FYI: 8th Cir Holds Debt Collector's Communication to CRA in Response to Debtor's Dispute Did Not Violate FDCPA

The U.S. Court of Appeals for the Eighth Circuit recently held that a debt collector’s failure to report to a credit reporting agency that the borrower disputed the debt at issue did not constitute a false, deceptive, or misleading communication in violation of the FDCPA.

 

In so ruling, the Eight Circuit rejected the borrower’s contentions that the required communication between the debt collector and the consumer reporting agency was “in connection with the collection of any debt” for the purposes of the FDCPA.

 

A copy of the opinion is available at: http://media.ca8.uscourts.gov/opndir/14/12/141164P.pdf

 

In April 2013, the borrower used a consumer reporting agency’s (“CRA”) online system to dispute a debt that the lender had supposedly agreed to settle.  As part of its required reinvestigation under the federal Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq. (“FCRA”), the CRA communicated the dispute to the debt collector.  The debt collector allegedly failed to confirm that the borrower had disputed the debt, and “in turn verified the debt to [the borrower].” 

 

The borrower argued that the debt collector’s failure to report that the debt was disputed constituted a false, deceptive or misleading communication of credit information to the CRA, in supposed violation of federal Fair Debt Collection Practices Act (“FDCPA”).  The lower court rejected the borrower’s argument, and granted judgment on the pleadings in favor of the debt collector.

 

As you may recall, the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692e(8), provides that “[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt,” which includes “(8) Communicating or threatening to communicate to any person credit information which is known or which should be known to be false, including the failure to communicate that a disputed debt is disputed”

 

To evaluate whether the debt collector’s verification of the debt was “false, deceptive or misleading,” the Eight Circuit views the communication “through the eyes of an unsophisticated consumer.”  See Hemmingsen v. Messerli & Kramer, P.A., 674 F.3d 814, 819 (8th Cir. 2012); Peters v. Gen. Serv. Bureau, Inc., 277 F.3d 1051, 1055 (8th Cir. 2002).  However, in this case, the recipient of the debt collector’s statement was the CRA, not a consumer. 

 

The Eighth Circuit noted that, although liability under § 1692e of the FDCPA is not confined to statements by collectors to consumers, the challenged statement must have the potential to "misl[ea]d, deceive[], or otherwise dupe[]" someone in order to be actionable. Hemmingsen, 674 F.3d at 818-19. 

 

The Eighth Circuit held that the facts alleged in the complaint did not support the borrower’s claim that the CRA could have been misled, deceived or duped when the debt collector did not explicitly state that the debt was disputed, because "the sole reason for [the debt collector] to even communicate with the credit agency… was in response to Plaintiff's dispute of the debts through the credit agency’s own dispute notification system." Neeley v. Express Recovery Servs., 2012 WL 1641198 at *2 (D. Utah 2012).

 

Next, the Appellate Court was asked to determine whether or not the communication between the debt collector and CRA was not a communication “in connection with the collection of debt.” 

 

In a case of first impression to the Eighth Circuit, it followed the interpretations of the Third, Sixth and Seventh Circuits, concluding that "for a communication to be in connection with the collection of a debt, an animating purpose of the communication must be to induce payment by the debtor." Simon v. FIA Card Servs., N.A., 732 F.3d 259, 266-67 (3d Cir. 2013); Grden v. Leikin Ingber & Winters PC, 643 F.3d 169, 173 (6th Cir. 2011); Gburek v. Litton Loan Servicing, 614 F.3d 380, 385 (7th Cir. 2010).

 

As you may recall, under the FCRA, when a consumer disputes a debt directly with a reporting agency, the CRA must within 30 days "conduct a reasonable reinvestigation to determine whether the disputed information is inaccurate and record the current status of the disputed information, or delete the item from the file" if it is "found to be inaccurate, incomplete, or cannot be verified." § 1681i(a)(1)(A), (5)(A). When a furnisher of information (such as a debt collector) is contacted as part of this reinvestigation process, it is obligated to "conduct an investigation with respect to the disputed information" and report the results to the consumer reporting agency. § 1681s-2(b).

 

Acknowledging that a communication between a debt collector and a consumer reporting agency may at times be in connection with debt collection, the Eighth Circuit held that the only “animating purpose” for the instant communication between the debt collector and the agency, was to comply with the reinvestigation procedures required by the FCRA, and not to induce payment from the borrower.

