laws, the Court observed that, because the representations were not made and received in the same state, the Restatement calls for an analysis of several factors, including the place where plaintiffs acted in reliance upon the alleged misrepresentations, and the place where plaintiffs received such misrepresentations.  Noting also that the domicile of the plaintiff is regarded as more important than that of the defendant, the Court held that the balance of these factors support that the laws of plaintiffs’ home states apply.  See Slip. Op. at 12-15.

 

Notably, the Court also rejected Debtors’ argument that, even if each class members’ home state law controlled, the claims were impractical for class certification. 

 

Debtors urged that the state consumer fraud claims be grouped into two categories for litigation: (i) unfair and deceptive conduct; and (ii) false and misleading conduct.  However, the Third Circuit agreed with the district court that Debtors “did not provide enough information or analysis to justify the certification of the classes they proposed.”  Slip. Op. at 16.  Merely asserting that the differences between state consumer fraud laws are “insignificant or non-existent,” Debtors failed to apply any of these state laws to the facts of this case, including elements of reliance, state of mind, and causation, among others.  See Slip. Op. at 16-17.

 

Turning to Debtors’ unjust enrichment claims against the Overbilling Class, the Third Circuit again affirmed the district court’s denial of certification.  Although the district court reasoned that the class was not ascertainable, the Third Circuit held that questions of law or fact did not predominate the class.  See Slip. Op. at 18-21; Fed. R. Civ. P. 23(b)(3) (“questions of law or fact common to class members [must] predominate over any questions affecting only individual members. . .”).  Rather, “individual inquiries would be required to determine whether an alleged overbilling constituted unjust enrichment for each class member.”  Slip. Op. at 20.

 

Additionally, the Third Circuit affirmed the denial of the FDCPA Class, agreeing that the representative plaintiff was inadequate. 

 

Debtors argued that the district court granted summary judgment in favor of the representative plaintiff on his FDCPA allegations, and noted in the opinion that he was “dunned.”  See Slip. Op. at 21-22.  However, because the alleged classwide violations involved written communications only, and the representative plaintiff testified he had only been contacted by telephone, the Court held this was insufficient to show clear error by the district court. 

 

Notably, the representative plaintiff admitted in a deposition that he had never received a written communication from a debt collector.  Further, according to the Third Circuit, the word “dunned” does not imply that a written communication was furnished.  See Slop. Op. at 22; cf. In re Hechinger Inv. Co. of Del., Inc., 320 B.R. 541, 549 (Bankr. D. Del. 2004) (“[T]here were no letters, telephone calls, or any attempts whatsoever on the part of Defendant to apply pressure or to ‘dun’ Debtor to encourage more prompt payment . . . .”).

 

Lastly, the Third Circuit affirmed the district court’s entry of summary judgment against one plaintiff.  Although the district court found that the plaintiff had not produced evidence of any non-pecuniary harm, Debtors pointed to a deposition wherein she claimed to have been “harassed and billed. . .”  Slip. Op. at p. 23.  Rejecting Debtors’ argument, the Third Circuit held that “one bare mention of being ‘harassed and billed,’ without more, is not evidence from which a reasonable jury could conclude that [plaintiff] suffered actual, though non-pecuniary, harm.”  Slip. Op. at p. 24.

 

Accordingly, the Third Circuit affirmed the rulings of the district court.

 

 

 

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

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

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

                                www.mwbllp.com

 

 

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FYI: ED Pa Issues Mixed Ruling on Motion to Dismiss Allegations Against Servicer Under New "Notice of Error" and "Request for Information" Mortgage Servicing Rules

The U.S. District Court for the Eastern District of Pennsylvania recently granted in part and denied in part a motion to dismiss allegations that a servicer did not comply with its RESPA obligations, because it allegedly failed to conduct a “reasonable investigation” in response to a Notice of Error, and “reasonable search for information” in response to a Request for Information, as required by 12 C.F.R. §§ 1024.35 and 1024.36

 

A copy of the opinion is available at:  https://www.paed.uscourts.gov/documents/opinions/14D0785P.pdf

 

The plaintiff (“Plaintiff”) inherited the mortgaged property from the mortgagor, and became the formal legal representative of the mortgagor’s estate.  Plaintiff applied for a HAMP modification with the mortgage servicer (“Servicer”), and executed a deed to the property from herself as administratrix to herself as the sole heir.  She entered into a three-month HAMP Modification Trial Period Plan (“TPP Agreement”) in her capacity as administratrix.

