FYI: 4th Cir Rules in Favor of Lender in IRS Tax Lien Priority Dispute

The U.S. Court of Appeals for the Fourth Circuit recently held that a bank’s deed of trust was prior and superior to a recorded Internal Revenue Service (“IRS”) tax lien, where the deed of trust was executed prior to the IRS tax lien, but recorded after the tax lien had been filed.

 

Notably, the Court rejected the application of a Maryland relation back statute which provides that, for purposes of priority, the effective date of a recorded deed of trust relates back to the date of execution of the deed of trust.

 

Nevertheless, the Court still determined that the bank enjoyed priority over the IRS tax lien because it had an equitable security interest as of the deed of trust’s execution.

 

A copy of the opinion is available at: http://www.ca4.uscourts.gov/Opinions/Published/132249.P.pdf

 

This action arose in the context of an adversary proceeding filed by a lender (“Bank”) against the IRS in a debtor’s Chapter 11 bankruptcy case, in which the IRS filed a proof of claim for taxes, interest, and penalties owed. In the adversary proceeding, Bank sought a declaratory judgment as to the priority of its deed of trust as against the IRS’s tax lien.

 

The debtor had borrowed $1 million from Bank, which was secured by a deed of trust on real property. Six days after Debtor obtained the loan, the IRS recorded a notice of its federal tax lien for unpaid employment taxes. One month later, Debtor recorded the deed of trust.

 

Upon cross motions for summary judgment in the bankruptcy court, the bankruptcy court held that Bank held priority due to application of Md. Code, Real Property § 3-201 (the “Maryland Relation-Back Statute”) which provides that the priority of a recorded deed of trust relates back to the date of its execution.  

 

On appeal from the bankruptcy court, the District Court agreed, clarifying that the Maryland Relation Back Statute, made applicable by 26 U.S.C. § 6323(h)(1)(a), provided that “a recorded deed of trust is effective against any creditor of the person who granted the deed of trust as of the date the deed of trust was delivered (not the date it was recorded) regardless of whether the creditor did or did not have notice of the deed of trust at any time.” Op. at 7 (quoting Chicago Title Insurance Co. v. Mary B., 190 Md. App. 305, 316; 988 A.2d 1044, 1050 (2010). Consequently, the District Court held that “as of when the IRS’s lien was recorded, [Bank]’s [deed of trust] was already a ‘security interest’ that was entitled to priority under Maryland law and, hence, federal law.” Op. at 6.

 

In the alternative, the District Court held that Bank’s security interest would have taken priority under Maryland law even if the deed of trust were never recorded, because Maryland’s common law doctrine of equitable conversion entitles the holder of a deed of trust to the same protections as a bona fide purchaser for value, who takes title free and clear of all subsequent liens regardless of recordation. The District Court determined that an IRS tax lien has only those protections that local law would afford to “a subsequent judgment lien arising out of an unsecured obligation,” 26 U.S.C. § 6323(h)(1)(a), and concluded that Bank’s deed of trust took priority over the lien.

 

The IRS then appealed to the U.S. Court of Appeals for the Fourth Circuit.

 

As you may recall, the priority of a federal tax lien is governed by federal law. See Aquilino v. United States, 363 U.S. 509, 513-14 (1960). Under federal law, an IRS tax lien attaches to all property owned by a person who neglects to pay taxes for which he is liable after the IRS demands payment. 26 U.S.C. § 6321. The IRS lien arises at the time the tax assessment is made, 26 U.S.C. § 6322, and generally takes priority over a lien created after that date under the common law principle that “the first in time is the first in right,” United States v. City of New Britain, 347 U.S. 81, 85 (1954), even if the IRS lien is unrecorded.  See United States v. Snyder, 149 U.S. 210, 214 (1893).

