FYI: MD Fla Denies Class Cert in FDCPA Case, Citing Ascertainability Issues as to "Consumer" Purpose of Debts, Predominance Issues as to SOL Determinations

In an action alleging that the defendants violated the federal Fair Debt Collection Practices Act ("FDCPA") by sending a form letter attempting to collect on allegedly time-barred debts, the U.S. District Court for the Middle District of Florida recently denied the plaintiff's motion for class certification.

 

In so ruling, the Court held:

 

-  The plaintiff failed to demonstrate that the defendants' records contain sufficient information from which the Court could determine whether each class member's debt was obtained for "consumer" purposes; and

 

-  Even if Plaintiff were able to establish on a class-wide basis that the defendants had a routine practice of attempting to collect on time-barred debts, significant issues of liability would still remain because the Court would still be required to conduct individualized inquiries as to whether each class member's debt was actually time-barred.

 

A copy of the opinion is attached.

 

The plaintiff defaulted on her credit card debt more than five years ago. A debt acquisition company purchased the account from the card issuer, and through its collection agent sent the plaintiff a letter stating the balance owed and offering to settle for 20% of the debt.

 

The plaintiff filed a putative class action alleging that the debt owner and debt collector violated the FDCPA by sending consumers the letter the plaintiff received trying to collect on a time-barred debt.

 

The plaintiff moved pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) to certify a class consisting of Florida residents who had, within 1 year prior to the filing the of lawsuit, received the subject letter in an attempt to collect a time-barred debt owed to the original card issuer where the consumer last made a payment five years or more before the date the letter was mailed.

 

The Court began with the legal standard applicable to class certification, noting that "a district court may only certify a class action if it is satisfied, after a rigorous analysis, that Plaintiff has met the implicit and explicit requirements of Rule 223 of the Federal Rules of Civil Procedure."

 

Plaintiff must first meet the implicit requirement that the proposed class be "adequately defined and clearly ascertainable." Once this "ascertainability" requirement is met, the plaintiff must establish the four elements contained in Rule 23(a): "(1) the class is so numerous that joinder of all members is impracticable ('numerosity'); (2) there are questions of law or fact common to the class ('commonality'); (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class ('typicality'); and (4) the representative parties will fairly and adequately protect the interests of the class ('adequacy of representation')."

 

If the plaintiff passes the 4-part test of Rule 23(a), she must still "satisfy at least one of the alternative requirements under Rule 23(b)." The one chosen by the plaintiff was 23(b)(3), "which requires her to establish 'that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy.'"  This is known as the "predominance" prong.

 

The defendants argued that certification was not appropriate, because (1) the plaintiff did not satisfy the predominance prong of Rule 23(b)(3); and (2) the plaintiff failed to prove that an "ascertainable" class exists.  For purposed of the motion, the Court assumed that the other requirements of Rule 23(a) (numerosity, typicality, commonality, and adequacy of representation) were met.

 

Addressing ascertainability first, the Court agreed with the defendants that the plaintiff failed to demonstrate that the defendants' business records would contain information from which the Court could determine whether the debt was for "consumer" -- i.e., for "personal, family, or household purposes," a threshold requirement in order to assert a claim under the FDCPA.

 

The Court reasoned that "Rule 23 does not set forth a mere pleading standard under which the plaintiff can establish ascertainability simply by asserting that class members can be identified using the defendant's records; the plaintiff must also establish that the records are in fact useful for identification purposes, and that identification will be administratively feasible."

 

Because the plaintiff failed to provide proof of her allegations that original creditor's records would identify the class in an administratively feasible manner with any actual evidence, and in addition the defendants presented declarations to the effect that their records did not reveal the nature of the debt, the Court concluded that class certification would not be appropriate.

 

Noting that although denial would be appropriate solely on the basis of lack of ascertainability, the Court nonetheless discussed the predominance argument "for the parties' benefit."

 

"Under the predominance prong of Rule 23(b)(3), Plaintiff must demonstrate that 'the issues in the class action that are subject to generalized proof … predominate over those issues that are subject only to individualized proof."

 

Citing Eleventh Circuit precedent, the Court explained that "[c]ommon questions of fact and law predominate if they have a direct impact on every class member's effort to establish liability that is more substantial than the impact of individualized issues in resolving the claim or claims or each class member. If after adjudication of the classwide issues, plaintiffs must still introduce a great deal of individualized proof or argue a number of individualized legal points to establish most or all or the elements of their individual claims, their claims are not suitable for class certification under Rule 23(b)(3)."

