FYI: Fla App Ct (4th DCA) Holds HOA Foreclosure Filed After Recording of Mortgagee's Lis Pendens Not Barred

Distinguishing its prior ruling in U.S. Bank National Ass'n v. Quadomain Condominium Ass'n, the District Court of Appeal of the State of Florida, Fourth District, recently held that a foreclosure of a homeowners association's lien against the property owner filed after the recording of a lis pendens by a first mortgagee is not barred, where the association's subordinate lien was imposed under the association's declaration of covenants recorded before the first mortgagee recorded its lis pendens.

 

In so ruling, the Court confirmed that the homeowners association's foreclosure action is inferior to the foreclosure of the first mortgage.

 

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

 

The first mortgagee on real property subject to a homeowners association's recorded covenants and restrictions sued to foreclose the mortgage in 2007, naming the association as a defendant and recording a notice of lis pendens at the same time. The homeowners association's declaration of covenants and restrictions had been recorded prior to the recording of the mortgage.

 

The homeowners' association recorded a claim of lien for unpaid assessments in 2011, sued in 2012 to foreclose its lien, and obtained a final default judgment. Later, the mortgagee's successor in interest obtained a final judgment of foreclosure in the previously-filed mortgage foreclosure action.

 

The borrower then filed a motion seeking to vacate the homeowners association's 2012 lien foreclosure judgment, relying on the Fourth District Court of Appeal's earlier ruling in U.S. Bank National Ass'n v. Quadomain Condominium Ass'n, 103 So. 3d 977 (Fla. 4th DCA 2012). The trial court denied the motion and the borrower appealed.

 

As you may recall, Fla. Stat. §  48.23(1)(d) provides that the recording of a lis pendens creates a bar to enforcement and provides for extinguishment of any unrecorded interests or liens if the case referenced in the lis pendens proceeds to judicial sale

 

On appeal, the Fourth District framed the issue before it as "whether the filing of the notice of lis pendens by the first mortgage holder constitutes a bar to the Association's foreclosure action based upon a claim of lien for unpaid assessments filed after the notice of lis pendens."

 

The Appellate Court concluded that "[b]ecause the Declaration of Covenants, which included provisions with respect to the Association's right to lien and foreclose on the property, was a recorded 'interest' at the time of the filing of lis pendens, … even though the lien was inferior to the mortgage, section 48.23, Florida Statutes, constitutes no bar to the enforcement of the lien between the Association and [the borrower]."

 

The Court reasoned that "[a] lis pendens serves two main purposes: (1) to give notice to and thereby protect any future purchasers or encumbrancers of the property; and (2) to protect the plaintiff from intervening liens."

 

The Appellate Court then distinguished its earlier ruling in Quadomain because, noting that  "does appear to preclude an association from filing a foreclosure action and lis pendens based on a lien filed after a lender with a superior interest has filed a foreclosure action and recorded a lis pendens … (1) the association in Quadomain was attempting to foreclose its lien against the bank's interest, as well as that of the homeowner, unlike the present case where the Association only foreclosed against the delinquent homeowner; and (2) the association's lien in the present case was imposed under the association's declaration of covenants recorded before the Lender recorded its notice of lis pendens."

 

The Fourth District also held that, although not addressed in Quadomain, the homeowners association's declaration of covenants "may qualify as an 'interest' under section 48.23(1)(d), Florida Statutes."  It buttressed this conclusion by citing section 720.3085, Florida Statutes, which "provides that the lien for unpaid assessments relates back to the recording of the declaration of community … However, as to determining superiority over first mortgages of record, the lien is effective only from the date the claim of lien is recorded."

 

The Court concluded that "[b]ecause the Declaration was recorded prior to the Lender's lis pendens, a foreclosure action based upon a claim of lien filed under its terms is not barred by section 48.23(1)(d)."

 

The Court further concluded that one of the purposes of the lis pendens statute – i.e., protecting the mortgagee from liens unrecorded the time of filing -- would not be served by allowing the homeowner to assert priority over the association's interest.

 

"Although section 48.23(1)(d) … creates a 'bar to … enforcement' and provides for extinguishment of any unrecorded interests or liens if the case proceeds to judicial sale, the statute is not designed to protect the delinquent homeowner. Unlike Quadomain, the Association's suit did not involve the Lender." In addition, the Court found significant that "the Lender's priority is not at issue here, and the Association acknowledges the Lender's superior interest."

 

Accordingly, the Court affirmed the lower court's order denying the homeowner's motion to vacate the final 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

 

 

 

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FYI: Cal App Ct (6th Dist) Holds Servicer May Owe Borrower Duty of Care as to Loan Mod Efforts, Loan Owner May Be Liable for Servicer's Misconduct

The Court of Appeal of the State of California, Sixth Appellate District, recently held that a loan owner may be liable for misrepresentations made by the loan servicer.

The Court also held that a loan servicer may owe a duty of care to a borrower through application of the "Biakanja" factors, even though its involvement in the loan does not exceed its conventional role.

