FYI: 7th Cir Holds Judgment Against Bankruptcy Debtor's Husband Did Not Violate Co-Debtor Stay

The U.S. Court of Appeal for the Seventh Circuit recently held that a bank's lawsuit against the husband of a debtor who had filed for bankruptcy did not violate the co-debtor stay because the husband's credit card debts were not a consumer debt for which the debtor was personally liable.

 

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

 

A debtor filed for bankruptcy in 2011. During the course of the bankruptcy proceedings, a bank filed suit and obtained a judgment against the debtor's husband on a credit card debt that he owed.

 

In 2015, the debtor initiated an adversary proceeding in bankruptcy court against the bank, alleging violations of the co-debtor stay, 11 U.S.C. § 1301(a); the Wisconsin Consumer Act, Wis. Stat. § 427.104; and the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692(d)-(e). The debtor claimed that her husband's credit card debt was covered by the co-debtor stay due to the operation of Wisconsin marital law, Wis. Stat. § 766.55.

 

As you may recall, in addition to automatically staying claims against the debtor, the Bankruptcy Code provides protections when co-debtors are involved.  See 11 U.S.C. § 1301(a).

 

For the co-debtor stay to apply: 1) there must be an action to collect a consumer debt (11 U.S.C. §§ 101(8), (12)); 2) the consumer debt must be of the debtor (Id. § 102(2)); and 3) the action to collect must be against an individual that is liable on such debt with the debtor. (11 U.S.C. § 1301(a).)

 

Here, the parties agreed that the debtor's husband's credit card debt was a "consumer debt" and that the bank's action was against the husband, but disagreed as to whether the credit card bills were a "consumer debt of the debtor," which triggered the co-debtor stay protections, as opposed to simply being a consumer debt of the husband.

 

The bankruptcy court granted summary judgment for the debtor, holding that the bank's lawsuit against the debtor's husband violated the co-debtor stay due to the operation of Wisconsin marital law, Wis. Stat. § 766.55, which makes marital property available to satisfy certain kinds of debts.

 

On appeal, the district court reversed the bankruptcy court, holding that the husband's credit card debt was not the debtor's consumer debt, and the co-debtor stay did not apply despite the application of Wisconsin marital law. The district court concluded that "consumer debt of the debtor," as used in 11 U.S.C. § 1301(a), does not include a debt for which the debtor is not personally liable but which may be satisfied from the debtor's interest in marital property.

 

The debtor then appealed to the Seventh Circuit, arguing that under a broader definition of "consumer debt of the debtor," and by operation of Wisconsin marital law, her husband's credit card debt became her debt for purposes of the co-debtor stay.

 

The Seventh Circuit disagreed with the debtor, and agreed with the bank that the credit card debt was not covered by the co-debtor stay.

 

Relying on In re Thongta, 401 B.R. 363, 368 (Bankr. E.D. Wis. 2009), and River Rd. Hotel Partners, LLC v. Amalgamated Bank, 651 F.3d 642, 651 (7th Cir. 2011), and noting that any attempt to collect a judgment from a spouse's marital property would likely violate the automatic stay that already protects the filing spouse, the Court observed that interpreting the co-debtor stay to eliminate the same liability, and thus providing the same protections against collection, would impermissibly render that co-debtor stay duplicative of the automatic stay applicable to the debtor.

 

The Court therefore held that because the debtor did not demonstrate that her husband's credit card debt was her own, the co-debtor stay did not apply. 

 

Moreover, because Wisconsin courts made clear that the state's marital laws do not give rise to liability on the part of the non-incurring spouse, the Court held that the debtor, as the non-incurring spouse, was not liable for her husband's credit card debt.

 

The Court noted that, in Wisconsin, "married individuals can have both individual and marital property." See Wis. Stat. § 766.55.  "Debts incurred during marriage are 'presumed to be incurred in the interest of the marriage or the family,' id. § 766.55(1), and '[a]n obligation incurred by a spouse in the interest of the marriage or the family may be satisfied only from all marital property and all other property of the incurring spouse' [the debtor's husband], id. § 766.55(2)(b)."  In addition, "in order to satisfy a judgment for a debt, a successful creditor 'may proceed against either or both spouses to reach marital property available for satisfaction of the judgment.' Id. § 803.045(3)."

