FYI: Ill App Ct Confirms TILA May Not Apply to Loan Secured by Borrower's Principal Residence

The Illinois Appellate Court, First District, recently affirmed a grant of summary judgment allowing a lender to foreclose its mortgage, even though it may not have complied with certain provisions in the federal Truth in Lending Act (TILA).  In so ruling, the Appellate Court found that TILA did not apply because the loan at issue was a commercial loan, not a consumer loan, even though the loan was secured by the borrower's principal residence.

 

A copy of the opinion is available at: http://illinoiscourts.gov/Opinions/AppellateCourt/2015/1stDistrict/1133775.pdf

 

The husband borrower owned a business that purchased tax certificates.  This business had a $2.3 million revolving line of credit.  That line of credit was secured by the tax certificates the company owned.

 

In June of 2011, the lender became concerned that this line of credit was under-capitalized.  The lender came to believe the tax certificates were less valuable than originally calculated.  Additionally, the lender was concerned that the husband had pledged the certificates as collateral to secure other loans.

 

To address the lender's concerns, the husband and wife personally borrowed $960,000 from the lender, secured by a first mortgage on the residence the husband and wife co-owned and in which they lived.  The funds from this loan were to be used to pay down the husband's company's revolving line of credit. 

 

Notably, that loan stated that its purpose was "Consumer."  However, it also stated that the loan was a "shareholder loan" for the husband's company.  The loan also contained a paragraph titled "Federal Truth-In-Lending Disclosures."  Along those lines, the loan included a "Notice of Right of Rescission" stating that the loan "relate[d] to a consumer credit account."  The husband and wife both signed documents stating that they received two copies of the TILA rescission notice.

 

That loan went into default quickly, and the lender foreclosed.  The husband and wife raised the lender's failure to comply with TILA as an affirmative defense.  They alleged that, despite the papers they signed, they did not each receive two copies of the notice of their right to rescission.  Consequently, they claimed they were still entitled to rescind the loan under TILA and attempted to do so.

 

The lender admitted that there was an issue of fact about whether the husband and wife received the notices.  However, it argued that this fact was not material to the suit, because TILA did not apply to this loan.  The husband and wife argued otherwise, claiming the loan was a consumer loan subject to TILA.

 

The trial court granted summary judgment to the lender, and the husband and wife appealed.  The Appellate Court noted that the record before it was quite deficient.  In spite of this, the Appellate Court discerned that the trial court had granted summary judgment because the loan at issue was a commercial loan not subject to TILA.

 

The Appellate Court began by noting that, if a loan is subject to TILA, a borrower can rescind a mortgage loan secured by the borrower's principal residence within three years of the loan's origination if the borrower did not receive certain material disclosures required under TILA, including two copies of the Notice of Right to Cancel.  However, the Court noted that only "consumer" loans are subject to TILA, and TILA defines "consumer" loans as "transactions 'in which the party to whom credit is offered or extended is a natural person, and the money, property, or services which are the subject of the transaction are primarily for personal, family, or household purposes.'"

 

The Appellate Court began its analysis of the consumer versus commercial distinction by saying there is no bright-line rule for making the determination.  Rather, courts consider the transactions as a whole.

 

First, the Appellate Court confirmed that the debtor's using his or her personal residence to secure the loan does not automatically make it a consumer loan.  In that vein, including the label "consumer" on the loan documents does not automatically make it a consumer loan as defined by TILA.  Instead, courts must look to the substance of the transaction, not the form.

 

With this in mind, the Appellate Court found it was "clear" that the loan to the husband and wife was a commercial loan, not a consumer loan subject to TILA.  The Appellate Court noted that the loan stated that it was a shareholder loan to the husband's company.  Moreover, the Appellate Court found that the loan was for a commercial purpose – i.e., paying down the husband's company's line of credit.

 

The Appellate Court found these factors more persuasive than the "consumer" label on the loan and the fact that the husband and wife's residence secured the loan.

 

To avoid this result, the wife argued that, because she had no ownership interest in the company, the loan, to the extent it was to her, was not commercial.  The Appellate Court rejected this argument.  It found that a loan can still be commercial even if a party to it does not own part of the business receiving the proceeds of the loan.

 

In that vein, the Appellate Court gave weight to the fact that the wife, presumably, would receive a commercial benefit from the loan.  Even if she did not own an interest in her husband's company, the Appellate Court noted she would benefit from the success of her husband's business.  As such, the Appellate Court held, she was not just a disinterested consumer mortgaging her residence to help someone else's unrelated business.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher 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@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: Fla App Ct (1st DCA) Holds Statute of Limitations Did Not Bar Re-Filed Foreclosure, Regardless of Dismissal With or Without Prejudice of Prior Action

The District Court of Appeal of the State of Florida for the First District recently held that the statute of limitations does not bar a second mortgage foreclosure action based on a subsequent default, regardless of whether the first case was dismissed with or without prejudice.

