FYI: 7th Cir Holds No FDCPA Bona Fide Error Defense for Intentional Conduct

Debt collectors seeking to avoid liability under the bona fide error exception of the federal Fair Debt Collection Practices Act (FDCPA) will not be excused from liability if the conduct at issue was intentionally undertaken. That is the recent ruling from the Seventh Circuit Court of Appeals in Leeb v. Nationwide Credit Corporation.

 

Plaintiff Mark Leeb received a telephone call and letter from Nationwide seeking payment for an unpaid medical debt.  Leeb wrote Nationwide stating he did not owe the debt because it was payable by his health insurance. He also requested Nationwide provide him verification of the debt under section 1692g(b) of the FDCPA and acknowledge his request.  Leeb's written request under section 1692g(b) was timely made so no further effort to collect the debt could be taken until the verification was provided.

 

But before sending Leeb verification of the debt, Nationwide sent him a form letter. The letter acknowledged Leeb's dispute and asked him to provide additional information about his dispute.

 

Letter Was an Attempt to Collect a Debt Regardless of What Leeb Believed

 

Nationwide argued its letter was not an effort to collect the debt because it was made in response to Leeb's request to acknowledge his dispute. Nationwide also contended that because Leeb believed he did not owe the debt, he understood the letter was not an attempt to collect a debt.

 

But the trial and appellate courts found that the letter also included three statements, which ultimately led to Nationwide's demise. First, it listed a "balance" of $327. Second, it instructed Leeb to: "Detach the Upper Portion and Return With Payment." Finally, it stated, "[t]his communication is from a debt collector attempting to collect a debt and any information obtained will be used for that purpose."

 

Leeb's subjective understanding of the letter, the court wrote, does not control whether the letter was an attempt to collect in violation of section 1692g(b). Rather, whether a letter is made to collect a debt is determined objectively from the letter's content. Here, the letter listed a balance, provided instructions for payment of the balance and stated it was an attempt to collect a debt. And, the only relationship Leeb had with Nationwide, the court noted, was concerning that debt.

 

Bona Fide Error

 

The FDCPA will not impose liability on a debt collector where it can show "by a preponderance of the evidence" that the violation was 1) not intentional, 2) resulted from a bona fide error, and 3) the error occurred despite the debt collector having procedures "reasonably adapted" to avoid the error.

 

The issue here was the meaning of "not intentional." Nationwide contended it should escape liability because it did not intend to violate the FDCPA by sending the letter.

 

The trial and appellate courts read "not intentional" to have two meanings. Not only must a debt collector demonstrate it did not willfully intend to violate the FDCPA, but it also requires that the conduct which is the basis for the FDCPA was not intentional. This second element follows the U.S. Supreme Court's 2010 decision in Jerman v. Carlisle, which limited the bona fide error exception to clerical mistakes (rejecting mistakes of FDCPA law).  It is this second prong that lost the day for Nationwide and likely constrains the bona fide error defense in the Seventh Circuit. According to the decision, Nationwide intended to send the offending letter and it did not commit a "clerical error" by sending it.

 

Important to this analysis is that Nationwide did not assert it was "unaware of all of the contents" of the letter. The court may have given Nationwide a pass if it had sent the wrong form letter as a result of a clerical error, not realizing the letter stated a balance, provided instructions for payment and indicated it was an attempt to collect a debt.

 

 

 

 

 

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 Massive Repurchase Action Time-Barred

The U.S. Court of Appeals for the Second Circuit recently affirmed the dismissal of an action by the trustee of a residential mortgage-backed securities trust for breach of contractual obligations to repurchase mortgage loans that allegedly did not conform to representations and warranties, holding that:

 

(1) the breach of contract claim was barred by the statute of limitations, which ran from the date the representations and warranties were made;

 

(2) the so-called "extender provision" of the federal Housing and Economic Recovery Act did not apply to the trustee's claim; and

 

(3) the trustee's claim for breach of the implied covenant of good faith and fair dealing failed as duplicative.

 

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

 

The defendant originated mortgage loans and sold them to a non-party sponsor pursuant to a purchase agreement dated June 1, 2006.  The agreement contained representations and warranties ("Reps and Warranties") about the quality of the loans and their compliance with certain origination and underwriting guidelines.

