The Supreme Court of Ohio recently held that, when debt on promissory note
secured by mortgage has been discharged in bankruptcy, the holder of note
may not pursue collection against the maker of note; but the mortgagee has
standing to foreclose on the collateral property, and can use the amounts
due on the note as evidence to establish that it may collect from the
forced sale of the property.
The Court also held that, regardless of whether the creditor can obtain a
personal judgment on the note against the borrowers, the creditor must
still prove that it is the person or entity entitled to enforce the note
secured by the mortgage..
A copy of the opinion is available at: Link to Opinion
The defendant borrowers executed a promissory note in order to refinance a
mortgage loan on their home. The plaintiff mortgagee subsequently
purchased the debt. The loan servicer received physical possession of the
original note, indorsed in blank, on behalf of the plaintiff mortgagee.
The defendant borrowers later had trouble making their mortgage payments
and after being unable to modify the loan, they filed for Chapter 7
bankruptcy. The bankruptcy court discharged their obligations on the note.
The plaintiff mortgagee later received an assignment of the mortgage, and
it was recorded.
The plaintiff mortgagee then filed this foreclosure action against the
defendant borrowers. A copy of the promissory note was attached to the
complaint, but this copy did not show an indorsement by the lender. The
defendant borrowers filed several counterclaims premised on allegations
that the plaintiff mortgagee did not own the promissory note or the
mortgage at the time it commenced the foreclosure action.
Both parties moved for summary judgment. The trial court granted summary
judgment to the plaintiff mortgagee, finding that the plaintiff was the
holder of the note and the assignee of the mortgage prior to commencement
of the action, and had standing to foreclose on the mortgage.
The Appellate Court reversed the trial court's ruling, explaining that a
foreclosure action can only be brought by the current holder of both the
note and the mortgage, and finding that genuine issue of material fact
existed regarding whether the plaintiff mortgagee owned the note as the
note was indorsed in blank.
The issue presented to the Supreme Court of Ohio was whether a party
filing a foreclosure action is required to establish ownership of both the
note and the mortgage in order to have standing to commence the action.
As you may recall, standing depends on whether the claimant has sufficient
personal stake in the litigation to obtain a judicial resolution of the
controversy. The claimant must generally show that it suffered an injury
that is fairly traceable to the defendant's allegedly unlawful conduct,
and likely to be redressed by the requested relief.
The Supreme Court of Ohio had previously recognized that, upon a
mortgagor's default in Ohio, the mortgagee may elect among separate and
independent remedies to collect the debt secured by a mortgage.
The Court noted that, in Ohio, a mortgagee may seek a personal judgment
against the mortgagor to recover the amount due on the promissory note,
without resort to the mortgaged property.
Alternatively, in Ohio, the mortgagee may bring an action to enforce the
mortgage, which is for the exclusive benefit of the mortgagee and those
claiming under it. Upon default, legal title to the mortgaged property
passes to the mortgagee and because of this superior title, the mortgagee
may bring an action in ejectment to take possession of the mortgaged
property, receive the income from it, and apply the proceeds to the debt,
restoring the property to the mortgagor when the debt is satisfied.
Lastly, the Court noted that, based on the property interest created by
the mortgagor's default on the mortgage, the mortgagee may bring a
foreclosure action to cut off the mortgagor's right of redemption,
determine the existence and extent of the mortgage lien, and have the
mortgaged property sold for its satisfaction.
The Supreme Court of Ohio also noted that it has long held that an action
for a personal judgment on a promissory note and an action to enforce
mortgage covenants are separate and distinct remedies: the action on the
note is based in contract, and the action on the mortgage is a property
interest.
Due to this distinction, the Court explained that a bar on enforcement of
the note or other instrument secured by a mortgage does not necessarily
bar an action on the mortgage. The Court noted this was the case here,
where the underlying debt the mortgage secures was discharged in a Chapter
7 bankruptcy proceeding.
However, the Court held, the mortgage interest survives a discharge in
Chapter 7 liquidation because the discharge extinguishes only the personal
liability of the debtor.
Nevertheless, the Court also held that, in a foreclosure action, the
creditor must still prove that it was the person or entity entitled to
enforce the note secured by the mortgage. Thus, in the foreclosure action
here, the plaintiff mortgagee must still demonstrate that it is the person
entitled to enforce the note, regardless of whether it can obtain a
personal judgment on the note against the defendant borrowers.
The Supreme Court of Ohio next focused on Fed. Home Loan Mtge. Corp. v.
Schwartzwald, 134 Ohio St.3d 13, 2012-Ohio-5017, 979 N.E.2d 1214, in which
the Court previously determined that a plaintiff in a foreclosure action
must have standing at the time the complaint is filed, and that standing
could not be established by post-filing events.
The Court noted that Schwartzwald did not define what was necessary to
establish standing in a foreclosure action, except that failure to
establish an interest in the note or mortgage at the time a foreclosure
action is filed creates a standing problem. The Court noted that
Schwartzwald made it clear that the party bringing the action must have a
personal stake in the outcome of the controversy.
