FYI: Fla App Ct (2nd DCA) Confirms Rule Allowing "Incorporation" or "Adoption" of Prior Servicer's Records

The Court of Appeals of the State of Florida, Second District (the “Second DCA”) recently reversed a trial court’s dismissal of a mortgage foreclosure action because the plaintiff bank was the proper party to sue and proved that it had standing.

 

In so ruling, the Second DCA applied its prior ruling allowing “incorporation” or “adoption” of a prior servicer’s records, which essentially allows a subsequent servicer to use a prior servicer’s records if the subsequent servicer verified the prior servicer’s records before using them as its own.

 

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

 

The borrowers obtained their mortgage loan in 2006.  Attached to the note was an allonge bearing a blank endorsement.

 

The borrowers defaulted and sometime thereafter the note was assigned to a third party entity (the “assignee”), who sued to foreclose the mortgage in 2008. The complaint included a count to re-establish a lost note, and included a copy of the mortgage.

 

In 2012, the assignee filed an amended verified complaint after the trial court granted its motion to amend. The appellate Court did not elaborate how the substitution of parties occurred.

 

The case went to trial and the judge entered final judgment in favor of the borrowers, because it determined that that the assignee was not a proper party and it lacked standing. The assignee appealed.

 

The Second DCA began its analysis by reiterating the “black letter law” in Florida that a plaintiff who is not the original lender can establish standing to foreclose by submitting a note with a blank or special endorsement, an assignment of the note, or an affidavit otherwise proving the plaintiff’s status as holder of the note. In addition, the Court noted that standing must be established as of the time the foreclosure complaint is filed.

 

The Court found that the assignee, although not the original lender, proved that it was the holder of the note and mortgage when the amended complaint was filed because it submitted the note with a blank endorsement.  Nothing more was required to prove standing, and the Court reversed the final judgment on this basis alone.

 

The Court went on address the trial court’s exclusion of the testimony of the bank’s witness as hearsay because it did not fall within the business records exception to the hearsay rule.

 

The Second DCA concluded that the trial court erred in relying on a decision from the Fourth District Court of Appeals, Glarum v. LaSalle Bank Natl. Ass’n, 83 So. 3d 780 (Fla. 4th DCA 2011).

 

Instead, the case was controlled by the Second DCA’s earlier decision in WAMCO XXVII, Ltd. V. Integrated Electronic Environments, Inc., 902 So. 2d 230 (Fla. 2d DCA 2005), in which the Second DCA held that testimony that relied in part on records received from a prior servicer were not inadmissible hearsay, when the current foreclosure plaintiff’s witness testified as to how the prior servicer’s records were entered into the current plaintiff’s systems, how the current plaintiff verified the accuracy of the prior servicer’s records, and that the current plaintiff relied on the prior servicer’s records after verifying their accuracy.

 

Here, because the assignee’s witness testified in detail about the procedures the loan servicer for whom he worked used, as well as about his personal experience with the type of loan at issue, the Second DCA held that the evidence was admissible as a business record.

 

Accordingly, the trial court’s judgment against the assignee was reversed, and the case remanded for a new trial.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 493-0874
Fax: (312) 284-4751
Email: rwutscher@MauriceWutscher.com

 

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FYI: Fla App Ct (5th DCA) Holds Improper Notice of Default/Right to Cure Not Defense to Foreclosure Absent Showing of Prejudice

The Court of Appeals of the State of Florida, Fifth District (“Fifth DCA”), recently reversed a final judgment of foreclosure in favor of a mortgagee, holding that the mortgagee failed to prove it had standing to sue.

 

In so ruling, the Court also held that failure to provide at least 30 days to cure the default in the mortgagee’s notice of default and right to cure did not prejudice the borrower, and therefore did not constitute a valid defense to the foreclosure.

 

A copy of the opinion is available at: http://www.5dca.org/Opinions/Opin2015/050415/5D13-3272.op.pdf

 

A corporate borrower and its principal signed a promissory note and mortgage securing the note in favor of the original lender. The mortgage named Mortgage Electronic Registration Systems, Inc. (“MERS”) as nominee for the lender and its successors and assigns.

 

The borrowers defaulted and the loan servicer sent a notice demanding payment of the past-due amount.  When the borrower failed to pay, the loan owner filed a foreclosure action, attaching copies of the note, mortgage and an assignment of the mortgage from MERS to the loan owner. The copy of the note was not indorsed. In their answer, the borrowers raised lack of standing and failure to comply with a condition precedent as defenses.