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

In May 2005, the borrowers obtained an adjustable rate mortgage. In early 2008, the borrowers asked their servicer refinance or modify the loan. They were told that neither were possible because another was in the process of acquiring the right to service the loan.

 

The borrowers eventually contacted the new servicer about refinancing the loan. They alleged they contacted the new servicer on a weekly basis until they finally received a loan modification application in mid-2009. The employees of the new servicer allegedly told the borrowers they would be granted a modification if they complied with all of the servicer's requirements.

 

Months later, the borrowers' modification application was denied because the borrowers did not provide the appropriate documents. The borrowers again applied for a loan modification.  The servicer allegedly told the borrowers they had provided the proper documentation, but then denied the application for failure to provide documentation.

 

In mid-2010, the borrowers again contacted the servicer and were supposedly told they were ineligible for loan modification because they were not at least three months' delinquent in their payments. The servicer's employees allegedly led the borrowers to belief they would be granted a loan modification if they became at least three months' delinquent in their mortgage payments.

 

The borrowers, who were current on the loan, allegedly purposefully became three months' delinquent in their payments. The borrowers were then allowed to reduce their payments.  The borrowers eventually attempted to resume making their regular higher monthly payments but the servicer allegedly refused to accept those payments. At the end of 2011, the servicer refused to accept any payment from the borrowers.

 

The borrowers continued to attempt to obtain a loan modification but were continually denied. The servicer's employees allegedly told the borrowers multiple times that the proper paperwork was not submitted, even though the servicer allegedly had independently confirmed receipt of the documents. In 2012, the borrowers again attempted to modify the loan but the servicer denied them because their home was underwater.

 

In August of 2011, the trustee on the deed of trust was substituted.  Another servicer began to service of the loan on December 1, 2012. In August 2012, a notice of default was recorded against the property. The notice was recorded on November 28, 2012..

 

The borrowers were plaintiffs in a mass joinder action against multiple servicers in 2011, Maxam et al v. Bank of America (Super. Ct. Orange County, 2011). The complaint alleged multiple causes of action based upon borrowing loans and loan modification.

 

The Maxam defendants moved to dismiss the allegations, and the trial court sustained the demurrer with 60 days' leave to amend. The borrowers failed to file an amended complaint. The trial court entered a judgment of dismissal with prejudice against the plaintiffs. Four months later, the borrowers moved to set aside the judgment due to its preclusive effect on their legitimate and meritorious claims.

 

The borrowers filed the current action against the servicers on March 19, 2013. The servicers filed motions to dismiss on the ground that the borrowers' claims were barred by res judicata.  The trial court sustained the demurrers. The borrowers appealed.

 

The Appellate Court first looked to if the borrowers' claims were precluded on the grounds of res judicata, based on the Maxam judgment.

 

As you may recall, claim preclusion bars re-litigation of a claim altogether where a second suit involves the same cause of action between the same parties after a final judgment on the merits by a court of competent jurisdiction.

 

Here, the Court of Appeal found that there were additional servicers in the instant suit that were not parties in the Maxam action. Thus, the Appellate Court held that the same parties' element was not satisfied as to those servicers and claim preclusion did not apply as to those parties.

 

The Court of Appeal then addressed the final factor.  The Court recited that, under California law, a former judgment entered after a general demurrer is sustained with leave to amend is a judgment on the merits. However, the former judgment will not bar a subsequent action alleging new or additional facts that cure the defects in the original pleading.

 

The Appellate Court held that the current action alleges facts about the origination and attempted modification of borrowers' loan that were not alleged in Maxam. The Court found the issue of whether the final judgment on the merits was satisfied was insufficiently developed, and thus it concluded that the borrowers were entitled to amend their complaint.

The Court of Appeal then looked at the borrowers' intentional and negligent misrepresentation claims.

 

As you may recall, the elements of a cause of action for intentional misrepresentation are (1) a misrepresentation, (2) with knowledge of its falsity, (3) with the intent to induce another's reliance on the misrepresentation, (4) actual and justifiable reliance, and (5) resulting damage.

 

The elements of a claim for negligent misrepresentation are nearly identical. Only the second element is different, requiring the absence of reasonable grounds for believing the misrepresentation to be true instead of knowledge of its falsity. Each element must be plead with specificity. However, this requirement is relaxed when the allegations indicate the defendant must necessarily possess full information concerning the facts of the controversy.

 

Here, the Court of Appeal looked to whether borrowers stated a claim for intentional or negligent misrepresentation based on any alleged misrepresentation by the servicers.

 

The Court noted that the borrowers alleged that one of the servicers had not received financial documents submitted in support of their loan modification application, and that the borrowers identified the employee in their complaint.  The Appellate Court held this was sufficient to apprise the defendant servicer of the specific grounds of the charge.

