FYI: Ill App Ct (1st Dist) Rejects Borrower's Constitutional Challenge to Illinois Statutory Form Foreclosure Complaint

The Appellate Court of Illinois, First District, recently held that the form foreclosure complaint provided by the Illinois Mortgage Foreclosure Law ("IMFL") complies with procedural due process guarantees of the Fifth and Fourteenth Amendments of the United States Constitution, and does not violate the Illinois Constitution's separation of powers doctrine by usurping the Illinois judiciary's rulemaking power.

 

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

           

A mortgagee foreclosed on the defendant borrower's residential property.  The mortgagee's complaint tracked a form complaint set forth in section 1504(a) of the IMFL ("Form Complaint").  Section 15-1504(c) of the IMFL enumerates multiple allegations that are "deemed and construed" to be included in Form Complaints. 

 

The defendant borrower filed a 735 ILCS 5/2-615 motion to dismiss arguing that the form allegations contained in section 15-1504(c) of the IMFL violates procedural due process guarantees of the United States Constitution and the separation of powers doctrine of the Illinois Constitution. 

 

The lower court denied the borrower's motion to dismiss and entered summary judgment for the lender.  The borrower appealed challenging solely the denial of the motion to dismiss.

 

The Appellate Court explained that the 12 allegations that are "deemed and construed" to be included in the Form Complaints "take a number of innocuously and uncontested issues out of play" and "help form a balance between a lender's interest that a foreclosure case not be bogged down by formalistic proofs over noncontroversial matters, and a mortgagor's interest in preserving his property."

 

The Appellate Court first considered the borrower's argument that the allegations under section 15-504(c) of the IMFL are not specifically included on the face of the complaint, and therefore are hidden from unsuspecting defendants leaving them unaware of the claims they must defend. 

 

In its rejection of this argument, the Court noted the requirements for raising a facial constitutional challenge. 

 

The Appellate Court explained that a party must show that he "has sustained or is in immediate danger of sustaining a direct injury" from the enforcement of the statute.  In addition, the injury must be "distinct and palpable" and the statute must be unconstitutionally applied to the complaining party rather than "third parties in hypothetical situations." 

 

The Court noted that the borrower's motion to dismiss did not address the effect of section 15-504(c) of the IMFL as applied to him, but rather the prejudicial effect on a hypothetical "common defendant" that may not be aware of the implied allegations. 

 

Accordingly, the Appellate Court held that the borrower lacked standing to assert a facial constitutional challenge to section 15-504(c) of the IMFL because he failed to allege that he sustained, or was in immediate danger of sustaining, a direct injury as a result of the enforcement of the statute.

 

The Court also disagreed with the borrower's argument that section 15-504(c) of the IMFL violated the separation of power's doctrine of the Illinois Constitution because the legislature usurped "the court's power to determine what allegations are sufficient to state a claim for mortgage foreclosure."

 

The Appellate Court noted that it is well established that the "legislature has authority to impose requirements upon the judiciary governing matters of procedure and the presentation of claims."  The test of whether such an enactment is an unconstitutional infringement is whether the requirements imposed by the legislature "unduly encroach upon the judiciary's function or conflict with any of the supreme court's rules."

 

The Court further explained that Illinois Supreme Court Rule 1 states that Illinois' Civil Practice Law and Code of Civil Procedure, along with the court rules, govern trial court proceedings.  As the procedures contested by the borrower are set forth in Article 15 of the Civil Practice law, mortgage foreclosure actions are governed by legislative enactment and Illinois Supreme Court Rule 1.  Therefore, the Court held, the enactment and the rules are complementary rather than conflicting.

 

The Appellate Court further noted that the borrower failed to allege that section 15-504 of the IMFL encroaches on the judiciary's power to determine the sufficiency of a foreclosure complaint.  Therefore, the Court found that section 15-504(c) of the IMFL was not an unconstitutional legislative encroachment.

 

Accordingly, the Appellate Court affirmed the circuit court's ruling rejecting the borrower's arguments.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

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

 

Admitted to practice law in Illinois

 

 

 

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FYI: 11th Cir Reverses Dismissal of RESPA "Notice of Error" Servicing Claim

The U.S. Court of Appeals for the Eleventh Circuit recently held that a borrower properly pled a "notice of error" claim under the federal Real Estate Settlement Procedures Act (RESPA), reversing the lower court's grant of the servicer's motion to dismiss.