 

At trial, the lower court admitted into evidence the original note and mortgage, the default letter, and a loan payment history. However, the original note, unlike the copy attached to the complaint, contained an undated special indorsement from the original lender to another bank as trustee rather than to the plaintiff mortgagee. The trial court entered final judgment in the plaintiff mortgagee’s favor, and the borrowers appealed

 

On appeal, the Fifth DCA began by reiterating the black letter rule of law that a party seeking to foreclose a mortgage must demonstrate that it has standing at the time the complaint is filed. In addition, the Court also noted that, under section 673.3011 of Florida’s version of the Uniform Commercial Code, the plaintiff must be either the holder of the note, a non-holder who has the rights of a holder, or a person not in possession who is entitled to enforce the note under section 673.3091, Florida Statutes.

 

The Court further noted that, if the note does not reflect the plaintiff as the payee, it must show a special indorsement in the plaintiff’s favor or a so-called blank indorsement, meaning it is payable to the bearer. In addition, the Court noted, the plaintiff can provide an assignment, an affidavit of ownership, or testimony of a witness at trial regarding the date the plaintiff became the owner of the note in order to prove standing.

 

Although the plaintiff mortgagee attached a copy of the assignment of mortgage to the complaint dated prior to the commencement of the action, it was not admitted into evidence at trial or mentioned by the plaintiff mortgagee’s only witness. The witness only stated in conclusory fashion that the plaintiff mortgagee was entitled to enforce the note, but failed to establish when the plaintiff mortgagee took possession of the note or that it had acquired the note before filing the foreclosure action. The witness also failed to explain why the copy attached to the complaint contained an undated indorsement to a non-party bank, not the plaintiff mortgagee.

 

Although the special indorsement on the note established that the non-party bank reflected as payee had standing to foreclose, there was no evidence in the record proving that the non-party bank indorsed the note to the plaintiff mortgagee, either specially or in blank, or that the trustee of the original lender’s pooling and servicing agreement had been changed. The indorsement on the original note did not reflect that plaintiff mortgagee was the proper party with standing to file the foreclosure action.

 

Importantly, however, the Court rejected the borrower’s second argument that the plaintiff mortgage failed to comply with the 30-day notice of default and right to cure requirement in the mortgage because, even though only 29 days’ notice was provided, the borrower was not prejudiced because he made no attempt to cure the default.  The Fifth DCA held that, under Florida law, without a showing of prejudice, the breach of a condition precedent is not a defense to enforcement of an otherwise valid contract.

 

Accordingly, the final judgment of foreclosure was reversed and remanded.  

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 493-0874
Fax: (312) 284-4751
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

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FYI: 7th Cir Rules Secured Creditor Must File Timely Claim to Receive Chpt 13 Plan Distributions

The U.S. Court of Appeals for the Seventh Circuit recently held that a secured creditor must file its proof of claim no later than the 90-day deadline under Federal Rule of Bankruptcy Procedure 3002(c) in order to receive distributions under a Chapter 13 plan of reorganization.

 

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

 

An individual debtor filed his petition under Chapter 13 of the Bankruptcy Code. The clerk of the Bankruptcy Court mailed the “Notice of Chapter 13 Bankruptcy Case, Meeting of Creditors, & Deadlines” to the debtor’s creditors. Pursuant to Federal Rule of Bankruptcy Procedure 3002(c), the notice required creditors other than governmental creditors to file a proof of claim within 90 days after the date scheduled for the meeting of creditors.

 

A secured creditor filed its proof of claim more than 3 months late. The proof of claim included a secured claim for the first mortgage on certain commercial property, and an unsecured claim for a deficiency judgment entered in a state court foreclosure action against residential property.

 

The debtor objected to the secured creditor’s claim as untimely. The secured creditor argued in response that:  (a) a secured creditor does not have to file a proof of claim in order to receive distributions under a Ch. 13 plan;  (b) a pleading filed before the deadline was the functional equivalent of a proof of claim; and  (c) the 90-day deadline set forth in Rule 3002(c) does not apply to secured claims.

 

The bankruptcy court rejected the secured creditor’s first and second arguments, but agreed with the third.  The bankruptcy court held that a secured creditor can file a proof of claim at any time before the Chapter 13 plan is confirmed, overruling the debtor’s objection to and allowing the secured claim, but sustaining the debtor’s objection to the secured creditor’s parallel unsecured claim. The debtor directly appealed to the Seventh Circuit, challenging the bankruptcy court’s ruling allowing the secured part of the claim.