 

Thus, the Appellate Court concluded that the borrower failed to plausibly allege that the communication at issue was "false, deceptive, or misleading",” or  was "in connection with the collection of any debt."

 

Accordingly, the trial court’s judgment in favor of the debt collector was affirmed.

 

 

 

 

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

 

Admitted to practice law in Illinois

 

 

 

 

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FYI: Ill App Ct Vacates Foreclosure Due to Alleged HAMP Violation, But Rejects Borrower's Challenge to Notice of Sale

The Illinois Appellate Court, First District, recently vacated an order confirming a foreclosure sale and remanded the matter for an evidentiary hearing, where the mortgagee allegedly moved forward with a foreclosure sale despite an allegedly pending FHA-HAMP application.

 

However, the Appellate Court also held that the borrower's allegations that she did not receive notice of the foreclosure sale failed, because the mortgagee complied with the statutory requirements for notice.   

  

A copy of the opinion is available at:  http://www.illinoiscourts.gov/Opinions/AppellateCourt/2014/1stDistrict/1131272.pdf

 

A mortgagee filed a foreclosure action against a borrower.  Prior to the foreclosure sale, the mortgagee allegedly sent the borrower a letter indicating that she was not eligible for the Federal Housing Administration Home Affordable Modification Program ("FHA-HAMP") due to insufficient income.  

 

A few days later, the mortgagee allegedly sent the borrower an additional letter indicating that it was evaluating her for a foreclosure prevention program, and would likely need 30 days to review.  The foreclosure sale took place a few days after the date of the second letter. 

 

The borrower filed a motion to set aside the sale, alleging among other things that she did not receive the required notice of the sale, and that the sale was improper in light of her pending FHA-HAMP application.  

 

The lower court confirmed the sale, denied the borrower's motion, and also denied a subsequent motion to reconsider.  The borrower appealed. 

 

As you may recall, Illinois law provides that a foreclosure sale shall be set aside if:

 

The mortgagor proves by a preponderance of the evidence that (i) the mortgagor has  applied for assistance under the Making Home Affordable Program [(MHAP)] established by the United States Department of the Treasury pursuant to the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009, and (ii) the mortgaged real estate was sold in material violation of the program's requirements for proceeding to a judicial sale.

 

735 ILCS 5/15- 1508(d-5).

 

The Appellate Court began by considering the borrower's allegations concerning notice of the foreclosure sale, and had little difficulty in rejecting this argument.  The Court explained that because the mortgagee's notice complied with the requirements of the applicable statute, the borrower's allegations that she never received the notice were irrelevant, as the statute and related Illinois Supreme Court Rules do not require receipt of the notice by the mortgagor, but rather only require conformity with the requirements for sending such notice.  See 735 ILCS 5/15-1507(c)(3) (West 2012); Il. S. Ct. R. 11, 12 (eff. Dec 29, 2009). 

 

However, the Appellate Court found merit in the borrower's allegations concerning her allegedly pending FHA-HAMP application.  The mortgagee argued that the borrower had not met her burden of proof to establish that she had applied for assistance under FHA-HAMP,  in that the borrower failed to attach her related application to her motion.  However, the Appellate Court disagreed.  It noted that the borrower provided a copy of the mortgagee's letter indicating that she was ineligible for assistance under FHA-HAMP, and other letter from the mortgagee stating the borrower’s loss mitigation application was under review, which proved "by a preponderance of the evidence" that the borrower had applied for such assistance. 

 

Next, the Appellate Court scrutinized the requirements of FHA-HAMP, noting that a mortgagee shall not proceed with a foreclosure sale "until the mortgagor has been evaluated for the program and, if eligible, an offer to participate in the FHA-HAMP has been made." 

 

The Appellate Court then examined the record, and determined that the borrower had been evaluated for assistance under FHA-HAMP, found to be ineligible, and informed of same by letter.  However, the Court noted that a few days after that letter was sent, the mortgagee sent the borrower an additional letter, indicating that it had received the borrower request to participate in a foreclosure review program, and would likely need 30 days to complete its review. 

 

The Appellate Court observed that the letter did not specifically state that the mortgagee was evaluating the borrower for an FHA-HAMP application, but the Appellate Court also noted that "the record...demonstrated that [the mortgagee] presented no evidence, and that the circuit court made no inquiries" as to whether the letter's mention of a "foreclosure assistance program" might refer to FHA-HAMP. 

 

The Appellate Court also noted that the statements in the mortgagee's letter indicating that the borrower was being considered for foreclosure assistance were "completely contradictory to [the mortgagee's] position in moving ahead with the foreclosure sale." 