 

The borrower allegedly made nine timely TPP payments, but the Servicer supposedly claimed that Plaintiff was ineligible for HAMP because she failed to make all the required TPP payments by the end of the trial period.  Plaintiff’s tenth payment was allegedly rejected because the funds had not been certified, but the Servicer supposedly never required certified funds before and allegedly accepted her nine previous personal checks.

 

According to the Plaintiff, the Servicer subsequently sent Plaintiff a letter entitled “Partial Payment Agreement,” which Plaintiff allegedly signed and returned with the required payment.  That letter allegedly did not refer to the HAMP program or explain what happened to either her pre-existing TPP Agreement or the funds she paid pursuant to that agreement.  Instead, the Servicer allegedly represented that it would decide at its sole discretion whether to offer a loan modification.

 

Plaintiff alleged she made eight payments under the Partial Payment Agreement until her tenth payment was supposedly returned with a note stating only, “[t]he amount remitted does not represent the total due.”  Plaintiff was supposedly later told that she would no longer be considered for a loan modification.

 

Notwithstanding Plaintiff’s alleged performance under the payment plans, Servicer obtained a default judgment in foreclosure.  Plaintiff allegedly sent the Servicer a number of written requests pursuant to the Real Estate Settlement Procedures Act (“RESPA”), 12 U.S.C. § 2605(e), requesting information regarding the HAMP agreement and other loss mitigation alternatives.  In response, the Servicer allegedly sent a reinstatement calculation supposedly containing figures for fees and charges that were different from the ones listed in the judgment.  According to the Plaintiff, the Servicer supposedly provided inaccurate or incomplete responses to Plaintiff’s other written requests for information. 

 

Plaintiff filed an action against Servicer asserting: (1) violation of RESPA for failure to conduct a “reasonable investigation” in response to the Notice of Error; (2) violation of RESPA for failing to properly respond to Request for Information; (3) violation of the Pennsylvania Unfair and Deceptive Practices and Consumer Protection Law (“UTPCPL”); (4) breach of the TPP contract; and (5) promissory estoppel/detrimental reliance. 

 

First, the Court addressed whether Plaintiff had standing to bring any of her claims – either under RESPA or under state law – in her individual capacity.  

 

As you may recall, the Pennsylvania’s Survival Act provides that “[a]ll cause of action, real or personal, shall survive the death of the plaintiff or of the defendant, or the death of one or more joint plaintiffs or defendants.”  42 Pa. Cons. Stat. § 8302.  In turn, “all actions that survive a decedent, must be brought by or against the personal representative of the decedent’s estate.”  Prevish v. Nw. Med. Ctr. Oil City Campus, 692 A.2d 192, 200 (Pa. Super. Ct. 1997). 

 

The Court held that Plaintiff did not have standing because she never assumed the loan in her individual capacity, and because the Servicer’s foreclosure action was brought against the mortgagor’s estate and against Plaintiff as the administratrix and heir.  Moreover, the initial HAMP TPP Agreement was sent to the mortgagor’s estate and signed by Plaintiff in her capacity as administratrix.  Therefore, the Court concluded that Plaintiff lacked standing to bring suit on state law claims as the heir to the property, but she may pursue them as the personal representative of the estate.

 

Similarly, the Court also held that Plaintiff lacked standing to bring her federal claims.  RESPA does not explicitly define the term “borrower,” but its provisions apply only to “federally related mortgage loan[s].”  12 U.S.C. § 2602(l).  According to the Court, this suggested that a “borrower” must be the named borrower on that loan.  Because the Complaint did not allege that Plaintiff assumed the loan on the property, the court held that the RESPA cause of action belongs only to Plaintiff as administratrix of the estate and not to her as an individual heir to the estate.

 

Next, the Court turned to Plaintiff’s RESPA claims.  Count I of Plaintiff’s complaint alleged that Servicer violated RESPA by failing to conduct a “reasonable investigation” and provide a written notice in response to Plaintiff’s Notice of Error, as required under Reg. X, 12 C.F.R. § 1024.35.  Count II alleged that Servicer failed to conduct a reasonable search for information requested in Plaintiff’s Requests for Information, as required by RESPA, Reg. X, 12 C.F.R. § 1024.36.

 

As you may recall, the new mortgage servicing rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  Pub. L. No. 111-203, 124 Stat. 1376 (July 21, 2010) (“Dodd-Frank Act”), were made effective on January 10, 2014.  The new regulations codified at 12 CFR §§ 1024.35 and 1024.36 delineate separate requirements and procedures for responding to a borrower’s Notice of Error and Request for Information.