 

The debtor contended that once the bank obtained a judgment against her husband, it created a liability on her part under the co-debtor stay.

 

Again, the Court disagreed. Noting that simply obtaining a judgment against a non-filing spouse who happens to have shared property interests with the filing spouse -- without more -- did not make the husband's debts the debts of the filing spouse under Wisconsin law, the Seventh Circuit held that Wis. Stat. § 766.55(2) did not create a direct cause of action against the debtor. See St. Mary's Hosp. Med. Ctr. v. Brody, 186 Wis. 2d 100, 519 N.W.2d 706, 711 (Wis. Ct. App. 1994).

 

Here, the bank had not attempted to sue the debtor directly, and had not sought to satisfy its judgment against the debtor's husband from any of the debtor's individual or marital property. Accordingly, the Court concluded the debtor had no liability for her husband's credit card bills.

 

The debtor next argued that she was liable for a direct cause of action against her for her husband's credit card debts under Wisconsin's "doctrine of necessaries," because Wis. Stat. § 765.001(2) provided a direct cause of action against one spouse for any marital "necessaries" incurred by the other spouse during the marriage.  Essentially, the debtor argued that "the possibility of a direct cause of action against her for her husband's credit card debts brings those debts within the co-debtor stay."

 

The Seventh Circuit again disagreed, holding that because she raised this theory for the first time on appeal, it was therefore waived.  Even if the argument had not been waived, the Court observed that the debtor provided no evidence that the credit card debt was for necessaries, as opposed to ordinary consumer goods, nor did she explain why this situation would trigger the co-debtor stay, as opposed to the automatic stay.

 

A, the Seventh Circuit held that since the bank in the collection proceeding was not a creditor of the debtor and the bank was not seeking payment of the credit card debts under the debtor's bankruptcy plan, there was no risk of preferential treatment, the bank's lawsuit against the debtor's husband did not violate the co-debtor stay, and the debtor's adversarial proceeding was properly dismissed.

 

Thus, the Seventh Circuit affirmed the judgment of the district court.

 

 

 

 

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: Ill Sup Ct Holds Mortgagee Trespass Not "Extreme and Outrageous" As a Matter of Law

The Supreme Court of the State of Illinois recently affirmed the dismissal of a borrower's claims for intentional and negligent infliction of emotional distress against her mortgagee, property inspection and preservation company and its local subcontractors, who entered the home after the borrower's default to secure the property.

 

In so ruling, the Court held that:

 

(a) a direct victim's claim for emotional distress must include an allegation of contemporaneous physical injury or impact that caused emotional distress, or that she was a bystander in a zone of physical danger that caused her to fear for her own safety and that she suffered physical injury or illness as a result of the emotional distress; and

 

(b) as a matter of law, the conduct was not so extreme and outrageous that it went beyond all possible bounds of decency.

 

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

 

The borrower signed a promissory note secured by a mortgage on her home in 1997 and defaulted in 2007.  The mortgage contained a paragraph allowing the mortgagee to enter the property in the event of default in order to protect its rights in the property and make repairs.

 

The mortgagee filed a foreclosure action and obtained a final judgment of foreclosure on May 25, 2010. Under Illinois law, the borrower had the right to continue in possession until her redemption period expired on August 25, 2010.

 

The mortgagee contracted with a company to provide property inspection and preservation services (the "preservation company"), which in turn contracted with local vendors to perform the inspections and repairs.

 

In June of 2010, the preservation company received a report that the subject property was vacant and asked its local contractor to obtain access to the property by changing one of the locks and "winterize" the house by turning off the utilities. The local contractor hired two individual subcontractors to carry out the work order.

 

When the two individual subcontractors arrived at the property, they observed that the landscaping was overgrown and there was a "for sale" sign on the property. There was a car and dumpster parked in the driveway. One of the men knocked on the front door, but there was no answer.

 

One of the subcontractors spoke with a neighbor, who told him that the house was unoccupied, but that a woman came and went occasionally. The neighbor also said she did not recognize the car, but that there was a school nearby and sometimes people from the school would park there because the property was vacant.

 

The two subcontractors tried knocking on the front door again, with the same result, then proceeded through a gate to the back, where they observed through a glass door boxes and debris on the floor.