Here, the Court found that the plaintiff mortgagee attached a valid
assignment of mortgage and a copy of the note that referenced the mortgage
to its complaint. Thus, the Court held, the plaintiff mortgagee alleged a
personal stake in the outcome of the controversy that it is entitled to
have a court hear its case.
The Court also clarified that just because the plaintiff mortgagee has
standing, it is not entitled to an automatic judgment against the
defendant borrowers. The Court held that the plaintiff mortgagee would
still need to prove that it was the person entitled to enforce the note
and collect the amounts due from the foreclosure sale of the collateral.
The Court found that the defendant borrowers failed to present any
evidence to show that a genuine issue of material fact existed regarding
any of the elements of the mortgagee's foreclosure action, and therefore
that the trial court properly ordered summary judgment in favor of the
plaintiff mortgagee.
Accordingly, the judgment of the Appellate Court was reversed, and the
judgment of the trial court was reinstated.
Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: rwutscher@MauriceWutscher.com
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FINANCIAL SERVICES LAW DEVELOPMENTS: An Industry Perspective
Saturday, July 16, 2016
Friday, July 15, 2016
FYI: MD Ga Holds SOL on Security Deed is 21 Yrs, Wrongful Foreclosure Claim May Stand Independently of Fraud Claim
The U.S. District Court for the Middle District of Georgia recently held that when a mortgagee makes some affirmative misrepresentation or action that renders a foreclosure sale unfair, a claim for wrongful foreclosure may stand independently of a claim for fraud.
The Court also held that the statute of limitations on a claim under a security deed is 21 years, if the security deed is a sealed instrument under Georgia law.
A copy of the opinion is available at: Link to Opinion
On August 26, 2007, in connection with a refinance mortgage loan, the plaintiff wife borrower conveyed a one-half interest in her home by warranty deed to her husband, the other plaintiff.
The plaintiffs signed closing documents for a new mortgage with their lender, including a promissory note and security deed, preprinted with the date of August 14, 2007. The security deeds were recorded.
In 2008, the plaintiffs received an offer for credit life insurance. They determined they did not want the policy and properly declined it. Yet, the insurance company began adding the premium for the life insurance policy to the plaintiffs' mortgage statement. The plaintiffs continued to make their mortgage payments, not including the payment for the insurance policy, until May 2009.
When the plaintiffs attempted to make their May 2009 mortgage payment, they were informed that they owed payments for January through June 2009 plus late fees and penalties because the payments were made to the lender and not to the defendant mortgagee. The plaintiffs were not informed until May 2009 that their payments should have been directed to the defendant mortgagee. The payments for January through May 2009 were not applied to the plaintiffs' account.
In January 2011, the defendant mortgagee's counsel sent a letter demanding payment and advised the plaintiffs of their right to dispute the debt. The plaintiffs subsequently sent a letter to the defendant requesting an accounting.
In February and March 2011, the plaintiffs faxed numerous documents to the defendant mortgagee in support of their inquiry into the debt. In May 2011, in order to avoid foreclosure, the plaintiffs paid $8,000 to replace to uncredited January through May 2009 payments.
The plaintiffs also contacted the Office of the Comptroller and initiated a case. The Comptroller found that the defendant mortgagee's response to the plaintiffs was adequate.
On February 10, 2012, the plaintiffs attempted to make another mortgage payment by personal check but it was rejected. The plaintiffs were told they would have to make their payment by certified funds. In late March, 2012, the defendant mortgagee sent another notice of foreclosure sale to the plaintiff-husband, showing that he was the sole borrower.
On September 3, 2013, the plaintiffs' security deed was foreclosed upon. In October, title was conveyed to the defendant mortgagee and subsequently transferred. After the foreclosure sale, the defendant mortgagee maintained an open account for the plaintiffs. As recently as February 5, 2016, the defendant mortgagee sent a notice to the plaintiffs that their loan was in foreclosure providing a reinstatement payment amount. However, there was an eviction proceeding pending against the plaintiffs.
The plaintiffs alleged they have made every mortgage payment when due, except for those that were not accepted.
The plaintiffs asserted three substantive claims against the defendants: breach of contract, fraud, and wrongful foreclosure. The plaintiffs also sought equitable relief against the REO owner to stop the eviction proceedings against them. The defendants moved to dismiss each of the plaintiffs' claims against them for failure to state a claim upon which relief can be granted.
Breach of Contract
The defendants argued that the breach of contract claim was barred by the six-year statute of limitations on written contracts pursuant to Georgia law. The plaintiffs disagreed, arguing that the statute of limitations is 21 years because the security deed is a sealed instrument under Georgia law.
For simple contracts in writing, O.C.G.A. § 9324 provides, "All actions . . . shall be brought within six years after the same become due and payable. However, this Code section shall not apply to actions for the breach of contracts for the sale of goods under Article 2 of Title 11 or to negotiable instruments under Article 3 of Title 11."
And for sealed instruments, O.C.G.A. § 9323 reads, "Actions . . . shall be brought within 20 years after the right of action has accrued. No instrument shall be considered under seal unless so recited in the body of the instrument."
