FYI: 7th Cir Holds Inclusion of 1692g "Debt Validation" Notice in Complaint Violated FDCPA

The U.S. Court of Appeals for the Seventh Circuit recently reversed the dismissal of a putative class action alleging that the debt collector defendants used misleading language in their state court collection complaints in violation of the federal Fair Debt Collection Practices Act (FDCPA).

 

In so ruling, the Court held that the debt collector's use of language similar to a notice under 15 U.S.C. § 1692g in its collection complaint was deceptive as a matter of law because it could lead an unsophisticated consumer to believe that the debt would be assumed to valid by the court if not disputed within a time period shorter than provided by the summons.

 

Joining other federal appellate courts on the issue, the Seventh Circuit also concluded that "pleadings or filings in court can fall within the FDCPA."

 

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

 

Three student loan debtors filed a putative class action alleging that a lawyer, his law firm and a debt collection agency violated section 1692 of the FDCPA by including a misleading and deceptive statement in complaints filed in state court. Specifically, the paragraph in question stated that "the debt referenced in this suit will be assumed to be valid and correct if not disputed in whole or in party within thirty (30) days from the date hereof."

 

The district court determined that the subject paragraph was not misleading or deceptive as a matter of law, and granted summary judgment in defendant debt collectors' favor. The plaintiffs appealed.

 

On appeal, the Seventh Circuit began it analysis by addressing the debt collectors' argument that the subject paragraph was not misleading as a matter of law because section 1692e of the FDCPA "does not regulate the content of state court pleadings."

 

The Court noted that in an earlier 2007 decision, it had "postponed for a future case the question of whether 1692e of the FDCPA covers the process of litigation", but the case at bar squarely presented the issue for resolution.

 

The Seventh Circuit cited decisions from its sister circuit courts that previously addressed the issue presented and concluded that "pleadings or filings in court can fall within the FDCPA."

 

Relying on the Supreme Court of the United States's ruling in Heintz v. Jenkins, which held that the FDCPA applies to the litigation activities of lawyers, the Seventh Circuit reasoned that "[n]othing in the broad language in Heintz would support an interpretation that would apply the FDCPA to attorneys whose debt collection activity consisted of litigation, but limit it to only those representations made by those attorneys outside of that litigation."

 

The Court noted that its conclusion was further supported by Congress' post-Heintz amendment of the FDCA in 1995, which "exempted legal pleadings from a specific provision of the FDCPA [i.e., the so-called mini-Miranda notice under 15 U.S.C. § 1692e(11)], but did not exempt it from the FDCPA as a whole."

 

The Seventh Circuit held that, "[b]y providing that sub-section 1692e(11) did not apply to a formal pleading made in connection with a legal action, the implication is that 1692e as a whole other than 1692e(11) applies to formal legal pleadings. Otherwise, the amendment would be merely superfluous, exempting formal legal pleadings from one specific requirement in the act even though legal pleadings were not subject to any provisions of the act already."

 

The Court further reasoned that its interpretation was consistent with the purpose if the FDCA, "to eliminate abusive debt collection practices, to ensure that those debt collectors who abstain from such practices are not competitively disadvantaged, and to promote consistent state action to protect consumers." 

 

This purpose, the Seventh Circuit held, "would be undermined if the FDCPA was inapplicable to communications that occurred in the context of litigation, particularly in the debt collection area in which judgments are overwhelmingly reached through forfeiture, and thus misleading or deceptive statements are more likely to influence the response of the defendant without ever coming to the attention of the court in any meaningful way."

 

The Court then turned to whether the district court erred in deciding that the subject paragraph was not misleading as matter of law.  The Seventh Circuit reasoned that because § 1692e specifically prohibits falsely representing "the character amount, or legal status of any debt," and in determining whether a statement is false involves "a fact-bound determination of how an unsophisticated consumer would perceive that statement", dismissal under Rule 12(b)(6) "is appropriate only if there is no set of facts consistent with the pleadings under which the plaintiffs could obtain relief."

 

Here, the summons in the state court action contained an error, which made the consumer refer to the complaint in order to determine how and when to respond. The subject paragraph, however, stated that the debt would be assumed to be valid if not disputed within 30 days.

 

The Court reasoned that this was misleading because an unsophisticated consumer would "believe that he had until the date in the summons to file an answer and contest the claim, but that beyond the 30-day period [in the subject paragraph] he could no longer contest the validity or correctness of the debt."  Because the time period for disputing the debt was shorter than the time period to answer the complaint, this "effectively shortened the time period provided in the summons for the consumer to answer." 