 

In addition, the Court of Appeal held it could reasonably infer from the allegations that the borrowers were alleging that they believed the representation, and that they relied upon information exclusively within the servicer's knowledge. The Court held that the borrowers also sufficiently pled the remaining factors for negligent and intentional misrepresentation. Accordingly, the trial court's order granting motion for judgment on the pleadings as to the intentional and negligent misrepresentation claims against the servicer were reversed.

 

However, the Court of Appeal found that the borrowers failed to state a claim for negligent and intentional misrepresentation against the subsequent servicer.

 

The borrowers alleged that the subsequent servicer was liable for the prior servicer's misrepresentations because the subsequent servicer benefited from the prior servicer's fraudulent conduct, and under agency and successor-in-liability theories. The Court noted that the subsequent servicer did not address any deficiencies with these arguments, but it nevertheless found the borrowers' allegations against the subsequent servicer to be insufficient. The Court of Appeal granted the borrowers another opportunity to amend their claims for intentional and negligent misrepresentation against the subsequent servicer.

 

Importantly, the Court of Appeal found that the borrowers stated misrepresentation claims against the owner of the loan based on agency.

 

As you may recall, an agent is anyone who undertakes to transact some business, or manage some affair, for another, by authority of and on account of the latter, and to render an account of such transactions. The chief characteristic of the agency is that of representation, the authority to act for and in the place of the principal for the purpose of bringing him or her into legal relations with third parties. The significant test of an agency relationship is the principal's right to control the activities of the agent. A principal is liable to third parties for the frauds or other wrongful acts committed by its agent in and as a part of the transaction of the business of the agency.

 

Here, the Court noted that the alleged business of the agency was the servicing and modification of the borrowers' loan. The Court found that the borrowers alleged the misrepresentations were made in the course of servicing their loan, and as such the representations were alleged to have been made within the scope of the alleged agency relationship. Accordingly, the Court of Appeal found that the borrowers stated claims for negligent and intentional misrepresentation against the owner of the loan.

 

However, the Court of Appeal held that the borrowers failed to state a negligent or intentional misrepresentation claim against two servicers and the owner of the loan under a civil conspiracy theory. The borrowers alleged the defendants conspired to deceive and defraud the borrowers into participating in the loan modification process.

 

The Court recited that conspiracy is not an independent cause of action, but rather a doctrine imposing liability for a tort upon those involved in its commission. Thus, liability for a conspiracy must be activated by the commission of an actual tort.  To allege a conspiracy, a plaintiff must plead: (1) formation and operation of the conspiracy and (2) damage resulting to plaintiff (3) from a wrongful act done in furtherance of the common design.

 

The Court of Appeal found the borrowers' allegations too conclusory as there were no factual allegations about the nature of the agreement or the timing of the alleged conspiracy. Accordingly, the Court of Appeal found the trial court did not err in dismissing the civil conspiracy cause of action without leave to amend.

 

The Appellate Court then looked to the borrowers' causes of action based on breach of contract.

 

As you may recall, a cause of action for damages for breach of contract is comprised of the following elements: (1) the contract, (2) plaintiff's performance or excuse for nonperformance, (3) defendant's breach, and (4) the resulting damages to plaintiff.

 

The borrowers alleged one of the servicers breached an oral agreement promising a loan modification.  The Court of Appeal found the terms of the alleged agreement to be not sufficiently definite to render the agreement enforceable.

 

The Court recited that the terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy. Where a contract is so uncertain and indefinite that the intention of the parties in material particulars cannot be ascertained, the contract is void and unenforceable. Typically, a contract involving a loan must include the identity of the lender and borrower, the amount of the loan, and the terms for repayment in order to be sufficiently definite. Agreements to agree are not enforceable contracts.

 

The Court of Appeal looked to the Home Affordable Modification Program and the U.S. Court of Appeals for the Seventh Circuit's ruling in Wigod v. Wells Fargo. The HAMP loan modification process consisted of two stages. After determining a borrower was eligible, the servicer implemented a Trial Period Plan (TPP) under the new loan repayment terms it formulated using the method prescribed by HAMP program directives. The trial period under the TPP lasted three or more months. After the trial period, if the borrower complied with all terms of the TPP Agreement—including making all required payments and providing all required documentation—and if the borrower's representations remained true and correct, the servicer had to offer a permanent modification.

In Wigod, the Seventh Circuit reasoned that the TPP was enforceable despite open terms because the HAMP guidelines provided an existing standard by which the ultimate terms of the permanent modification were to be set.

 

In the instant case, the Appellate Court found that the borrowers did not allege or argue on appeal that HAMP applied thus there was no standard to determine the essential terms of the loan modification they were allegedly promised. Thus, the Court held that the borrowers did not allege the existence of an enforceable contract.

The defendants also argued that the alleged oral contract fell within the statute of frauds and thus is not enforceable as it was not in writing.  The Court noted that full performance takes a contract out of the statute of frauds. Here, the Court of Appeal found the borrower alleged full performance of their obligations under the contract and therefore the statute of frauds did not bar enforcement of the alleged oral contract.