 

They then removed the lock to the back door and one of them entered by climbing over the boxes. Once in, he was confronted by the borrower, who asked him to leave. The subcontractor explained that he was with the mortgage company and asked the borrower to go to the front door, but when he went around she did not answer.

 

The borrower called the police, who investigated by speaking with the parties and neighbor, but made no arrest.

 

In October of 2010, the borrower filed a five-count complaint against the mortgagee, the preservation company, and the two subcontractors, alleging claims for trespass, negligent trespass, private nuisance, intentional infliction of emotional distress, and negligence.

 

The defendants moved for summary judgment on all counts, and in response the borrower sought leave to amend by dropping the negligence claim and adding a claim for negligent infliction of emotional distress.

 

The trial court granted the defendants' motions for summary judgment as to the claims for private nuisance and intentional infliction of emotional distress, but denied summary judgment as to the trespass and negligent trespass claims. The trial court then dismissed the borrower's negligent infliction of emotional distress claim. The borrower appealed.

 

The Appellate Court affirmed the trial court's ruling.

 

Addressing the negligent infliction of emotional distress claim first, the Appellate Court reasoned that there are "two types of victims emotional distress cases: bystanders and direct victims." It then found that the borrower's negligent infliction of emotional distress allegations indicated she "was a direct victim and must allege 'some physical impact' from defendants' conduct." Because the borrower did not plead any physical contact, the Appellate Court found she could not state a claim for negligent infliction of emotional distress and that count was properly dismissed.

 

Turning to the intentional infliction of emotional distress claim, the Appellate Court found that summary judgment in the defendants' favor was proper because plaintiff could not show that the defendants' conduct was "extreme and outrageous." One justice dissented, arguing that the majority "was wrong in continuing to require physical impact in claims for negligent infliction of emotional distress for direct victims."

 

The borrower filed a petition for leave to appeal to the Illinois Supreme Court, which was granted. The Court also granted the Illinois Association of Defense Trial Counsel leave to file a brief amicus curiae in support of the defendants.

 

The Illinois Supreme Court first addressed the borrower's argument that her claim for negligent infliction of emotional distress was improperly dismissed because physical impact is not a required element for such a claim by a direct victim.  The defendants and amicus argued, in response, that the impact rule was still good law in Illinois "when a direct victim pleads negligent infliction of emotional distress."

 

The Court reviewed the history of the cause of action of negligent infliction of emotional distress and the impact rule, noting that in order "to state a claim for negligent infliction of emotional distress, a plaintiff must allege the traditional elements of negligence: duty, breach, causation, and damages. … And until this court's decision in Rickey, all plaintiffs were also required to allege a contemporaneous physical injury or impact. … This was known as the 'impact rule.' Under the impact rule, a plaintiff could recover damages if he suffered (1) emotional distress and (2) 'a contemporaneous physical injury or impact.' … Prior to Rickey, there was no distinction between a direct victim and a bystander in negligent infliction of emotional distress cases."

 

The Illinois Supreme Court explained that in Rickey, where a mother sued on behalf of her eight-year-old son for emotional distress caused when he witnessed his brother getting choked by a subway escalator, it "adopted the "zone-of-physical-danger rule" for bystanders who allege negligent infliction of emotional distress." Under this rule, "a bystander who is in a zone of physical danger and who, because of the defendant's negligence, has reasonable fear for his own safety is given a right of action for physical injury or illness resulting from emotional distress. … Therefore, this court held that a bystander must show physical injury or illness as a result of the emotional distress, caused by the defendant's negligence and not a contemporaneous physical injury or impact."

 

The Court further explained that in its later Corgan ruling, which involved a patient suing her therapist who held himself out to be a licensed psychologist for sexually abusing her under "treatment," "this court made it clear that Rickey did not define the scope of negligent infliction of emotional distress as it applies to direct victims. … Corgan was a direct victim case, and the patient satisfied the impact rule; on multiple occasions, the psychologist had sexual relations with her. … Thus, Corgan is an example of the continued application of the impact rule in direct victim cases."

 

Finally, the Court noted that in its Pasquale decision, "where the husband of a spectator at a drag race, who was killed when she was struck by flying debris resulting from the failure of a clutch mechanism on a race car", it determined that the elimination of the contemporaneous injury or impact requirement for bystander recovery for emotional distress in the area of negligence" did not eliminate "the element of physical harm for a bystander's recovery for emotional distress under strict liability theory."