 

After a series of transactions involving sales and assignments, the loans ended up in a securitization trust for which the a trustee ("Trustee") received all the rights, title and interest in the mortgage loans for the benefit of the certificate-holders in the securitization.  The Trustee also stepped into the sponsor's shoes, including its rights against the defendant originating lender arising from the Reps and Warranties.

 

The securitization trust issued certificates representing interests in the mortgage loans to investors in a public offering, the closing date of which was May 8, 2007.  One of the certificate purchasers was the Federal Home Loan Mortgage Corporation ("Freddie Mac").

 

The purchase agreement contained a protocol for any material breach of the Reps and Warranties that required notice of any breach and required the originating lender to cure the breach, with a possible 15-day extension. If the breach was not cured, the lender had to repurchase the loans at a predetermined price.

 

The purchase agreement also contained a section providing that any cause of action based on a material breach of the Reps and Warranties would accrue upon the earlier of (a) discovery of the breach by the lender or notice thereof by the trustee to the lender; (b) the failure of the lender to cure any material breach; and (c) demand by the trustee for compliance with the purchase agreement.

 

The Federal Housing Finance Agency ("FHFA") sued the originating lender in New York state court as conservator of Freddie Mac and on behalf of the Trustee on May 8, 2013.  The lender removed the case to federal district court pursuant to 28 U.S.C. § 1345, which confers jurisdiction on district courts over "all civil actions, suits or proceedings commenced by the United States, or by any agency or officer thereof expressly authorized to sue by Act of Congress."

 

The Trustee took over the case from the FHFA, and on October 18, 2013 filed the complaint based on diversity jurisdiction under 28 U.S.C § 1332 instead of § 1345.

 

The defendant mortgage lender moved to dismiss the complaint, arguing that that breach of contract claim was barred by New York's the statute of limitations. The district court agreed, ruling that the cause of action accrued when the Reps and Warranties were made, that "the extender provision of the Housing and Economic Recovery Act ("HERA"), 12 U.S.C. § 4617(b)(12), did not apply because FHFA abandoned prosecution of the action after realizing it was not the proper plaintiff", and that the claim for breach of the implied covenant of good faith and fair dealing failed because it was duplicative of the breach of contract claim.

 

The Trustee appealed.  The Second Circuit began its analysis by explaining that "[w]hen sitting in diversity jurisdiction and determining New York state law claims, we must apply 'the law of New York as interpreted by the New York Court of Appeals."

 

The Court explained that "New York's six-year limitations period on contractual claims generally runs from the time the contract was breached" and cited a recent New York Court of Appeals decision holding that "[a] cause of action for breach of contractual representations and warranties that guarantee certain facts as of a certain date—but do not guarantee future performance—accrues on the date those representations and warranties become effective."

 

The Second Circuit then turned to determine whether the Reps and Warranties contained any guarantee of future performance or whether the clause defining the accrual of a cause of action constitutes a substantive condition precedent, which would delay accrual of the cause of action."

 

The Court found the Reps and Warranties in the case at bar indistinguishable from those in the recent controlling New York Court of Appeals decision because they "guaranteed only 'certain facts about the loans' characteristics as of' the execution date, not how the mortgage would perform in the future." In addition, as in the controlling New York case, "as an 'alternative remedy' to damages, the repurchase obligation ... was itself dependent on, and indeed derivative of' the representations and thus also 'could not be reasonably viewed as a distinct promise of future performance.'"

 

The Second Circuit rejected the Trustee's argument that because there was an express provision providing that the Reps and Warranties survived the sale of the loans they promised future performance because the Reps and Warranties here "guarantee, at their core, no more than the present characteristics and quality of the loans as of a specific moment in time. Whether they 'survived' or remained valid and enforceable "does not alter the question of performance."  The Court held that, because immediately upon the effectiveness of the Reps and Warranties, the Trustee was "entitled to demand the contractual remedy—cure or repurchase—as to any material breach, … the cause of action therefore accrued at that time."

 

The Court next addressed, and rejected, the Trustee's argument the "the Accrual Clause makes demand 'a substantive condition precedent to suit that delayed accrual of the cause of action...'" explaining that "New York courts 'distinguish between substantive demands and procedural demands.'" In the case of substantive demands, the statute of limitations 'begins to run only after such demand and refusal,' while [in the case of procedural ones] … the limitations period 'begins to run when the right to make the demand is complete.'"