 

The Court of Appeal held that the borrowers should be given another opportunity to amend their complaint to include the specific pleading deficiencies.

The borrowers also alleged that the servicer twice promised them a loan modification and they relied on those promises by (1) applying for the promised loan modifications, (2) becoming delinquent in their monthly mortgage payments, (3) making the lower monthly payments, (4) providing the servicer with personal financial information, (5) spending time and resources applying for loan modifications, and (6) foregoing other remedies to cure the default.

As you may recall, the elements of a promissory estoppel claim are (1) a promise clear and unambiguous in its terms; (2) reliance by the party to whom the promise is made;?(3) [the] reliance must be both reasonable and foreseeable; and (4) the party asserting the estoppel must be injured by his reliance.

The Court of Appeal found that the borrowers adequately alleged detrimental reliance to sustain a promissory estoppel cause of action by alleging they repeatedly contacted the servicer, prepared documents at the servicers request, and by foregoing other means of avoiding foreclosure. 

 

However, the Court found that the absence of essential loan modification terms rendered the alleged promise insufficiently clear and unambiguous to support promissory estoppel. In addition, the Court found that no borrower could reasonably rely on a promise to make a unilateral loan modification offer because the offered modification might not lower their monthly payments sufficiently to allow them to avoid default.

 

Nevertheless, the Court of Appeal held that the borrowers should be given another opportunity to amend their promissory estoppel claim.

 

The borrowers also alleged the servicer breached its duty to act reasonably with respect to their loan modification application by (1) allegedly failing to accurately account for the documents the borrowers supposedly submitted, (2) allegedly failing to give them a fair loan modification evaluation, and (3) allegedly accepting trial payments from the borrowers but by not accurately accounting for this or by not granting them or denying a modification in a reasonable time period.

As you may recall, to state a cause of action for negligence, a plaintiff must allege (1) the defendant owed the plaintiff a duty of care, (2) the defendant breached that duty, and (3) the breach proximately caused the plaintiff's damages or injuries.

As a general rule in California, a financial institution owes no duty of care to a borrower where the institution's involvement is simply to lend money.

However, this general rule has exceptions. In Biakanja v. Irving, 49 Cal.2d 647 (1958), the Supreme Court of California held that whether the defendant in a specific case will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, including: (1) the extent to which the transaction or conduct was intended to affect the plaintiff, (2) the foreseeability of harm to the plaintiff, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of the connection between the defendant's conduct and the injury suffered, (5) the moral blame attached to the defendant's conduct, and (6) the policy of preventing future harm.

The Court of Appeal looked to the Biakanja factors to determine if the servicer had a duty to the borrowers.

 

As to the first factor -- the extent to which the transaction was intended to affect the plaintiff – the Appellate Court found that the alleged conduct was intended to affect the borrowers as it was directed toward determining whether or not the borrowers could keep their home and at what cost. The Court concluded the first factor weighed slightly in favor of finding a duty of care.

As to the second factor -- the foreseeability of harm to the plaintiff -- the Appellate Court noted that the alleged mishandling of the borrowers' documents and the alleged failure to grant or deny a modification in a timely fashion in the Court's view kept the borrowers in a lending limbo where they paid less than they owed on the servicers instruction, and fell further into arrears. The Court concluded the second factor weighed in favor of finding a duty of care.

As to the third factor -- the degree of certainty that the plaintiff suffered injury – the Appellate Court noted that the borrowers alleged they were injured due to damage to their credit, foregone remedies, and increased arrears, interest, penalties, and fees due to the servicer's alleged conduct. The Court concluded the third factor weighed in favor of finding a duty of care.

As to the fourth factor -- the closeness of the connection between the defendant's conduct and the injury suffered – the Appellate Court noted that the borrowers were current on their loan payments until the servicer allegedly advised them to become delinquent to obtain a loan modification, which in the Court's view suggested a close connection between the servicer's conduct and the default-related remedies. The Court concluded the fourth factor weighed in favor of finding a duty of care.

As to the fifth factor -- the moral blame attached to the defendant's conduct – the Appellate Court held that the servicer's blameworthiness was impossible for the Court of assess at this stage thus it considered the factor neutral.

 

As to the sixth and last factor -- the policy of preventing future harm -- the Court of Appeal found the policy of preventing future harm to cut both ways. The Court looked to Alvarez v. BAC Home Loans Servicing, L.P., 228 Cal.App.4th 941 (2014) for guidance. In Alvarez, the appellate court concluded that the sixth Biakanja factor weighed in favor of finding a duty because recent statutory enactments demonstrate the existence of a public policy of preventing future harm to loan borrowers. Here, the Court of Appeal could not say whether or not the imposition of a duty would prevent future harm to borrowers.

In sum, in the Appellate Court's view, four of the six factors weighed in favor of finding a duty, and therefore the Court of Appeal concluded that the servicer owed the borrowers a duty of care with respect to the loan modification process.

The Court of Appeal also found the borrowers properly alleged a breach of duty and damages, thus concluding the borrowers stated a claim for negligence against the third servicer.