 

Reasoning that the "predominance analysis' begins, or course, with the elements of the underlying cause of action,'" the Court reasoned that to "prevail on her FDCPA claim, Plaintiff must demonstrate that: (1) each putative class member was the object of collection activity arising from consumer debt; (2) Defendants are debt collectors as defined by the FDCPA; and (3) Defendants engaged in an act or omission prohibited by the FDCPA."

 

The Court ultimately agreed with the defendants that the plaintiff failed to establish the predominance prong because whether a class member's claim debt is time-barred "will require individualized inquiry." This is because "Plaintiff provides no evidence that the debts of persons meeting her proposed class definition are time-barred" but merely assumes so because the form letter in question was sent more than 5 or more years before the date of mailing" and "Plaintiff's assumption is flawed because many factors must be considered when determining the expiration of a limitations period, one in particular being the accrual date."

 

Because the plaintiff failed to provide any evidence from which the Court could "determine when the statute of limitations began to accrue on each class member's debt" and the defendants by declaration established they did not have possession, custody or control of the cardholder agreements between the debtors and the original creditor, "to determine whether each class member's debt is time-barred, the Court would first need to review the applicable cardholder agreements to determine when the limitations period began to accrue."

 

The Court held this would require individualized inquiries "to determine when the limitations period actually expired on each class member's debt."  Doing this "is not always a simple task. In fact, in making such a determination, the Court will be required to consider many factors, such as the charge-off date, tolling issues, revival issues, and any actions between the debtor and creditor that may have modified their original agreement." As the Court held, "[t]his is exactly the type of extensive factual inquiry that courts have held to be too administratively burdensome to warrant class certification."

 

Because even if the plaintiff established that the defendants sent to consumers the form letter in question "in an attempt to collect on time-barred debts, significant issues of liability would still remain … as to whether each class member's debt was actually time-barred, the Court found that "Plaintiff has failed to establish that common issues predominate over individual issues, and her motion for class certification must be denied."

 

 

 

 

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: 2nd Cir Holds FDCPA Action Accrues When Injury Occurs, Not Necessarily When Violation Occurs

The U.S. Court of Appeals for the Second Circuit recently reversed dismissal of a federal Fair Debt Collection Practices Act (FDCPA) claim based on the statute of limitations, holding that an FDCPA violation occurs when a bank freezes a debtor's bank account, not when a debt collector sends a restraining notice to the bank.

 

In so ruling, the Court distinguished the rulings in Maloy v. Phillips, 64 F. 3d 607 (11th Cir. 1995) and Mattson v. U.S. W. Commc'ns, Inc., 967 F. 2d 259 (8th Cir. 1992), which held that an FDCPA violation occurs when the alleged unlawful debt collection notices are mailed, not when received.

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

A creditor obtained judgment against a judgment debtor.  Approximately five years later, a debt collector initiated enforcement proceedings as to the judgment, including as to the plaintiff, who was not the judgment debtor but who had a name similar to that of the judgment debtor.

 

The plaintiff's bank froze the plaintiff's bank account after it received a restraining notice from the debt collector.  The restraining notice named the judgment debtor, but identified the plaintiff's social security number and address. 

 

The plaintiff contacted the debt collector to remove the restraint, but was unsuccessful.  The plaintiff then retained counsel, who threatened legal action, and the restraining notice was withdrawn. 

 

Three and a half years later, the bank again froze the plaintiff's account pursuant to a second restraining notice issued by the same debt collector based on the same judgment and containing the same errors as the first restraining notice.  The plaintiff again retained counsel, who contacted the debt collector, and the restraint was again lifted. 

 

Thereafter, the plaintiff filed an FDCPA lawsuit against the debt collector, alleging false, deceptive, or misleading representation or means in connection with the collection of the judgement debt, and unfair or unconscionable means to collect or attempt to collect the debt.

 

The debt collector moved to dismiss, arguing the complaint was time-barred under the FDCPA, as it was filed more than one year after service of the restraining notices.  The district court dismissed the lawsuit, and the plaintiff appealed.