In Georgia, a sealed instrument must contain both a recital in the body of the instrument of an intention to use a seal and the affixing of the seal or scroll after the signature. The affixing of a seal may simply be the word "seal" written next to the signor's signature.
Georgia courts have held that even where a grantee did not sign a deed, where the deed was otherwise a covenant, in writing, under seal, the grantee accepted the legal consequences resulting from the character and form of the instrument and was therefore bound by the 21-year statute of limitations.
The allegedly breached contract was the August 2007 security deed the plaintiffs entered into with the lender. On the security deed, each of the plaintiffs' signatures was accompanied by the word "seal."
Accordingly, the District Court found that the plaintiffs alleged breach of contract on a sealed instrument. Therefore, the Court held, the breach of contract claim was not barred by the statute of limitations as the 21-year statute applies.
Fraud
The plaintiff borrowers alleged that the lender committed fraud in soliciting their purchase of a credit life insurance policy, and continuing to charge the premium payments for the policy even after they rejected it.
The defendants move to dismiss the fraud claim on the basis that it was barred by the four-year statute of limitations for injuries to personalty under Georgia law. The plaintiffs argued the fraud is continuous and ongoing and thus was not barred by the statute of limitations.
O.C.G.A. § 9331 reads, "Actions for injuries to personalty shall be brought within four years after the right of action accrues." Georgia courts have held generally that O.C.G.A. § 9331 applies to common law fraud claims. The statute of limitations for a continuous tort runs from the happening of any given injury.
The plaintiffs alleged they were first charged with the life insurance policy in April 2008. This action was filed in August 2014. Incorporated into the plaintiffs' complaint was a document that indicated the policy ceased to be charged approximately 12 months after the first charge appeared in April 2008.
Therefore, the Court held that even if the plaintiffs were charged the insurance premiums every month for two entire years after the first charge in April of 2008, the claim would still be barred by the four-year statute of limitations. Although the plaintiffs alleged the fraud was ongoing because the policy payments were not refunded, the Court ntoed that the plaintiffs expressly alleged that the premium charges were the fraudulent acts.
Accoridngly, the District Court found that the fraud claim against the defendants was barred by the four-year statute of limitations and granted the defendant lender's motion to dismiss.
Wrongful Foreclosure
The plaintiffs' wrongful foreclosure claim arose from their allegations that the defendant mortgagee failed to act in good faith when foreclosing on their home. The plaintiffs also allege that the defendant REO owner was not a good faith third-party purchaser because the REO owner was closely identified with the defendant lender.
The defendants argue that the plaintiffs failed to state a wrongful foreclosure claim against the defendant REO owner because the REO owner was not the foreclosing party and thus could not have violated the foreclosure statutes and did not owe a legal duty to the plaintiffs The District Court agreed.
In addition, the Court found the plaintiffs' arguments that the REO owner and lender were closely aligned was insufficient to state a claim for wrongful foreclosure against the REO owner.
For its part, the defendant mortgagee argued that the plaintiffs had not alleged unfairness in the foreclosure procedure itself, and therefore did not state a claim for wrongful foreclosure.
To assert a wrongful foreclosure claim, the plaintiffs must establish a legal duty owed to them by the foreclosing party, a breach of that duty, a causal connection between the breach of that duty and the injury they sustained, and damages. Allegations of a violation of the foreclosure statute are required to maintain a claim for wrongful foreclosure.
The Court noted that a claim for wrongful exercise of a power of sale under O.C.G.A. § 232114 can arise when the creditor has no legal right to foreclose. Alternatively, the Court also noted that when a lender makes some affirmative misrepresentation that renders the foreclosure sale unfair, a claim for wrongful foreclosure may stand independently of a claim for fraud.
The plaintiffs' allegations centered on the theory that the defendant mortgagee breached a duty of good faith. The District Court had allowed a wrongful foreclosure claim for breach of duty of good faith in the loan modification context, where the mortgagee in that case had made repeated oral and written assurances that a loan modification would be granted, accepted payments, and nonetheless continued with a foreclosure sale.
However, where a different mortgagee failed to respond to a debtor's request for a loan modification, and had no obligation to grant him a modification, and the debtor failed to make payments, another District Court held that the debtor could not maintain a wrongful foreclosure claim because he had caused his own damages by failing to pay the amount owed.
The Court found that the plaintiffs here stated a wrongful foreclosure claim for breach of duty of good faith.
The Court noted that the plaintiffs alleged they made every mortgage payment except for those the defendant mortgagee would not accept. The plaintiffs also alleged they sought an accounting of the amount owed and payments made, but never received one. The Court also noted that the plaintiffs alleged they relied on the insurance company's oral instruction that they continue to make their usual mortgage payments and disregard the life insurance premium.
For their wrongful foreclosure claim, the plaintiffs sought to set aside the foreclosure in order to recover the property and also sought damages. The District Court held that the plaintiffs may seek both forms of relief against the defendant bank. The Court also held that the plaintiffs' allegations that they tried to tender full payment to the defendant bank was sufficient to state a claim for equitable relief.
Thus, the District Court denied the defendant mortgagee's motion to dismiss the wrongful foreclosure claim, but granted the REO owner's motion to dismiss.