 

The Court reasoned that while the language of the clause defining when a cause of action accrued under the contract "makes an initially appealing case for inclusion as a substantive condition precedent" the New York Court of Appeals' recent decision "requires us to examine the object of the demand, rather than merely apply the phrase 'shall accrue' as a talisman. Instead, we must ask whether demand 'is a condition to a party's performance (substantive) or whether it 'seeks to remedy a preexisting wrong' (procedural)."

 

Finding that the relevant "performance" was the truth or falsity of the Reps and Warranties, the Court concluded that "notwithstanding the 'shall accrue' language, the Trustee's demand seeks only the remedy to which it is already entitled, not performance of the underlying contractual obligation. Accordingly, the demand is merely procedural and does not delay accrual of the cause of action."

 

The Court thus agreed with the District Court that the statute of limitations began to run on the date the Reps and Warranties became effective, and were either true or false at that time. Because the lawsuit was "facially untimely," the Court turned to the only remaining issue: "whether HERA extends the statute of limitations for the Trustee's claim."

 

As you may recall, HERA's so-called "extender provision" provides that in any action "brought by [FHFA] as conservator or receiver, the statute of limitations begins to run on whichever is later, "the date of the appointment of [FHFA] as conservator or receiver" or "the date on which the cause of action accrues."

 

The Court rejected the Trustee's argument that the lawsuit was brought by the FHFA when it filed the summons and notice in state court, and thus "HERA delays accrual of the cause of action until September 6, 2008, when FHFA was appointed conservator of Freddie Mac" because after the case was removed to federal court, the trustee filed the complaint and prosecuted the case without any participation by FHFA. Under such circumstances, the Court concluded that "the present action cannot reasonably be said to  have been 'brought by' the FHFA" within the meaning of the so-called extender provision under HERA.

 

Because HERA's extender provision did not apply, the Trustee's claim was barred as untimely.

 

The Second Circuit, in concluding also rejected that Trustee's last argument that "its claim for breach of the implied covenant of good faith and fair dealing was erroneously dismissed as duplicative" because both claims arose from the same facts and sought identical damages for the alleged breach of the explicit language of the agreement.

 

Accordingly, the district court's order of dismissal was affirmed.

 

 

 

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 (4th DCA) Reverses Foreclosure as to Note with Undated Indorsement, Other Evidentiary Issues

The District Court of Appeals of the State of Florida, Fourth District, recently reversed final judgment of foreclosure in favor of a mortgagee for entry of judgment in favor of the mortgagors, where the mortgagee failed to prove that it came into possession of the note containing an undated, blank endorsement before the foreclosure was filed.

 

In so ruling, the Fourth District confirmed that a trial court abuses its discretion in admitting business records if it is not established that the records were made at or near the time of the event.

 

In addition, the Fourth District held that a witness is not qualified to lay the necessary foundation for admitting a document into evidence under the business records exception when the witness is not familiar with the systems that generated the document.

 

A copy of the opinion is available at: http://www.4dca.org/opinions/Nov.%202015/11-25-15/4D14-2457.op.pdf

 

The mortgagors executed a promissory note and mortgage, the servicing rights for which were retained by originating lender.  The loan was subsequently sold and assigned to the foreclosing mortgagee, for which the originating lender / servicer was a wholly owned subsidiary.

 

Following default, the mortgagee filed a foreclosure complaint, but failed to attach a copy of the note.  The mortgagee later filed the original note which contained an undated, blank endorsement from the servicer. 

 

At trial, the servicer's employee was asked to authenticate several documents.  The witness stated he is required to review the mortgagee's foreclosure files and internal systems, that he typically reviews the note, mortgage, breach letter, and payment history prior to trial, and that he was familiar with three separate record keeping systems used by the servicer and mortgagee.

 

The employee further stated the blank endorsement was placed on the note prior to filing the initial complaint because it was the mortgagee's policy to endorse notes upon receiving them after execution. 

 

In addition, the employee relied on a screenshot from "the system…used by our vault people to keep track of any original documents" to testify that the note was endorsed in blank three days after the promissory note and mortgage were executed, and three years prior to suit.