 

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

 

In 2006, a borrower refinanced her mortgage with a lender, with monthly payments of $998.68. Several years later, servicing of the loan was transferred.  The borrower's payments allegedly increased by about $100 after the transfer. The borrower claimed that she repeatedly contacted the servicer seeking an explanation but did not receive one.

 

In 2013, the borrower refinanced her mortgage a second time with a second lender, which ended the servicer's duties.

 

On June 17, 2014, the borrower allegedly sent another letter to the servicer, again pointing out the increase in payments, as well as her suspicions that the servicer mistakenly charged property taxes or had miscalculated the loan amortization schedule. The borrower supposedly requested an investigation, a detailed explanation, certain account information, and a refund if appropriate. The borrower also alleged that she attached several loan documents in support of the letter.

 

On June 26, 2014, the servicer responded to the borrower's letter in which it denied any error, and supposedly concluded that the loan documents complied with all state and federal guidelines that regulate them. The servicer allegedly included various documents, many that the borrower did not request, yet the letter said nothing about the substantive content of the alleged documents and supposedly gave no explanation for the borrower's issues.

 

In July, 2014, the borrower filed suit alleging that the servicer violated RESPA by allegedly failing to reasonably investigate the error she alleged she pointed out in her account, by allegedly failing to adequately respond to her notice of error, and by allegedly failing to refund overpayments. The servicer moved to dismiss the case for failure to state a claim, asserting that it had satisfied its obligations under RESPA and that the borrower had not adequately plead damages.

 

The case went before a Magistrate Judge who recommended granting the defendant's motion to dismiss. The Magistrate Judge reasoned that the defendant complied with RESPA, referencing documents related to the loan were reviewed. Yet, these documents were found nowhere in the record.

 

In addition, the Magistrate Judge found that the borrower had not plead actual damages under RESPA because the overpayments occurred before she wrote to the defendant. The overpayments were therefore a breach of contract, not a RESPA violation. Further, the Magistrate Judge also held that no statutory pattern or practice damages could accrue without actual damages.

 

The District Court adopted the Magistrate Judge's report, over objection from the borrower, and dismissed the complaint without prejudice. The borrower timely appealed.

 

As you may recall, RESPA's servicing provision require servicers among other things to respond to notices of error by fixing any error, crediting the borrower's account, and notifying the borrower; or by concluding that there is no error based on an investigation and then explaining that conclusion in writing to the borrower.

 

RESPA makes violators liable to individual borrowers for "(A) any actual damages to the borrower as a result of the failure; and (B) any additional damages, as the court may allow, in the case of a pattern or practice of noncompliance with the requirements of this section."  See 12 U.S.C. § 2605(f)(1).

 

Also, in 2013, the Consumer Financial Protection Bureau ("CFPB") promulgated new regulations that clarified servicers' obligations after receiving a notice of error.  Under these rules, and in relevant part, a servicer must respond to a notice by "(B) Conducting a reasonable investigation and providing the borrower with a written notification that includes a statement that the servicer has determined that no error occurred, a statement of the reason or reasons for this determination, a statement of the borrower's right to request documents relied upon by the servicer in reaching its determination, information regarding how the borrower can request such documents, and contact information, including a telephone number, for further assistance." See 12 C.F.R. §1024.35(e)(1)(i).

 

The Appellate Court considered two aspects of the borrower's claim. First, whether she stated a RESPA violation, and second, whether she alleged any actual damages related to that violation.

 

The borrower alleged that the servicer violated RESPA because it supposedly failed to provide "any explanation" for its conclusion; supposedly failed to provide "an explanation of whether it was charging . . . property taxes"; supposedly failed to provide "an explanation of how payments were calculated and which amortization schedule was used"; and supposedly failed to "conduct any reasonable investigation."

 

At oral argument, the servicer acknowledged that its letter did not explain to the borrower why the two errors she suspected were not present, and why the payment had increased.