 

Accordingly, the Appellate Court vacated the lower court's order approving the sale, and remanding the matter for limited discovery and an evidentiary hearing as to whether the property was sold in "material violation" of the FHA-HAMP requirements. 

 

 

 

 

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: 1st Cir Rules Prior Owner's Attempt to Invalidate Mortgage Barred by Estoppel by Deed

The U.S. Court of Appeals for the First Circuit recently affirmed the entry of summary judgment in favor of a mortgagee where a borrower’s father, the original owner of the collateral property, sought to invalidate the mortgage. 

 

In so ruling, the First Circuit concluded that the father was estopped from claiming an interest in the property pursuant to the doctrine of estoppel by deed.  The First Circuit also rejected the father’s argument that borrower was not a bona fide purchaser.

 

A copy of the opinion is available at:  http://media.ca1.uscourts.gov/pdf.opinions/14-1381P-01A.pdf

 

In 1984, the original owner (“Father”) owned two non-contiguous lots in Alton, New Hampshire.  One property, located at 132 Roger Street, fronted a lake and had various improvements, including a house (the “House Lot”).  The other property was located further down Roger Street but did not have an address or any improvements (the “Vacant Lot”).  Both lots were bisected by Roger Street, which used to be known as Mount Major Park Road.

 

In December of 2001, Father entered into a purchase and sale agreement with his son (“Brother”) to sell property “located at Mount Major Road.”  Although Father and Brother intended to convey the House Lot, both the warranty deed and Brother’s mortgage contained a legal description of the Vacant Lot.  The warranty deed did not include a street address.  Although there were no buildings on the Vacant Lot, the deed’s description of land referenced a tract of land with buildings thereon before reciting the metes and bounds of the Vacant Lot.

 

In 2000 the town of Alton (“Town”) recorded a lien on the Vacant Lot for unpaid taxes.  In October 2002, because the taxes still had not been paid, a tax collector conveyed the Vacant Lot to the town by the tax collector’s deed.  In July 2005, Father’s mortgagee paid off the tax debt, and on August 3, 2005, the town reconveyed the Vacant Lot to Father by quitclaim deed.

 

On January 20, 2006, Brother entered into a purchase and sale agreement to convey “land and building situated at 132 Rogers Road” to his sister (“Borrower”).   Although the agreement referenced the House Lot’s address, it referred to the deed from Father to Brother for the property description.  As stated above, that deed described the Vacant Lot, not the House Lot. 

 

Thus, Borrower’s mortgage agreement with the lender, dated April 27, 2006, stated that the property securing the loan was located at 132 Rogers Road, the House Lot’s street address, but including a legal description of the Vacant Lot.  The warranty deed from Brother to Borrower recited the same legal description of the Vacant Lot found in the deed from Father to Brother, and did not include a street address.  Borrower’s mortgage was eventually assigned to Mortgagee.

 

Father filed for Chapter 7 Bankruptcy in 2005.  The bankruptcy Trustee considered the House Lot to be part of the bankruptcy estate, and in July 2008, filed a notice of intent to sell the House at public auction.  Over the objection of Borrower and the Mortgagee, the bankruptcy court granted bankruptcy Trustee’s motion to sell the House Lot.  Subsequently, the House Lot was sold. 

 

Borrower stopped making her mortgage payments in August 2007, and Mortgagee notified her that it intended to foreclose on the vacant lot.  Then, Father brought suit in state court, styling his complaint as a petition to quiet title on the Vacant Lot and for a declaratory judgment that he held a fee simple title to the Vacant Lot. 

 

Mortgagee removed the case to federal course on diversity grounds.  The district court allowed Father to amend his complaint to add a petition to invalidate Borrower’s mortgage agreement with Mortgagee.  Both parties moved for summary judgment, and the district court granted Mortgagee’s motion, reasoning that Father was estopped from claiming title to the Vacant Lot because he had conveyed that property to his son in 2002.

 

On appeal, Father argued that he still held title to the Vacant Lot pursuant to the quitclaim deed issued to him by the Town in August 2005.  Second, he argued that Mortgagee’s mortgage interest in the Vacant Lot was invalid because Borrower was not a bona fide purchaser for value.