 

The trial court admitted the screenshot, payment history, default letters, collection notes, and payoff calculation under the business records exception, and over the mortgagors' objection based on lack of foundation and hearsay. 

 

The trial court entered final judgment of foreclosure in favor of the mortgagee.  The mortgagors appealed, arguing the trial court abused its discretion by admitting the records into evidence.

 

The Fourth District held that the trial court abused its discretion in admitting the records under the business records exception, as it was not established that the record was made at or near the time of the event, and the employee did not appear to be qualified to lay the proper foundation for introduction of the screenshot.

 

As you may recall, the business records exception allows a party to introduce evidence that would normally be inadmissible hearsay if (1) the record was made at or near the time of the event, (2) was made by or from information transmitted by a person with knowledge, (3) was kept in the ordinary course of a regularly conducted business activity, and (4) that it was a regular practice of that business to make such a record.

 

The Fourth District found the employee was not questioned whether each record was made at or near the time of the event, and held that admitting the records was error because this element was not established.

 

In addition, as you may recall, to lay a foundation for the admission of a business record, it is not necessary for the proponent of the evidence to call the person who actually prepared the business records.  The records custodian or any qualified witness who has knowledge of the record maintenance process to testify as to how the record was made can lay the necessary foundation, and "the witness just need be well enough acquainted with the activity to provide testimony."

 

The Court noted that, to the extent the individual making the record does not have personal knowledge of the information contained therein, the second prong of the predicate requires the information to have been supplied by an individual who does have personal knowledge of the information and who was acting in the course of a regularly conducted business activity.

 

The Fourth District also noted that a servicer's representative testifying at trial is not required to have personal knowledge of the documents being authenticated, but must be familiar with and have knowledge of how the "company's data [is] produced."  If a servicer's representative knows "how the data was produced," and is "familiar with the bank's record-keeping system and has knowledge of how the data was uploaded into the system," the business records exception is satisfied, the Court noted.

 

Here, the Fourth District found the servicer's employee testified he had seen similar screenshots to the one admitted into evidence, but that he did not know anything about the process by which the screenshots were created, that the screenshots were not generated by any of the three servicing systems with which he was acquainted, and that whether the screenshot accurately reflected the date the endorsement was placed on the note was based entirely on a conversation with another employee that the witness could identify only by first name.

 

The Fourth District cited Ensler v. Aurora Loan Servs., No. 4D14-351 (Fla. 4th DCA Oct. 28, 2015), which stated that general testimony that a prior note holder follows a standard record-keeping practice, without discussing details to show compliance with the business records exception, is not enough to establish a foundation for the exception. 

 

Based on Ensler and the testimony of the servicer's employee, the Fourth District held that the servicer's employee did not have sufficient knowledge to lay the foundation for the screenshot under the business records exception

 

Moreover, the Fourth District held that even if properly admitted, the screenshot would have established only the servicer's, and not the mortgagee's, standing to foreclose as the employee did not testify when the mortgagee came into possession of the note.

 

Ass you may recall, possession of the original note, indorsed in blank, is sufficient under Florida's Uniform Commercial Code to establish that a party is the lawful holder of the note, entitled to enforce its terms.  However, a party attempting to prove standing based on possession of a note reflecting an undated, blank endorsement must prove it had possession of the note at the time the initial complaint was filed, and a failure to provide sufficient proof of standing warrants reversal.

 

In Wright v. JPMorgan Chase Bank, N.A., 169 So. 3d 251 (Fla. 4th DCA 2015), the Fourth District previously stated that "[a] parent corporation and its wholly-owned subsidiary are separate and distinct legal entities…As a separate legal entity, a parent corporation…cannot exercise the rights of its subsidiary[,]" and held that a ownership of a note by a subsidiary does not give the parent the right to enforce a note, absent evidence the parent acquired such a right through, for example, an authenticated purchase or servicing agreement admitted into evidence.

 

The Fourth District held that the fact that a subsidiary may have standing to foreclose does not automatically establish that its parent also has standing, absent evidence more substantial than testimony regarding the existence of a parent-subsidiary relationship and other evidence required under the Wright ruling.

 

Accordingly, the Fourth District reversed the final judgment of foreclosure for entry of judgment in favor of the mortgagors. 

 

 

 

 

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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and

 

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