 

The Second Circuit reversed the dismissal, holding that the FDCPA violation occurred when the bank froze the plaintiff's bank account, not when the debt collector send the restraining notice to the bank.

 

As you may recall, the FDCPA provides that plaintiffs must file suit within one year from the date on which the violation occurs.  The Second Circuit noted that it is a general principal of law that a cause of action accrues when conduct that invades the rights of another has caused injury.  In addition, when the injury occurs, the injured party has the right to bring suit for all of the damages, past, present and future, caused by the defendant's acts.

 

The lower court had distinguished between the violations allegedly committed by the debt collector sending the notices, and the violation supposedly committed by the bank freezing the account. 

 

The Second Circuit rejected this notion, as the plaintiff suffered no injury prior to the freezing of the bank account and could not have filed suit.  The Court noted that counsel for the debt collector conceded at oral argument that the plaintiff could not have sued the debt collector before the bank froze his account.  According to the Court, "[b]efore that time, he had no 'complete and present cause of action' against the debt collector.

 

The Court also found no indication in the text of the FDCPA that Congress intended the statute of limitations to run before a FDCPA plaintiff could file suit. 

 

In addition, in Serna v. Law Office of Joseph Onwuteaka, P.C., 732 F. 3d 440 (5th Cir. 2013) and Johnson v. Riddle, 305 F. 3d 1107 (10th Cir. 2002), other federal appellate courts held that an FDCPA violation occurs when a plaintiff is served, not when a complaint purportedly violating the statute is filed.

 

The Second Circuit noted that the plaintiff could not have known the notices were sent until, at the earliest, his account was frozen.

 

The Second Circuit also distinguished the rulings in Maloy v. Phillips, 64 F. 3d 607 (11th Cir. 1995) and Mattson v. U.S. W. Commc'ns, Inc., 967 F. 2d 259 (8th Cir. 1992), which held that an FDCPA violation occurs when the alleged unlawful debt collection notices are mailed, not when received.

 

According to the Second Circuit, in Maloy and Mattson, mailing was the debt collector's last opportunity to comply with the FDCPA, and the date of the mailing was easy to determine and ascertainable by each party, yielding a rule that is easy to apply. 

 

However, in the context of a bank account freeze, the Second Circuit held that the mailing of the restraining notice here was not the last opportunity for the debt collector to comply, and that it is no easier to ascertain the date of mailing the restraining notice than the date of the freeze itself, which can be ascertained by looking at bank records.

Accordingly, the Second Circuit reversed the dismissal of the FDCPA claim, and remanded for a determination of when the bank froze the plaintiff's account.

 

 

 

 

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: 8th Cir Affirms Dismissal of FDCPA Allegations of "No Personal Knowledge" Affidavits

The U.S. Court of Appeals for the Eighth Circuit recently affirmed the dismissal of federal Fair Debt Collection Practices Act ("FDCPA") allegations that an affiant did not have personal knowledge of the facts and therefore did not know whether the information in the affidavit was true or not.

 

In so ruling, the Court held that, absent allegations of actual false statements, the plaintiff debtor had not plausibly alleged that the debt collector misled the state court in any meaningful way.

 

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

 

The plaintiff debtor was sued by his landlord in Missouri state court for unpaid rent.  The law firm retained by the landlord (the "Debt Collector") filed an affidavit with the complaint, signed by a lawyer in the Debt Collector firm as affiant, which recited information received from the landlord.  After a trial, judgment was entered against plaintiff debtor.   

 

The plaintiff debtor subsequently sued the Debt Collector, alleging the Debt Collector violated the FDCPA when its attorney swore to an affidavit in the state court collection action without personal knowledge of the facts.  The plaintiff did not allege that the substantive information contained in the affidavit regarding the debt was false.  The Debt Collector filed a motion to dismiss, which was granted.

 

On appeal, the Eighth Circuit first held that that the FDCPA action was not directed at or attacking the state court judgment, and therefore that the Court was not deprived of jurisdiction under the Rooker-Feldman doctrine.

 

The plaintiff debtor argued the Debt Collector violated the FDCPA because its attorney did not have personal knowledge of the facts and, therefore, did not know whether the information in the affidavit was true or not.  The plaintiff debtor claimed that the filing of the affidavit was a "false, deceptive, or misleading representation" made in connection with collection of a debt in violation of 15 U.S.C. § 1692e, and that it used "unfair or unconscionable means" to collect a debt in violation of 15 U.S.C. § 1692f.