 

The Court rejected the Servicer’s argument that it complied with its RESPA obligations, because it responded to Plaintiff’s Notice of Error and explained the reasons why her loan modification requests were declined. 

 

In so doing, the Court noted that Regulation X altered the landscape of RESPA obligations.  A servicer must now conduct a “reasonable investigation,” and provide the borrower “with written notification that includes a statement that the servicer has determined that no error occurred, a statement of the reason or reasons for this determination, a statement of the borrower’s right to request documents relied upon by the servicer in reaching its determination, information regarding how the borrower can reach such documents, and contact information, including a telephone number, for further assistance.”  12 C.F.R. § 1024.35(e)(1)(i)(A).

 

The Court determined that Servicer did not comply with 12 C.F.R. § 1024.35(e) because it provided inaccurate information regarding Plaintiff’s loss mitigation options and foreclosure.  Taking the allegations as true at this stage of the proceeding, the Court concluded that no “reasonable investigation” had occurred with respect to Plaintiff’s Notice of Error. 

 

Similarly, the Court also rejected Servicer’s argument that its failure to provide all the information sought in Plaintiff’s Request for Information was excused, because it had properly asserted delineated exceptions to its obligations – i.e., that the request for materials was overbroad, unduly burdensome, and sought duplicative, confidential, proprietary, privileged, or irrelevant information – pursuant to 12 C.F.R. § 1024.36(f). 

 

The Court again pointed to the changes imposed by Regulation X.  A servicer must now conduct “a reasonable search for the requested information.”  12 C.F.R. § 1024.36(d)(1)(ii).  Moreover, the servicer’s duty to comply with its response obligations are obviated only “if the servicer reasonably determines that” the documents meet any of the enumerated exceptions.  12 C.F.R. § 1024.36(f)(1). 

 

According to the Court, Plaintiff plausibly alleged that Servicer did not reasonably determine that the documents were in the excluded categories, and in a fact, many of the requested documents were available and within the categories of documents that a servicer should provide.  For these reasons, the Court denied Servicer’s motion to dismiss the RESPA claims.

 

It is unfortunately unclear whether the court deemed all of the materials listed in the request for information -- even including  “audio files of telephone calls with Plaintiff” and “invoices from Defendant’s foreclosure firm” -- to be proper, or whether some might be proper and some not.

 

The Court then turned to Plaintiff’s claim for violation of the UTPCPL, which prohibits “[u]nfair or deceptive acts or practices in the conduct of any trade or commerce.”  73 Pa. Stat. § 201-3. 

 

Plaintiff alleged that Servicer violated the UTPCPL by representing to the U.S. Treasury and the American public that it would comply with HAMP guidelines and offer loan modifications to eligible borrowers.  However, Servicer engaged in deceptive conduct in its dealings with Plaintiff about the property and created the likelihood of confusion or misunderstanding regarding her right to a loan modification. 

 

In its defense, Servicer argued that a UTPCPL claim based upon alleged HAMP violations fails because HAMP violations do not give rise to a private cause of action.   The Court rejected the argument because the Seventh Circuit has held that the absence of a private right of action from a federal statute does not provide a reason to dismiss a claim under a state law merely because it refers to or incorporates some elements of the federal law.  See, e.g., Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547, 581 (7th Cir. 2012).

 

Thus, the Court declined to dismiss Plaintiff’s UTPCPL claim as an effort to enforce compliance with HAMP, and allowed the claim to the extent it relied on allegations that Servicer induced Plaintiff to make TPP payments under the promise of loan modification, and other misleading actions separate and apart from Servicer’s obligations under the TPPs and HAMP.

 

In addressing Plaintiff’s breach of contract claim, the Court relied on Cave v. Saxon Mortg. Services, Inc., No. Civ.A. 12-5366, 2013 WL 1915660 (E.D. Pa. May 9, 2013), which declined to dismiss a breach of contract claim based on allegations that the defendant failed to offer a permanent modification after the borrowers complied with their obligations under the trial payment plan.  Like the plaintiff in cave, Plaintiff here alleged that Servicer promised to offer a permanent loan modification upon satisfaction of her obligations under the TPP Agreement.  Therefore, the Court held that Plaintiff may assert a viable breach of contract claim.

 

Finally, because the Court found that a valid and enforceable contract existed between the parties, Plaintiff’s claim for promissory estoppel or detrimental reliance was precluded by law.