 

The Illinois Supreme Court concluded that "[t]his precedent makes clear that a direct victim's claims for negligent infliction of emotional distress must include an allegation of contemporaneous physical injury or impact." Contrary to plaintiff's argument, a close reading of Rickey, Corgan, and Pasquale "indicates that this court did not eliminate the impact rule for negligent infliction of emotional distress claims brought by direct victims."

 

Turning to whether the complaint contained sufficient allegations to state a cause of action for negligent infliction of emotional distress, the Court held that while the borrower alleged that the mortgagee and property preservation company negligently trained and supervised their employees, agents and contractors who entered the premises, "since plaintiff did not include an allegation of a contemporaneous physical injury or impact, as a direct victim, she failed to allege a cause of action for negligent infliction of emotional distress" and this count was properly dismissed.

 

The Illinois Supreme Court then addressed the borrower's argument that summary judgment on her intentional infliction of emotional distress claim was improper because a question of fact existed whether the subcontractors' conduct in entering the property was extreme and outrageous.

 

"First, the conduct involved must be truly extreme and outrageous. Second, the actor must either intend that his conduct inflict severe emotional distress or know that there is at least high probability that his conduct will cause severe emotional distress. Third, the conduct must in fact cause severe emotional distress. … It is clear that the tort 'does not extend to mere insults, indignities, threats, annoyances, petty oppressions, or other trivialities."

 

The Court stressed that "[l]iability has been found only where the conduct has been so outrageous in character, and so extreme in degree, as to go beyond all possible bounds of decency, and to be regarded as atrocious, and utterly intolerable in a civilized community."

 

Applying this rule, the Illinois Supreme Court held that the conduct of the two subcontractors that entered the home 'did not rise to the level of extreme and outrageous" because their investigation into whether the home was occupied was reasonable and they changed the lock not to take possession from the borrower, but to secure the property and make repairs.

 

The Court acknowledged "that under Illinois law, the sanctity of the home and right to be free from intrusion are important principles of law[,]" but the Court nevertheless rejected the borrower's argument that the entry into the home was, by itself, extreme and outrageous conduct, reasoning that the borrower knew that her property was in foreclosure and was still in the redemption period, but still refused to answer the door, which prevented the subcontractors from explaining who they were and why there where there.

 

Finally, the Court rejected the borrower's argument that the defendants had no right to enter the home without a court order under Illinois foreclosure laws, distinguishing between "the right to possession for residential purposes, which these statutes address, and the contractual right to enter to make repairs."

 

However, because mortgage gave the mortgagee and its agents the right to enter the property to secure it and make repairs, and the foreclosure judgment also contained language permitting repairs, the Illinois Supreme Court found that the mortgagee had "the right to enter the property to make reasonable repairs for the preservation of the property."

 

The Court concluded that as a matter of law "based upon this record in the context of mortgage foreclosure proceedings, it cannot be said that the entry, after which defendants left and never returned, is conduct so extreme and outrageous that it goes beyond all possible bounds of decency."  As there was no question of fact whether the inspection was outrageous, summary judgment against the borrower was proper on her intentional infliction of emotional distress claim. 

 

The case was remanded to the trial court for further proceedings on the borrower's remaining claims.

 

 

 

 

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

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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FYI: 4th Cir Rejects UDAP and Constructive Fraud Claims Against Bank on "Seller Holdback" Agreement

The U.S. Court of Appeals for the Fourth Circuit recently held that claims against a bank under North Carolina's Unfair and Deceptive Trade Practices Act ("UDTPA") were barred by the four-year statute of limitations, because the plaintiff was or should have been aware within the limitations period of all the information that led it to file suit.

 

The Court also held that relationship between the plaintiff and the bank was an ordinary contractual relationship, and not a fiduciary relationship that would give rise to the plaintiff's constructive fraud claims.

 

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

 

This action arose from a "seller holdback" agreement between an investment corporation that was selling a vacant lot for home construction, and a bank that was financing the lot's purchase by a third party individual.

 

Under the 2008 "seller holdback" agreement, part of the purchase price owed to the corporation would be retained by the bank, pending completion of the home and subject to certain conditions. The corporation entered into the agreement after consulting with its attorney, its banker, and a real estate appraiser.