 

However, an IRS tax lien is not “valid as against any . . . holder of a security interest . . . until notice thereof . . . has been filed by the Secretary [of the Treasury].” 26 U.S.C. § 6323(a). As used in § 6323(a), a “security interest” is defined as “any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability,” 26 U.S.C. § 6323(h)(1), and its existence at a particular moment depends on whether “the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation.”  26 U.S.C. § 6323(h)(1)(A).

 

The Fourth Circuit observed that, under Maryland law, a deed of trust becomes effective against subsequent judgment liens when it is both executed and recorded.  See Md. Code Ann., Real Prop. § 3-101(a). However, the Fourth Circuit ruled that the District Court failed to distinguish between Congress’s use of the present and present perfect tenses in § 6323(h)(1)(A) to determine the proper point in time to analyze whether Bank had a security interest protected under local law.

 

According to the Fourth Circuit, the issue was not whether Bank had a protected security interest against subsequent judgment liens on the deed’s recordation date, but whether Bank had a protected security interest on the earlier recordation date of the IRS tax lien. The Court held that the Maryland Relation-Back Statute could not be applied until the Bank had properly recorded its deed; one month after the IRS recorded its tax lien. Therefore, on the date the IRS lien was recorded, Bank had no protected security interest against the IRS’s tax lien under the Maryland Relation-Back Statute.

 

However, the Court also considered the Maryland doctrine of equitable conversion, under which Maryland courts have afforded priority to the purchaser of a property as against judgments subsequently obtained against the seller.  Under the Maryland doctrine of equitable conversion, a purchaser’s security interest is protected against other parties – except for bona fide purchasers – regardless of whether the purchaser has recorded his deed.  Under that doctrine, Maryland law is clear that “a judgment creditor is not in the position of a bona fide purchaser.” Kolker v. Gorn, 67 A.2d 258, 261 (Md. 1949). Thus, a judgment creditor’s claim “is subject to prior, undisclosed equities” and “must stand or fall by the real, and not the apparent rights of the defendant in the judgment.” Kolker, 67 A.2d at 261 (quoting Ahern v. White, 39 Md. 409, 421 (1874)) (internal quotation marks omitted).

 

Although Bank did not sign a contract to purchase Debtor’s property, it did receive a conditional deed to secure repayment of its loan via the deed of trust, and Maryland principles in equity “treat lenders who secure their interests with a mortgage or deed of trust as entitled to the protections available to bona fide purchasers for value,” so long as those lenders act in good faith. Was. Mut. Bank, 974 A.2d at 396.

 

Accordingly, the Court held that because Bank held equitable title to the property specified in the deed of trust as of the date the deed was executed, it was entitled to priority over all of Debtor’s subsequent judgment-creditor lienholders, which would include, pursuant to § 6323(a), the IRS tax lien.

 

Thus, the Fourth Circuit affirmed the District Court’s judgment determining that Bank’s deed of trust enjoyed priority over the IRS’s tax lien.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
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FYI: Ill App Ct Holds "Void After 90 Days" Notation on Check Did Not Trump Account Agreement w/ Bank, or Render Check Void Rather Than Stale

The Illinois Appellate Court, First District, recently affirmed the dismissal of an account holder’s complaint against a bank, holding that:

 

(1) the customer’s notation of “void after 90 days” on a $50,000 check had no legal effect under the terms of the parties’ written deposit account agreement; and

(2) the account holder’s failure to contest the bank’s payment within the time requirements set forth in the agreement barred the claim.

 

A copy of the opinion is available at: http://www.illinoiscourts.gov/Opinions/AppellateCourt/2014/1stDistrict/1133645.pdf

 

In December 2003 and November 2010, the plaintiff account holder opened business checking accounts with the defendant bank pursuant to the terms of the bank’s “Handbook for Personal and Business Accounts” (“the agreement”).

 

The agreement provided specific procedures for stopping payments on checks, which included the bank’s specifically reserved right to pay a “stale check,” defined as one that is more than six months old.  The agreement also required account holders to notify the bank of any erroneous statement entries or improper charges within sixty (60) days, and to commence any legal action against the bank within one year after the bank statement was made available to the account holder.