 

A copy of the opinion is available at: https://edca.1dca.org/DCADocs/2014/4381/144381_DC13_08242015_111309_i.pdf

 

The borrowers defaulted on their mortgage in February of 2007. In April of 2007, the plaintiff mortgagee's predecessor in interest accelerated the note based on the February, 2007 breach and sued to foreclose the mortgage. The case was dismissed without prejudice in October of 2007 when the mortgagee's counsel failed to appear at a case management conference.

 

In November of 2010, the plaintiff mortgagee sent a new notice of intent to accelerate based on the failure to pay the March, 2007 installment. The default was not cured and the plaintiff mortgagee filed a second foreclosure action in November of 2012.

 

The borrowers raised the statute of limitations as an affirmative defense, arguing that the second action was barred because it was not filed within 5 years after the 2007 acceleration of the note. The trial court entered summary judgment in the borrowers' favor, holding that the second action was barred by the statute of limitations.  The plaintiff mortgagee appealed.

 

On appeal, the First District held that the Florida Supreme Court's holding in Singleton v. Greymar Associates, 882 So. 2d 1004 (Fla. 2004) controlled.  

 

As you may recall, Singleton held that the failure to pay each installment was a separate default that "created a new and independent right in the mortgagee to accelerate payment on the note in a subsequent foreclosure action," finding it "irrelevant whether acceleration had been sought in earlier foreclosure actions."

 

The First District observed that in the case at bar, both the note and mortgage contained typical clauses "reflecting the parties' agreement that the mortgagee's forbearance or inaction do not constitute waivers or release [borrowers] from their obligation to pay the note in full," and that such binding contractual terms are inconsistent with the trial court's judgment.

 

In addition, the Appellate Court noted that it had previously held that "not even a dismissal with prejudice of a foreclosure action precludes a mortgagee 'from instituting a new foreclosure action based on a different act or a new date of default not alleged in the dismissed action.'"

 

The First District found that the plaintiff mortgagee's "assertion of the right to accelerate was not irrevocably 'exercised' within the meaning of cases defining accrual for foreclosure actions, when the right was merely asserted and then dismissed without prejudice." 

 

The Court concluded that "[a]fter the dismissal without prejudice, the parties returned to the status quo that existed prior to the filing of the dismissed complaint.  As a matter of law, appellant's 2012 foreclosure action, based on breaches that occurred after the breach that triggered the first complaint, was not barred by the statute of limitations."

 

In so ruling, the First District acknowledged that its decision was contrary to the Third District Court of Appeal's current holding in Deutsche Bank Trust Co. Americas v. Beauvais, but reasoned that a federal district court recently refused to follow Beauvais because it is "contrary to the overwhelming weight of authority," which the Beauvais court itself acknowledged. The First District also noted that the Beauvais court had "set the case for rehearing en banc [and] it remains to be seen whether the merits disposition will change."

 

Accordingly, the trial court's judgment was reversed 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) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 11th Cir Reverses Dismissal of City of Miami's FHA "Predatory Lending Discrimination" Claims Against Three Banks

The U.S. Court of Appeals for Eleventh Circuit recently held that a municipality has standing to bring disparate impact discrimination claims under the federal Fair Housing Act to recover for allegedly increased police, fire and other costs supposedly caused by the defendant banks' so-called "predatory lending" practices.

 

A copy of the opinion is available at:  http://media.ca11.uscourts.gov/opinions/pub/files/201414543.pdf

 

The City brought three separate cases against three different banks, alleging that they violated the Fair Housing Act, 42 U.S.C. § 3601 et seq. (FHA), by supposedly targeting Black and Latino customers for so-called "predatory" loans that were allegedly riskier and had higher fees and costs than those offered to similarly situated white borrowers. The subject loans included those with higher interest rates, "subprime loans, interest only loans, balloon payment loans, loans with prepayment penalties, negative amortization loans, no documentation loans and adjustable rate mortgages with teaser rates."

 

The complaint alleged that by steering minority applicants to such "predatory" loans, the defendant banks caused minority-owned properties throughout the City to be prematurely foreclosed, thus depriving the City of tax revenue, and also forcing it to spend more on police, fire, trash and other municipal services in order to address the resulting urban blight. The complaint also contained a common law claim for unjust enrichment under Florida law.

 

The three cases were consolidated before the same district judge, who dismissed the FHA claims with prejudice because:  a) the City lacked statutory standing under the FHA because it was not within the statute's "zone of interests" sought to be protected;  b) the City had not adequately pled that the defendant banks' conduct proximately caused the City's damages; and  c) the statute of limitations barred the FHA claims and the continuing violation doctrine exception did not apply. The City appealed.