 

Accordingly, the Eleventh Circuit held that the borrower had in fact stated a RESPA violation in her complaint.

 

The Court reasoned that, if servicers want to try to shelter behind their RESPA response letters, they must provide a more comprehensive, supported explanation of their findings. 

 

In addition, as a procedural matter, servicers must introduce the supporting attachments into the record and covert their motions to dismiss into motions for summary judgment.

 

The Eleventh Circuit also held that the borrower sufficiently plead actual damages.

 

According to the Court, the language in RESPA ("as a result of") suggests there must be a causal link between the alleged violation and the damages.

 

Here, the Court noted that the borrower alleged she sustained actual damages when the servicer failed to refund her mortgage overpayments. The Eleventh Circuit found that there was a sufficient causal link to the servicer's alleged violation. The Court noted that, had the servicer followed its statutory duties, the borrower would have received a refund.

 

The servicer argued that the borrower's actual damages argument failed as the borrower's damages occurred before she sent the notice of error. 

 

However, the Eleventh Circuit held that this argument ignores the fact that the notice of error triggers RESPA obligations with respect to past error.  In addition, the Court noted that the defendant's logic was flawed because a servicer notified of an account error could always avoid RESPA liability just by claiming it thought there was no error and correcting the error going forward.

 

The Eleventh Circuit also discussed RESPA liability for "pattern or practice of noncompliance" allegations.

 

As such damages are not clearly defined by the Court's precedent, the Eleventh Circuit looked to other circuits to determine how many violations create a pattern or practice of non-compliance.

 

Of note, the U.S. District Court for the Eastern District of New York found that two violations of RESPA are insufficient to support a claim for statutory damaged, but the U.S. District Court for the Northern District of Illinois found that five RESPA violations were adequate to plead statutory damages. See Kapsis v. Am. Home Mortg. Servicing Inc., 923 F. Supp. 2d 430, 445 (E.D.N.Y. 2013); Ploog v. HomeSide Lending, Inc., 209 F. Supp. 2d 863, 868–69 (N.D. Ill. 2002).

 

Here, the borrower alleged a total of five RESPA violations, and the Court did not decide the minimum number of similar violations that must be pled for RESPA "pattern or practice of noncompliance" liability.

 

The servicer argued that the borrower did not disclose the specific facts about the other alleged borrower who supposedly had similar issues with the servicer nor did she disclose the nature of their requests.

 

However, the Court disagreed with the servicer because at the motion to dismiss stage the plaintiff need only plead enough facts to state a claim to relief that is plausible on its face.  Accordingly, the Eleventh Circuit found that the borrower had plausibly alleged a pattern or practice of noncompliance with the servicing requirements of REPSA.

 

The Eleventh Circuit held that the borrower adequately plead a REPSA violation, as well as a basis for actual and statutory damages, and accordingly reversed and remanded the matter to 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: 6th Cir Rejects Borrowers' Attempt to Invalidate DOT Based on Faulty Acknowledgement

The U.S. Court of Appeals for the Sixth Circuit recently held that two borrowers lacked standing to challenge the validity of a deed of trust in a lien priority dispute interpleader action filed by the foreclosure trustee, as the borrowers did not dispute that they executed the deed of trust, the lien placed on the property was valid, or that they were in default.

 

In so ruling, the Court rejected the borrowers' argument that an alleged defect in the acknowledgement invalidated the deed of trust, because a validly recorded instrument that was not properly acknowledged shall nevertheless place "all interested parties . . . on constructive notice of the contents of the instrument."  Tenn. Code Ann. § 66-24-101(e)(2). 

 

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

 

The borrowers executed a deed of trust ("First DOT") on their home ("Property") to secure a loan from a lender ("First Lender") to refinance.  Although the First DOT's acknowledgment stated it was acknowledged in Alabama, it was actually executed in Tennessee.  The First DOT was later re-recorded with the acknowledgement revised to reflect "Tennessee" instead of "Alabama" allegedly without the borrowers' knowledge, re-execution, or acknowledgement.

 

The borrowers subsequently executed and recorded a second deed of trust ("Second DOT") with a separate lender ("Second Lender").  The borrowers later defaulted on the loan secured by the First DOT and the substitute trustee ("Trustee") sold the Property to a third party purchaser ("Purchaser") at a foreclosure sale resulting in a surplus. 