 

To secure payment of the holdback amount, the investment corporation also obtained a note signed by the third party buyer, along with a deed of trust on the same collateral property.

 

In 2010, the bank notified the third party buyer that the "seller holdback" loan had come due and that failure to make payments on the loan had put the loan into default. On March 30, 2012, the bank foreclosed on the collateral property.

 

Although the investment corporation's promissory note from the third party buyer was also secured by a deed of trust on the same collateral property, the corporation did not assert any security interest in connection with the bank's foreclosure.

 

Over four years after entering into the "seller holdback" agreement, the investment corporation sued the bank in state court, alleging that the bank fraudulently induced it to enter into the seller holdback agreement, in supposed violation of North Carolina's Unfair and Deceptive Trade Practices Act ("UDTPA"), and for claims under the common-law doctrine of constructive fraud. The bank removed the action to federal district court.

 

The trial court granted summary judgment to the bank, holding that the investment corporation's UDTPA claim was barred by the four-year statute of limitations. The district court also concluded that the investment corporation could not establish the necessary elements of a constructive fraud claim.

 

The investment corporation then appealed to the Fourth Circuit.

 

As you may recall, when a UDTPA claim is based on alleged fraudulent conduct, the limitations clock starts running when the fraud is discovered or should have been discovered with the exercise of reasonable diligence.

 

The investment corporation argued that it would be more appropriate to analogize its action to one for breach of contract, in which case the 4-year limitations period would begin to run at the time of the breach, asserting that the earliest date on which it could have discovered or been expected to discover the bank's alleged fraud was in 2009, within the four-year limitations period, when the individual received the certificate of compliance on his home.

 

The investment corporation contended that it was not until then, when the bank was required to make good on the "seller holdback" agreement by releasing the holdback to the corporation, that the corporation could have known that the bank did not intend to honor the agreement.

 

The Fourth Circuit disagreed, noting that the investment corporation made it clear that its claim was based on deceptive statements made by the bank in order to induce the corporation to enter into a sham seller holdback scheme.

 

Moreover, the Court noted that in 2009, the investment corporation had already announced that it planned to sue the bank on the same theory. In other words, the Court said, the investment corporation was already privy to the information that ultimately led it to file suit more than four years later.

 

The Court held that the investment corporation could not, therefore, claim that it lacked capacity and opportunity to discover that fraud until six months later.

 

Accordingly, the Fourth Circuit concluded that the limitations period on the investment corporation's UDTPA claim began running by in 2009, more than four years before it filed suit. The Court therefore agreed that, with respect to the UDTPA claim, the trial court properly granted summary judgment to the bank on statute of limitation grounds.

 

The Fourth Circuit next turned next to the investment corporation's constructive fraud claim, on which the trial court also granted summary judgment to the bank.

 

Under North Carolina law, the key to a constructive fraud claim is a fiduciary relationship between a plaintiff and a defendant, which gives rise to a special duty to act in good faith and with due regard to the interests of the one reposing confidence.

 

When such a fiduciary relationship exists a plaintiff need not bear the exacting burden of proving actual fraud, but may instead rely on a presumption of constructive fraud that arises under equity when the superior party obtains a possible benefit.

 

The bank argued that the investment corporation could not show such a relationship in this case, and the Fourth Circuit agreed.

 

Under North Carolina law, fiduciary relationships are characterized by confidence reposed on one side, and resulting domination and influence on the other.

 

Lawyers and their clients, for instance, or trustees and their beneficiaries, share such relationships, with a "heightened level of trust" matched with a corresponding duty to "maintain complete loyalty."

 

By contrast, parties to a contract like the seller holdback agreement between the bank and the investment corporation generally do not become each other's fiduciaries; what they owe each other is defined by the terms of their contracts, with no special duty of loyalty.

 

The Fourth Circuit, relying on Strickland v. Lawrence, 176 N.C. App. 656, 627 S.E.2d 301, 306 (N.C. Ct. App. 2006), held that as a matter of law, there can be no fiduciary relationship between parties in equal bargaining positions dealing at arm's length, although they are mutually interdependent businesses.