 

On appeal, the Eleventh Circuit quickly concluded that the City had constitutional standing to pursue its claims under the FHA, reasoning that "under controlling Supreme Court precedent, the 'zone of interests' for the Fair Housing Act extends as broadly as permitted under Article III of the Constitution, and therefore encompasses the City's claim."

 

The Eleventh Circuit explained that the concept of constitutional standing arises from the "case-or-controversy" requirement in Article III of the Constitution, and that in order to establish "constitutional standing at the pleading stage, the plaintiff must plausibly allege: (1) an injury in fact that is concrete, particularized, and actual or imminent; (2) 'a causal connection between the injury and the conduct complained of,' such that the injury is 'fairly traceable to the challenged action of the defendant'; and (3) that a favorable judicial decision will 'likely' redress the injury."

 

According to the Eleventh Circuit, the Supreme Court precedent also requires that the "'line of causation' between the alleged conduct and the injury must not be 'too attenuated,' [and] [a]t the pleading stage, 'general factual allegations of injury resulting from the defendant's conduct may suffice' to demonstrate standing."

 

The Court rejected the defendant banks' argument that City's harm was not fairly traceable to the banks' conduct, because other factors such as the declining housing market broke the causal chain, reasoning, that, although "[a]t a subsequent stage in the litigation it may well be difficult to prove which foreclosures resulted from discriminatory lending, how much tax revenue was actually lost as a result of the Bank's behavior… at this early stage, the claim is plausible and sufficient … [and] [t]he City has said enough to establish Article III standing." 

 

The Eleventh Circuit then turned to the district's court's conclusion that the City lacked "statutory standing," explaining that the Supreme Court recently called it a misleading label because "[t]he proper inquiry is whether the plaintiff 'has a cause of action under the statute.' … But that inquiry isn't a matter of standing, because 'the absence of a valid … cause of action does not implicate subject-matter jurisdiction, i.e., the court's statutory of constitutional power to adjudicate the case…Instead, it is 'a straightforward question of statutory interpretation."

 

The Court explained further that '[i]n general, a statutory cause of action 'extends only to those plaintiffs whose interests 'fall within the zone of interests protected by the law invoked,' [and that] [t]he Supreme Court has instructed us that this test 'applies to all statutorily created causes of action,' but its application is not uniform: 'certain statutes … protect a more-than-usually 'expansive range of interests.'"

 

The defendant banks argued that the City was not an "aggrieved person" as defined by the FHA  and, thus, did not fall within the statute's zone of interests. The City argued that under the controlling case law, it fell within the zone of interests because statutory standing is a broad as the Constitution's Article III permits.

 

After carefully reviewing the Supreme Court's landmark FHA cases and its own precedent, noting that "[t]he scope and role of the zone of interests analysis in the FHA context is a difficult issue, and one that has sharply divided the courts that have considered it," the Eleventh Circuit concluded that "[u]ltimately we disagree with the district court, and hold that the phrase 'aggrieved person' in the FHA extends as broadly as is constitutionally permissible under Article III."

 

The Eleventh Circuit also concluded that the City adequately alleged proximate cause, and "[b]ecause the district court imposed too stringent a zone of interests test and wrongly applied the proximate cause analysis, [the district court] erred in dismissing the City's federal claims with prejudice and in denying the City's motion for leave to amend on grounds of futility."

 

The Court then addressed the district court's ruling that the statute of limitations barred the FHA claims. and that the continuing violation doctrine exception did not apply.

 

As you may recall, the FHA requires that claims be filed "not later than 2 years after the occurrence or the termination of an alleged discriminatory housing practice."  In addition, a claim under the FHA based on a discriminatory loan "begins to run from the date that the loan closes."

 

The City failed to allege that any of the alleged predatory loans closed within the limitations period, which was December 13, 2011 to December 13, 2013. On appeal, the City argued that this defect could easily be cured if it were granted leave to amend.

 

The district court never addressed whether the City's proposed amended complaint was sufficient, because it concluded that the City still fell outside the FHA's zone of interests and thus lacked statutory standing. The Appellate Court disagreed, concluding that "[b]ecause the district court erred both as to the zone of interests and proximate cause, we are obliged to remand the cause of action in the first instance to determine whether or not the City could remedy any statute of limitations deficiency."

 

In order to provide guidance on remand, the Eleventh Circuit addressed the district court's holding that the continuing violation doctrine did not apply "because the complaint did not identify a singular and uniform practice of continuing conduct."

 

As you may recall, the continuing violation doctrine allows a plaintiff to sue based on the continued enforcement of a discriminatory policy as long as one prohibited act of discrimination occurs during the limitations period.