 

As you may recall, the doctrine of estoppel by deed, which prevents a party from denying representations made in a valid deed.  See Hilco Prop. Servs., Inc. v. United States, 929 F. Supp. 526, 545 (D.N.H. 1996).  Even if an individual does not possess clear title at the time he grants the deed, he is estopped from denying the grant of the deed once his title is perfected.  White v. Ford, 471 A.2d 1176, 1178 (N.H. 1984).

 

The First Circuit noted that parties agreed that Father’s deed to Brother described the Vacant Lot, on which the town held a lien due to unpaid taxes.  Thus, when Father deeded the property to Son in 2002, he did not hold complete title to the Vacant Lot.  Mortgagee argued that the title issue was cured when the taxes were paid off by Father’s mortgagee and the Town deeded the Vacant Lot back to Father in 2005.

 

The Appellate Court noted that any deficiencies in Father’s title passed to Brother when Father’s mortgagee paid the taxes owed to the Town in 2005, making fully valid his conveyance of the Vacant Lot to Son in January 2002.  Accordingly, as of August 3, 2005, it was Brother rather than Father who held title to the Vacant Lot.  Thus, the Appellate Court concluded that Father could not meet his burden to establish his good title to the Vacant Lot.

 

Next, the First Circuit considered Father’s argument that Borrower could not grant the loan originator a mortgage on the Vacant Lot because she held no interest in the Vacant Lot.  Father argued that Borrower could not claim title to the Vacant Lot because the town’s quitclaim deed to him in 2005 defeated her purchase from Brother in 2006.  According to Father, because the quitclaim conveyance from the town to him was recorded, a proper title search would have put Borrower and loan originator on notice of his interest in the Vacant Lot.  See Thomas v. Finger, 743 A.2d 1283, 1285 (N.H. 1999) (noting that a bona fide purchaser for value is one who acquires title to property for value, in good faith, and without notice of competing claims or interests in the property).

 

The Appellate Court rejected this argument and noted that a proper title search in the Vacant Lot at the time of Borrower’s purchase would have uncovered both the 2005 quitclaim deed and the 2002 warranty deed from Father to Brother, by which Father divested himself of any interest in the Vacant Lot.  Since Brother held no interest in the Vacant Lot, and was not a party to Borrower’s mortgage agreement with Mortgagee, the district court properly denied Father’s motion for summary judgment as to his petition to invalidate Borrower’s mortgage agreement with Mortgagee.

 

Finally, the First Circuit considered whether the district court properly granted Mortgagee’s Motion for Summary Judgment.  It concluded that because Father bore the burden of proof in his quiet title action, he had to offer definitive, competent effort to rebut the motion.  See Cahoon v. Shelton, 647 F.3d 18, 27 n. 6 (1st Dist. 2011).  As Father had failed to establish a valid title, he had no basis to contest either Borrower’s title to property or her mortgage agreement with Mortgagee.  Accordingly, summary judgment in favor of Mortgagee was appropriate.

 

Accordingly, the First Circuit affirmed the ruling 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

 

 

 

 

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FYI: Fla App Ct (4th DCA) Holds Prior Servicer's Records Admissible On Testimony By Subsequent Servicer

The District Court of Appeal of the State of Florida, Fourth District, recently reversed a trial court’s dismissal of a mortgage foreclosure action, ruling that the testimony of a successor loan servicer’s records custodian was sufficient to lay a proper evidentiary foundation to admit payment records over the borrower’s lack of foundation and hearsay objections. 

      

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

 

The mortgagee sued to foreclose its mortgage in 2008.  The matter eventually went to trial in May of 2013. At trial, the mortgagee relied on one witness, a litigation foreclosure specialist for the mortgagee’s servicer, whose main purpose was to authenticate the servicer’s business records in order to get them admitted into evidence.

 

The servicer’s employee testified that the servicer became the fourth such entity for the subject loan in 2012, more than 5 years after the borrower defaulted in 2007. In order to effectuate the change in ownership of the loan, the prior servicer transferred the borrower’s original loan documents as well as its business records showing the payment history. Upon receipt, the fourth servicer scanned the information into its computer system.

 

At trial, the mortgagee’s witness tried to introduce into evidence a payment history document and another document showing the transaction and transfer details of the loan.  The borrower’s counsel objected on the basis of lack of foundation and, during “voir dire” questioning, the witness admitted that because the fourth servicer had acquired the servicing rights five years after borrower’s default, the payment history records were derived from the prior servicer’s records.

 

The witness also conceded that she never worked for the prior (3rd) servicer and did not know how it recorded its payment information, who at the 3rd servicer input the records, whether that information was entered in the regular course of business and whether the person who input the information did so with knowledge of its contents.