Attorney's fees and punitive damages
The defendants also moved to dismiss the plaintiffs' claim for attorney's fees and punitive damages. Because the plaintiffs' breach of contract and wrongful foreclosure claims against the defendant mortgagee remained, the Court denied the motion to dismiss. However, the motion to dismiss was granted as to the REO owner.
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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Thursday, July 14, 2016
FYI: 11th Cir Holds FCRA "Reasonable Investigation" May Require Assignee to Examine Account-Level Documents
The U.S. Court of Appeals for the Eleventh Circuit recently reversed in part a trial court's ruling granting summary judgment in favor of a debt buyer, its affiliated debt collector and their parent company, holding that a reasonable jury could find that the defendants willfully violated section 1681s-2(b) of the federal Fair Credit Reporting Act ("FCRA") when they reported two charged-off debt accounts as "verified" without obtaining sufficient documentation that the debts in fact belonged to the plaintiff consumer.
In so ruling, the Court held that a jury could find that because the buyer retained the right to seek account-level documentation through its agreements with the sellers, it behaved unreasonably when it reported the accounts as 'verified' without first exercising those rights.
A copy of the opinion is available at: Link to Opinion
In September of 2008, the debt buyer acquired one of the subject debts in the amount of $357.56 from another debt buyer, and sent a collection letter to the debtor offering to settle the debt for $237.49. The debt buyer received payment of the settlement amount in October of 2008, but reported to the consumer reporting agencies ("CRAs") that the debt "was assigned to internal or external collections."
In December of 2008, the debt buyer "zeroed out the account and marked it paid in full." It also reported to the CRAs that the account was "paid in full" in January, February and March of 2009 then stopped further reporting. "The CRAs marked the account as 'paid' but continued to show that it had been in '[c]ollection as of Dec 2008, Nov 2008.'"
The plaintiff consumer allegedly "became aware of the [first account] in May of 2011, when she obtained her credit report and discovered that [the debt buyer] had erroneously attributed the account to her." She then disputed the account with the CRAs, who notified the debt buyer about the dispute. The plaintiff consumer also sent a letter disputing the debt to the debt buyer. The debt buyer took no action because it had marked the account "paid" and had already stopped reporting it to the CRAs.
In December of 2011, the debt buyer acquired the second debt attributable to the plaintiff — a cell phone account — in the amount of $300.80. It then sent a collection letter to the plaintiff offering a 10% discount to settle the debt. The plaintiff disputed the debt orally during a phone conversation, saying that the account did not belong to her.
In February of 2012, the debt buyer sent the plaintiff a letter advising her that the dispute was being investigated, and requesting "any documentation you may have that supports your dispute." Nevertheless, it began reporting the account to the CRAs as "assigned to internal or external collections" and then "flagged the debt as '[d]isputed.'"
In July of 2012, plaintiff obtained her credit report and disputed the second cell phone account with the CRAs, who then notified the debt buyer of the dispute the same month.
The evidence showed that the debt buyer "verified the debt by double-checking the information it had reported to the CRAs against its own internal records [which] consisted of the same electronically-stored information [it] received from the [seller] when it purchased the debt." It did not request "account-level documentation" from the seller or original creditor.
The debt buyer sent the plaintiff another letter requesting documentation supporting her position, to which she responded in writing, reiterating that neither of the accounts belonged to her and that she could not furnish and documentation for accounts that were not hers. The debt buyer continued to report the cell-phone debt as "assigned to internal or external collections" through March of 2013.
In April of 2013, the plaintiff, proceeding pro se, sued in federal district court. At the close of discovery, the defendants moved for summary judgment, which the district court granted and entered judgment against the plaintiff on all counts. The plaintiff appealed.
On appeal, the Eleventh Circuit began by explaining its understanding of how the debt-buying industry works, citing to the Federal Trade Commission's 2013 report titled The Structure and Practices of the Debt Buying Industry. According to the Eleventh Circuit, this case involved two "junk debt" accounts, which are "[d]ebts that have been repeatedly bought and sold … They are often sold 'as-is,' in the form of electronic data, and without 'account-level documentation' such as applications, agreements, billing statements, promissory notes, notices, correspondence, payment checks, payment histories, or other evidence of indebtedness."
The plaintiff argued that the district court erred by granting summary judgment in defendants' favor on her claim under section 1681s-2(b) of the FCRA, which requires entities that furnish information to the CRAs to "promptly … modify[,] … delete [or] permanently block the reporting" of disputed information to the CRAs if, after conducting a "reasonable investigation to determine whether the disputed information is inaccurate" the investigation determines that the disputed information is "inaccurate or incomplete or cannot be verified."
The plaintiff also argued that section 1681s-2(b) "requires down-the-line buyers to investigate mistaken-identity disputes by verifying the identity of the alleged debtor against account-level documentation (not just against electronic-data files)", and that because the debt buyer failed to get such documentation, a reasonable jury could find that the investigation was inadequate.