 

The Fourth Circuit held that that the relationship between the bank and the investment corporation was an ordinary contractual relationship, with nothing that could give rise to a special fiduciary relationship.  Because the existence of a fiduciary relationship is a necessary element of constructive fraud, the Court concluded that the trial court properly granted summary judgment to the bank on this claim.

 

Accordingly, the Fourth Circuit affirmed the trial court's summary judgment in favor of the bank.

 

 

 

 

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

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Maryland   |   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.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

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Webinars

 

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FYI: 1st Cir Rejects BK Trustee's Effort to Avoid Mortgage Due to Allegedly Defective Acknowledgment

The U.S. Court of Appeals for the First Circuit recently bankruptcy trustee's effort to avoid a mortgage on the basis that the acknowledgment signed by the borrowers' attorney-in-fact was defective under Massachusetts law, holding that the acknowledgment was not materially defective because as a matter of agency law the attorney-in-fact's signature was the borrowers' "free act and deed."

 

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

 

The borrowers purchased a parcel of "registered land" in 1994 in North Attleboro, Massachusetts (the "subject property"). "Registered land" is real property for which a certificate of title is recorded with the Massachusetts Land Court, governed by chapter 184 of the Massachusetts General Laws.

 

In April of 2004, the borrowers signed a power of attorney authorizing their attorney-in-fact to execute a mortgage encumbering the subject property. The attorney-in-fact subsequently signed a note and mortgage, which were "registered on the certificate of title" for the property in the Registry of Deeds of the Massachusetts Land Court for the county where the property was located.

 

Attached to the mortgage was a certificate of acknowledgment, signed by the attorney-in-fact, which attested that he appeared before the notary to sign the mortgage on behalf of the borrowers.

 

The borrowers filed separate bankruptcy cases. The bankruptcy trustee appointed for both cases then filed an adversary proceeding against the original lender's successor-in-interest seeking to avoid the mortgage pursuant to 11 U.S.C. § 544(a)(3), which "put[s] the estate in the shoes of the creditor whose lien is avoided."

 

The two adversary actions were consolidated. In the consolidated action, the trustee argued that subsection 544(a)(3) permits him to avoid the subject mortgage where such a transfer is voidable under state law by a bona fide purchaser, section 29 of chapter 183 of the Massachusetts General Laws requires a valid certificate of acknowledgment along with the recorded mortgage, and the subject mortgage was voidable because the certificate of acknowledgment was "materially defective" under section 29.

 

Specifically, the trustee argued that the certificate of acknowledgment was "materially defective" because it did not clearly state the mortgage was signed as the "free act and deed" of the borrowers. If only the attorney-in-fact appeared to sign, the bankruptcy trustee argued, then it was his "free act and deed" while acting under the power of attorney, not that of the borrowers.

 

The mortgagee filed a motion to dismiss, arguing: 

 

(a) section 29 did not apply to the subject mortgage because that section is part of chapter 183, which governs "recorded land" and the encumbered property is "registered land," governed by chapter 185;

 

(b) if section 29 did apply, the certificate of acknowledgment complied with its requirements because it made clear that the execution of the mortgage was the free act and deed of the borrowers; and

 

(c) even if the certificate of acknowledgment did not comply with the formal requirements of section 29, it still provided constructive notice of the mortgage to bona fide purchasers, which is all that state law requires to prevent a bona fide purchaser from voiding the mortgage.

     

The mortgagee also filed a motion asking the bankruptcy court to certify to the Massachusetts Supreme Judicial Court "the question of whether a 'mortgage encumbering registered land, whose certificate of acknowledgment is … ambiguous regarding whether the execution … was the voluntary act of the mortgagors, but which … is noted on the certificate of title of such registered land, provides constructive notice.'"

      

The motion to dismiss was converted into a motion for summary judgment, after which the bankruptcy court denied both motions, ordering the mortgagee to show cause why summary judgment should not be entered in the trustee's favor.

      

After briefing, the bankruptcy court granted summary judgment in the trustee's favor, finding that (a) a certificate of acknowledgment was required for the subject mortgage by section 29, even though the property was "registered land;" (b) the certificate of acknowledgment at issue was ambiguous as to who appeared before the notary; (c) this rendered it materially defective because it was unclear whether the execution of the mortgage was the free and act deed of the mortgagors; and (d) the defective certificate of acknowledgment and other loan documents did "not suffice to provide constructive notice of the mortgage to a bona fide purchaser."