 

The borrower’s counsel argued the proffered documents were inadmissible hearsay and did not fall under the Florida Evidence Code’s business records exception to the hearsay rule because the mortgagee’s witness did not have personal knowledge of the prior servicer’s processes for obtaining and recording loan information.

 

The trial court sustained the borrower’s hearsay objection, reasoning that the mortgagee needed testimony from a witness familiar with the prior servicer’s recordkeeping methods. This effectively left the mortgagee with no evidence supporting its case. The borrower moved for involuntary dismissal at the close of the evidence, which the trial court granted, because it could not determine what the loan balance was. The mortgagee moved for rehearing, which was denied, and this appeal ensued.

 

The Appellate Court explained the rationale behind the business records exception to the hearsay rule -- that such documents have a high degree of reliability because businesses have a built-in incentive to make sure their own records are accurate records, because the businesses rely on them to operate.

 

Where a business acquires custody of another business’ records and makes them part of its own business records, the records become those of the successor business. However, because such second-hand records are not as inherently reliable as self-generated ones, the proponent must not only meet the formal requirements of the applicable Florida Evidence Code provision, subsection 90.803(6), Florida Statutes, but must also show that the records are trustworthy by, for example, explaining that the business or contractual relationship between the two companies provides a substantial incentive for accuracy.

 

As an alternative, the successor servicer itself can independently verify that the business records it acquired are trustworthy by, for example, stating that, in order verify the accuracy of information it receives in connection loan transfers, its employees go through the files, check them for accuracy and then contact the borrower.

 

The Appellate Court held that the mortgagee’s witness provided sufficient evidence of trustworthiness by testifying that the fourth servicer reviewed the prior servicer’s payment records for accuracy before integrating them into its records.

 

However, even if she had not, the facts of the loan transfer itself, as testified to by the mortgagee’s witness, sufficed to establish trustworthiness because of the business relationships and common practices of lenders and other financial institutions buying and selling loans.

 

Given the prevalence of lenders and other financial institutions buying and selling loans, the Appellate Court noted it is the normal business practice to maintain accurate records and provide them to a buyer of the loan. Thus, the mortgagee does not have to provide testimony from a witness with personal knowledge of how the predecessor kept its business records, because to hold otherwise would impair the ability of assignees of debt to collect the debt because the assignee’s records are based on the predecessor servicer’s records.

 

The Appellate Court rejected the borrower’s argument that the fourth servicer’s payment records were inaccurate and thus untrustworthy, because the borrower testified some payments were not accounted for, holding that as long as a servicer’s records obtained from a prior servicer are trustworthy, i.e., they are what they purport to be and went through the customary internal practices and procedures to ensure accuracy, the records are admissible and satisfy the business records exception to the hearsay rule.

 

In the Appellate Court’s words, “[m]inor discrepancies in calculations, given the volumes of records transferred from one business entity to another, should not render business records of a successor servicer untrustworthy for purposes of laying a foundation for the business record exception given that the trustworthiness of the records has been established.”

 

 

 

 

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

 

 

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: Cal App Ct Enforces Arbitration Clause, Confirms that FAA Preempts State Laws that Limit Arbitration

The Court of Appeal of the State of California, Fourth Appellate District, recently reversed a trial court’s refusal to compel arbitration of a borrower’s injunctive claims under the unfair competition law, the false advertising law, and the consumer legal remedies act. 

 

The Fourth District confirmed that state laws limiting the enforcement of arbitration clauses are preempted by the Federal Arbitration Act (the “FAA”) following the U.S. Supreme Court’s ruling in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). 

 

A copy of this opinion is available at:  http://www.courts.ca.gov/opinions/documents/G049838.PDF

 

As you may recall, Congress passed the FAA “to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate,” and place such agreements “upon the same footing as other contracts.”  Volt Info. Sciences v. Leland Stanford Jr. U., 489 U.S. 468, 474 (1989) (internal citations omitted).  Toward that end, the FAA declares that a written agreement to arbitrate in any contract involving interstate commerce or a maritime transaction “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2.

 

The borrower opened a credit card account with the creditor and purchased the creditor’s credit protector plan.  Under its credit protector plan, the creditor defers or credits certain amounts on the borrower’s credit card account when one or more qualifying events occur, such as long-term disability, unemployment, divorce, military service, and hospitalization. 