 

The Seventh Circuit held this incongruity "would cause an unsophisticated consumer to believe that beyond that time in [the subject paragraph] for disputing the debt, even if filing an answer, the validity of the debt could no longer be disputed in that answer."

 

The Court concluded that the subject paragraph "is simply improper in its entirety at this stage of the proceedings, as the failure to dispute the debt will have no impact on the court case. Its presence in the complaint serves no purpose. Its function in the complaint is only to mislead."

 

Finding that the paragraph at issue was plainly deceptive and misleading to an unsophisticated consumer, the Seventh Circuit held that the trial court erred by reaching the opposite conclusion and reversed and 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: DC Cir Denies Lender's Challenge to NLRB's Ruling as to Lender's Confidentiality and Non-Disparagement Employee Rules

The U.S. Court of Appeals for the District of Columbia Circuit recently denied a mortgage company's petition for review and granted the National Labor Relations Board's cross-petition for enforcement, holding that the NLRB correctly determined that the mortgage company's workplace rules unreasonably burdened its employees' ability to discuss legitimate employment matters, protest employer practices and organize in violation of section 7 of the National Labor Relations Act.

 

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

 

A loan officer began working in the mortgage company's Scottsdale, Arizona office and signed an employment agreement containing confidentiality and non-disparagement provisions. She resigned in 2011 and began working at a competitor.

 

The mortgage company sued to enforce the employment agreement, to which the loan officer responded by filing an unfair labor practice claim with the National Labor Relations Board, arguing that the confidentiality and non-disparagement rules violated Section 7 of the National Labor Relations Act (NLRA).

 

The NLRB filed an unfair labor practice complaint against the mortgage company alleging that the rules violated Section 8(a)(1) of the NLRA, 29 U.S.C. § 158(a)(1).

 

An administrative law judge ("ALJ") held an evidentiary hearing and sustained the NLRB's complaint, finding that both of the subject contractual provisions violated Section 8(a)(1) of the NLRA because they supposedly interfered with the exercise of loan officer employees' Section 7 rights.

 

The ALJ reasoned this was "because the [confidentiality rule] flatly forbade employees from discussing 'with others, including their fellow employees or union representatives, the wages and other benefits that they receive,' and 'the names, wages, benefits, addresses or telephone numbers of other employees.'" In addition, the ALJ found the non-disparagement rule "invalid because it prohibited employees from 'publicly criticiz[ing], ridicul[ing], disparage[ing] or defam[ing] the Company or its products, services, [or] policies … through any written act or oral statement.'"

 

The NLRB affirmed the ALJ's ruling, but instead of rescinding the confidentiality provision completely, the NLRB required the mortgage company to only delete certain offending language.

 

On appeal from the NLRB's decision, the DC Circuit Court of Appeals began by emphasizing that its review was limited, because the NLRB's decisions, as the agency charged by Congress with enforcing the Act, "'are entitled to considerable deference,' … and will be sustained as long as the Board 'faithfully applies' the legal standards, and its textual analysis of a challenged rule is 'reasonably defensible' and adequately explained….."

 

As you may recall, section 7 of the NLRA guarantees employees 'the right to self-organization, to form, join or assist labor organizations, to bargain collectively through representative of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.' … Those rights 'necessarily encompass' employees' rights to … 'seek to improve terms and condition of employment or otherwise improve their lot as employees through channels outside the immediate employee-employer relationship ….'"

 

Employers that "'interfere with restrain, or coerce employees in the exercise of the rights guaranteed' by section 7 commit an unfair labor practice, 29 U.S.C. § 158(a)(1), and are subject to civil sanction by the Board, id. § 160(a)."

 

The test of whether workplace rules violate section 7 involves "an objective inquiry into 'whether the rules would reasonably tend to chill employees in the exercise of their statutory rights.'" Lawful employee activities can be "chilled" in two ways: a) facially, "by, for example, explicitly barring employees from complaining to third parties about their working conditions … [or b)] even if facially unobjectionable, a rule is invalid if (i) 'employees would reasonably construe the language to prohibit Section 7 activity'; (ii) the rule 'was promulgated in response to union activity'; or (iii) 'the rule has been applied to restrict the exercise of Section 7 rights.'"