     

The mortgagee appealed the bankruptcy court's order to the district court, which reversed the bankruptcy court's summary judgment ruling in favor of the trustee because the certificate of acknowledgment was not materially defective. The trustee appealed the district court's order to the Circuit Court of Appeals.

     

On appeal, the First Circuit concluded that the certificate of acknowledgment complied with section 29 of chapter 183 and was not materially defective because even if it were read to reflect that only the attorney-in-fact appeared before the notary, it "still [did] all that it needed to do."

 

The Court held that this is because the certificate of acknowledgment expressly stated that the attorney-in-fact was appearing for the borrower under the power of attorney recorded along with the mortgage, and the power of attorney specifically authorized the attorney-in-fact to sign the mortgage.

 

In addition, the First Circuit held, the certificates of acknowledgment accompanying the power of attorney stated that the borrowers each signed the power of attorney forms "voluntarily for [their] stated purpose." Under the common law of agency in Massachusetts, the voluntary act and deed of an agent acting within the scope of his authority "was the voluntary act and deed do his principal."

     

The Court rejected the trustee's argument that certificate of acknowledgment at issue was defective because its language differed from the official form for an individual acting under a power of attorney in an appendix to chapter 83 and the model certificate of acknowledgment published by the Land Court.

      

The First Circuit reasoned that even though the language differed, the subject certificate of acknowledgment made clear that the attorney-in-fact appeared as the borrowers' attorney pursuant to the recorded power of attorney forms, which in turn clearly reflected that the borrowers "voluntarily granted the power to execute the mortgage to [the attorney-in-fact]. And, indeed, the [borrowers] acknowledged those power of attorney forms as their fee act and deed." The Court held that nothing more was required under section 29.

     

Finally, the Court explained that the form acknowledgments were permissive, not mandatory, and the Massachusetts Supreme Judicial Court had confirmed that "[t]he acknowledgment required for proper recording of a mortgage … need not take any one specific form."

      

Accordingly, the First Circuit affirmed the district court's order in favor of the mortgagee.

 

 

 

 

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: MD Pa Holds Initiation of a Call is Enough for TCPA Liability

The U.S. District Court for the Middle District of Pennsylvania recently held that, under the federal Telephone Consumer Protection Act (TCPAA), "a plaintiff need not answer or hear a call to prove prohibited conduct under the TCPA, but need only prove the act of placing the call itself."

 

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

 

The consumer alleged that the issue of statutory damages was resolved by the Court during the summary judgment phase when the Court held that "[u]ncontroverted record evidence establishes that Mercury Dialer placed 146 calls to [the consumer]."

 

The defendant argued that the Court's ruling during the summary judgment phase did not resolve the issue of statutory damages because the consumer must further demonstrate that he either answered his phone or heard it ring for each of the subject calls.

 

While the Third Circuit had not addressed the issue at hand, the Ninth Circuit has found that a "call" within the TCPA means "to communicate with or try to get into communication with a person by telephone."  Satterfield v. Simon & Schuster, Inc., 569 F.3d 946, 954 (9th Cir. 2009).

 

The Court relied on the Ninth Circuit's holding and other district courts' decisions in finding that "a plaintiff need not answer or hear a call to prove prohibited conduct under the TCPA, but need only prove the act of placing the call itself." See, e.g., King v. Time Warner Cable, 113 F. Supp. 3d 718, 725 (S.D.N.Y. 2015); Fillichio v. M.R.S. Assocs., Inc., No. 09-61629, 2010 WL 4261442, at *3 (S.D. Fla. Oct. 19, 2010); see also Forrest v. Genpact Servs., LLC, 962 F. Supp. 2d 734, 737 (M.D. Pa. 2013),

 

The Court clarified for the parties that the sole issue at trial was whether the consumer should be awarded treble damages.

 

 

 

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

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Maryland   |   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.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

 

FYI: NJ Fed Ct Holds 18 Calls Over Two Weeks - Mostly Unanswered - Did Not Violate FDCPA

The U.S. District Court for the District of New Jersey recently ruled that 18 telephone calls to a consumer over a two-week period – of which 17 were unanswered, and the last where the consumer hung up – did not violate the federal Fair Debt Collection Practices Act (FDCPA).