 

The operative credit card agreement when the borrower opened her account did not include an arbitration provision. The creditor, however, later sent the borrower a “Notice of Change in Terms Regarding Binding Arbitration” that amended the agreement to add an arbitration provision.

 

In 2011, the borrower filed a putative class action based on the creditor’s marketing of the credit protector plan and the manner in which the creditor administered the borrower’s claim under the plan when she lost her job.  The operative complaint alleges claims against the creditor for (1) violation of the unfair competition law (the “UCL”); (2) violation of the false advertising law (the “FAL”); (3) violation of the consumer legal remedies act (the “CLRA”); and (4) improper sale of insurance (Ins. Code, § 1758.9).  The borrower demanded restitution, monetary and punitive damages, attorney fees and costs, and injunctive relief enjoining the creditor from continuing to engage in its allegedly illegal and deceptive practices.

 

The creditor filed a petition to compel the borrower to arbitrate her claims on an individual basis as required by the credit protector plan’s arbitration provision.  The trial court granted the petition in part and denied it in part.  Specifically, the trial court severed and stayed the claims for injunctive relief under the UCL, FAL, and CLRA, and ordered the borrower to arbitrate all her other claims, including claims for restitution and damages under the UCL, FAL, CLRA, and Insurance Code.  Despite finding the credit protector plan’s arbitration provision applied to all of the borrower’s claims, the trial court refused to compel arbitration of the injunctive relief claims based on the California Supreme Court’s Broughton-Cruz rule.

 

As you may be aware, the Broughton-Cruz rule categorically prohibits arbitration of all injunctive relief claims under the UCL, FAL, and CLRA that are brought for the public’s benefit.

 

In Broughton, the California Supreme Court determined that CLRA claims for injunctive relief were not arbitrable because the California Legislature never intended to allow arbitration of such claims.  The California Supreme Court based its conclusion on an “inherent conflict” between arbitration and the underlying purpose of the CLRA’s injunctive relief remedy.  Broughton v. Cigna Healthplans, 21 Cal. 4th 1066, 1082 (1999). 

 

The California Supreme Court found this inherent conflict arose from two factors.  First, injunctive relief under the CLRA was for the benefit of the general public rather than the individual plaintiff who brought the action.  And, “[s]econd, the judicial forum has significant institutional advantages over arbitration in administering a public injunctive remedy, which as a consequence will likely lead to the diminution or frustration of the public benefit if the remedy is entrusted to arbitrators.”  Id.

 

In reaching its decision, the California Supreme Court relied on earlier United States Supreme Court cases holding that statutory claims are subject to arbitration unless arbitration would prevent the effective vindication of the statutory rights at issue.  Those cases explained that a statutory claim is not arbitrable when the text of the statute creating the claim, the statute’s legislative history, or an inherent conflict between arbitration and the statute’s purpose demonstrate Congress did not intend the claim to be arbitrated. Id., 1075.

 

The Broughton court acknowledged this exception to the general rule of arbitrability only had been applied to federal statutory rights—not state statutory rights—but nonetheless applied it to the CLRA’s injunctive relief provision because “it would be perverse to extend the [federal] policy [of enforcing arbitration agreements] so far as to preclude states from passing legislation the purposes of which make it  incompatible with arbitration, or to compel states to permit the vitiation through arbitration of the substantive rights afforded by such legislation.” Id., 1083.

 

In Cruz, the California Supreme Court subsequently extended Broughton rule to injunctive relief claims under the UCL and FAL.  Cruz v. PacifiCare Health Systems, Inc., 30 Cal.4th  303, 307 (2003).

 

In determining the Broughton-Cruz rule’s continuing vitality, the Fourth District noted that the U.S. Supreme Court’s decision in AT&T Mobility had dramatically broadened the FAA’s preemptive scope.  In AT&T Mobility, the U.S. Supreme Court explained, “When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.”  AT&T Mobility, supra, 131 S.Ct. at 1747.

 

Following the U.S. Supreme Court’s decision in AT&T Mobility, the Ninth Circuit Court of Appeals found that the Broughton-Cruz rule was preempted by the FAA.  The Ninth Circuit overturned the two lower court decisions reaching the opposition conclusion. Ferguson v. Corinthian Colleges, Inc. 733 F.3d 928, 934-937 (9th Cir. 2013); Lombardi v. DirecTV, Inc. 546 Fed.Appx. 715, 716 (9th Cir. 2013).  In Ferguson, the Ninth Circuit explained the effective vindication exception is “reserved for claims brought under federal statutes.”  Ferguson, supra, 733 F.3d at 936.