 

The DC Circuit Court of Appeals concluded that "[t]he Board properly determined that [the confidentiality rule], as applied to personnel information, directly impinged upon employees' Section 7 rights … [because] personnel lists, employee rosters, and employee contact information—has long been recognized as information that employees must be permitted to gather and share among themselves and with union organizers in exercising their Section 7 rights."

 

The same applied to "'handbooks' and other types of workplace information contained in 'personnel files' [because the company's] blanket prohibition directly interferes with mortgage bankers' ability to discuss their wages and other terms and conditions of employment with their fellow employees or union organizers, which is a core Section 7 right."

 

The Court rejected the mortgage company's objections to the NLRB's decision to exclude evidence of the former employee's understanding of the rules because her subjective interpretation or how she actually understood the meaning of the rules was irrelevant. "The validity of a workplace rule turns not on subjective employee understandings or actual enforcement patterns, but on an objective inquiry into how a reasonable employee would understand the rule's disputed language. Thus, '[t]he Board is merely required to determine whether 'employees would reasonably construe the [disputed] language to prohibit Section 7 activity, … and not whether employees have thus construed the rule.'"

 

The DC Circuit Court of Appeals also rejected the mortgage company's argument that the NLRB failed to consider the mortgage company's legitimate interest in protecting non-public information because the NLRB confined its decision to how the confidentiality rule affected "the types of personnel information protected by Section 7 … [and] the Board left portions of the Rule protecting proprietary information intact, and it afforded … adequate room to revise and 'narrowly tailor the … rule to achieve its goal without interfering with Section 7 activity…."

 

Simply put, the Court held that the mortgage company's "claim that some sub-portion of the covered information could properly be protected does nothing to legitimate the blunderbuss sweep of its existing rule."

 

Finally, the DC Circuit Court of Appeals rejected the mortgage company's argument that the confidentiality rule's "disputed language only protect non-public information of co-workers" because the company's "so-called 'widely publicized' personnel information … is little more than a general description on its recruiting website of the mortgage banker position and the generic salary and benefits packages that might be available to successful applicants."

 

Thus, the Court held, the NLRB could reasonably find that "[i]t beggars belief" "that [the company's] mortgage bankers would view the company's publication of such generalized information as relaxing the Rule's explicit and absolute prohibition against employees disclosing all manner of 'personnel information,' including actual employee pay and benefits."

 

Turning to the non-disparagement provision, the Court concluded that it "similarly flies in the teeth of Section 7," because the provision "prohibits mortgage bankers from 'publicly criticiz[ing], ridicul[ing], disparage[ing], or defam[ing] the Company or its products, services, policies, directors , officers, shareholders, or employees' in any written or oral statement, including on the internet or even in private emails."

 

The Court reasoned that "[t]he Board quite reasonably found that such a sweeping gag order would significantly impede mortgage bankers' exercise of their Section 7 rights because it directly forbids them to express negative opinions about the company, its policies, and its leadership in almost any public forum."

 

Because the DC Circuit Court of Appeals held that the NLRB correctly determined that the mortgage company's employees "would reasonably construe the sweeping prohibitions [of the company's confidentiality and non-disparagement rules] as trenching upon their rights to discuss and object to employment terms and conditions, and to coordinate efforts and organize to promote employee interests", the Court denied the mortgage company's petition for review and granted the NLRB's cross-application for enforcement.

 

 

 

 

 

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: 9th Cir Rules Each and Every Debt Collector - Not Just the First - Must Comply with Section 1692g

The U.S. Court of Appeals for the Ninth Circuit, in a case of first impression and the first published circuit court opinion to address the issue, recently held that each and every debt collector -- not just the first one to communicate with a debtor -- must send the debt validation notice required by the federal Fair Debt Collection Practices Act ("FDCPA").

 

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

 

A consumer financed the purchase of her automobile, but stopped making payments on the loan. A debt collection company sent her a letter trying to collect the debt, to which the debtor did not respond.  The debt collector hired a law firm to collect the debt, which sent the debtor another collection letter.

 

The debtor filed a putative class action alleging that the law firm violated 15 U.S.C. § 1692g(a) of the FDCPA by not informing the debtor that if she disputed the debt, she had to do so in writing.