 

On July 10, 2010, the plaintiff account holder’s president issued a $50,000 check to his wife, whom he was divorcing.  Although the face of the check stated “void after 90 days” above the signature line, the check was honored by the bank more than 90 days after its issuance on December 30, 2010.  At no time between July 2010 and December 2010 did the plaintiff place a stop payment on the check or communicate with the bank about the check.

 

The plaintiff’s December 2010 account statement was made available to it in January 2010, which disclosed that the bank had honored the check on December 30, 2010.   Nearly two years later, the plaintiff brought suit against the defendant bank seeking reimbursement of the $50,000 check, alleging that its account was improperly debited when the bank honored the check containing the “void after 90 days” language. 

 

The lower court dismissed the plaintiff’s amended complaint, holding that the claim was barred by the terms of the parties’ written deposit account agreements requiring notification of the improper payment within sixty days, and legal action to be commenced within a year of making the statement available, as well as several provisions of the Uniform Commercial Code.

 

As you may recall, UCC §4-403(a) provides that a customer “may stop payment of any item drawn on the customer’s account…at a time and in a manner that affords the bank a reasonable opportunity to comply.”  Here, the plaintiff account holder argued that, under this UCC provision, it was not required to comply with the stop payment terms of the agreement, which included specific notice and fee requirements for stopping payment of a check. 

 

The Appellate Court rejected this argument under the plain language of the UCC, which permits variation of its provisions by agreement, and determined that the agreed-upon requirements of the stop pay provision superseded the UCC provision in question.  See UCC §4-103(a). 

 

Next, the Appellate Court determined whether the check’s “void” notation constituted a stop payment under UCC §4-403(a).  Here, the plaintiff admitted it did not provide the check bearing the “void after 90 days” language directly to the bank; it was first transmitted to the payee of the check.  The Appellate Court held that the “void after 90 days” notation did not comply with UCC §4-403(a), and did not provide a reasonable means to direct a bank to stop payment on a check.

 

Furthermore, the Court found the Plaintiff’s argument that the bank’s reservation of rights to pay a “stale check” was inapplicable because the check “was not stale [but instead] it was void” was without merit.  As commentators of the UCC have stated, the effect of a bank customer writing “void after 90 days” on a check has been described as making the check stale after the initial 90-day period.  6A William D. Hawkland, et al., Uniform Commercial Code Series § 4-404:2 (2013) (“‘void after 60 days’ should operate to make a check stale after 60 days”); 7 Anderson on the Uniform Commercial Code § 4-404:8 [Rev.], at 466 (3d. ed. 2013).

 

Lastly, the Appellate Court held that the plaintiff account holder could not claim that the bank’s decision to honor the check was erroneous, given the plaintiff’s own failure to comply with the agreement’s sixty-day notice provision, and also could not claim that the one-year limitation period to commence legal action was procedurally unreasonable or “overly harsh or one-sided” so as to be unenforceable.

 

Accordingly, the Appellate Court affirmed the trial Court’s dismissal.

 

 

 

 

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: SD Fla Holds "Estimated Fees" in Reinstatement/Payoff Quote Did Not Violate FDCPA or Parallel State Law

The U.S Court District Court for the Southern District of Florida recently entered summary judgment in favor of a servicer and against a borrower, ruling that a reinstatement or payoff letter that contained itemized estimated legal fees that the servicer did not actually incur did not violate the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et. seq. (“FDCPA”) or the Florida Consumer Collection Practices Act, Fla. Stat. § 559.55, et. seq. (“FCCPA”).

 

In so ruling, the district court found that the reinstatement letter, which contained clearly separated incurred legal fees and estimated future legal fees, did not violate § 1692f(1) or § 1692e of the FDCPA or § 559.72(9) of the FCCPA.

 

A copy of the Court’s order attached.

 

This action concerns a loan a bank extended to the borrower in April of 2004.  The borrower signed a promissory note which was secured by a mortgage on his real property.  The borrower defaulted on the loan in August of 2012.  The servicer began servicing the loan in October of 2012. The servicer retained a foreclosure law firm.