 

However, the Court of Appeal found the borrowers' secondary liability allegations against the subsequent servicer and the loan owner were insufficient. The Court found the borrowers should be permitted to amend their negligence claims against these parties.

 

The borrowers also alleged wrongful foreclosure.  As you may recall, in California, the basic elements of a tort cause of action for wrongful foreclosure track the elements of an equitable cause of action to set aside a foreclosure sale. These are: (1) the trustee or mortgagee caused an illegal, fraudulent, or willfully oppressive sale of real property pursuant to a power of sale in a mortgage or deed of trust; (2) the party attacking the sale (usually but not always the trustor or mortgagor) was prejudiced or harmed; and (3) in cases where the trustor or mortgagor challenges the sale, the trustor or mortgagor tendered the amount of the secured indebtedness or was excused from tendering.

Here, the borrowers alleged the assignment of the deed of trust to the trustee was invalid because the securitized trust closed prior to the assignment.  The borrowers conceded during oral argument that, as pled, their wrongful foreclosure claim was insufficient and they would be unable to amend it to create a viable cause of action. The Court of Appeal therefore held that the trial court did not abuse its discretion in dismissing the claim for wrongful foreclosure.

 

The borrowers also sued under California's Unfair Competition Law (UCL).  The UCL prohibits, and provides civil remedies for, unfair competition, which it defines as any unlawful, unfair or fraudulent business act or practice. A plaintiff may pursue a UCL action in order to obtain either (1) injunctive relief, the primary form of relief available under the UCL, or (2) restitution as may be necessary to restore to any person in interest any money or property, real or personal, which may have been acquired by means of such unfair competition.

 

The Appellate Court held that to the extent the borrowers' UCL claim was predicated on an alleged violation based on transfer of property, the allegations fail because  the borrowers' failed to state a claim for wrongful foreclosure. Otherwise, the Court of Appeal held that the trial court erred by denying the borrowers leave to amend their UCL claim.

 

In sum, the Court of Appeal reversed the judgment of the trial court with specific remand instructions for each respondent and 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

 

 

 

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FYI: 11th Cir Holds Procedural Violation of FDCPA Enough for Standing Under Spokeo

In an unpublished opinion, the U.S. Court of Appeals for the Eleventh Circuit recently held that a consumer alleging that she did not receive disclosures required by the federal Fair Debt Collections Practices Act ("FDCPA") sufficiently alleged that she suffered a concrete injury, and thus satisfied the standing doctrine's injury-in-fact requirement under Article III of the U.S. Constitution.

 

In so ruling, the Court confirmed that the FDCPA only applies to debts that are in default when the debt collector obtained them, rejecting the consumer's argument that "a debt can be in default before the debtor is ever asked to pay a balance."

 

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

 

A consumer filed a putative class action against a debt collector, alleging that a dunning letter used by the debt collector violated the FDCPA because it lacked required disclosures under 15 U.S.C. § 1692g.  The consumer did not allege that she suffered any actual damages from the alleged failure to include the disclosures, but alleged that the letter made her "very angry" and that she "cried a lot."

 

The district court granted summary judgment in the defendant's favor, and the consumer appealed.

 

The Court began it analysis by explaining that "[t]he sole issue raised at summary judgment was whether, at the time the debt at issue was obtained by [the debt collector], the debt was in default, as contemplated by the FDCPA."

 

As you may recall, the FDCPA exempts "any person collection or attempting to collect any debt owed or due or asserted to owed or due another to the extent such activity … concerns a debt which was not in default at the time it was obtained by such person. 15 U.S.C. § 1692a(6)(F)."

 

The debt collector argued that the debt was not in default when it obtained the debt from the initial creditor, and therefore the FDCPA did not apply to the subject dunning letter.

 

The consumer argued on appeal that "a debt can be in default before the debtor is ever asked to pay a balance." The Eleventh Circuit disagreed.

 

The Court first addressed the issue of standing, which was raised by the debt collector in a notice of supplemental authority filed before oral argument.

 

The supplemental authority cited was the Supreme Court of the United States' recent decision in Spokeo v. Robins, which addressed "standing's injury-in-fact requirement." The debt collector argued that the consumer's injury "was not sufficiently concrete to support Article III standing because [she] incurred no actual damages from [the debt collector's] violation of the FDCPA." The consumer argued in response that the debt collector waived the standing issue by not raising it earlier, and "that a violation of a procedural right granted by statute can be sufficient in some circumstances to constitute injury-in-fact."

 

The Eleventh Circuit explained that the standing doctrine comes from Article III of the United States Constitution, which "limits federal court jurisdiction to actual cases and controversies. … Accordingly, 'standing is a jurisdictional question which must be addressed prior to and independent of the merits of a party's claims.'"

 

Because under the case law the issue of subject matter jurisdiction can be raised at any time while a case is pending, and moreover, the court must consider standing sue sponte even if the parties have not raised the issue, the Court concluded that although the debt collector failed to raise its standing argument below, the Court would address the issue to ensure the consumer has standing.