 

Section 158(d)(2)(A) of the United States Code permits federal circuit courts of appeal to hear direct appeals of bankruptcy court orders if the order involves “a question of law as to which there is no controlling decision,” “a question of law requiring resolution of conflicting decisions,” or “a matter of public importance.”  See 28 U.S.C. § 158(d)(2)(A)(i)-(ii).

 

The Seventh Circuit began its analysis by noting that, because the appeal involved a thorny and unresolved legal question of public importance, it would review the bankruptcy court’s decision under the de novo standard.

 

The Court then noted that, under Federal Rule of Bankruptcy Procedure 3021 and section 502(a) of the Bankruptcy Code, a creditor must file a proof of claim in order to receive Chapter 13 plan distributions. However, the Court also noted that, although all creditors must file a proof of claim in order to receive distributions, a secured creditor that opts not to file a proof of claim can still enforce its lien through foreclosure, even after the debtor receives a discharge.

 

Pursuant to 11 U.S.C. § 502(a) and (b)(9), a debtor has the right to object to a claim if the proof of claim is not timely filed within the 90-day period set forth in Federal Rule of Bankruptcy Procedure 3002(c), and the court must disallow an untimely claim.

 

The Seventh Circuit stated that the narrow issue before it was whether the 90-day deadline in Rule 3002(c) applies to all creditors, or just to unsecured creditors. Because Rule 3002 does not expressly mention “secured creditors” at all, some courts have held that the rule applies only to unsecured creditors.

 

The Seventh Circuit rejected that line of cases, concluding that the better interpretation of the rule is that all creditors—both secured and unsecured—are bound by the Rule 3002(c) deadline.

 

The Court reasoned that subsection (c) of the Rule expressly applies to any proof of claim, and does not distinguish between secured and unsecured claims.  The Court also reasoned that subsection 105(5)(A) of the Bankruptcy Code, and Federal Rule of Bankruptcy Procedure 9001, by incorporation, define “claim” as including both secured and unsecured claims. Since Rule 3002 contains both the terms “all” claims and “unsecured” claims, and subsection (c) does not specifically refer to unsecured claims, the Court concluded that the 90-day deadline applies to all claims, unless one of the six enumerated exceptions applies.

 

The Court noted that the fact that under subsection 3002(a) only unsecured creditors must file a proof of claim in order to receive payments under a Chapter 13 plan does not undermine its conclusion, because if an unsecured creditor does not file a proof of claim, it will not receive payments and its claim will be discharged, but on the other hand secured debts are non-dischargeable.

 

The Court also noted that its conclusion that subsection 3002(c) requires all creditors to file a proof of claim within 90 days after the meeting of creditors furthered “[p]rinciples of sound judicial administration,” i.e., the bankruptcy court’s ability to manage is docket.

 

According to the Seventh Circuit, “[r]equiring all creditors to file claims by the same date allows the debtor to craft a finalize a Chapter 13 plan without the concern that other creditors might swoop in at the last minute an upend a carefully constructed repayment schedule. If we held otherwise, secured creditors could wreak havoc on the ability of the debtor and bankruptcy court to assemble and approve an effective plan.”

 

Because the Court held that the deadline for filing a proof of claim under Rule 3002(c) applies to all claims, including secured creditors, and the secured creditor here filed its proof of claim after the deadline had passed, the Court held that the bankruptcy court should have disallowed the secured portion of the secured creditor’s claim with the disallowance of the unsecured claim.

 

Accordingly, the Seventh Circuit reversed the bankruptcy court’s order overruling the debtor’s objection to the secured part of the bank’s claim, and remanded for further proceedings.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 493-0874
Fax: (312) 284-4751
Email: rwutscher@MauriceWutscher.com

 

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FYI: ND Cal Declines to Apply Broad Language of Arbitration Agreement to TCPA and Rosenthal Act Claims Against Servicer

The U.S. District Court for the Northern District of California recently denied a motion to compel arbitration filed by two allegedly affiliated banks that issued department store credit cards, and the one of the issuing banks and another entity that serviced the cards, in a case alleging violations of the federal Telephone Consumer Protection Act (“TCPA”) by calling the debtor’s cellular phone in an attempt to collect on the credit card debt.

 

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

 

The plaintiff stopped paying his credit card in July of 2013 and sent a letter to the issuing bank advising that he could no longer make payments and requesting the bank stop calling him. The issuing bank and its servicer continued making phone calls to the plaintiff.  He then sent a second letter in September of 2013 requesting that the calls stop.