 

The Trustee filed an interpleader action in state court against the borrowers and various lienholders which was removed to federal district court.

 

The Second Lender filed a motion for summary judgment claiming priority over the proceeds.  The borrowers filed a third party complaint ("Complaint") against the Purchaser and a response to the Second Lender's motion claiming that the First Lender had invalid title due to the First DOT's allegedly defective acknowledgment. 

 

The district court granted both the Second Lender's and the Purchaser's motions for summary judgment and awarded the proceeds to the Second Lender.  The court denied the borrowers' motion and declined their request to certify a question of state law to the Tennessee Supreme Court.  The district court also denied the borrowers' subsequent motion to alter the judgment arguing that the court lacked jurisdiction over complaint.  The borrowers appealed.

 

On appeal, the Sixth Circuit rejected the borrowers' arguments that the district court lacked subject matter jurisdiction over the complaint and that the complaint violated Rule 14 of the Federal Rules of Civil Procedure.  Although parties cannot waive the issue of subject matter jurisdiction, the Court noted that whether impleader was proper under Rule 14 is a different inquiry.  The Court held that Rule 14 does not extend jurisdiction, it merely sanctions an impleader procedure.  According, because the borrowers did not raise this issue in the trial court, the Sixth Circuit held it was waived.

 

As statutory impleader provides an independent grant of subject-matter jurisdiction, the Court determined that the district court possessed original subject-matter jurisdiction over the interpleader action under 28 U.S.C. § 1335.  The surplus funds far surpassed the statutory threshold of $500 and the borrowers; and, the borrowers and the Second Lender were citizens of different states which satisfied the minimum diversity requirement. 

 

Further, the Court determined that resolution of the complaint required a determination of the First Lender's title and the relative priority of the other liens on the Property when it foreclosed.  Accordingly, the operative facts necessary to resolve the claims in the complaint were common to those needed to determine the proper distribution of the proceeds in the interpleader.  As the Complaint and the interpleader action derived from a common nucleus of operative facts, the Court found that the district court had supplement jurisdiction over the Complaint under 28 U.S.C § 1357.

 

The Sixth Circuit also held that the borrowers lacked prudential standing to assert that the First DOT was defective.  The Court explained that the borrowers did not dispute that they executed the First DOT, the lien placed on the Property was valid, or that they were in default.

 

Thus, the Court held, by the borrowers asserting that the First Lender's title was invalid, they were not asserting their own rights but rather those of the Second Lender. 

 

The Sixth Circuit noted that the borrowers should have asserted an argument as to the commercial reasonableness of the sale to achieve their true goals. The Court believed that the borrowers' true intention was to invalidate the sale in order for the Property to be sold at a higher price to satisfy their remaining debts.  However, the borrowers never raised a commercial reasonableness argument and therefore it was waived.

 

The Court last determined that the state law acknowledgement issue was moot.  The statute at issue provided that an otherwise validly recorded instrument that was not properly acknowledged shall nevertheless place "all interested parties . . . on constructive notice of the contents of the instrument."  Tenn. Code Ann. § 66-24-101(e)(2). 

 

Because the Second Lender never raised the issue and the borrowers did not have standing to raise the issue, any determination of the statute's effect on potential priority would not have been dispositive of the case

 

Accordingly, the Sixth Circuity affirmed the district court's 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   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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FYI: How Spokeo May Limit Consumer Financial Services Litigation (Commentary)

Yesterday's ruling from the Supreme Court of the United States in Spokeo v. Robins should bolster the defense of companies subject to several federal consumer protection statutes.

 

The ruling addresses lawsuits that claim an injury created solely by the violation of a federal statute and require the plaintiff to demonstrate not only that the statute was violated, but that the plaintiff herself suffered harm.

 

The opinion does not go as far as many in the consumer financial services industry would have liked (for example, not all injuries must be "tangible"), but it does close the door on civil lawsuits many have faced. The opinion was authored by Justice Alito, with a separate concurring opinion by Justice Thomas. Justice Ginsburg authored a dissent and was joined in the dissent by Justice Sotomayor.