 

The Eleventh Circuit then discussed the holding in Spokeo, in which the Supreme Court explained that in order to "establish injury in fact, a plaintiff must show that he or she suffered an invasion of a legally protected interest that is concrete and particularized and actual or imminent, not conjectural or hypothetical." While an injury must be "concrete," which means "real" and not "abstract," the Supreme Court in Spokeo held that "an injury need not be tangible to be concrete and reiterated that Congress may elevate to the status of legally cognizable injuries concrete, de facto injuries that were previously inadequate in law." Accordingly, "the violation of a procedural right granted by statute can be sufficient in some circumstances to constitute injury in fact."

 

Relying on the Supreme Court's earlier decision in Havens Realty Corp. v. Coleman, which held that a tester-plaintiff had standing to sue under the Fair Housing Act, the Eleventh Circuit concluded that "[j]ust as the tester-plaintiff had alleged injury to her statutorily-created right to truthful housing information, so too has [the consumer] alleged injury to her statutorily-created right to information pursuant to the FDCPA."

 

By requiring a debt collector to include certain disclosures in the initial communication with a debtor or within five days thereafter and creating a private right of action for failure to comply with FDCPA, the Eleventh Circuit found that "Congress has created a new right—the right to receive the required disclosures in communications governed by the FDCPA—and a new injury—not receiving such disclosures."

 

The Eleventh Circuit held that the consumer "sufficiently alleged that she has sustained a concrete—i.e., 'real'—injury because she did not receive the allegedly required disclosures."

 

According to the Eleventh Circuit, the violation of her right to receive the required disclosures was "not hypothetical or uncertain" because she did not receive information to which she was entitled under the FDCPA.

 

The Eleventh Circuit explained that, while this was not "economic or physical harm that courts often expect, the Supreme Court has made clear an injury need not be tangible to be concrete."  The Court held that, because "this injury is one that Congress has elevated to the status of a legally cognizable injury through the FDCPA … [the consumer] has sufficiently alleged that she suffered a concrete injury, and thus, satisfies the injury-in-fact requirement."

 

Turning to the merits, the Court affirmed the district court's ruling summary judgment in the debt collector's favor because the debt at issue was not in default when the debt collector obtained it and thus the FDCPA did not apply to the dunning letter.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

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and

 

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FYI: Ill App Ct (2nd Dist) Rules Deficiency Judgment Not To Be Reduced by Profit on Later Private Sale of Collateral

The Appellate Court of Illinois, Second District, recently held that when a mortgagee obtains a deficiency judgment in a foreclosure action, purchases the property at a judicial sale, and then resells it to a third party for an amount that exceeds the price paid at the judicial sale, the debtor is not entitled to a setoff in the mortgagee's enforcement proceedings to recover the deficiency judgment.

 

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

 

In June, 2013, the trial court entered a judgment of foreclosure and sale with respect to a property. The judgment reflected an outstanding loan balance of over $1.36 million. The defendants were guarantors on the loan.

 

On June 19, 2014, a sheriff's sale was conducted and the plaintiff purchased the property for $900,000. The guarantor defendants contested confirmation of the judicial sale on the basis that the plaintiff's bid was unconscionably low. Each party submitted appraisals on the property that varied between $1 million and $1.28 million.  The trial court entered an order approving the sale at $900,000 and entered a deficiency judgment for the remainder owed to the plaintiff-lender. The defendants did not appeal the order.

 

Four months later, the plaintiff sold the property to a third party for $1.32 million.

 

In February, 2015, the plaintiff initiated enforcement proceedings against the guarantor defendants seeking the full deficiency amount. The guarantor defendants filed a petition for equitable setoff, requesting a reduction in the deficiency judgment to reflect the difference between the plaintiff's winning bid at the judicial sale and its resale price.

 

The plaintiff moved to dismiss the petition on the grounds the guarantor defendants failed to state a claim upon which relief could be granted. The trial court dismissed the petition explaining that, in the foreclosure context, a claim for setoff is unavailable, because (1) it could cause foreclosure proceedings to drag on indefinitely; and (2) in many cases it would be impossible for the trial court to determine the setoff amount.  The guarantor defendants appealed.

 

The issue presented was one of first impression in Illinois. The Appellate Court based its analysis on long-recognized principles from Illinois and other states.

 

In Illinois, a purchaser at a foreclosure sale takes under the decree and not under the mortgage or trust deed, and therefore the purchaser's rights are not dependent on privity of contract between the purchaser and the mortgagor. Thus, a new relationship is created.  The foreclosure ends the mortgagor-mortgagee relationship and vests in the purchaser at the foreclosure sale all the rights, title, and interest of both the mortgagor and the mortgagee.