 

In August of 2013, the borrower requested to reinstate the mortgage.  On September 4, 2013, the servicer sent a letter to the borrower stating that “the reinstatement amount if received between 9/4/2013 and 9/27/2013 is $15,569.64.”  Under the heading “Reinstatement Amount,” the servicer provided borrower with an itemized list of charges. These charges included $1,125 for “Legal Fees F/C” under the heading “Actual Charges Through 9/27/2013” and $3,175 for “Estimated Legal/Attorney” under the heading “Estimated Charges Through 9/27/2013.”

 

The borrower paid the full $15,569.64 to servicer on September 26, 2013, and filed this action on October 3, 2013 alleging violations of the FDCPA and FCCPA.  The servicer had not incurred the estimated legal fees at the time the borrower made his reinstatement payment and sent a refund check to borrower for $3,175 on November 14, 2013.  At the close of discovery, the parties filed cross-motions for summary judgment.

 

In support of his summary judgment motion, the borrower argued that there is no genuine issue of material fact that servicer committed “textbook violations” of the FDCPA, 15 U.S.C.§ 1692f(1), and the FCCPA, Fla. Stat. § 559.72(9), when the servicer sent borrower a dunning letter which included $3,175.00 for “estimated legal fees,” i.e., fees for services that had not been rendered.  The borrower cited to an Eleventh Circuit case in support of its FDCPA argument, Bradley v. Franklin Connection Service, Inc., 739 F.3d 606 (11th Cir. 2014), and cited to a Florida trial court opinion in support of his FCCPA argument. See Banner v. Wells Fargo Bank, No. 502007CA0008, 2011 WL 7501176, at *1 (Fla. 15th Cir. Ct. Oct. 25, 2011)).

 

In response and in support of its own summary judgment motion, the servicer argued that no violations occurred because borrower agreed to pay reasonable attorney’s fees, and the dunning letter included $1,125 in legal fees already incurred and clearly indicated that the remaining $3,175 in fees were “estimated.” See Miller v. McCalla, Raymer, Padrick, Cobb, Nichols, and Clark, L.L.C., 214 F.3d 872 (7th Cir. 2000).

 

At issue in the cross-motions for summary judgment was the appropriateness of the servicer charging “estimated legal fees.”

 

The district court began by noting that it was undisputed that on September 4, 2013, servicer sent a letter to borrower stating that the requested payoff amount was “good through 9/27/2013.”  It was also undisputed that the borrower testified that he understood that the $3,175 amount was an “estimated” legal fee, which he paid, and later received a refund of that exact amount. The borrower did not dispute the particular amount of $3,175, or how the figure was calculated.

 

The district court also observed that the servicer’s Corporate Representative testified that “because the reinstatement quote is good for an amount in the future, they have to include a cost that is about to happen in the future, as well.  That’s where the $3,175 came to.” Additionally, the corporate representative explained that the fee agreement with the foreclosure firm occurs “per stages of foreclosure,” and the $1,125 represented the fees for the first step of the foreclosure, and borrower was “about to enter in the next step, and that’s why the . . . $3,175 was quoted.”  The representative further explained that the foreclosure never entered into the next step “because [borrower] reinstated the loan fully.”

 

The district court found that these facts, in addition to the language of the agreement, were the material facts for deciding the cross-motions for summary judgment.

 

As you may recall, the FDCPA provides, in pertinent part: “a debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt. Without limiting the general application of the foregoing, the following conduct is a violation of this section: (1) 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).

 

Also, the FDCPA provides that “[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.” 15 U.S.C. § 1692f(1).

 

The FDCPA further provides that “[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.” 15 U.S.C. § 1692e. “The false representation of (A) the character, amount, or legal status of any debt; or (B) any services rendered or compensation which may be lawfully received by any debt collector for the collection of a debt” also constitute violations of the FDCPA. 15 U.S.C. § 1692e(2).