 

The Eighth Circuit noted that, although the plaintiff debtor alleged that the Debt Collector violated both 15 U.S.C. §§ 1692e and 1692f by swearing to the truth of the affidavit without having personal knowledge of the facts contained within it, the plaintiff debtor did not allege that the Debt Collector's attestation was literally false.

 

Instead, the Court noted, the plaintiff debtor alleged that the Debt Collector swore to the truth of the allegations in affidavits when in fact they did "not know whether the allegations are true or not."  For example, the Court noted, the plaintiff debtor did not allege that the Debt Collector swore to facts it knew to be false, nor that the plaintiff debtor did not actually rent the property or owe rent.

 

The Eighth Circuit held that, even if the Debt Collector's attestation were literally false, the plaintiff debtor had not plausibly alleged that he or anyone else was misled by that falsehood.

 

As the Court noted, courts have rejected claims that a debt collector violated §§ 1692e and 1692f with its litigation activity, in part because no one "was misled, deceived, or otherwise duped" by the contested court filings.  See, e.g., Hemmingsen v. Messerli & Kramer, P.A., 674 F.3d 814, 819 (8th Cir. 2012) quoting O'Rourke v. Palisades Acquisition XVI, LLC, 635 F.3d 938, 945 (7th Cir. 2011).  

 

The Eighth Circuit referenced the concurring opinion in O'Rourke, a Seventh Circuit case, which explained that courts link "false to misleading," meaning "[i]f a statement would not mislead the unsophisticated consumer, it does not violate the FDCPA - even if it is false in some technical sense." O'Rourke, 635 F.3d at 945.

 

Thus, the Eighth Circuit held that, absent allegations of actually or literally false statements (e.g., here, an allegation that the plaintiff debtor actually did not owe rent), the plaintiff debtor had not plausibly alleged that the Debt Collector misled the state court in any meaningful way.  Instead, the Eighth Circuit held, the plaintiff debtor's complaint indicated that a trial was had in which the state court received evidence before rendering a judgment on the underlying rent issue.

 

Therefore, the Eighth Circuit held that the plaintiff debtor did not allege a plausible violation of the FDCPA, and that his claims were properly dismissed.

 

 

 

 

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 (5th DCA) Holds Foreclosure Action Time-Barred, As Alleged Default Occurred Outside 5-Year SOL

The District Court of Appeal of the State of Florida, Fifth District, recently reversed a final judgment of foreclosure in the mortgagee's favor, holding that based on the default date alleged in the complaint, the default date alleged in a prior foreclosure suit as to the same loan, and the dismissal without prejudice of the prior foreclosure action, the mortgagee's foreclosure claim was barred by Florida's 5-year statute of limitations.

 

However, in so ruling, the Fifth District also held that the mortgagee was "not precluded from filing a new foreclosure action based on different acts or dates of default not previously alleged, provided that the subsequent foreclosure action on the subsequent defaults is brought within the statute of limitations period found in section 95.11(2)(c), Florida Statutes."

 

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

 

The plaintiff mortgagee sued to foreclose its mortgage and reestablish the lost note in January of 2013. The complaint alleged that the borrowers failed to make the payment due on June 1, 2006 and all subsequent payments and that the mortgagee had accelerated the loan.

 

The borrowers in their answer raised the affirmative defense that the complaint was barred by subsection 95.11(2)(c), Florida Statutes, which provides a 5-year statute of limitations for mortgage foreclosure actions. The mortgagee did not reply to this affirmative defense.

 

At the trial, counsel for the parties stipulated to the following facts:  (a) the borrowers defaulted on June 1, 2006;  (b) the prior note holder sued to foreclose on September 8, 2006, but that case was voluntarily dismissed in 2008;  (c) in 2011, the current note holder sent a notice of intent to accelerate to the borrowers; and  (d) the current note holder then filed the second foreclosure action in 2013.

 

The trial court entered a final judgment of foreclosure in the mortgagee's favor, and the borrowers appealed.

 

On appeal, the Fifth District noted that the dispositive facts were not disputed then reasoned that "[b]ecause the earlier voluntary dismissal was not an adjudication on the merits … [the] Bank was entitled to bring a later suit to foreclose on the note and mortgage. However, the suit must still be based on an act of default within the five-year statute of limitations period."