 

As you may recall, a setoff refers to a reduction of the damage award because a third party has already compensated the plaintiff for the same injury. It is derived from a contractual or equitable right. Without a contractual right, there is no inherent right to setoff in equity; rather, equitable setoff was conceived as a limited remedy. A right to setoff in equity arises only if the indebtedness is certain and already reduced to a precise figure without a need for the intervention of a court or jury to estimate it.

 

The Appellate Court noted that courts have approved a defendant's request for an award of setoff where a insurance company made payments on his behalf or where a co-defendant made payments for the same injury. The Appellate Court could find no case where a defendant was entitled to a setoff because a third party, who had no relationship to the defendant, made a payment to the plaintiff.

 

The Appellate Court noted that it did not matter whether the purchaser at a foreclosure sale was the plaintiff in the enforcement proceedings or a stranger to such proceedings. See Kentucky Joint Stock Land Bank of Lexington v. Farmers Exchange Bank of Millersburg, 119 S.W.2d 873, 877 (Ky. Ct. App. 1938).

 

Here, the Court held that the foreclosure action terminated the mortgagor-mortgagee relationship and the plaintiff obtained an unencumbered right of ownership at the judicial sale, which conferred the right to sell to a third party. The plaintiff did not receive an improper double recovery for the same injury, and the deficiency judgment represents a single satisfaction of the defendants' debt owed to the plaintiff.

 

The Appellate Court noted that reopening the judgment under the pretext of awarding a setoff would undermine the finality of the judicial sale and require a full evidentiary hearing on the amount and reasonableness of the mortgagee's expenses and other economic matters.

 

In addition, the Court noted, a mortgagee may not recover the difference in enforcement proceedings and its resale price when it sells for less than what it paid for at a judicial sale. When the mortgagor-mortgagee relationship ends with the judicial sale, the debtor loses any input over how the property will be maintained, and thus faces no liability for potential losses incurred by the lender.

 

Moreover, the Appellate Court explained, the possibility of a setoff in enforcement proceedings might give the lender a perverse incentive to not bid on the property at all, resulting in a lower purchase price and a greater deficiency. Second, a lender who chooses to purchase the mortgaged property by judicial sale would be inclined to avoid a setoff by retaining ownership, to the extent that such retention is lawful, until the deficiency-judgment enforcement proceedings concluded. Third, defendants advocate a rule that could expand to cover all secured transactions besides mortgages.

 

The Appellate Court also held that the defendants' failure to appeal the confirmation order precludes them from receiving equitable relief. Under the undisputed facts of the case, the Appellate Court concluded that the trial court did not err in granting the plaintiff's motion to dismiss defendants' petition for a setoff.

 

Accordingly, the judgment of the trial court was affirmed.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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FYI: Fla App Ct (4th DCA) Rules New Foreclosure Plaintiff Following Transfer of Servicing Failed to Prove Standing

The District Court of the Appeal of the State of Florida, Fourth District ("Fourth DCA"), recently reversed summary judgment in favor of a mortgagee, holding that a genuine issue of material fact as to whether the original plaintiff or the substituted successor in interest held the note when the complaint was filed precluded summary judgment, and thus that the borrower's lack of standing defense was not refuted.

 

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

 

A mortgagee sued to foreclose its mortgage. The complaint alleged that it was "entitled to enforce the Note as a holder in possession."  The mortgagee's successor in interest was substituted as the plaintiff.  The new substituted plaintiff mortgagee moved for summary judgment, which the trial court granted.  The borrower appealed.

 

The Appellate Court began it analysis by citing the black-letter rule that a party moving for summary judgment must "show conclusively the complete absence of any genuine issue of material fact." In addition, the Court recited that "[a] plaintiff alleging standing as a holder must prove it is a holder of the note and mortgage both as of the time of trial and also that [it] had standing as of the time the foreclosure complaint was filed."

 

The Fourth DCA found that the plaintiff successor in interest "failed to meet its burden of establishing the absence of an issue of fact regarding standing" because the affidavit it filed in support of summary judgment, which stated that it held the note at the time the complaint was filed, "would negate [the original lender's] standing at the time suit was filed. Accordingly, the fact of who held the note at the time the complaint was filed was not crystallized as of the time of summary judgment."

 

The Appellate Court pointed out that although "attaching a copy of a note endorsed in blank to the complaint and filing the original note in the same condition as the copy attached to the complaint is generally sufficient to establish standing," under the facts of the case at bar, "those practices did not neutralize the conflict between the affidavit and allegation of the complaint regarding the identity of the party who held the note at the time the complaint was filed."

 

The summary judgment was therefore reversed, and the case remanded for further proceedings.

 

  

 

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 Upholds Denial of Arbitration, Holds Trial Not Required If No Genuine Issue of Material Fact

In a case involving the enforceability of so called "clickwrap" web-based agreements, the U.S. Court of Appeal for the Eleventh Circuit recently affirmed the denial of a defendant's motion to compel arbitration, holding that the defendant failed to prove the existence of an agreement to arbitrate.