 

The relevant portion of the FCCPA provides: “[i]n collecting consumer debts, no person shall: . . . (9) Claim, attempt, or threaten to enforce a debt when such person knows that the debt is not legitimate, or assert the existence of some other legal right when such person knows that the right does not exist.” Fla. Stat. § 559.72(9).

 

Significantly, the relevant mortgage provides in pertinent part that:

 

9. Protection of Lender’s Interest in the Property and Rights Under this Security Instrument. If (a) Borrower fails to perform the covenants and agreements contained in this Security Instrument . . . then Lender may do and pay for whatever is reasonable or appropriate to protect Lender’s interest in the Property and rights under this Security Instrument, including protecting and/or assessing the value of the Property, and securing and/or repairing the Property. Lender’s actions can include, but are not limited to: (a) paying any sums secured by a lien which has priority over this Security Instrument; (b) appearing in court; and (c) paying reasonable attorneys’ fees to protect its interest in the Property and/or rights under this Security Instrument. . . All amounts disbursed by Lender under this Section 9 shall become additional debt of the Borrower secured by this Security Instrument. These amounts shall bear interest at the Note rate from the date of disbursement and shall be payable, with such interest, upon notice from Lender to Borrower requesting payment.

 

Also, with regard to bringing a default current, the mortgage provides:

 

19. Borrower’s Right to Reinstate After Acceleration. If Borrower meets certain conditions, Borrower shall have the right to have enforcement of this Security Instrument discontinued . . . Those conditions are that Borrower: (a) pays Lender all sums which then would be due under this Security Instrument and the Note as if no acceleration had occurred; (b) cures any default of any other covenants or agreements; (c) pays all expenses incurred in enforcing this Security Instrument, including, but not limited to, reasonable attorneys’ fees, property inspection and valuation fees, and other fees incurred for the purpose of protecting Lender’s interest in the Property and rights under this Security Instrument; and (d) takes such action as Lender may reasonably require to assure that Lender’s interest in the Property and rights under the Security Instrument, and Borrower’s obligation to pay the sums secured by this Security Instrument, shall continue unchanged. . . Upon reinstatement by Borrower, this Security Instrument and obligations secured hereby shall remain fully effective as if no acceleration had occurred.

 

The district court first addressed the borrower’s contention that Bradley v. Franklin Connection Service, Inc., 739 F.3d 606 (11th Cir. 2014) supports his argument that the servicer violated the FDCPA.  In Bradley, the plaintiff agreed with a medical service provider 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.”  Once the plaintiff did not pay, the medical services provider retained a collection agency, and the collection contract between them, which did not involve the plaintiff, added a 33-and-1/3% collection fee to the balance owed before the account was transferred to the collection agency. 

 

The Eleventh Circuit in Bradley held this violated the FDCPA because “there was no express agreement” between the plaintiff and the medical services provider “allowing for collection of the 33-and-1/3% fee.” Bradley, 739 F.3d at 610. In so holding, the Court explained that “it is the nature of the agreement between [the plaintiff and the medical services provider], not simply the amount of the fee that is important here.” The Court agreed that “the collection fee he paid violates [Section 1692f] of the FDCPA because the fee was really liquidated damages rather than the actual cost of collection,” and the plaintiff “agreed to pay the actual costs of collection; he did not agree to pay a percentage above the amount of his outstanding debt that was unrelated to the actual costs to collect that debt.”

 

The district court distinguished Bradley because here, the imposition of the $3,175 had a direct relation to the actual costs to collect the debt.  The letter sent to borrower indicated that the $3,175 was the amount for legal fees that the servicer estimated would be incurred between the date of the letter, Sept. 4, 2013, and the date the statement was good through—Sept. 27, 2013.  The borrower paid servicer $15,569.64 — an amount which included the estimated $3,175 — on Sept. 26, 2013, with the understanding that these attorneys’ fees were indeed an estimate.