 

As you may recall, section § 1692g(a) requires a "debt collector" to notify a debtor either in the "initial communication" with a consumer incident to collecting a debt or within 5 days thereafter, of the amount of the debt, the name of the creditor, that the consumer can dispute the debt in writing within 30 days after receiving the initial notice, that if the consumer does so, the debt collector will obtain verification of the debt and mail a copy to the debtor, and that if the debtor requests it in writing within the 30-day period, the debtor collector will provide the name and address of the original creditor, if the debt has been sold.

 

The parties filed cross-motions for summary judgment. The law firm argued that it was not required to comply with § 1692g(a) because its letter was not the "initial communication" with the debtor. The district court agreed and granted summary judgment in its favor. The debtor appealed.

 

On appeal, the debtor argued that § 1692g(a) requires that each and every debt collector that communicates with a consumer send the "validation notice." The Consumer Financial Protection Bureau ("CFPB"), the agency charged with rulemaking authority under the FDCPA, and the Federal Trade Commission ("FTC"), which has concurrent authority to enforce the FDCPA, filed an amicus curiae brief agreeing with the debtor's interpretation.

 

The Ninth Circuit began its analysis with the statutory text, explaining that under well-recognized rules of interpretation, "[i]f the operative text is ambiguous when read alongside related statutory provisions, we 'must turn to the broader structure of the Act,' … and to its 'object and policy to ascertain the intent of Congress."

 

If the plain language of the statute, its structure and purpose clearly reveals Congress' intent, the court's inquiry stops there. However, "if the plain meaning of the statutory text remains unclear after consulting internal indicia of congressional intent, [the court] may then turn to extrinsic indicators, such as legislative history, to help resolve the ambiguity."

 

The Court found that the text of § 1692g(a) is ambiguous because "Congress did not define the term 'initial communication' or the word 'initial.'" It noted, however, that "Congress did define 'communication' to mean 'the conveying of information regarding a debt directly or indirectly to any person through any medium… [and] [t]his definition … is broad enough to sweep into its ambit both" the initial letter from the debt collector and the second one from the law firm.

 

After parsing the statutory language and still finding the text ambiguous, the Ninth Circuit turned "to the broader structure of the FDCPA to determine which initial communication triggers the validation notice requirement — the first ever sent or the first sent by any debt collector, whether first or subsequent."

 

The Court concluded that interpreting the text of § 1692g(a) "in the context of the FDCPA as a whole makes clear that the validation notice requirement applies to each debt collector that tries to collect a given debt", reasoning that its "interpretation is the only one that is consistent with the rest of the statutory text and that avoids creating substantial loopholes around both § 1692g(a)'s validation notice requirement and § 1692g(b)'s debt verification — loopholes that otherwise would undermine the very protections the statute provides."

 

Having found that Congress intended that "each debt collector send a validation notice with initial communication is clear from the statutory text," the Ninth Circuit reasoned that it was not necessary to consult "external sources to interpret § 1692g(a)," but even if any ambiguity remained, "the external indicia of Congress's intent eliminate it."

 

In particular, the Ninth Circuit stressed that the "Senate Report's description of the validation notice suggests that Congress intended it to apply to each debt collector's first communication." The Court also highlighted the FDCPA remedial nature and that "the legislative history also shows that Congress's sole goal in enacting § 1692g(a) was consumer protection. … Nothing in this legislative history suggests that Congress thought consumers needed less protection from successive debt collectors or less information as their debts passed from hand to hand."

 

After applying "the tools of statutory construction", the Ninth Circuit held "that the FDCPA unambiguously requires any debt collector — first or subsequent — to send a § 1692g(a) validation notice within five days of its first communication with a consumer in connection with the collection of any debt."

 

Accordingly, the Ninth Circuit held that the trial court committed error by determining that because the law firm was not the first debt collector to communicate with the debtor, it did not have to send the validation notice, and the case was reversed and 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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FYI: Cal App Ct (2nd Dist) Confirms No Implied Right to HBOR Injunctive Relief

The Court of Appeal of the State of California, Second District, recently affirmed the denial of injunctive relief to a borrower who claimed a violation of Cal. Civ. Code § 2924(a)(6) of the California Homeowner's Bill of Rights (HBOR), holding that injunctive relief is only available under two specific HBOR provisions where the state legislature explicitly authorized such relief – i.e., Cal. Civ. Code §§ 2924.12(a)(1) and 2924.19(a)(1). 

 

Because the borrower's allegations did not fall under either of those sections, the Court held that the borrower was not entitled to injunctive relief.

 

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

 

Following the commencement of a nonjudicial foreclosure against a borrower, the borrower filed suit seeking an injunction to prevent the foreclosure. 