 

Because the Court found that the defendant offered no competent evidence to demonstrate the existence of a genuine issue of material fact concerning the existence of an arbitration agreement, the debt buyer's motion to compel arbitration must be denied as a matter of law without the need for a trial.

 

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

 

The plaintiff consumer applied for a credit card issued by a Delaware bank using the Internet in November of 2005. She incurred charges on the card, but failed to pay the balance in full.  The defendant debt buyer purchased the account in 2008.

 

In 2013, the consumer filed a Chapter 13 bankruptcy. In January of 2014, the debt buyer filed a proof of claim in the bankruptcy case.

 

In September of 2014, the consumer filed a putative class action in Georgia superior court, claiming that the debt buyer violated the federal Fair Debt Collection Practices Act ("FDCPA") by filing a proof of claim on a time-barred debt.

 

The debt buyer removed the case to federal court in October of 2014 and then  moved to compel arbitration, relying upon an arbitration clause in the cardholder agreement between the plaintiff and the debt-buyer's predecessor in interest.

 

The trial court denied the motion, concluding that the arbitration clause did not apply to plaintiff's claim. The defendant appealed.

 

On appeal, the Eleventh Circuit began its analysis by noting that the only evidence in the record that the plaintiff had agreed to the terms and conditions in the cardholder agreement was a declaration of an individual employed at the time with a company that maintained the bank's credit card records that plaintiff applied for the credit card.

 

The Court noted that the declaration stated in conclusory terms only that the plaintiff had "accepted the terms governing her account and opened the account," without explaining how she had done so, without explaining how the assertions were based on personal knowledge, and without providing any documents supporting the assertion.

 

The Court mentioned the ubiquity of so-called "clickwrap agreements," but found that the defendant introduced no evidence "that the Internet web page or pages that [plaintiff] viewed, or upon which she applied for her [credit card], displayed or referred to any terms or conditions of the credit card she sought, much less that she was required to consent to any such terms in order to obtain her credit card."

 

Although the declaration stated that a "Welcome Kit" with the cardholder agreement "would have been sent" to the plaintiff consumer, the witness did not affirmatively state that it was, in fact, sent in the company's ordinary course of business or that the one that was sent was the same as the form attached to his declaration.  The witness also did not state that the form that was sent contained an arbitration clause that was the same as the one attached to his declaration.

 

The Court explained that while the Federal Arbitration Act embodies a policy favoring the enforceability of arbitration agreements and creates a "presumption of arbitrability," "the presumption does not apply to disputes concerning whether an agreement to arbitrate has been made."  The Court noted that "[t]he threshold question of whether an arbitration agreement exists at all is 'simply a matter of contract' [and] … [a]bsent such an agreement, 'a court cannot compel the parties to settle their dispute in an arbitral forum.'"

 

The Eleventh Circuit then turned to the "onus of proof with respect to the existence of an agreement to arbitrate," explaining that since the Supreme Court's 1992 ruling in First Options of Chicago, Chastain v. Robinson-Humphrey Co., the Eleventh Circuit "repeatedly has emphasized that 'state law generally governs whether an enforceable contract or agreement to arbitrate exists.'"

 

Applying Georgia law, the Court found the declaration of the debt buyer's witness "woefully inadequate" for three reasons. First, the Eleventh Circuit held that the debt buyer "presented no competent evidence as to what, if any, terms plaintiff agreed to when ordering her credit card [and] [i]n particular, … presented no competent evidence that she entered into any relevant arbitration agreement" the debt buyer could not compel the plaintiff to arbitrate.

 

Second, the Court refused to give the debt buyer the benefit of the presumption under the so-called common law "mailbox rule" that the plaintiff received the "Welcome Kit" because the debt buyer's witness had no personal knowledge that the kit was in fact sent and did not state that he had reviewed any records showing that the kit was sent.

 

Third, even if the evidence showed that a Welcome Kit was sent to the plaintiff, the Eleventh Circuit found that such evidence would not prove that "the Welcome Kit included the arbitration clause upon which [the debt buyer] relies or any relevant variant."

 

The Court concluded that the debt buyer did not meet "its burden under Georgia law to prove the existence and terms of the arbitration agreement it seeks to enforce" and that the trial court correctly denied its motion to compel arbitration.

 

Finally, the Court rejected the debt buyer's argument that the case should be remanded for a trial if the debt buyer failed to prove that the arbitration agreement had been agreed upon, following the Third, Eighth and Tenth Circuits in holding that the "standard for determining whether a trial is necessary to determine the existence of an arbitration agreement" is similar to the standard for summary judgment.

 

The Eleventh Circuit held that if there is no genuine issue of fact on whether an agreement to arbitrate was made, the court can decide the question as a matter of law.

 

The Court concluded that because "defendant offered no competent evidence to demonstrate the existence of a genuine issue of material fact concerning the existence of an arbitration agreement, its motion to compel arbitration must be denied as a matter of law without the need for a trial" and affirmed the district court's denial of the motion to compel arbitration and stay the case, although on different grounds.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

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and

 

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and

 

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