 

The district court then stated that with the benefit of hindsight, the borrower asserts that the servicer never incurred these fees.  However, at the time servicer was called upon to state the amount of the debt on Sept. 4, 2013, servicer did not have the benefit of hindsight— and indicated, in a manner that borrower admits he understood, that it estimated incurring $3,175 in legal fees.

 

This estimate applied to the period between Sept. 4, 2013 and Sept. 27, 2013, a period of time during which the foreclosure could have proceeded and borrower would have incurred $3,175. The Court held this was authorized under the mortgage, as the servicer’s actions were reasonably required to assure the loan owner’s interests.

 

The Court also held that the fact that servicer’s estimation was not exact does not mean that it violated the FDCPA and FCCPA in the Sept. 4, 2013 letter — where the servicer clearly, and accurately, marked those fees as “estimates.” Compare Kaymark v. Bank of America, N.A., 11 F. Supp. 3d 496, 513-14 (W.D. Pa. 2014) (holding no FDCPA violation occurred where debt collector “itemized fees and costs that were yet-to-be-incurred on work that was yet-to-be-performed” in foreclosure complaint and rejecting “hypertechnical argument that the contract only provides for reasonable incurred charges for serviced performed”), and Elyazidi v. SunTrust Bank, Civ. No. DKC 13-2204, 2014 WL 824129, at *5-*7 (D. Maryland Feb. 28, 2014) (FDCPA complaint failed to state claim where “the assertions in documents attached to the warrant in debt as to the amount owed as attorneys’ fees were merely estimates of what would be due at the conclusion of the case.”), with McLaughlin v. Phelan Hallinan & Schmieg, LLP, 756 F.3d 240, 246 (3d Cir. 2014) (FDCPA complaint stated claim where Defendant did not distinguish between estimated amounts and accrued amounts: “[i]f [Defendant] wanted to convey that the amounts in the Letter were estimates, then it could have said so. It did not. Instead, its language informs the reader of the specific amounts due for specific items as of a particular date.”).

 

The Court also found no genuine issue of material fact regarding whether the pertinent communications satisfy the “least-sophisticated consumer” standard. See LeBlanc v. Unifund CCR Partners, 601 F.3d 1185, 1193-94 (11th Cir. 2010). Not only did borrower concede that he knew the amount was estimated, but his Reply references a phone call borrower made to servicer “to complain about the jump in his reinstatement amount from $12,000.00 to over $15,000.00.” The Court noted the borrower “was specifically advised this was due to the placement of the attorney fees at issue.”

 

The district court also distinguished LeBlanc from this action. The plaintiff in LeBlanc sued after receiving a dunning letter from a debt collector which contained the following warning: “if we are unable to resolve this issue within 35 days we may refer this matter to an attorney in your area for legal consideration. If suit is filed and if judgment is rendered against you, we will collect payment utilizing all methods legally available to us, subject to your rights below.” The Eleventh Circuit explained that a least-sophisticated consumer could read the letter in two ways: (1) “more informative than threatening and did not threaten imminent legal action,” or (2) “an overt or thinly-veiled threat of suit.” The Court emphasized though the letter used conditional language, such as “if” and “may,” when discussing “the event of suit, the tone of the letter shifts to more forceful language . . . we will collect payment utilizing all methods legally available to us.” Id. (emphasis in original). The Eleventh Circuit found that the parties reasonably disagreed on the proper inferences that can be drawn from the debt collector’s letter, and thus, the issue was for the trier of fact.