 

The plaintiff sued, asserting claims under the TCPA, the California Rosenthal Fair Debt Collection Practices Act, Cal. Civ. Code §§ 1788 et seq., and state common law claims. The defendants filed a motion to compel arbitration based on the arbitration clauses in the cardholder agreements for one of the two credit cards issued by one of the defendant banks that also serviced on of the two cards (“First Card”).  The second credit card agreement issued by the allegedly affiliated bank did not contain an arbitration clause (“Second Card”).

 

The District Court noted that the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (“FAA”), governs the enforceability and scope of an arbitration agreement and, under the FAA, a party may petition the court having jurisdiction for an order enforcing the arbitration agreement.

 

The Court also noted that, once a petition to compel arbitration is filed, the district court’s inquiry is limited to a two-part test: first, it must determine whether the arbitration agreement is valid; second it must determine whether the agreement encompasses the claims at issue in the lawsuit. Any doubts are to be resolved in a favor of arbitration.

 

The parties did not dispute the validity of the arbitration agreements.  Instead, the parties disputed whether they applied to the claims raised in the lawsuit.

 

The defendants argued that the plaintiff’s claims fell within the broadly-worded terms of the cardholder agreements for the First Card which was governed by South Dakota law.

 

The arbitration clause provided for binding arbitration concerning: "All claims relating to your account, a prior related account, or our relationship . . . including Claims regarding the application, enforceability, or interpretation of this Agreement and this arbitration provision."

 

The arbitration clause also explained whose claims are subject to arbitration: "Not only ours and yours, but also Claims made by or against anyone connected with us or you or claiming through us or you, such as a co-applicant, authorized user of your account, an employee, agent, representative, affiliated company, predecessor or successor, heir assignee, or trustee in bankruptcy."

 

Moreover, the arbitration clause provided that it was to be interpreted "in the broadest way the law will allow it to be enforced."

 

Accordingly, because the issuing banks were alleged to be affiliates, and the servicing entity an agent, the defendants argues that the arbitration provision from the First Card agreement applied to all of the plaintiff’s allegations against all of the entities.

 

Interpreting the First Card agreement, the District Court agreed that South Dakota had a substantial relationship to the parties, and that state’s principles of contract interpretation were not contrary to any fundamental California policy.

 

However, the Court concluded that even under South Dakota law, the defendants’ interpretation of the First Card arbitration language was overly broad.

 

The District Court reasoned that there was no basis on which to conclude that by accepting the First Card agreement, the plaintiff agreed to arbitrate any and all claims that  could ever arise between himself and the issuing bank. To do so would mean that “one credit card agreement could be used to dictate the parties’ ‘relationship’ ad infinitum, regardless of the subject matter of their future interactions. That is an absurd consequence.”

 

The Court concluded that the arbitration clause in the First Card agreement must be limited to the relationship created by those agreements—a relationship between plaintiff and the issuing bank, and not as the servicer or debt collector on any other unrelated card agreement.

 

The District Court found that there was no reason for a consumer like the plaintiff to believe that he had a direct relationship with one of the bank’s seeking to compel arbitration because that bank identified itself during the collection process only as the servicer for the Second Card.

 

In addition, District Court found no evidence that the two credit cards were related in any way, other than they were issued by the same bank and that its parent was the servicer bank.

 

Finally, the District Court found there was no evidence that, when the plaintiff agreed to the cardholder agreement for the Second Card card, he knew or received notice that that account might be serviced in the future by the servicer bank.

 

Relying on another district court’s holding in In re Jiffy Lube Int’l, Inc., Text Spam Litig., 847 F. Supp. 2d 1253 (S.D. Cal. 2012), which rejected an attempt to compel arbitration of TCPA claims based upon similarly broad language, the District Court here concluded that the language of the First Card agreement was limited to the relationship between the plaintiff and the card issuer, not the servicer or debt collector for the card issuer, because the plaintiff’s claims related only to collection calls for his Second Card account, not the First Card account.

 

In addition, although the plaintiff pled that the defendants were agents of the First Card issuer,  the Court refused to apply the language of the arbitration clause covering “agents” of the issuing bank.

 

Accordingly, the Court held that the language in the First Card agreement did not encompass or apply to plaintiff’s claims relating to the Second Card, and the Court denied defendants’ motion to compel arbitration.  

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 493-0874
Fax: (312) 284-4751
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

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