The Eleventh Circuit first addressed the "scope of the duty to investigate under § 1681s-2(b) … an issue of first impression in the Eleventh Circuit" concluding that "'reasonableness' is an appropriate touchstone for evaluating investigations under § 1681s-2(b)," citing to decisions from the First, Ninth and Fourth Circuits.
The Court stressed that "what constitutes a 'reasonable investigation' will vary depending on the circumstances of the case and whether the investigation is being conducted by a CRA under § 1681i(a), or a furnisher of information under § 1681s-2(b).
Here, the Eleventh Circuit agreed with the plaintiff that the debt buyer's electronic records "were insufficient to verify the accounts and that, absent additional proof, [the debt buyer] should have reported the accounts as "cannot be verified."
The Court then held that, on the facts before it, the defendants were not entitled to summary judgment under § 1681s-2(b).
The Court reasoned that § 1681s-2(b) presents a furnisher with a choice when handling disputed information. First, the Eleventh Circuit held, the furnisher can conduct an investigation, verify the disputed information, and report this to the CRAs. "When a furnisher reports that disputed information has been verified, the question of whether the furnisher behaved reasonably will turn on whether the furnisher acquired sufficient evidence to support the conclusion that the information was true. This is a factual question, and it will normally be reserved for trial."
Second, the Court held, the furnisher can "conduct an investigation and conclude, based on that investigation, that the disputed information is unverifiable. Furnishers can avail themselves of this option if they determine that the evidence necessary to verify disputed information either does not exist or is too burdensome to acquire. Having made such a determination, furnishers are entitled to cease investigation and notify the CRAs that the information 'cannot be verified.'"
Finally, the Eleventh Circuit held, the third option for a furnisher is "to satisfy § 1681s-2(b) is to conduct an investigation and conclude that the disputed information is 'inaccurate or incomplete.'" "When a furnisher determines that disputed information is false or 'cannot be verified,' the furnisher must notify the CRAs of this result pursuant to § 1681s-2(b)(1). The furnisher must also 'as appropriate, based on the results of the reinvestigation promptly … modify[,] … delete [or] permanently block the reporting' of that information to CRAs."
The Court concluded that while what the "results of the reinvestigation" will require depends of the "nature of the disputed information", when a furnisher is unable to verify the identity of an alleged debtor, "the appropriate response will be to delete the account or cease reporting it entirely. Similarly, when a CRA receives notice that an account is unverifiable, it must 'promptly delete that item of information from the file of the consumer."
The Eleventh Circuit noted that the debt buyer here faced with a mistaken-identity dispute. However, according to the Court, the debt buyer merely confirmed that "the identifying information possessed by the CRAs was the same as the identifying information contained in its internal data files", that information was obtained from previous debt buyers instead of the original creditors "and was the same information [the debt buyer] had reported to the CRAs in the first place" and, finally, the buyer "did not attempt to consult account-level documentation."
On these facts, the Court found that "[a] reasonable jury could find that the documentation … reviewed was insufficient to prove that the [two accounts] belonged to [plaintiff] and that [the buyer] therefore had a duty to report the account as 'cannot be verified.' … A jury could also find that because [the buyer] retained the right to seek account-level documentation through its agreements with [the sellers] [it] behaved unreasonably when it reported the accounts as 'verified' without first exercising those rights."
The district court's summary judgment was reversed as to the § 1681s-2(b) claim, affirmed as to the other claims, and the case remanded.
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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Wednesday, July 13, 2016
FYI: Ill App (2nd Dist) Holds Defect in Summons Voids Foreclosure
The Appellate Court of Illinois, Second District, recently held that a foreclosure judgment was void, where the foreclosing first mortgagee did not properly name a second mortgagee in its summons.
A copy of the opinion is available at: Link to Opinion
In 1997, the defendant borrowers executed a mortgage and note against their rental property. The mortgage conveyed a lien interest in the property as security for the note to the first mortgagee. This first mortgage was recorded.
On January 28, 2005, the defendant-borrowers executed a second mortgage and note against the property. The mortgagee was Mortgage Electronic Systems, Inc. (MERS). The second mortgage was recorded.
On June 9, 2006, the defendant-borrowers executed a third mortgage and note against the property. The mortgage conveyed a lien interest to the first mortgagee. The third mortgage was recorded.
In January 2009, the first mortgagee filed a foreclosure complaint and issued summons on the registered agent of a non-existent entity, but apparently intending to name the second mortgagee. The trial court entered a default judgment in favor of the first mortgagee in the foreclosure action.
Meanwhile, MERS assigned the second mortgage, and recorded the assignment.
On November 5, 2009, the trial court entered a consent judgment in the foreclosure action as to the first mortgage. A few months later, the first mortgagee sold the property to a third party buyer
On June 9, 2014, the second mortgagee filed a new foreclosure complaint. The borrowers filed a motion to dismiss the second mortgagee's foreclosure action, alleging the complaint was barred by res judicata, based on the consent judgment entered in the first foreclosure action. The buyer of the property from the foreclosure sale of the first mortgage also filed a motion to dismiss based on res judicata.
The trial court granted both the borrowers' and the buyer's motions to dismiss based on res judicata. The second mortgagee appealed.