 

Relying on the Supreme Court's decision in Havens, the leading case "on the continuing violation doctrine in the FHA context," the Eleventh Circuit found that City "has alleged 'not just one incident … but an unlawful practice that continues into the limitations period." The Court reasoned that "[t]he fact that the burdensome terms have not remained perfectly uniform does not make the allegedly unlawful practice any less 'continuing.' The various instances of discriminatory lending comprise the practice, which continues into the limitations period. At least at the pleading stage, this is enough to plausibly invoke the continuing violation doctrine."

 

Having found that the City was within the FHA's zone of interests, and that it sufficiently alleged that the defendant banks' conduct was the proximate cause of its injury, the Court concluded that the district court abused its discretion by refusing to allow the City to file its amended complaint on the grounds that it would be futile. 

 

However, the Eleventh Circuit affirmed the dismissal of the state law unjust enrichment claims, because the benefits allegedly conferred on the defendant banks were insufficiently direct to state a claim under Florida law.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher 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@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 5th Cir Holds Unaccepted Offer of Judgment Does Not Moot Individual or Putative Class Claims

The U.S. Court of Appeals for the Fifth Circuit recently held that an unaccepted offer of judgment does not moot a lead plaintiff's claim in a putative class action.

 

In so ruling, the Fifth Circuit reversed the district court's ruling that, because a motion for class certification was not filed before the offer, the putative class action was also mooted.

 

A copy of the opinion is available at: http://www.ca5.uscourts.gov/opinions/pub/14/14-20496-CV0.pdf

 

The plaintiff withdrew money from his checking account at an automated teller machine (ATM) and subsequently sued the ATM owner, seeking statutory damages under the Electronic Funds Transfer Act (EFTA), 15 U.S.C. § 1693 et seq., because he was charged $2.95 for the withdrawal, but there was no notice posted on or at the ATM informing customers about the fee.

 

The defendant made an offer of judgment under Fed. R. Civ. Pro. 68 for $1,000, the maximum recoverable statutory damages for the plaintiff's individual claim, plus "costs accrued and reasonable and necessary attorney fees, through the date of acceptance of the offer … to be determined by the court if agreement cannot be reached."

 

As you may recall, Rule 68 allows a party to accept an offer of judgment within 14 days of service. The plaintiff did not accept the offer.  Instead, the plaintiff filed a motion to strike the offer of judgment, which the district court denied.

The plaintiff filed his motion for class certification and, the same day, the defendant filed a motion to dismiss for lack of subject matter jurisdiction. The magistrate judge recommended that the motion for class certification be granted, and that the motion to dismiss be denied as moot, which the district court adopted.

 

Thereafter, the defendant filed a second motion to dismiss, arguing that plaintiff's individual claim and the class action were mooted by the unaccepted offer.  The district court granted the defendant's motion to dismiss and vacated its prior order.  The plaintiff appealed.

 

On appeal, the plaintiff argued that the Rule 68 offer was not complete because it only included attorney's fees through the date of the offer. Under Fifth Circuit precedent, "[a]n incomplete offer of judgment—that is, one that does not offer to meet the plaintiff's full demand for relief—does not render the plaintiff's claims moot."

 

The Fifth Circuit noted that it had not addressed whether an offer of judgment is complete when it includes attorney's fees incurred up to the offer date, but not thereafter.  As you may recall, other courts have split on what must be included for the offer to be complete.

 

The Fifth Circuit then held that, if the offer were incomplete, plaintiff's individual claim was not mooted under its precedent. In addition, the Fifth Circuit held that, even if the offer were complete, the plaintiff's individual claim, as well as the class claims, were not mooted by the unaccepted offer.

 

The Court reasoned that Rule 68 provides that "[a]n unaccepted offer is considered withdrawn," and consistent with the rulings of the Ninth and Eleventh Circuits, holding that "an unaccepted offer of judgment to a named plaintiff in a class action is a legal nullity, with no operative effect."  The Fifth Circuit also relied on the law of contracts, which provides the rejection of an offer nullifies the offer.

 

The Fifth Circuit noted that it had "previously expressed concern for defendant induced mootness in the class action context where defendants may attempt to 'pick off' individual plaintiffs before class certification '[b]y tendering to the named plaintiffs the full amount of their personal claims each time suit is brought as a class action." 

 

The Court reasoned that "[a] contrary ruling would serve to allow defendants to unilaterally moot name-plaintiffs' claims in the class action context — even though the plaintiff, having turned down the offer, would receive no actual relief."  

 

The Fifth Circuit also held that, because the plaintiff's individual claim was not mooted by the unaccepted offer, neither were the putative class claims.  The district court's ruling was reversed and the case 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) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

CALIFORNIA   |   FLORIDA   |   ILLINOIS   |   INDIANA   |   MASSACHUSETTS   |   NEW JERSEY   |   NEW YORK   |   OHIO   |   PENNSYLVANIA   |   TEXAS   |   WASHINGTON, D. C.

 

 

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