 

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

 

Standing and 'Injury in Fact'

 

The decision concerns "standing" – whether a person can bring a lawsuit in a federal court. Standing, as the Court wrote, requires three elements: first, an injury in fact; second that the injury is "fairly traceable" to the conduct of the defendant at issue; and last, that the conduct can be likely redressed by the court.

 

Robins claimed Spokeo compiled a report about him that contained false information in violation of the Fair Credit Reporting Act (FCRA). The trial court dismissed his case finding Robins lacked standing because he had no tangible harm — he did not allege the information compiled by Spokeo lead to, for example, the denial of a job or credit.

 

The Ninth Circuit Court of Appeals reversed and held that the statutory violation was enough to allow Robins his day in court; first, because his claims were associated with a violation of protections afforded to him by the FCRA and, second, because his lawsuit addressed the handling of his own credit information, and these concerns are "individualized."

 

Yesterday's decision addressed whether Robins met the first element of standing – whether he had alleged an injury in fact under the FCRA. This requires pleading harm to a "legally protected interest" that is "concrete and particularized." The harm cannot be hypothetical or conjectural; it must be "actual or imminent."

 

The Court held that while Robins may have pleaded a violation of a legally protected interest under FCRA that was particular harm to him, he did not plead any actual or imminent harm stemming from the alleged FCRA violation.

 

Simply stated, all Robins alleged was a technical violation of the FCRA, which he did not allege caused him any harm beyond a hypothetical or speculative harm.

 

Requires a "Concrete" Injury to Assert a Claim

 

In the context of a statutory violation of the FCRA, one could assert like Robins did, that a credit reporting agency's compilation of false information certainly does demonstrate a violation of a legally protected interest. That, after all, is a purpose of the FCRA:  to promote and protect the accuracy of information reported. The harm was also "particularized." Robins' claim concerned the handling of his information and he filed a lawsuit seeking relief to redress the wrong done in the compilation and dissemination of that information.

 

The problem for Robins, and now for many who seek to assert similar lawsuits, is that all of this did not lead to any "concrete" injury.

 

The Ninth Circuit's decision focused only on whether the harm was particularized to Robins. It did not evaluate, the Court wrote, whether the harm was "'real' and not 'abstract.' "

 

Concrete Harms Not Always Tangible

 

The opinion points out that there are some statutory violations whose transgression can itself cause a particularized and concrete harm. An example provided is a decision where the Federal Election Commission denied a group of voters information "that Congress had decided to make public." The violation was of a certain statutory right (mandatory access to specific information) that, in and of itself, constituted a sufficient injury in fact (denial of access to the information). In such cases, a person need not identify any "additional harm" other than the harm Congress identified in the statute.

 

Robins' case is different. While the FCRA imposes procedures that must be followed in order to curb the reporting of inaccurate information, not all inaccuracies result in a real harm. The mere fact there is an inaccuracy is not itself a sufficient, concrete harm. Although the information concerning Robins was alleged to be false and in violation of the FCRA, Robins did not point to any actual or imminent harm to him stemming from Spokeo's conduct.

 

"A violation of one of the FCRA's procedural requirements may result in no harm," wrote Justice Alito in the Court's opinion. "An example that comes readily to mind," the opinion continues, "is an incorrect zip code. It is difficult to imagine how the dissemination of an incorrect zip code, without more, could work any concrete harm."

 

The decision does not close the door on Robins' case. "We take no position as to whether the Ninth Circuit's ultimate conclusion—that Robins adequately alleged an injury in fact—was correct," the Court concluded. The Ninth Circuit's analysis supporting its decision was flawed, the Court held, and because it did not examine whether the injury was "concrete," the Court directed the Ninth Circuit to reexamine the case once more using its Spokeo analysis.

 

Curbs on FCRA, FDCPA, EFTA and TILA Lawsuits

 

The decision has immediate impact on FCRA claims alleging the reporting and furnishing of information. A failure to simply follow FCRA procedures will likely not withstand a Spokeo analysis absent pleading an actual harm.