As you may recall, the doctrine of res judicata provides that a final judgment on the merits rendered by a court of competent jurisdiction bars any subsequent actions between the same parties or their privies on the same cause of action. Three requirements must be satisfied for res judicata to apply: (1) a final judgment on the merits has been reached by a court of competent jurisdiction; (2) an identity of cause of action exists; and (3) the parties or their privies are identical in both actions.
The second mortgagee argued that the defendants failed to establish the first element of res judicata, contending the service of process in the first foreclosure action did not confer personal jurisdiction over the second mortgagee.
As you may also recall, to enter a valid judgment, a court must have personal jurisdiction over the parties. Personal jurisdiction can be established by service of process in accordance with statutory requirements or by a party's voluntary submission to the court's jurisdiction. Generally, in Illinois, a judgment rendered without service of process, where there has been neither a waiver of process nor a general appearance by the defendant, is void regardless of whether the defendant had actual knowledge of the proceedings.
The Appellate Court noted that effective service of process vests jurisdiction in the court over the person whose rights are to be affected by the litigation. Therefore, a failure to effect service as required by law deprives a court of jurisdiction over the person, and any default judgment based on defective service is void.
Section 2- 201(a) of the Illinois Code of Civil Procedure provides for the issuance of summons in civil cases, stating: "Every action, unless otherwise expressly provided by statute, shall be commenced by the filing of a complaint. The form and substance of the summons, and of all other process, and the issuance of alias process, and the service of copies of pleadings shall be according to rules." 735 ILCS 5/2-201(a).
Illinois Supreme Court Rule 101(a) provides for the form of the summons, stating: "the summons shall be issued under the seal of the court, tested in the name of the clerk, and signed with his name. It shall be dated on the date it is issued, shall be directed to each defendant, and shall bear the address and telephone number of the plaintiff or his attorney."
The second mortgagee argued that its name did not appear on the face of the summonses in the first foreclosure action.
The Appellate Court agreed, holding that the trial court lacked personal jurisdiction to enter judgment against the second mortgagee in the first foreclosure action. Therefore, the Appellate Court held, the defendants failed to establish the first requirement of res judicata – i.e., that a final judgment on the merits has been reached by a court of competent jurisdiction. In light of this, Appellate Court held that the trial court erred by granting the defendants' motions to dismiss the second mortgagee's foreclosure action.
The foreclosure buyer argued that the trial court properly determined that the second mortgagee was estopped from disputing issues related to its identity because the second mortgagee was an undisclosed principal.
However, the Appellate Court disagreed, holding that the foreclosure buyer failed to establish that the plaintiff in the first foreclosure action could not have served the second mortgagee. For example, the Appellate Court noted that the public record indicated that MERS could have been served on behalf of the second mortgagee.
The foreclosure buyer also argued that the misnomer doctrine applied. However, the Appellate Court found that misnomer and mistaken identity are different.
The Appellate Court noted that misnomer occurs were a plaintiff files an action against the correct party under an incorrect name. Mistaken identity occurs when the plaintiff names the wrong party. The effect of misnomer is that the court acquires personal jurisdiction over the party who is called by an incorrect name but receives notice of the lawsuit. The effect of mistaken identity is that the court does not acquire personal jurisdiction over the party wrongly named but served.
Here, the Appellate Court found, nothing in the record indicates that the defendant named in the first foreclosure action exists, and thus the judgment entered in the first foreclosure action was void.
Lastly, the foreclosure buyer argued that he was a bona fide purchaser. The Appellate Court confirmed that a bona fide purchaser of an interest in property takes that interest free and clear from all claims except those of which he has notice. However, a purchaser cannot be a bona fide purchaser if he had actual or constructive notice of the outstanding rights of other parties to the property.
The Court also confirmed that actual notice is knowledge that the purchaser had at the time of the conveyance, and constructive notice is knowledge that the law imputes to the purchaser. There are two types of constructive notice: record notice and inquiry notice. Record notice is what is shown in the records of the office of the recorder of deeds, whereas inquiry notice is that which appears in the records of the courts in the county where the property is located.
In this case, the Appellate Court found that the MERS mortgage and its assignment had been recorded when the foreclosure buyer purchased the property. The Appellate Court also noted that the court records indicated that the first mortgagee failed to name MERS in the first foreclosure action. Thus, whether the foreclosure buyer was a bona fide purchaser was a disputed question of fact and not a basis for dismissal of the current foreclosure action as to the second mortgage.
Accordingly, the Appellate Court reversed the trial court's order dismissing the plaintiff's complaint as barred by res judicata.
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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Tuesday, July 12, 2016
FYI: 8th Cir Holds Time-Barred Proof of Claim Does Not Violate FDCPA, Disagreeing with 11th Cir
The U.S. Court of Appeals for the Eighth Circuit recently held that "[a]n accurate and complete proof of claim on a time barred debt is not false, deceptive, misleading, unfair, or unconscionable under the FDCPA."
In arriving at this holding, the Court declined to follow the Eleventh Circuit's rulings in Crawford and Johnson.