 

In this case, the letter separated the incurred charges from the estimated charges, and specifically labelled which charges were estimated and which were incurred.  The Court noted that the parties cannot reasonably disagree that any inference can be drawn from the dunning letter other than that the $3,175 in fees were estimated. Cf. Pettway v. Harmon Law Offices, P.C., No. 03-CV-10932-RGS, 2005 WL 2365331, at *7 (D. Mass. Sept. 27, 2005) (letter “failed to clearly segregate what was owed from would become due and owing” created genuine issue of material fact for “least sophisticated debtor” standard); Fields v. Wilber Law Firm, P.C., 383 F.3d 562, 565-66 (7th Cir. 2004) (reversing district court’s dismissal for failure to state a claim of FDCPA claims because “nowhere did [Defendant] explain that it was seeking attorneys’ fees of $250,” and “the unsophisticated consumer would not necessarily understand that [Defendant] was seeking $250 in attorneys’ fees, an amount allowed, but not specified, by the contract.”).

 

The district court also rejected the borrower argument’s the phone conversation misled him into paying the full reinstatement amount because the phone call was made just one day after the date of the dunning letter—September 5, 2013.  The district court found no basis for the assertion that the clarity of whether the $3,175 would be incurred was any different during the September 5, 2013 phone call than at the time servicer estimated the legal fees in the September 4, 2013 dunning letter.

 

The district court further found that the record does not contain evidence that anything during the September 5, 2013 phone call could have changed the only inference that can be gained from the dunning letter—that the $3,175 in fees were estimated. Thus, this is a case where “the only issue is the application of law to the undisputed facts,” making summary judgment appropriate. See Caceres v. McCalla Raymer, LLC, 755 F.3d 1299, 1304 (11th Cir. 2014) (holding as a matter of law that a dunning letter “would not mislead the least sophisticated consumer” where letter substituted “creditor” for “debt collector” because “the debt collector is obviously the agent of the creditor.”).

 

Finally, turning to the question of the borrower’s FCCPA claim, because the Court found no genuine issue of material fact regarding whether the servicer violated the FDCPA, the Court reached the same conclusion for the borrower’s FCCPA claim under Florida law. See Fla. Stat. § 559.77(5) (“In applying and construing this section, due consideration and great weight shall be given to the interpretations of the Federal Trade Commission and the federal courts relating to the federal Fair Debt Collection Practices Act.”) (citing 15 U.S.C. § 1692, et seq.).

 

Accordingly, the district court entered summary judgment in favor of the servicer and against the borrower on all of the borrower’s FDCPA and FCCPA claims.

 

 

 

 

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   |   OHIO   |   WASHINGTON, D. C.

                                  www.mwbllp.com

 

 

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FYI: ND Ill Holds Hazard Insurance Notice Not Debt Collection Communication Under FDCPA

The U.S. District Court for the Northern District of Illinois recently ruled that a notice of lender-placed hazard insurance sent to a consumer in bankruptcy was not a communication in connection with the collection of a debt subject to the federal Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692, et seq. (“FDCPA”).

 

In so ruling, the Court rejected the borrowers’ argument that their obligations under the mortgage to maintain hazard insurance were discharged as a result of their “surrender” of the property in Chapter 13 bankruptcy.

 

A copy of the opinion is attached.

 

The borrowers (“Borrowers”) defaulted on their mortgage loan and filed for Chapter 13 bankruptcy protection.  The subject property was “surrendered” in the Borrowers’ Chapter 13 plan and the plan was confirmed.  The mortgage servicer (“Servicer”) sent a notice of lender-placed insurance (“Hazard Insurance Notice”) advising Borrowers that they were obligated to carry hazard insurance coverage on the property securing the mortgage. 

 

The Hazard Insurance Notice stated that:

 

“Your loan agreement requires that you maintain adequate hazard insurance at all times. . .  You will be charged for the cost of this insurance if we do not receive adequate proof of coverage within 15 days from the date of this letter.”

 

The Hazard Letter also contained the following statement:

 

“IF YOU ARE IN BANKRUPTCY OR RECEIVED A BANKRUPTCY DISCHARGE OF THIS DEBT, THIS LETTER IS NOT AN ATTEMPT TO COLLLECT THE DEBT, BUT NOTICE OF POSSIBLE ENFORCEMENT OF OUR LIEN AGAINST THE COLLATERAL OR FOR INFORMATIONAL PURPOSES ONLY.”