 

The Fourth District agreed with the Ninth Circuit and determined that the Broughton-Cruz rule is no longer valid in light of the U.S. Supreme Court’s decision in AT&T Mobility.  The Fourth District reversed the trial court and held that the FAA required that all of the borrower’s claims be arbitrated.

 

In so ruling, the Fourth District distinguished the California Supreme Court’s recent decision in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014).  In Iskanian, the California Supreme Court held that claims under Labor Code Private Attorneys General Act (the “PAGA”) were not arbitrable notwithstanding the FAA.

 

In Iskanian, the California Supreme Court distinguished an employee’s class action to recover unpaid wages from an employee’s representative action to recover civil penalties under the PAGA.  The California Supreme Court noted that the PAGA was enacted “to allow aggrieved employees, acting as private attorneys general, to recover civil penalties for Labor Code violations, with the understanding that labor law enforcement agencies were to retain primacy over private enforcement efforts.”  Id., 379.

 

Before an aggrieved employee may file a representative PAGA action, he or she must give written notice of the alleged Labor Code violations to both the employer and the Labor and Workforce Development Agency.  The employee may not file the action unless the agency declines to investigate, declines to issue a citation after investigating, or fails to initiate and complete its investigation within the time periods the Labor Code specifies.  (Lab. Code, § 2699.3; Iskanian, supra, 59 Cal.4th at p. 380.)  The employee brings the action as a “‘proxy or agent of the state’s labor enforcement agencies,’” and those agencies are “always the real part[ies] in interest in the suit.”  (Id., 380, 382.)

 

The California Supreme Court found that “[b]ecause an aggrieved employee’s action under the [PAGA] functions as a substitute for an action brought by the government itself, a judgment in that action binds all those, including nonparty aggrieved employees, who would be bound by a judgment in an action brought by the government.”  Id., 381.

 

Therefore, the California Supreme Court concluded that “a PAGA claim lies outside the FAA’s coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship.  It is a dispute between an employer and the state.”  Id., 386-87.

 

The Fourth District concluded that “[a]lthough a plaintiff in both a PAGA representative action an action seeking injunctive relief under the UCL, FAL, and CLRA generally acts as a private attorney general, the PAGA representative action is fundamentally different than the injunctive relief action under the other statutes.

 

Accordingly, the Appellate Court reversed the trial court’s order denying the creditor’s motion to compel arbitration, and remanded for the trial court to order all claims to arbitration.

 

 

 

 

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: Fla App Ct (3rd DCA) Holds Foreclosure SOL Triggered By Acceleration, Not Merely By Notice of Default With Reference to Future Acceleration

The Third District Court of Appeal, State of Florida, recently held that a re-filed foreclosure action was not barred by Florida’s five year statute of limitations, because the statute of limitations was triggered by a notice of default.

 

In so ruling, the Appellate Court held that the statute of limitations was triggered by the foreclosure complaint, not the mortgagee’s notice of default, because the mortgagee exercised its acceleration option and notified the borrower by filing its foreclosure complaint because the foreclosure complaint explicitly provided that the sums due and owing were accelerated, but the notice of default only sought to collect the amount necessary to cure the default and did not constitute an automatic acceleration. 

 

A copy of the opinion is available at:  http://www.3dca.flcourts.org/Opinions/3D14-1547.pdf

 

The borrowers executed a note and mortgage. Pursuant to the terms of the mortgage, the lender had the option to accelerate the debt in the event of a default by the borrower.

 

The borrowers failed to make the required monthly payment due on October 1, 2007. On December 6, 2007, the mortgagee sent the borrowers a notice of default, which provided, among other things, that the full amount of the default must be paid by January 10, 2008, and if this amount were not paid, the mortgagee would accelerate the entire sum of both principal and interest due and payable.

 

Thereafter, the mortgagee filed a foreclosure action against the borrowers on March 12, 2008, alleging, among other things, that the borrowers defaulted under the note and mortgage by failing to make their October 1, 2007 payment and all subsequent payments due and owing.

 

On June 28, 2011, mortgagee voluntarily dismissed the foreclosure action against borrowers without prejudice. Subsequently, on March 5, 2013, mortgagee filed a second foreclosure action against borrowers. The borrowers answered this complaint and alleged as an affirmative defense that the expiration of the five-year statute of limitations barred the second foreclosure action.