 

Because the parties stipulated that the mortgagee's complaint was filed in 2013 based upon a June 1, 2006 default, the Court concluded that the trial court "erred when it failed to dismiss the foreclosure complaint with prejudice based on a default that occurred outside of the five-year statute of limitations period."

 

Importantly, however, relying upon the Florida Supreme Court's decision in Singleton v. Greymar Associates, 882 So. 2d 1004 (Fla. 2004) and its progeny, the Fifth District rejected the borrowers' argument that the mortgagee was "forever barred from bringing an action to foreclose" because the "Bank is not precluded from filing a new foreclosure action based on different acts or dates of default not previously alleged, provided that the subsequent foreclosure action on the subsequent defaults is brought within the statute of limitations period found in section 95.11(2)(c), Florida Statutes."

 

As the Fifth District held, "[t]his is because a 'subsequent and separate alleged default create[s] a new and independent right in the mortgagee to accelerate payment on the note in a subsequent foreclosure action.'"

 

The final judgment of foreclosure was reversed and remanded with directions to dismiss the complaint.

 

 

 

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, DC

 

 

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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and

 

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FYI: 1st Cir Holds Failure to File Probate Claim Does Not Void Mortgage Under RI Law

The U.S. Court of Appeals for the First Circuit recently held that a failure to file a probate claim does not extinguish a mortgage lien under Rhode Island law.  In so ruling, the Court held that "the piper must be paid."

 

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

 

The plaintiffs, a brother and sister, inherited their mother's house.  During her lifetime, the mother had taken out a reverse mortgage secured by the house.  The mortgage securing the loan contained an acceleration clause and power of sale and became due and payable upon the mother's death.

 

The mother died intestate. Her son and daughter commenced a probate proceeding in Rhode Island state court. Notice was given to creditors, including the mortgagee, but the mortgagee did not file a claim in the probate proceeding. The probate case was administered and closed, with the court granting the decedent's interest in the property to the plaintiffs.

 

In late 2010, the plaintiffs received a notice of foreclosure, which was published pursuant to Rhode Island law. A foreclosure proceeding followed and the mortgagee recorded the foreclosure deed granting the Property to it in November of 2011.

 

The plaintiffs filed suit in federal district court, invoking diversity jurisdiction, challenging the validity of the mortgage assignments and the foreclosure. After the close of discovery, the mortgagee moved for summary judgment, which the trial court granted.  This appeal followed.

 

On appeal, the heirs argued that a) "the district court erred in determining that he lacked standing to contest the mortgage assignments;  and b) the mortgagee's "failure to file a claim in the probate proceedings pretermitted its right to foreclose on the Property."

 

The Court began by noting that in a diversity case, the it looks to federal law on procedural issues, and to state law for "rules of decision" on substantive issues.

 

The First Circuit then discussed the "idiosyncratic nature of reverse mortgages" explaining that "[a] reverse mortgage is a loan or line of credit available to a person over the age of 62 who has equity in real estate, typically the person's home. The loan provides the borrower with cash (usually in the form of a single lump-sum payment) and is secured by the borrower's equity in the real estate. There are no monthly payments; instead, the loan is due and payable in full when the borrower dies, sells the home, or no longer uses the home as her principal residence."

 

The typical reverse mortgage also is unique in that the loan is "non-recourse," meaning the borrower is not personally liable and the lender looks only to the mortgaged property for repayment.

 

Turning to appellant's standing argument, the Court explained that "[s]tanding is a threshold question in every case" and that "[a] plaintiff suing in federal court normally must shoulder the burden of establishing standing."

 

The First Circuit further explained that "Rhode Island is a title-theory state, in which 'a mortgagee not only obtains a lien upon the real estate by virtue of the grant of the mortgage deed but also obtains legal title to the property subject to defeasance upon payment of the debt.'"

 

In addition, the Court's own precedent established that "a mortgagor has standing to challenge the assignment of a mortgage on her home to the extent that such a challenge is necessary to contest a foreclosing entity's status qua mortgagee. … This means that a mortgagor (or a party standing in the mortgagor's shoes) only has standing to challenge an invalid, ineffective, or otherwise void mortgage." However, the Court noted, "a mortgagor does not have standing to challenge shortcomings in a mortgage assignment that renders it merely voidable at the election of one party but otherwise effective to pass legal title."