 

The Borrowers filed a complaint against Servicer, alleging that the Hazard Insurance Notice violated three subsections of the FDCPA, 15 U.S.C. §§ 1692g, 1692c, and 1692e, as well the Illinois Collection Agency Act, 225 ILCS 42/1, et seq. (“ICAA”). 

 

More specifically, the Borrowers alleged that the Hazard Insurance Notice supposedly violated the FDCPA because:  (1) it failed to include the “debt validation notice” information required under section 1692g;  (2) it was sent at time when Servicer allegedly had actual knowledge that Borrowers were represented by counsel in violation of section 1692c; and  (3) it attempted to collect a debt that Servicer had no legal right to collect in violation of section 1692e. 

 

Servicer filed a motion to dismiss, arguing among other things that the Hazard Insurance Notice was not sent in connection with an effort to collect a debt, and thus was not subject to the restrictions of the FDCPA. 

 

The Borrowers countered, arguing that the Hazard Insurance Notice contained language indicating it was an attempt to collect on a pre-petition debt against them personally. 

 

As you may recall, the FDCPA regulates a communication from a debt collector only if the communication is made “in connection with the collection of any debt.”  See 15 U.S.C. §§ 1692, et seq.; Gburek v. Litton Loan Servicing LP, 614 F.3d 380, 385 (7th Cir. 2010).

 

There is no bright line test to determine whether a communication is made in connection with the collection of a debt.  Id. at 384.  Rather, the court weighs several factors to determine whether a communication was made in connection with the collection of a debt, including: (1) presence or absence of a demand for payment; (2) the nature of the parties’ relationship; and (3) the purpose and context of the communications.”  Id. 385 (citing Ruth v. Triumph P’Ships, 577 F.3d 790, 799 (7th Cir. 2009)).

 

In ruling on the motion to dismiss, the Court relied on Bailey v. Security Nat’l Servicing Corp., 154 F.3d 384, 389 (7th Cir. 1998), which recognized that informational notices without a demand for payment do not constitute attempt to collect a debt under the FDCPA.

 

The Hazard Insurance Notice stated that the mortgage required the property securing the loan to be insured.  It further advised that if Borrowers did not purchase insurance for the property, Servicer would insure the property and the cost of that insurance would be added to the balance of their loan. 

 

Thus, the Court held that the Hazard Insurance Notice did not demand payment, but instead advised Borrowers of the possible consequences if Servicer did not receive confirmation of insurance coverage on the property.  Accordingly, the Court found that the first relevant factor weigh in favor of the conclusion that the communication was not made in connection with the collection of a debt.

 

Next, the Court determined that the purpose and context of the communication suggested that the Hazard Insurance Notice was not an attempt to collect a debt, but instead an effort to comply with RESPA, which required Servicer to provide notice to Borrowers before purchasing hazard insurance and billing it to Borrowers.

 

12 C.F.R. § 1024.37(e) provides, in relevant part:

 

(1) In general. Before a servicer assesses on a borrower a premium charge or fee related to renewing or replacing existing force-placed insurance, a servicer must:

 

(i) Deliver to the borrower or place in the mail a written notice containing the information set forth in paragraph (e)(2) of this section at least 45 days before assessing on a borrower such charge or fee. . .

 

See 12 C.F.R. § 1024.37(e)(1)(i).

 

As explained by the Court, “[t]he content of the Hazard [Insurance Notice] bolsters the conclusion that it was sent for a purpose other than debt collection.  The Hazard [Insurance Notice] does not discuss a balance due on the underlying mortgage loan or discuss ways to settle that balance.” 

 

The Court also noted that no other documents accompanied the Hazard Insurance Notice that might have provided suggestive context or changed the apparent purpose for which the Hazard Insurance Notice was sent.  Therefore, the Court concluded that purpose and context of the Hazard Insurance Notice demonstrated that it was not sent in connection with the collection of any debt.

 

Accordingly, the Court granted the motion to dismiss.

 

 

 

 

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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