 

At trial, borrowers argued that because they failed to cure the default within the time period set forth in the default letter, the debt was automatically accelerated when the borrowers failed to cure their default by the January 10, 2008 deadline stated in the notice of default.  Because the second foreclosure action was not filed within 5 years of the January 10, 2008 deadline in the notice of default, the borrowers argued, the subsequent foreclosure action was time-barred.

 

The mortgagee argued that the date of acceleration was not the January 10, 2008 deadline stated in the notice of default, but rather the March 12, 2008 date the complaint was filed in the first foreclosure action. Therefore, mortgagee argued, the five-year limitations period had not yet expired when the second lawsuit was filed on March 5, 2013.

 

According to the mortgagee, the notice of default stated only that the mortgagee would take future action, including but not limited to acceleration of the debt and the filing of a foreclosure action, if the default were not cured.

 

The trial court held that the debt was accelerated on the date the mortgagee filed the original foreclosure lawsuit on March 12, 2008, and that the statute of limitations commenced on that date, and that the second foreclosure action was filed prior to the expiration of the five-year limitations period.  Final judgment of foreclosure was entered thereafter, and this appeal followed.

 

The Appellate Court began its analysis by examining acceleration clauses.  As you may recall, the statute of limitations on a mortgage foreclosure action in Florida does not commence until a default in payment of the final installment due, unless the mortgage contains an acceleration clause. Locke v. State Farm Fire and Cas. Co., 509 So. 2d 61375 (Fla. 1st DCA 1987).

 

Under Florida law, when an acceleration clause is absolute, the entire indebtedness becomes due immediately upon default, requiring neither notice of default nor some further action to accelerate the debt.  Baader v. Walker, 153 So. 2d 51 (Fla. 2d DCA 1963). By contrast, where the acceleration clause is optional, it is not automatic or self-executing, but requires the lender to exercise this option and to give notice to the borrower that it has done so.  See Campbell v. Werner, 232 So. 2d 252, 254 n. 1 (Fla. 3d DCA 1970).

 

Also under Florida law, when the borrower defaults on a payment under a note containing an optional acceleration clause, the lender can exercise its option to accelerate all future payments, making the entire debt immediately due and payable. A cause of action on an accelerated debt accrues, and the statute of limitation commences, when the lender exercises the acceleration option and notifies the borrower of this exercise. See Greene, 733 So. 2d at 1115; Monte v. Tipton, 612 So. 2d 714 (Fla. 2d DCA 1993).

 

The Appellate Court held that the notice of default did not accelerate the debt nor did it “apprise the maker of the fact that the option to accelerate has been exercised.”  Central Home Trust, 392 So. 2d at 933.  Rather, the communication served as a notice of default, notice of borrowers’ right to cure, and notice that the mortgagee intended, at some unspecified future date, to accelerate the debt if borrowers failed to cure the default as set forth in the notice.

 

Importantly, absent from the notice of default was any declaration by mortgagee that the full amount of principal and interest is immediately due, or any demand for payment of the full amount of principal and interest.  Indeed, under the terms of the mortgage, a tender by borrowers of the default amount would cure the default and prevent mortgagee from accelerating the debt. Yelen v. Bankers Trust Co., 476 So. 2d 767 (Fla. 3d DCA 1985). The payment demanded by the notice of default was merely the specific amount necessary to bring the loan current.

 

The borrowers’ argument focused on one portion of the letter which reads:  “If you do not pay the full amount of the default, we shall accelerate the entire sum of both principal and interest due and payable. . . “ 

 

The Appellate Court rejected the borrowers’ contention that the phrase “we shall accelerate” somehow converted the optional acceleration into a prospective, self-executing acceleration which was automatically triggered upon the failure of borrowers to cure the default.  Instead, the Appellate Court held, the notice of default indicated only that the mortgagee intended to exercise its option to accelerate in the future, should borrowers fail to cure the default.

 

Therefore, the lapse of the 35-day grace period (without a cure of the default) did not automatically accelerate the debt or trigger the commencement of the five-year statute of limitations. Instead, the limitations period commenced when mortgagee filed the original March 12, 2008 foreclosure complaint, expressing in clear and unequivocal language that it was exercising its option and accelerating the debt:  “[mortgagee] declares the full amount due under the note and mortgage to be now due.”

 

Thus, the Appellate Court held the statute of limitations would have expired March 12, 2013, and because the second foreclosure action was filed March 5, 2013, it was not time-barred.

 

 

 

 

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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