 

The impact on Fair Debt Collection Practices Act (FDCPA) claims may be extraordinary. In determining whether a communication is false or misleading in violation of the FDCPA, courts have looked to whether the communication would violate a hypothetical "least sophisticated" or "unsophisticated" consumer.

 

Several courts of appeals have defined the standard as an evaluation of how an imaginary consumer, who is gullible and naïve, would view the letter. As the Third Circuit Court of Appeals recently put it, "[t]he standard is an objective one, meaning that the specific plaintiff need not prove that she was actually confused or misled, only that the objective least sophisticated debtor would be." Although the standard may have some life left in it, the belief that the plaintiff herself need not demonstrate she has been harmed would be contrary to Spokeo. FDCPA lawsuits alleging false and deceptive communications may well be required to plead the plaintiff herself suffered some "particularized and concrete" injury that is "actual" or "imminent."

 

Businesses facing claims under the federal Electronic Fund Transfers Act (EFTA) and Truth in Lending Act (TILA) could also benefit from Spokeo. The EFTA and TILA, like the FCRA, impose procedures on companies providing financial services to consumers. However, a failure to follow these procedures does not always result in an actual or imminent harm, especially if courts find the statutes do not themselves define the harm.

 

TCPA Impact Probably Less Clear

 

Many cases involving the Telephone Consumer Protection Act (TCPA) have been put on hold pending the Court's decision. Spokeo's impact is certainly positive in that the demonstration of some actual or imminent harm will be necessary to allow standing to sue.

 

But expect plaintiffs to focus on the opinion's language concerning Congress' ability to pass a law that both provides a statutory protection and, in doing so, identifies the harm, which is protected by the right.

 

Impact on Class Actions

 

Spokeo has benefits to those defending class claims under these statutes. Even if the plaintiff can demonstrate a particularized and concrete injury that is actual or imminent, that same harm injury may not easily carry over to the class.

 

The injury may be so unique to the class representative's individual circumstances that even if the defendant's conduct violated the statute, persons who do not share similar or specialized circumstances are not harmed.

 

State Court Litigation Option

 

The Court's decision is limited to standing in federal courts. Many of the federal laws impacted, such as the FDCPA, TCPA, FCRA and EFTA, can also be brought in state courts. It will be up to each state to decide whether their courts can hear claims where there is no actual or imminent harm (tangible or statutorily identified) to the plaintiff.

 

Comments from Justice Breyer during the Spokeo oral argument touched on states having "public action" statutes that allow persons to bring claims for statutory violations even where they have suffered no injury.

 

Moving Ahead with Spokeo

 

Although Spokeo does not require only real, tangible harms in all cases, it does limit a wide array of claims and makes clear that not all alleged statutory violations are accompanied by a cognizable, statutory harm.

 

Expect Spokeo to quickly make its way into consumer financial services litigation. The next few months should see several trial court decisions that will flesh out whether certain statutory protections themselves identify harms sufficient alone for standing or whether those violations require additional, real world harms.

 

Also, because a lack of standing may often be raised at any time during the life of a case, several appeals courts may right now be looking at Spokeo's application to matters before them.

 

 

 

 

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   |   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: SCOTUS Rejects FDCPA "Specter of Consumer Confusion" and "Risk of Intimidation" Theories

In a unanimous opinion reversing a ruling from the U.S. Court of Appeals for the Sixth Circuit, the Supreme Court of the United States recently held that attorneys retained as independent contractors by the Ohio Attorney General to collect debts owed to the state do not violate the federal Fair Debt Collection Practices Act (FDCPA) when sending collection letters on Attorney General letterhead.

 

In so ruling, the Court noted that the FDCPA "bars debt collectors from deceiving or misleading consumers; it does not protect consumers from fearing the actual consequences of their debts."

 

Authored by Justice Ginsburg, a copy of the opinion is available here:  Link to Opinion

 

Under Ohio law, debts owed to the state are certified to the Attorney General's Office ("AGO") for collection or other disposition, and the law authorizes the AGO to retain outside attorneys, under the designation of "Special Counsel," to engage in collection activities on its behalf.  The Special Counsel are required to use official AGO letterhead when sending dunning letters.