A copy of the opinion is available at: Link to Opinion
As you may recall, in Crawford v. LVNV Funding LLC, the Eleventh Circuit held that a debt collector violates the FDCPA when it files a proof of claim in a bankruptcy case on a debt that it knows to be time-barred.
More recently, in Johnson v. Midland Funding LLC, the Eleventh Circuit held that there is no irreconcilable conflict between the FDCPA and the Bankruptcy Code.
The case decided by the Eighth Circuit began in a fashion similar to the Crawford and Johnson cases. The debtor defaulted on a consumer debt. Roughly nine years later, the debtor filed a Chapter 13 petition in bankruptcy court. The agent for the owner of the debt filed a proof of claim. The debtor objected to the proof of claim on the grounds that the debt was time-barred under Missouri law. The bankruptcy court disallowed the claim and the debtor subsequently sued the creditor's agent, alleging that filing a proof of claim on a time-barred debt violates the FDCPA. The district court dismissed the case for failure to state a claim upon which relief can be granted.
In affirming the district court's dismissal, the Eighth Circuit took issue with the Eleventh Circuit's reasoning in Crawford. In Crawford the Eleventh Circuit found that the concerns underlying the rule against litigating, or threatening to litigate, time-barred debts apply equally to debt collectors filing proofs of claim on stale debts. But the Eighth Circuit stated that Crawford "ignores the differences between a bankruptcy claim and actual or threatened litigation."
The court listed some examples of how bankruptcy and collection litigation are different with regard to the protections provided to debtors. For instance, in bankruptcy debtors have the assistance of trustees who have a statutory obligation to object to unenforceable claims. Also, objecting to a time-barred proof of claim in bankruptcy is not as burdensome as defending a collection lawsuit filed on an old debt. And a proof of claim "does not expand the pool of available funds in bankruptcy," thus debtors in bankruptcy do not have as much at stake as a defendant in a collection lawsuit.
The Eighth Circuit found that because these bankruptcy protections are sufficient to satisfy the FDCPA's concerns, there is no reason to further protect debtors who enjoy those protections or to supplement the remedies already provided by bankruptcy itself.
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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Monday, July 11, 2016
FYI: ED NY Denies Class Cert on "Ascertainability" Grounds, Holds "Probing" Questions in Dispute Call Did Not Violate FDCPA
The U.S. District Court for the Eastern District of New York recently granted summary judgment in favor of a debt collector, holding that the debt collector did not violate the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. ("FDCPA"), by reporting a debt as "deleted" rather than "disputed," and by asking probing questions in response to a call from the consumer disputing the debt.
In addition, the Court denied the plaintiff's motion for class certification on ascertainability grounds, holding that trying to decipher the debt collector's system notes summaries of its calls with the putative class members would not be administratively feasible.
A copy of the opinion is available at: Link to Opinion
In 2010, the plaintiff consumer switched phone services. The new phone service provider performed some work on the phone line in order to ensure adequate service, and charged the plaintiff $131 fee for such work. The consumer never paid the bill.
The defendant debt buyer acquired the debt from the phone company in July 2013. The debt buyer sent an initial collection letter and demanded payment for the debt. The letter was returned as undeliverable.
The consumer eventually called the debt buyer, and recorded his conversation with it. The consumer asked what he had to do to dispute the debt, but refused to answer any of the follow-up questions posed by the debt buyer.
The debt buyer marked the account as deleted following the call and instructed the major credit reporting agencies ("CRAs") to delete the information. On the same day, following the call, the debt buyer sent the consumer a letter "advising him that it had ceased collection efforts and had instructed the CRAs to delete the information" the debt buyer had furnished regarding the account.
The debt buyer reiterated the requests to the CRAs each month for three months, in accordance with its policies and procedures.
The consumer later received a credit report. The report showed the debt buyer's account as still due and owing, but also contained a disclaimer making it clear that it was not to be relied upon as a report from the three recognized CRAs.
The consumer filed suit against the debt buyer alleging four overlapping violations of the FDCPA, all of which essentially asserted false or misleading representations in connection with the collection of a debt.
The District Court first looked to the alleged violation of 15 U.S.C. §1692(e)(8) which states it is a violation of the FDCPA to communicate "credit information which is known or which should be known to be false, including the failure to communicate that a disputed debt is disputed." The Court found there to be insufficient evidence in the record to this effect.
The consumer first argued that the credit report he received continued to list the debt buyer's debt. However, the consumer did not produce any evidence that any of the three major CRAs continued to report the debt.
In addition, the Court held that the FDCPA does not make a debt collector a guarantor of the CRAs' compliance with its furnishing requests, but rather that the debt collector only has to make the request to the CRAs.
The Court also noted that the FDCPA is not a device for a debtor to wipe out his debt. Instead, the Court held, "the purpose of the FDCPA, inter alia, is to place a halt, whether temporary or permanent, on collection efforts once a debtor alleges that a debt is not valid. It is not a device whereby a debtor can force a collection company to write down his debt to zero. It does not wipe out the debt. The collection company has to maintain the ability to, at least, file a proof of claim in bankruptcy if the debtor later seeks bankruptcy protection, as some do."