 

In so ruling, the Court also affirmed that under the federal Telephone Consumer Protection Act (TCPA), persons who knowingly release their phone numbers have in effect given their invitation or permission to be called at the number which they have given, absent instructions to the contrary.

 

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

 

The consumer had a delinquent television services account that was referred to a debt collector for collection. The consumer had previously provided his telephone number to the television services provider. This information was given to the debt collector as part of the delinquent account.

 

The debt collector began contacting the consumer on April 30, 2015.  The debt collector called the consumer's cell phone multiple times until May 12, 2015.  On May 18, 2015, the debt collector received a letter from the consumer's attorney demanding a stop to all calls.

 

As you may recall, to prevail on an FDCPA claim, a consumer must prove that (1) she is a consumer, (2) the debt collector is a debt collector, (3) the debt collector's challenged practice involves an attempt to collect a debt as the FDCPA defines it, and (4) the debt collector has violated a provision of the FDCPA in attempting to collect the debt.

 

In this case, it was undisputed that the consumer was a consumer, the debt collector was a debt collector, and that the debt collector was trying to collect a debt owed to the television service provider.

 

The consumer specifically alleged a violation of  15 U.S.C. §§ 1962d and 1962d(5). Section 1692d of the FDCPA makes unlawful "any conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt." 15 U.S.C. § 1692d. The statute identifies certain conduct that is a per se violation, including as relevant here, "causing a telephone to ring or engaging any person in telephone conversation repeatedly or continuously with intent to annoy, abuse, or harass any person at the called number." Id. at 1692d(5).

 

The debt collector argued that the consumer could not show the 18 calls to his cellular telephone constituted a violation of § 1692d or § 1962d(5).

 

The consumer disputed the number of phone calls only with his personal recollection, which were contradicted by evidence shown on telephone logs. The Court found the record established the debt collector only made 18 calls to the consumer over 13 days, between the hours of 9:30 am and 7 pm, as allowed under the FDCPA.

 

As to whether conduct is harassing, the Court noted that "actual harassment or annoyance turns on the volume and pattern of calls made," and "[t]here is no consensus as to the amount and pattern of calls necessary for a Court to infer a debt collector intended to annoy, abuse, or harass a debtor."  In addition, "[n]umerous courts have found that the number of calls alone cannot violate the FDCPA; there must also be outrageous in order to have the natural consequence of harassing a debtor."

 

The Court also noted that courts usually allow juries to decide whether a debt collector's conduct is annoying, abusive or harassing.  However, "if the conduct has — or does not have — the natural consequence of harassing, oppressing or abusing the consumer as a matter of law, summary judgment is appropriate."

 

The Court here found that the debt collector's calls were neither excessive nor harassing, as the calls were limited to no more than three times in one day, between regular business hours, only one call resulted in actual contact, the representative was polite, and the debt collector immediately ceased communications once requested.

 

Accordingly, the Court found the debt collector was entitled to summary judgment as a matter of law on the FDCPA claims.

 

The consumer also alleged a violation of 15 U.S.C. § 1692f, a catch-all provision for conduct that is "unfair" but not specifically identified in any section of the FDCPA. Courts have routinely found that § 1692f cannot be the basis for a separate claim for claims already addressed by another section of the FDCPA.

 

Here, the consumer's claim was based upon the same conduct as the prior counts.  Accordingly, the Court granted the debt collector's motion for summary judgment as to this claim as well.

 

The consumer also sued for alleged violation of the TCPA.  As you may recall, the TCPA prohibits the use of any automatic telephone dialing system or an artificial voice to make nonconsensual calls to cell phones.

 

Under the TCPA, persons who knowingly release their phone numbers have in effect given their invitation or permission to be called at the number which they have given, absent instructions to the contrary. Prior express consent extends to "[c]alls placed by a third party collector on behalf of that creditor."

 

Here, the parties disagreed as to whether the consumer provided his prior express consent to be called on his cell phone.

 

However, the Court noted that the consumer had a contract with the television service provider where he provided his address and phone number. The consumer alleged this was insufficient to show prior consent, but he did not provide any evidence that he ever revoked the original consent.

 

Accordingly, the District Court granted in full the debt collector's motion for summary judgment.

 

 

 

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

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Maryland   |   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.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments