FYI: 9th Cir Rules in Favor of Defendant in Putative TCPA Class Action Involving Third Party Consent

In an unreported ruling, the U.S. Court of Appeals for the Ninth Circuit recently affirmed summary judgment for the defendant in a putative class action for alleged violation of the federal Telephone Consumer Protection Act, 47 U.S.C. § 227 ("TCPA"). 

 

The Court held that the named plaintiff expressly consented to the text message in question when she provided her cell phone number to a third party contracting with the defendant while using the third party's services.

 

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

 

The named plaintiff booked flights online for herself and her family on an airline website.  A section of the website entitled "Contact Information" provided spaces to enter various phone numbers, noting that at least one was required.  The plaintiff entered her cell phone number. 

 

The defendant contracts with airlines to provide traveler notification services to passengers.  Three weeks after the named plaintiff made her reservation with the airline, and about a month before her scheduled departure, the defendant sent a text message to the consumer's cell phone.  The text message invited the named plaintiff to reply "yes" to receive flight notification services.  The named plaintiff did not respond and the defendant sent her no more messages.

 

The named plaintiff brought this action, alleging that the defendant violated the TCPA by sending her the unsolicited text message.  She sought to represent a class of people who received similar text messages from the defendant. 

 

As you may recall, the TCPA restricts calls and text messages made using an automatic dialing system or an artificial or prerecorded voice absent "prior express consent" from the called party.  47 U.S.C. § 227(b)(1)(A).

 

The Federal Communications Commission ("FCC"), having authority to prescribe regulations to implement specific parts of the TCPA, determined that "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."  In re Rules & Regulations Implementing the Tel. Consumer Prot. Act of 1991, Report and Order, 7 FCC Rcd. 8752, 8769 (Oct. 16, 1992) ("1992 Order").  The Ninth Circuit noted that the defendant's assertion that the named plaintiff consented to receive the text message is an affirmative defense to liability under the TCPA.

 

The district court relied upon the 1992 FCC Order, stating that "[i]f a call is otherwise subject to the prohibitions [against using an autodialer, and other rules targeting telemarketing], 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." 1992 FCC Order ¶ 31. 

 

The district court reasoned that the FCC appeared to have intended its 1992 Order to provide a definition of "prior express consent" in Paragraph 31, which states, in its entirety:

 

31. We emphasize that under the prohibitions set forth in [47 U.S.C.] § 227(b)(1) and in [47 C.F.R.]§§ 64.1200(a)-(d) of our rules, only calls placed by automatic telephone dialing systems or using an artificial or prerecorded voice are prohibited. If a call is otherwise subject to the prohibitions of § 64.1200, 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. Hence, telemarketers will not violate our rules by calling a number which was provided as one at which the called party wishes to be reached. However, if a caller's number is "captured" by a Caller ID or an ANI device without notice to the residential telephone subscriber, the caller cannot be considered to have given an invitation or permission to receive autodialer or prerecorded voice message calls. Therefore, calls may be placed to "captured" numbers only if such calls fall under the existing exemptions to the restrictions on autodialer and prerecorded message calls.

 

2008 FCC Order ¶ 31 (footnote citing H.R. Rep. No. 102-317 omitted).

 

The district court noted that, although "Paragraph 31 of the 1992 FCC Order is not a model of clarity," the statement that "telemarketers will not violate our rules by calling a number which was provided as one at which the called party wishes to be reached" begs the question of whether merely providing a cellphone number demonstrates that the number is "one at which the called party wishes to be reached" by an automated telephone dialing system, instead of a number at which the called party wishes to be reached by a human being.

 

Nevertheless, the district court held that Paragraph 7 of the 1992 FCC Order showed that the FCC intended to provide a definition of the term "prior express consent," and that definition governed the district court's analysis of whether the plaintiff could prevail on her claim that the defendant's text message to her cell phone violated the TCPA.  The district court held that under the FCC's definition, the plaintiff "knowingly release[d]" her cellphone number to the airline when she booked her tickets, and by doing so gave permission to be called at that number by an automated dialing machine. See 1992 FCC Order ¶ 7, 31.

 

The named plaintiff appealed.  The Ninth Circuit's ruling affirming the lower court's judgment in favor of the defendant was twofold: 

 

First, the Ninth Circuit held that the named plaintiff's argument that providing her phone number did not constitute "prior express consent" "may not be challenged in the context of this appeal" because her lawsuit was not brought pursuant to the Hobbs Act. 

 

The Ninth Circuit noted that the Hobbs Act provides the court of appeals with exclusive jurisdiction to determine the validity of all final orders of the FCC.  A party may invoke this appellate jurisdiction "only by filing a petition for review of the FCC's final order in a court of appeals naming the United States as a party." US W. Commc'ns v. MFS Intelenet, Inc., 193 F.3d 1112, 1120 (9th Cir. 1999).  Because the named plaintiff did not bring suit pursuant to the Hobbs Act, the Court held that the validity of the FCC's interpretation of "prior express consent" must be presumed valid. 

 

Second, the Ninth Circuit held that when the named plaintiff released her phone number to the airline while making a flight reservation, she expressly consented to the text message in question.  The Court noted that she did not provided the airline any "instructions to the contrary" indicating that she did not "wish[] to be reached" at that number.  See 1992 Order, 7 FCC Rcd. at 8769.

 

Accordingly, the Ninth Circuit affirmed the district court's order granting of summary judgment in favor of the defendant. 

 

 

 

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: Illinois Amends Collection Agency Act to Correct Problematic Provisions

Illinois Governor Bruce Rauner recently signed Illinois SB 1369 into law, thereby providing welcomed corrections to the Illinois Collection Agency Act ("ICAA") arising from problematic August 2015 amendments to the statute.

 

A copy of Act now signed into law is available here:  Link to Public Act 099-0500

 

We previously described the proposed changes in SB 1369 that would rewind some of the unintended consequences wrought by the prior August 2015 amendments.  The text of our prior update is available here:  Link to Update

 

The August 2015 amendments would potentially have expanded sections of the ICAA to commercial debt, and would have required disclosures contrary to (and possibly in violation of) the federal Fair Debt Collection Practices Act.

 

The corrective legislation:

 

 

-  Amends section 9.1 (Communication with persons other than debtor) to provide that when seeking location information from third parties, collection agencies and debt buyers must provide the name of their employer "only if expressly requested"

 

-  Amends section 9.3 (Debt validation) to provide that a collection agency or debt buyer provide a debtor with the name and address of the original creditor only if requested by a debtor, in writing, within the 30-day validation period

 

-  Amends the above sections as well as sections 2 (Definitions) and 9.2 (Communication in connection with debt) to apply only to debt incurred primarily for personal, family or household purposes

 

-  Adds that a collection agency or debt buyer is immune from civil liability under sections 2, 9.1, 9.2, or 9.3 of the ICCA if it can demonstrate compliance with comparable provisions of the FDCPA

 

 

The Act became effective upon the Governor's signature on January 29, 2016.

 

 

 

 

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: 4th Cir Holds Finance Company Could Be Liable Under MD's Version of FDCPA, But Holds Company Properly Cured Excessive Interest Rate

The U.S. Court of Appeals for the Fourth Circuit recently held that a finance company properly cured a contractual interest rate provision in excess of the statutory cap, and was not liable under the Maryland Credit Grantor Closed End Credit Provisions, Com. Law § 12-1001 et seq. (MCLEC).

 

However, the Court also held that the defendant could be liable under the Maryland Consumer Debt Collections Act, Com. Law § 14-201 et seq. (MCDCA), if it falsely claimed to have taken legal actions against the debtor.

 

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

 

In 2008, a customer entered into a retail installment sales contract (RIC) with a car dealership to finance the purchase of a used car.  The dealership sold and assigned the RIC to the defendant, a finance company.

 

The RIC was subject to the MCLEC, and originally provided for a 26.99% interest rate, which exceeded MCLEC's maximum allowable interest of 24%.  The finance company realized this discrepancy and sent a letter to the customer in September 2010 informing him that the interest rate on the loan was incorrect, crediting $845.50 to his account, and advising him that there would be a new interest rate until final payment was made.  The finance company did not disclose in the letter the new interest rate, which was 23.99%. 

 

Shortly after receiving the letter, the customer defaulted on his payments.  From July 2011 to December 2012, the finance company contacted the customer four times by letter and once by telephone.  The customer alleged that the finance company made several false and threatening statements during these communications.

 

The customer filed suit in state court for breach of contract and violations of CLEC and the MCDCA.  The finance company removed the case to federal court.

 

After limited discovery, the finance company successfully moved for summary judgment on all claims.  The district court held that the customer presented insufficient evidence of a MCLEC violation and that section 12-1020's safe harbor provision shielded the finance company from any other liability under the statute.  The lower court further found that the customer had no claim for breach of contract if he could not prevail on his claim under MCLEC.  Finally, the lower court ruled that the finance company's course of conduct in attempting to collect the customer's debt did not rise to a level that constituted violation of MCDCA.  The customer appealed this ruling to the Fourth Circuit.

 

The Fourth Circuit began its analysis "by sketching out CLEC's basic framework."  The Court noted that violators of MCLEC may collect the principal of a loan but not interest, costs, fees or other charges.  If

a credit grantor "knowingly violates [MCLEC]," it "shall forfeit to the borrower 3 times the amount of interest, fees, and charges collected in excess of that authorized by [the statute]." § 12-1018(b). MCLEC's two safe-harbor provisions allow a violator to avoid liability through self-correction, unless for a knowing violation, in which case the statute affords protection from liability only if the party cures its violation within 60 days.        

 

The Court rejected the customer's first argument that the finance company was liable under MCLEC because it failed "to expressly disclose in the contract an interest rate below the statutory minimum."  The Fourth Circuit noted that, taken to its logical conclusion, the customer's argument would impose strict liability for any written contract providing for an interest rate above 24%, but in its view the only disclosure required under the statute was to express the rate to the customer as a simple interest rate.

 

Accordingly, the Fourth Circuit held that the "mere failure to disclose an interest rate below [MCLEC's] statutory maximum is not a distinct violation of section 12-1003(a) for which liability may be imposed."

 

The Court also rejected the customer's second argument that it should apply Maryland's "discovery rule" from the statute of limitations context to find that the finance company did not avoid liability through self-correction.  The standard for under the discovery rule is when a party knew or should have known of a potential claim.  The customer argued that application of the discovery rule means that the finance company knew or should have known about the violation as soon as it was assigned the contract, in which case more than 60 days had passed before it cured its error. 

 

The Fourth Circuit disagreed, holding that the 60 days afforded under Section 12-1020's safe harbor provision did not run until the violator had actual knowledge of the violation.  The Court noted that if the discovery rule governed section 12-1020, credit grantors would have little incentive to cure their violations.  Moreover, the Court held, the customer's interpretation of the statute did not comport with its purpose, which was in part to "entice creditors to do business in the state."

 

The Court also rejected the customer's argument that the finance company's correction letter was too vaguely worded to meet section 12-1020's requirement that "the credit grantor notif[y] the borrower of the error."  The finance company's letter identified a "problem" with the interest rate on the loan and informed the customer of a credit to his account in the amount of $845.40.  Taken together, the Court found that the finance company complied with the notice required under section 12-1020.

 

The Court similarly rejected the customer's final argument for liability under MCLEC — that the statute prohibits charging and collecting any interest on a loan when the interest rate is above 24%.  Based on the purpose of the statute to encourage credit grantors to self-correct, the Court found it "inconceivable" that a customer would receive an interest-free windfall as a result of a MCLEC violation.  Instead, the Court held, the finance company only needed to credit to the customer the interest collected in excess of the 24% interest rate and correct the interest rate moving forward, which it did here.

 

Thus, the Fourth Circuit affirmed the district court's order granting summary judgment on the CLEC claim.

 

Turning to the question of whether the district court properly granted summary judgment on the customer's breach of contract claim, the Court noted that the RIC "incorporates all of [MCLEC] — including its safe harbors."  Accordingly, the Court held, just as liability under MCLEC begets breach of contract, defenses under MCLEC preclude liability.  Thus, because the Court found no liability under MCLEC, it found no liability for breach of any contract based on MCLEC.  The Court held that any contrary scenario would nullify the effect of MCLEC's safe harbor provisions because credit grantors would still face contract liability after properly curing their mistakes.

 

Accordingly, the Fourth Circuit affirmed the district court's order granting summary judgment on the breach of contract claim.

 

As to the customer's MCDCA claim, the Court reversed the district court's ruling and concluded that a reasonable jury could find that the finance company violated the statute.  The Fourth Circuit explained that the portion of MCDCA at issue was section 14-202(6), which prohibits a debt collector from communicating with a debtor with frequency, at unusual hours, "or in any other manner as reasonably can be expected to abuse or harass the debtor."

 

The customer argued that the finance company violated MCDCA because it represented that certain legal actions had occurred when such actions had not, in fact, occurred.  The customer specifically alleged that the finance company suggested it had obtained a replevin warrant, provided notice of a complaint to the Maryland MVA's fraud division, and represented that the instant case was dismissed when it was still pending.

 

The Court ruled that a jury could find that "attempting to collect a debt by falsely claiming that legal actions have been taken against a debtor" violates section 14-202(6) of MCDCA.  The Court pointed out that a similar claim under section 14-202(6) survived a motion to dismiss where the defendant allegedly falsely represented that the plaintiffs' home had been foreclosed upon when no such foreclosure occurred.  See Zervos v. Ocwen Loan Servicing, LLC, 2012 WL 1107689 (D. Md. Mar. 29, 2012).

 

Zervos and other cases suggested to the Court that threats of appropriate legal action against a debtor are different than false representations that legal action against a debtor has already been taken.  With the latter, a jury could find that these actions could have reasonably been expected to abuse or harass the debtor, and therefore violate MCDCA.

 

Accordingly, the Court reversed the district court's order granting summary judgment on the MCDCA claim.

 

 

 

 

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   |   Maryland   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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FYI: 7th Cir Holds Lender's Inquiry Notice of Fraud Involving Collateral Allows Avoidance of Security Interest in Bankruptcy

The U.S. Court of Appeals for the Seventh Circuit recently held that a lender that is on inquiry notice that its security interest in the collateral had been fraudulently conveyed may lose its secured status.

 

However, the Court also held that the lender's negligence here did not amount to "purposeful avoidance of the truth" sufficient to justify application of the doctrine of equitable subordination, which allows a bankruptcy court to reduce the priority of a claim in bankruptcy.

 

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

 

The bankrupt debtor was a cash management firm -- i.e., it invested cash, which had been lent it by persons or firms, in liquid low-risk securities. It also traded on its own account, using money borrowed from two affiliated New York banks to finance the trades.

 

The debtor improperly pledged securities that it had bought for its customers with their money even though its loans from the banks were used for trading on its own account, in violation of 7 U.S.C. §§ 6d(a)(2) and 6d(b) and its own contracts with it customers, which required the securities to be held in accounts segregated from the debtor's own assets.

 

In August of 2007, the debtor experienced trading losses that prevented it from both maintaining its collateral with the banks and meeting the demands of its customers for redemption of the securities that the debtor had bought with their assets.

 

The debtor filed bankruptcy in August of 2007. The banks expressed their intention to liquidate the collateral pledged to secure the credit line, but the bankruptcy trustee objected because he deemed the transfers from customer accounts to collateralize the subject loans to be fraudulent transfers under section 548(a)(1)(A) of the Bankruptcy Code. The reason was that the trustee believed the bank officials knew something unlawful was happening, but looked the other way.

 

After a 17-day bench trial, the trial judge dismissed the trustee's claim. However, a panel of the Seventh Circuit in a prior appeal reversed, holding the debtor had made fraudulent transfers, and instructing the district judge to decide on remand whether the banks had been on inquiry notice in its dealings with the debtor.

 

On remand, the district judge did not conduct an evidentiary hearing or make additional findings, instead issuing a "supplemental opinion" which confusingly incorporated by reference his earlier opinion on the merits as well as the Seventh Circuit's prior ruling.

 

In this second appeal, the Seventh Circuit explained that the district court's supplemental opinion misunderstood "the concept of inquiry notice" because it suggested that as long as the banks "did not believe that [debtor] had pledged customers' assets to secure its loans without the customers' permission, [they were] entitled to accept that security for its loans without any investigation." The Court reasoned that this was error "because inquiry notice is not knowledge of fraud or other wrongdoing but merely knowledge that would lead a reasonable, law-abiding person to inquire further — would make him in other words suspicious enough to conduct a diligent search for possible dirt."

 

By way of example that the banks were on inquiry notice, the Court explained that a senior employee in an e-mail questioned how the debtor could show so much collateral on its books when its capital was a tiny fraction of the pledged collateral.  He specifically stated that he had to assume most of the collateral belonged to someone else.  After receiving a non-responsive answer from his subordinates, there was no further investigation.

 

The Seventh Circuit criticized the district court because although the senior employee never expressly said that he "knew or believed that all of the collateral was for somebody else's benefit" he was still suspicious, which according to the Seventh Circuit "was enough to place him on notice of possible fraud and so require that he or others at the bank investigate. In fact it was more than enough. Notice that because of the recipient's obtuseness fails to trigger suspicion is nevertheless sufficient to create inquiry notice because all that is required to trigger it is information that would cause a reasonable person to be suspicious enough to investigate."

 

In addition to failure to follow an "obvious lead" that put the banks on inquiry notice, the Seventh Circuit reasoned that the district court's findings in its earlier opinion that was reversed "actually prove inquiry notice."

 

The Court then turned to the second issue on appeal: i.e., "whether the bank's conduct was sufficiently egregious to justify application of the doctrine of equitable subrogation, which allows a bankruptcy court to reduce the priority of a claim in bankruptcy."

 

Reasoning that "there is general agreement in the case law that the defendant's conduct must be not only 'inequitable' but seriously so ('egregious,' 'tantamount to fraud,' and 'willful' are the most common terms employed) and must harm other creditors", the Court agreed with the district court that the case at bar did not satisfy that high standard because "[t]o suspect potential wrongdoing yet not bother to seek confirmation of one's suspicion is negligent, and negligence has not been thought an adequate basis for imposing equitable subordination."

 

The Seventh Circuit noted that, while the senior bank official should have followed-up on his suspicions, "he may have thought he'd done so when he communicated his suspicions to colleagues at the bank, and if so then at worst he was negligent."

 

Because the banks were "on inquiry notice that the assets that [the debtor] had used to secure the … loans had been fraudulently conveyed," the Court ruled that the banks lost their security interest, but retained an unsecured claim. The district court's judgment was affirmed in part, reversed in part and remanded for further proceedings consistent with the Seventh Circuit's opinion.

 

 

 

 

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   |   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.

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and

 

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FYI: 4th Cir Rejects "Substantive Unconscionability" Based Solely on Amount of Loan, But Allows "Unconscionable Inducement" Under WV Law

In a case that attracted a number of amici for both the borrower and the mortgagee, the U.S. Court of Appeals for the Fourth Circuit recently affirmed a trial court's summary judgment ruling against a borrower on his claim that the mortgage loan on his home was substantively unconscionable, holding that "the amount of a mortgage loan, by itself, cannot show substantive unconscionability under West Virginia law."

 

However, the Fourth Circuit allowed the borrower's claim of "unconscionable inducement," holding that the applicable West Virginia statute authorized such a claim "even when the

substantive terms of a contract are not themselves unfair."  

 

A copy of opinion is available at: http://www.ca4.uscourts.gov/Opinions/Published/142126.P.pdf

 

The plaintiff borrower purchased his home in West Virginia in 2004 for approximately $110,000.  Two years later, he refinanced his home to consolidate and pay down other debt at the height of the housing boom in 2006.  When the housing market collapsed, he found himself with a mortgage payment he couldn't afford and facing foreclosure.

 

The borrower entered into a loan modification on May of 2010, which reduced the interest rate and extended the term of the loan, but increased the principal amount.  The borrower failed to make payments as promised and the mortgagee filed a foreclosure action in 2012.

 

In response to the foreclosure action, the borrower filed suit in federal district court, alleging that the mortgage was an "unconscionable contract" under the West Virginia Consumer Credit and Protection Act (the "WVCCPA") because the principal amount due on the loan far exceeded the home's value.

 

The district court disagreed and granted the mortgagee's motion for summary judgment, ruling that the fact that the loan exceeded the home's value did not, standing alone, constitute "substantive unconscionability" under West Virginia law.  The borrower appealed.

 

On appeal, the Fourth Circuit agreed "with the district court that the amount of a mortgage loan, by itself, cannot show substantive unconscionability under West Virginia law, and that [borrower] has not otherwise made that showing."  

 

However the Appellate Court noted that the trial court granted summary judgment in favor of the mortgagee "without considering the fairness of the process by which the agreement was reached."  The Fourth Circuit held that the WVCCPA "allows for claims of 'unconscionable inducement' even when the substantive terms of a contract are not themselves unfair."

 

The Court first addressed the borrower's argument that the district court erred as a matter of law when it ruled that the mortgage was not substantively unconscionable. The borrower argued that the loan was substantively unconscionable for two reasons: first, the loan far exceeded the value of the property; and second, "the loan did not provide a net tangible benefit" to the borrower.

 

The Fourth Circuit noted that under West Virginia case law, "[a] contract term is substantively unconscionable only if is both 'one-sided' and 'overly harsh' as to the disadvantaged party. … The point is not to disturb the 'reasonable allocation of risks or reasonable advantage because of superior bargaining power."  

 

The Appellate Court agreed with the district court "that under this standard, a mortgage agreement would not be deemed substantively unconscionable solely because it provides a borrower with more money than his home is worth. Whatever the pitfalls, receiving too much money from a bank is not what is generally meant by 'overly harsh' treatment, and we have no reason to think that the West Virginia Supreme Court of Appeals would apply its standard in such a counterintuitive manner."

 

The Fourth Circuit rejected the argument of the borrower and several amici curiae consumer advocacy groups that the harm to borrowers and the general public caused by loans that exceed home values made such loans substantively unconscionable because the widespread practice of overvaluing homes contributed to a national foreclosure crisis, and "[w]hen a borrower is bound to a mortgage that exceeds the value of his home, he is trapped, unable to refinance to obtain better terms or sell his home to relocate, and foreclosure is the result."

 

The Court reasoned that, while consumers "may be harmed, sometimes grievously, when they take on more mortgage debt than their homes are worth", and it had "no reason to doubt that West Virginia's courts would acknowledge that disproportionate debt may be dangerous both for homeowners and for the broader economy", "[t]he fact that a practice is harmful does not by itself make it substantively unconscionable as a matter of West Virginia contract law. Rather, … substantive unconscionability is an equitable doctrine reserved for those cases in which a contract is 'so one-sided that it has an overly harsh effect on the disadvantaged party.' … And an under-collateralized loan, though it ultimately may cause harm, cannot meet this standard, because it will benefit the borrower in at least some respects and operate to the detriment of the lender in others."

 

The Fourth Circuit believed its conclusion that loan balance, by itself, was not evidence of substantive unconscionability was supported by the practical "problems that would arise in fashioning a remedy in such circumstances." For example, if a particular contract term is found to be unconscionable, a court may sever the offending term, but the only way of avoiding the harm of being loaned too much money would be to void the entire agreement.  The Court noted that, although this would spare the borrower foreclosure, it would also require him to return the loan principal to the lender, which is precisely what he wants to avoid.

 

Because the West Virginia Supreme Court of Appeals "has been clear that 'cancellation of the debt' … 'is not a permissible remedy' under circumstances like those in the case at bar, the Fourth Circuit refused to "create a new variant of substantive unconscionability for which there appears to be no sensible remedy."

 

The Fourth Circuit also rejected the borrower's alternative theory that the mortgage was substantively unconscionable because it did not provide him with any "net tangible benefit", agreeing with the district court that this inquiry was irrelevant to the legal standard of substantive unconscionability under West Virginia law contract law.

 

The Court reasoned that the borrower "appears to have borrowed the 'net tangible benefit' test … from West Virginia's anti-predatory lending statute, which prohibits mortgage brokers from charging certain fees 'unless the new loan has a reasonable, tangible net benefit to the borrower considering all of the circumstances."  However, the Fourth Circuit pointed out, the borrower did not allege the lender had violated this law nor cited any West Virginia case law applying this language in the context of a statutory "unconscionable contract" claim.

 

The Fourth Circuit held that the test of unconscionability under West Virginia law focuses on whether a contract is so "one-sided" and "overly harsh" that it should not be enforced as written.  In the Court's words, "[w]hether a contract provides either or both parties with a 'tangible net benefit' is an entirely separate question; contracts are made all the time that include terms that might not provide either party with a 'net tangible benefit' yet remain fair and even-handed — or at least fair and even-handed enough not to be considered substantively unconscionable under West Virginia's standard."

 

The Court then addressed the borrower's argument that "the district court erred by dismissing his unconscionable contract claim solely on the ground that he could not show substantive unconscionability."  Specifically, the borrower argued that his unconscionability claim could not be dismissed without considering "the fairness of the process leading up to contract formation."

 

The Fourth Circuit agreed, in part, finding that although "West Virginia law clearly requires a showing of substantive unconscionability to make out a traditional claim that a contract itself is unconscionable … we think it is equally plain that the WVCCPA authorizes a stand-alone unconscionable inducement claim which, unlike its common-law antecedents, may be based entirely on evidence going to process and requires no showing of substantive unfairness."

 

The Court's conclusion was based primarily on the statutory text itself, which expressly "authorizes a court to refuse enforcement of an agreement on one of two distinct findings: that the agreement was 'unconscionable at the time it was made, or [that it was] induced by unconscionable conduct."

 

Accordingly, the Fourth Circuit held "that the district court erred in dismissing [borrower's] claim of unconscionable inducement on the ground that substantive unconscionability is a necessary predicate of a finding of unconscionability under the WVCCPA."

 

The case was remanded to the district court with instructions to "consider in the first instance whether [borrower's] mortgage agreement was induced by unconscionable conduct."

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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Email: rwutscher@MauriceWutscher.com

 

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