 

Referencing that the Rhode Island Supreme Court "has embraced this void/voidable distinction with respect to real estate mortgages", the First Circuit turned to the question of "whether the challenged mortgage assignment are void or voidable."

 

The First Circuit reasoned that under Rhode Island law, "a valid mortgage or any of its assignments must be signed, acknowledged by notarization, delivered, and recorded. … It is not necessary that the mortgage and the note that is secures be held by the same entity."

 

In the case at bar, there were two assignments, both of which complied with the aforementioned formalities. The parties treated them as valid.  Accordingly, the Court rejected the heirs' argument that the assignors lacked the required authority to execute the assignment because "the summary judgment record contains no evidence sufficient to create a genuine issue of material fact in this regard. Unsupported allegations are not enough."

 

Accordingly, the First Circuit ruled that "[o]n this record, the assignments are not void but, at worst, merely voidable. It follows that the district court did not err in concluding that the appellant lacked standing to challenge them."

 

Turning to the heirs' argument that the mortgagee lost its right to foreclose by not filing a claim in the probate proceeding, the Court first found that the heirs had standing to challenge the validity of the mortgage itself because under Rhode Island law, "the appellant, who has a personal stake in the outcome, has the right to ensure that the foreclosure conforms with the law."

 

"Because the Rhode Island Supreme Court has not addressed whether probate extinguishes a real estate mortgage," the First Circuit characterized its job as figuring out "how that court would likely rule if faced with the issue."

 

The Court began its analysis "by tracing how the common law historically has characterized foreclosure." Foreclosure is an equitable remedy in which "[t]he land is the real defendant." Although technically a quasi in rem proceeding, a foreclosure "is in the nature of such a proceeding and is not intended ordinarily to act in personam." However, "[a]bsent a statute to the contrary, a mortgagee can both sue the parties to the mortgage at common laws and pursue foreclosure. … If a deficiency results from a foreclosure sale, an action on the mortgage note normally will lie to recover that deficiency."

 

The First Circuit found "much the same dichotomy between the encumbered property and the underlying debt in the venerable structures of maritime law" which has "long recognized the feasibility of separating the mortgage res from the associated debt."

 

It also found a "compelling analogy … in the realm of bankruptcy law" where "a creditor may recover the deficiency on a mortgage loan through 'an action against the debtor in rem,' notwithstanding the debtor's discharge in bankruptcy."

 

The First Circuit pointed out that the Rhode Island Supreme Court frequently consulted "the Restatements to bring clarity to state law," finding it noteworthy that "this splitting of in rem and in person liability is consonant with the [Restatement (Third) of Property's] declaration that 'a mortgage is enforceable whether or not any person is personally liable for that performance."

 

The First Circuit also found "[t]his dichotomy is also consistent with section 3-814 of the Uniform Probate Code, which authorizes payment of a mortgage even if a claim has not been filed in the decedent's estate. And finally, no less an authority than the United States Supreme Court has noted that the lender's 'right to foreclose on the mortgage can be viewed as a 'right to an equitable remedy' for the debtor's default on the underlying obligation."

 

A survey of "the case law elsewhere" confirmed the Court's "intuition that the Rhode Island Supreme Court, if faced with the question, would hold that the right to foreclose should be treated as separate and distinct from the right to collect the underlying debt. The upshot is that though the failure to file a claim in probate proceedings may extinguish personal liability on the note secured by the real estate mortgage, that failure does not extinguish the mortgage itself. Consequently, such a failure does not interfere with the mortgagee's right to foreclose."

 

The First Circuit rejected the heirs' final argument that "the failure to submit a claim to the probate court within the statutorily prescribed period … bars [the mortgagee] from later foreclosing against the Property to satisfy the underlying debt" because "the statute of limitations applicable to foreclosures in Rhode Island is the general 20-year statute of limitations" and the "limitations period associated with the probate claim-filing statute … does not apply."

 

The Court affirmed the district court's summary judgment, holding that "the appellant lacks standing to challenge the interstitial mortgage assignments; and though he does have standing to challenge the effectiveness of the mortgage itself on a different ground, that challenge is fruitless."  Accordingly, despite its failure to file a probate claim, the mortgagee "retained the right to enforce its reverse mortgage through foreclosure."

 

 

 

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

 

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