 

In 2012, two law firms that had been retained as Special Counsel sent collection letters to the respondents.  The letters were on AGO letterhead and explained that the firms were "Outside Counsel" or "Special Counsel" to the AGO.  In 2013, the respondents filed a putative class action against the law firms alleging multiple violations of the FDCPA.

 

The District Court granted summary judgment in favor of the law firms, finding: (1) the law firms were acting as "officers" within the meaning of 15 U.S.C. § 1692a(6)(C), which excludes from the FDCPA "any officer or employee of the United States or any State to the extent that collecting or attempting to collect any debt is in the performance of his official duties"; and (2) the letters were not materially false or misleading.

 

On appeal, the Sixth Circuit determined the "officer" exclusion was inapplicable to the law firms because of their status as independent contractors, and remanded the case on the question of whether the letters could be misleading to the least sophisticated consumer.

 

The Supreme Court of the United States granted a Petition for Writ of Certiorari on Dec. 11, 2015, and heard oral arguments on March 29, 2016.

 

In reversing the decision of the Sixth Circuit, the Supreme Court declined to decide whether the FDCPA's "officer" exclusion applied to the law firms.  Nevertheless, the Court did determine that even if it were assumed, for the sake of argument, that the law firms were "debt collectors" under the FDCPA, their use of the AGO letterhead accurately conveyed that they were acting on behalf of the Attorney General and did not, therefore, violate the FDCPA.

 

During oral argument, the respondents acknowledged that use of the following statement in a letter, in lieu of letterhead and in bold typeface, would not violate §1692e's prohibition of false, deceptive or misleading statements: "We write to you as special counsel to the Attorney General who has authorized us to collect a debt you owe to [the State or an instrumentality thereof]."  The Court reasoned "it would make scant sense to rank as unlawful use of a letterhead conveying the very same message, particularly in view of the inclusion of special counsel's separate contact information and the conspicuous notation that the letter is sent by a debt collector."

 

Continuing, the Court found use of the letterhead could not violate §1692e(9) which prohibits, in part, letters that falsely represent they are authorized, issued or approved by a state official.  "Special counsel create no false impression in doing just what they have been instructed to do. . . use of the Attorney General's letterhead conveys on whose authority special counsel writes to the debtor."

 

Similarly, the Court found no violation of §1692e(14), which requires use of the debt collector's true name in all communications, as the letters identified the AGO as being primarily responsible for collecting the debt and explained the nature of Special Counsels' relationship to the AGO.

 

The Court was unconvinced by the Sixth Circuit's "specter of consumer confusion," noting that consumers who believed the letters to be a scam contacted the AGO which, in response, assured them the letters were authentic.  The Supreme Court saw benefit in consumers' use of official channels to verify the letters' legitimacy.

 

The Court also countered the Sixth Circuit's belief that use of the AGO letterhead carried a "risk of intimidation" that might lead consumers to believe the failure to pay might lead to more severe consequences.  "This impression is not false; the State does have enforcement powers beyond those afforded private creditors."  The Court concluded this analysis with a noteworthy quote: "In other words, §1692e bars debt collectors from deceiving or misleading consumers; it does not protect consumers from fearing the actual consequences of their debts."

 

Addressing the principle of federalism, the Court saw no reason to interpret the FDCPA in a manner that would interfere with Ohio's "core sovereign function" of collecting debts owed to it and the manner arranged for doing so.  While this issue was only lightly briefed by petitioners and respondents, it was one of the main issues addressed in the amicus curiae brief of the State of Michigan and 11 other states, filed by the states' respective Attorneys General.

 

The States' brief also noted that at least 31 states statutorily allow Attorney General delegation of duties to special counsel, and it identified 11 states that specifically provide for Attorney General delegation of debt collection.

 

On behalf of the United States, the U.S. Solicitor General filed an amicus curiae brief with counsel for the Consumer Financial Protection Bureau.  The irony of this was not lost as the Reply Brief for Eric Jones and the Law Office of Eric A. Jones, LLC noted in a footnote that "Richard Cordray, who now serves as the director of the CFPB, previously served as the Ohio Attorney General from 2009-2011, when Special Counsel were used to protect the state's bottom line."

 

 

 

 

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

 

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