 

Accordingly, the district court dismissed Plaintiff’s Complaint to the extent it alleges any claims in her individual capacity and to the extent it seeks relief under a theory of promissory estoppel/detrimental reliance.  However, Servicer’s Motion to Dismiss was denied as to the claims for violation of RESPA, UTPCPL, and breach of contract.

 

 

 

 

 

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: 2nd Cir Affirms Denial of Motion for Prelimin Injunction Filed by Out-Of-State Short-Term High-Interest Lender Under Indian Commerce Clause

The U.S. Court of Appeals for the Second Circuit recently affirmed the denial of a lender’s motion for a preliminary injunction which sought to enjoin a state’s attempt to bar out-of-state lenders from extending short-term high interest loans to its residents.

 

A copy of the opinion can be found at:  Link to Opinion

 

The plaintiff Native American Tribes (“Lender”) are internet based lending companies, which extend short-term loans (the “Loans”) to borrowers who have difficulty obtaining credit through traditional means.  The Loans are made at high interest rates and allow Lender to recover interest and principle by making direct deductions from a respective borrower’s bank account. 

 

The defendant Department of Financial Services (“DFS”) is a New York State regulatory body that enforces New York’s usury laws in an attempt to “protect desperately poor people from the consequences of their own desperation.”

 

As you may recall, New York State’s usury laws prohibit lenders from lending money at an interest rate above 16 percent per year, and criminalizes loans with interest rates higher than 25 percent per year.  See N.Y. Gen. Oblig. Law § 5-501(1); N.Y. Banking Law § 14a (1); N.Y. Penal Law §§ 190.40-42.

 

DFS launched a campaign seeking to prevent out-of-state lenders from extending usury loans to New York residents, which included loans extended by Lender.  Specifically, DFS sent cease-and-desist letters to 35 payday lenders, which it identified as having made usurious loans to New York residents.  These letters targeted Lender, foreign lenders, and out-of-state lenders who did business in states with no interest rate cap.

 

DFS also sent letters to financial service companies affiliated with any lender DFS targeted.  The letters asked the financial service companies to cease doing business with any lender who extended usurious loans to New York residents.

 

Lender claimed DFS’ campaign had an immediate effect on it as banks and other financial institutions abruptly ended their relationship with Lender.  The resulting loss of revenue caused large gaps in tribal budgets as proceeds generated by the Loans allegedly accounted for close to half of the tribe’s non-federal income. 

 

Lender proceeded to file suit in district court claiming DFS violated the Indian Commerce Clause by infringing on a tribe’s fundamental right to self-government.  Lender subsequently moved for a preliminary injunction seeking to bar DFS from further interfering with Lender’s transactions in New York and elsewhere. 

 

In support of its motion for a preliminary injunction, Lender argued the Loans occurred on Native American reservations (the “reservations”), and thus DFS’ attempt to regulate the Loans violated the Indian Commerce Clause.  In support of its claim, Lender argued that: (1) the loan application process took place on websites owned and controlled by tribes; (2) the loans were reviewed and assessed by tribal loan underwriting systems; (3) the loans were administered and regulated by tribal authorities; (4) the loans were funded by tribally owned bank accounts; and (5) each loan application notified the borrower that it was exclusively governed by tribal and applicable federal law.

 

DFS opposed Lender’s injunction by arguing the Loans occurred off-reservation because: (1) the loans flowed across tribal borders to consumers in New York; (2) borrowers never traveled to reservations; (3) borrowers e-signed the loan applications by listing their New York addresses and provided routing numbers for personal bank accounts located in New York; (4) and Lender reached into New York to collect payments.  Thus, DFS claimed it was not regulating on-reservation activity and its efforts to bar usurious loans did not violate the Indian Commerce Clause.  

 

The district court denied Lender’s motion because Lender “built a wobbly foundation that the state is regulating activity that occurs on the Tribe’s land.”  The district court further held that DFS’ “action was directed at activity that took place entirely off tribal land, involving New York residents who never leave New York State.” 

 

This appealed followed. 

 

As you may recall, a “district court’s denial of a motion for a preliminary injunction is reviewed for abuse of discretion.”  WPIX, Inc. v. ivi, Inc., 691 F.3d 275, 278 (2d Cir. 2012).  District courts may grant a preliminary injunction where a plaintiff demonstrates “irreparable harm” and meets one of two of the following related standards: “(1) a likelihood of success on the merits, or (2) sufficiently serious questions going to the merits of its claims to make them fair ground for litigation, plus a balance of the hardships tipping decidedly in favor of the moving party.”  Lynch v. City of N.Y., 589 F.3d 94, 98 (2d Cir. 2009).

 

However, a plaintiff cannot rely on the “fair ground for litigation” alternative to challenge “governmental action taken in the public interest pursuant to a statutory or regulatory scheme.” Plaza Health Labs, Inc. v. Perales, 878 F.2d 577, 580 (2d Cir. 1989) (internal citations omitted).   This exception reflects the idea that governmental policies “are entitled to a higher degree of deference and should not be enjoined lightly.”  Able v. United States, 44 F.3d 128, 131 (2d Cir. 1995).

 

In an attempt to avoid the “fair ground for litigation” exception, Lender argued that tribes are independent nations, and DFS’ regulatory action interfered with their “ability to provide for their members and manage their own internal affairs.”  The Court dismissed Lender’s argument stating, “a party seeking to enjoin governmental action taken in the public interest pursuant to a statutory or regulatory scheme cannot rely on the fair ground for litigation alternative even if that party seeks to vindicate a sovereign or public interest.”  Oneida Nation of N.Y. v. Cuomo, 645 F.3d 154, 164 (2d Cir. 2011). 

 

Accordingly, the Court held that the “fair ground for litigation” exception applied, and thus Lender had to establish a likelihood of success on the merits concerning its claim that DFS’ regulations violated the Indian Commerce Clause.

 

The Court began its “likelihood of success on the merits” analysis by examining a state’s ability to regulate tribal activities.  It explained the “Supreme Court has held that states may regulate tribal activities, but only in a limited manner, one constrained by tribes’ fundamental right to self-government, and Congress’s robust power to manage tribal affairs.”  White Mountain Apache Tribe v. Bracker, 448 U.S. 136, 142-143 (1980).

 

The ability of a state to regulate tribal activities depends on the location of the targeted conduct and the citizenship of participants in the regulated activity.  Native Americans “going beyond the reservation boundaries” must comply with state laws as long as those laws are “non-discriminatory and . . . otherwise applicable to all citizens of that State.”  Mescalero Apache Tribe v. Jones, 411 U.S. 145, 148-49 (1973).  However, once a state reaches across “a reservation’s borders its power diminishes and courts must weigh the interests of each sovereign--the tribes, the federal government, and the state--in the conduct targeted by the state’s regulation.”

 

Thus, a court must determine “who” a challenged regulation targets and where the targeted activity occurs.  Only after making this determination, can a court “either test for discriminatory laws” or “balance competing interests.”  

 

The Court then examined where the Loans were originated and where other loan related activity occurred.  Lender argued that the Loans were “on-reservation” activity because they originated and were approved on tribal land.   The Court dismissed this argument stating that Lender failed to present evidence supporting their assertion that the Loans were “on-reservation” activity.

 

Specifically, the Court determined that Lender failed to provide evidence: (1) that a specific portion of a lending transaction took place on a facility physically located on reservations; (2) failed to provide the citizenship of Lender’s personnel, where they worked, or where the website hosts were located; (3) whether the loan underwriting system involved actuaries working on reservations; (4) and whether any “tribally held bank accounts” were held by or funded by tribal banks.  The Court also noted that a majority of the Loan’s commercial activity took place in New York because credit extensions and subsequent collection activities clearly took place within state borders and away from tribal land.

 

Lender next argued that the traditional “on-or-off reservation” analysis was too simplistic of an approach to modern e-commerce.   Specifically, Lender claimed “tribes bear the legal burden of the regulation,” and thus the Court should proceed directly to balancing the interests of each respective sovereign. The Court disregarded this argument stating that no precedent allowed it to dismiss the initial test of determining the regulated activity’s location.  The Court explained that even if it could move directly to interest balancing, Lender failed to provide sufficient evidence concerning what should be weighed when balancing each sovereign’s  respective interest. 

 

Lender further argued that DFS “infringed upon tribal sovereignty by launching a national campaign with the express purpose of destroying out-of-state business.”  However, the Court determined that DFS’ efforts could not be seen as singling out tribal lending companies as DFS encouraged financial service companies to cease doing business with any online lender who made usurious loans to New York State residents.

 

Thus, DFS’ attempt to discourage banks and other financial institutions from cooperating with Lender did not violate the Indian Commerce Clause

 

Therefore, the district court’s denial of Lender’s preliminary injunction was proper because the district court reasonably determined that Lender failed to prove a likelihood of success on the merits. 

 

Accordingly, the Court affirmed the district court’s denial of the preliminary injunction.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
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Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
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Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

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