 

The borrower alleged that the deed of trust was assigned and transferred in a manner that rendered such assignments void due to what the borrower alleged were "numerous breaks and misrepresentations in the chain of title."  For instance, the borrower asserted that his loan was allegedly transferred from a second mortgagee to a third mortgagee on March 23, 2011, yet the original mortgagee's beneficiary recorded an assignment four months later, purporting to transfer the loan to the second mortgagee. 

 

On April 19, 2014, the third mortgagee recorded and filed a Substitution of Trustee, and the newly substituted trustee immediately filed a Notice of Default on the loan.

 

The borrower asserted, among other things, that the mortgagees lacked standing to foreclose because they were not property assigned an interest in the deed of trust, citing Cal. Civil Code § 2924(a)(6), and for breach of contract due to the mortgagees' alleged failure to enter into a permanent loan modification after the borrower successfully made three trial loan modification payments.

 

The trial court sustained the mortgagees' demurrers (motions to dismiss), dismissed the borrower's suit, and entered a judgment of dismissal without leave to amend.  The instant appeal followed. 

 

As you may recall, Cal. Civil Code § 2924(a)(6) provides that only the holder of the beneficial interest under a mortgage or deed of trust may foreclose.  In the HBOR, the California Legislature authorized a private right of action to enjoin a nonjudicial trustee's sale where a lender violates any one of nine statutory provisions. 

 

Under Cal. Civil Code § 2924.12(a)(1), a borrower may bring an action for injunctive relief due to a material violation of Cal. Civil Code §§ 2923.55, 2923.6, 2923.7, 2924.9, 2924.10, 2924.11, or 2924.17.  Under Section 2924.19(a)(1), a borrower may bring an action for injunctive relief due to a material violation of Sections 2923.5 or 2924.18.

 

The Appellate Court began its analysis by noting that while the HBOR did not apply retroactively, HBOR's provisions were applicable to the subject action, because the April 9, 2014 Notice of Default was recorded after the January 1, 2013 effective date of the HBOR. 

 

The Court then pointed out that while the HBOR is applicable to this case, Section 2924(a)(6) -- the statutory provision specifically cited by the borrower -- is not one of the nine sections that explicitly provides for injunctive relief. 

 

Because the Legislature chose to provide for injunctive relief for some HBOR violations, but not for others, the Court found that such relief is not impliedly available for an alleged violation of Section 2924(a)(6).

 

The Appellate Court then reviewed the legislative history of the HBOR, finding that the HBOR's enforcement mechanisms were drafted to avoid "frivolous claims" and attempts to "merely delay legitimate foreclosure proceedings."  Significantly, the Conference Committee Reports stated that while damages are available postforeclosure, prior to a foreclosure sale the only remedy that a borrower may seek is an action to enjoin a violation of the specified sections, along with any trustee's sale.  The Court thus found a clear indication that the Legislature intended to preclude borrowers from seeking to enjoin a foreclosure sale for reasons other than those expressly authorized. 

 

The Court then addressed the apparent tension with the California Supreme Court's recent holding in Yvanova v. New Century Mortgage Corp., 62 Cal. 4th 919 (Cal. 2016).  In Yvanova, the California Supreme Court recognized a cause of action for wrongful foreclosure under a similar set of facts.  In Yvanova, the California Supreme Court held that after a foreclosure, a borrower may potentially "base an action for wrongful foreclosure on allegations a purported assignment of the note and deed of trust to the foreclosing party bore defects rendering the assignment void."  See Yvanova at 923. 

 

Here, the Court distinguished Yvanova on two grounds.  First, the instant appeal was not a wrongful foreclosure but an action brought preemptively to enjoin a foreclosure, which Yvanova did not address.  Second, Yvanova involved a foreclosure that preceded the effective date of the HBOR and thus did not address the effect of that legislation.  The Court noted that the borrower may have a postforeclosure cause of action for damages under Yvanova; the Legislature appears to have simply made a policy decision as to preforeclosure injunctive relief, where foreclosure delays may occur due to litigation, even where the lenders are ultimately vindicated. 

 

Next, the Court rejected the borrower's argument that he should have been given leave to amend his complaint to allege violations of Cal. Civil Code § 2923.17, as the declarations required by that section were all properly filed below.  The Court noted that nothing precludes the borrower from challenging the substance of those declarations in a postforeclosure suit, which the Court held is the borrower's exclusive remedy for the alleged violations under the HBOR's statutory scheme.