The plaintiff then argued that the account was marked as deleted, instead of disputed. However, the Court noted that the undisputed evidence showed that the "disputed" code allowed the debt buyer free to investigate the debt, and depending on the results of the investigation, to restore the account to undisputed status, while the "deleted" code identifies a disputed account as to which no further action is going to be taken. Accordingly, a "disputed" code is a step before a "deleted" code. The Court noted that the debt buyer merely skipped the "disputed" code as it was obvious that the $131 debt was going to be more trouble than it was worth.
The Court found no violation of the FDCPA's credit reporting accuracy provisions at 15 U.S.C. §1692(e)(8) as the debt buyer did all it was required to do in response to the consumer's dispute.
The Court then looked to the alleged violation of 15 U.S.C. §1692e(10). This subsection prohibits a debt collection from using any false representation or deceptive means to collect or attempt to collect any debt.
The plaintiff argued that the debt buyer violated the provision by "asking too many questions when he called to dispute his debt," and thus the least sophisticated consumer could have been deceived into believing that he had to provide the defendant with a valid reason to dispute his debt.
The Court reviewed the transcript of the call between the plaintiff and the debt buyer, that the plaintiff recorded. The Court found it obvious that the plaintiff was evading questions and harassing the collection agent. The plaintiff did not do what the least sophisticated consumer would do. The Court noted that the least sophisticated consumer would simply state that the phone company did not tell him they would be charged a service fee and that he refused to pay it.
The Court found that neither the debt buyers policies nor anything said in the telephone call prevented the plaintiff from disputing the debt. The debt buyer still marked the account as deleted and requested that the CRAs delete its reported information. The Court also held that the questions asked did not violate the FDCPA.
The plaintiff further alleged that the letter in which debt buyer advised him that it was ceasing collection efforts and reporting the debt as deleted to the CRAs was a false representation under 15 U.S.C. §§ 1692e(2)(A) and 1692e(10) because, in fact, the debt buyer did not cease collection efforts and did not advise the CRAs to delete the debt.
However, as discussed above, the Court found that the record demonstrates that the debt buyer properly notified the CRAs that the plaintiff's debt was disputed and ceased collection activities. Accordingly, the Court rejected these allegations also.
Lastly, the plaintiff alleged that the debt buyer violated 15 U.S.C.§ 1692e(2)(a), which makes it a violation to falsely represent the legal status of a debt.
However, the Court held that, as long as the debt collector has included appropriate language notifying the consumer about the debt validation procedure under the FDCPA (15 U.S.C. § 1692g), an allegation that the debt is invalid cannot alone constitute the basis for an FDCPA claim.
The Court found that the debt buyer did not violate the FDCPA by attempting to collect on the debt prior to verifying it. The Court noted that the phone company represented the amount of the debt was $131.21, and the debt buyer's initial letter to the plaintiff provided adequate notice of how to dispute the debt. Moreover, the Court noted that after the plaintiff disputed the debt, the debt buyer was placed on notice to cease collection or verify the debt, but the debt buyer had no obligation to independently investigate the debt prior to collection.
The Court then discussed class certification of the putative class. The plaintiff proposed either a nationwide or a New Yorkonly class which he defined as follows: "All persons who, according to Defendants' records (a) have a United States mailing address; (b) within one year before the filing of this action; (c) verbally disputed the debt; and (d) were asked probing questions regarding the reason for the dispute."
As you may recall, Fed. R. Civ. Pro 23 requires a proposed class to have numerosity, commonality, typicality, and adequacy of the representative. A class must also be ascertainable.
The Court found two essential issues with the plaintiff's proposed class.
First, the Court held that ascertainability requires a class to be sufficiently definite in order that it is administratively feasible for the court to determine whether a particular individual is a member.
The Court found that the plaintiff's proposed class definition would require a two-step process: (a) first, to find the consumers to whom the debt buyer assigned a certain code within a year; and (b) then, to determine which of the consumers were asked probing questions.
In this case, the plaintiff recorded the conversation and the Court was able to review the transcript. However, the Court noted that in most cases, the debt buyer merely maintains notes on their system of the communication. Thus, the Court noted that each of the notes would have to be reviewed individually to ascertain class membership and it would be difficult to even tell if probing questions were asked based on the notes. In addition, the Court noted that the plaintiff's use of the term "probing" was not defined and it would require a case-by-case inquiry to determine which questions have an improper deterrent effect and which do not.
Thus, the Court held that the proposed class would be unascertainable.
Next, the Court recited that adequacy of the representative requires the named plaintiff to show there is no conflict of interest between the named plaintiff and the other members of the class, and that class certification is inappropriate where a putative class representative is subject to unique defenses which threaten to become the focus of litigation.
Here, the plaintiff faced a defense unique to him – i.e., the Court believed the plaintiff would be subject to the argument that his FDCPA claims should be rejected due to his attempt to entrap the collection agent into violating the statute. This the Court held made the plaintiff an inadequate class representative.
Accordingly, the Court granted the debt buyer's motion for summary judgment and denied the plaintiff's motion for class certification.
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.
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and
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and
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