 

Finally, the Court rejected the borrower's breach of contract claim, finding the claim barred under the two year statute of limitations for breach of an oral contract.  Cal. Code Civ. Proc., § 339).  Accepting the borrower's allegations as true, the latest date the breach of contract suit could have accrued was March 23, 2011; however, the original complaint was not filed below until August 13, 2014, over three years after the alleged breach. 

 

Thus, the Appellate Court held that the plain language and legislative history of the HBOR does not authorize a court to enjoin a violation of Section 2924(a)(6), and therefore no injunctive relief is available for a violation of that section. 

 

Moreover, the Court held that the borrower failed to show a reasonable possibility of amending his complaint to plead any of the authorized grounds for injunctive relief under the HBOR. 

 

Accordingly, the trial court's judgment of dismissal was affirmed on all counts.

 

 

 

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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FYI: Fla App Ct (2nd DCA) Holds Non-Party HOA Not Subject to Foreclosure, and Thus HOA Lien Not Limited

The District Court of Appeal of the State of Florida, Second District, recently reversed a summary judgment in favor of a mortgagee in two consolidated actions for declaratory and injunctive relief regarding the extent of the mortgagee's liability for unpaid homeowners' association assessments, holding that the trial court erred because the homeowners' association was not joined as a party, and therefore its liens remained unaffected by foreclosure of the mortgages.

 

The Court pointed out that the only remedies available to a purchaser such as the mortgagee was to move "to compel redemption or filing a de novo action to re-foreclose."

 

A copy of opinion is available at:  Link to Opinion

 

The servicers of mortgage loans on two properties subject to a recorded homeowners' association's (HOA) declaration of covenants, conditions and restrictions sued to foreclose. The HOA, which had recorded liens for unpaid assessments against the subject properties, was not named as a party in either action.

 

Final judgments of foreclosure were entered and the first-lien mortgagee was the highest bidder at the foreclosure sales. It then requested an "estoppel letter" from the HOA setting forth the amount owed for unpaid assessments.

 

The mortgagee refused to pay the amount sought and filed two lawsuits seeking a declaration that its liability was limited to assessments coming due after it acquired title and an injunction compelling the HOA to provide a correct estoppel letter.

 

The HOA argued that because it was not joined as a party, its liens were not extinguished. In addition, the HOA argued, if it had been joined, it could have bid on the properties and shared in any surplus as a junior lienor.

 

The trial court rejected the HOA's arguments and entered summary final judgment in the mortgagee's favor, concluding that it was liable only for assessments coming due after it acquired title. The HOA appealed.

 

On appeal, the Second District Court of Appeal examined the language of the declaration, which provided that the association's lien was subordinate to first mortgage liens as to assessments coming due prior to acquisition of title by foreclosure or deed in lieu.

 

The Court distinguished one of its prior decisions from 2010 and another from the Fifth District in 2011 relied upon by the trial court because in the case at bar, while the declaration subordinated the association's lien to first mortgages, it did "not contain language specifically limiting or eliminating a subsequent owner's liability for unpaid assessment[s]."

 

In addition, the Court reasoned that the two cases relied upon by the trial court "are distinguishable in that they do not address a subsequent owner's liability for assessments following a foreclosure that failed to include the association."  The Second District Court of Appeal reasoned that at common law, the foreclosure of a senior lien extinguished junior liens included in the judgment and "[i]t is well settled that when a junior lienor is omitted as a party to a foreclosure action brought by a senior mortgage holder, 'the lien of the junior mortgagee is unaffected by the judgment.'"

 

The Court concluded that because the mortgagee's servicers did not join the HOA as a party in the foreclosure actions, the HOA's liens "have not been foreclosed and remain on the properties as if the foreclosures never happened."

 

The Second District Court of Appeal pointed out that the only remedies available to a purchaser such as the mortgagee was to move "to compel redemption or filing a de novo action to re-foreclose." It also stressed that the mortgagee chose the wrong remedies because neither actions for declaratory or injunctive relief are "a recognized remedy for removing the lien of an omitted junior lienor."

 

The Court reversed and remanded, concluding that because the mortgagee failed to prove that its liability for assessments was limited by the declaration and that it was entitled to an estoppel letter for the reduced amount, the trial court erred in granting summary judgment in the mortgagee's favor.

 

 

 

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

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