FYI: IN Sup Ct Holds Out-of-State Consumer Attorneys Not Exempt from Indiana Consumer Protection Statutes

In an action brought by the Indiana Attorney General against a Florida-based foreclosure defense law firm and its owner-officer, the Supreme Court of Indiana recently held that none of the defendants were expressly or impliedly exempt from liability under four Indiana state consumer protection statutes.

 

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

 

A foreclosure defense law firm incorporated in Florida ("law firm") and its owner-officer (collectively, "defendants") subcontracted with at least five Indiana attorneys to provide local services through "of Counsel," "associate," and/or "Partnership" agreements with the law firm — prior to the law firm's registration as a foreign entity authorized to conduct business within the state.

 

Upon receipt of complaints from Indiana consumers, the Office of the Indiana Attorney General investigated the law firm, and found that:  (i) the Indiana consumers maintained no contact with their local Indiana-based attorneys following retention;  (ii) no borrowers obtained a successful loan modification, and;  (iii) all of the conduct occurred prior to the law firm's registration with the Indiana Secretary of State.

 

The State of Indiana filed suit against the law firm and its owner-officer, alleging their conduct violated four Indiana consumer protection statutes: (1) the Indiana Credit Services Organizations Act (CSOA), Indiana Code chapter 24-5-15 (2016); (2) the Indiana Mortgage Rescue Protection Fraud Act (MRPFA), Indiana Code article 24-5.5 (2016); (3) the Indiana Home Loan Practices Act (HLPA), Indiana Code article 24-9 (2016); and (4) the Indiana Deceptive Consumer Sales Act (DCSA), Indiana Code chapter 24-5-0.5 (2016).

 

The law firm defendants moved for summary judgment in the trial court, arguing that they were statutorily exempted from liability.  After the trial court denied the motion, it certified its order for interlocutory appeal to the Indiana Court of Appeals. 

 

The Appellate Court affirmed in part, reversed in part, and remanded, finding that the law firm was exempt from liability under everything but a portion of the DCSA claim, while its owner-officer was not exempt under any of the four statutes. Consumer Attorney Servs., P.A. v. State, 53 N.E.3d 599, 612 (Ind. Ct. App. 2016), reh'g denied.  The State petitioned to transfer and vacate the appellate court's ruling, and the Indiana Supreme Court granted cert.

 

The Indiana Supreme Court first addressed the defendants' argument that they were exempt front the CSOA, which mandates that "credit services organizations" provide potential customers with certain written disclosures, obtain appropriate surety bonding, and refrain from engaging in "deceptive acts," including imposition of charges before services are rendered.  Ind. Code §§ 24-5-15-2 through -8.

 

Citing precedent under a similar Kansas consumer protection statute, the law firm defendants argued that they were both exempt from the CSOA because the statute expressly excludes liability for any "person admitted to the practice of law in Indiana if the person is acting within the course and scope of the person's practice as an attorney," Ind. Code § 24-5-15-2(b)(6), and defines "person" as "an individual, a corporation, a partnership, a joint venture, or any other entity." Ind. Code § 24-5-15-4.

 

Conceding that the statutes are ambiguous read together, and that the exemption should reach exempted Indiana attorneys' firms in general, the State argued that a genuine issue of material fact remained as to whether the law firm defendant was the "bona fide law firm of the Indiana attorneys," and as to whether it was registered to conduct business in Indiana during the pertinent facts of this case. State's Br. at 22.

 

In a matter of first impression, the Indiana Supreme Court agreed that the CSOA's language is facially ambiguous, and tuned to its canons of statutory construction, concluding that the statute should be constructed liberally in favor of those invoking its protections—i.e., "protecting [its] vulnerable [citizens] from further financial depletion by predators."

 

Under the CSOA, the term "person" is part of the definition of a "credit services organization," Ind. Code § 24-5-15-2(a), applies to those who violate the CSOA, Ind. Code § 24-5-15-11, but also to those damaged by a credit services organization, Ind. Code § 24-5-15-9. 

 

Reading the statute as a whole, the Indiana Supreme Court concluded that the General Assembly's expansive definition of "person" in Indiana Code section 24-5-15-4 was not intended to apply to every usage of that word in the CSOA, but rather read in context for each usage, with only the practicable definitions applying.  As such, it concluded that the that only individual Indiana lawyers were intended to be exempted under Indiana Code section 24-5-15-2(b) of the CSOA.

 

Next, the Supreme Court interpreted a similar exemption contained in the MRPFA which serves to prevent a "foreclosure consultant" from engaging in the acts prohibited under the CSOA, and also, among other things, from gaining any personal interest in real property that is the subject of the client's foreclosure, or from gaining power of attorney over the homeowner. Ind. Code § 24-5.5-5-2.  

 

The relevant exemption under the MPRFA is more limited in scope, applying to "[a]n attorney licensed to practice law in Indiana who is representing a mortgagor." Ind. Code § 24-5.5-1-1(6).  Because "attorney" is not defined under the statute, the Supreme Court read the term under its plan, ordinary and usual meaning, to read that it unambiguously exempts attorneys as individuals, but not the law firms which they are affiliated, because only an individual can be "licensed to practice law in Indiana."  See Ind. Admis. Disc. R. 17 Sec. 1.

 

The Indiana Supreme Court rejected the defendants' argument that supporting a CSOA law firm exemption would "uphold[] the authority of the Indiana Supreme Court to discipline attorneys [and] regulate the practice of law," reasoning that the State's General Assembly would choose  to exempt attorneys specifically (who are subject to far more extensive disciplinary action by this Court), while not exempting their firms under the State Admission and Disciplinary Rules.

 

Accordingly, the Indiana Supreme Court held that under the CSOA exemption in Indiana Code section 24-5-15-2(b)(6) a "person" must be both "admitted to the practice of law in Indiana" and "acting within the course and scope of the person's practice as an attorney." Therefore, "although a law firm may qualify as a 'person' with respect to other provisions of the CSOA, it does not qualify for an exemption under Indiana Code section 24-5-15-2(b)(6)."

 

Finally, the Court examined the defendant law firm's argument that it is exempt from liability under: (i) the HLPA, which prohibits "deceptive act[s] in connection with a mortgage transaction or a real estate transaction," Ind. Code § 24-9-3-7(c)(3), and further defines "deceptive act" to include MRPFA violations, Ind. Code § 24-9-2-7(a)(2), and; (ii) the DCSA which bars an "unfair, abusive, or deceptive act, omission, or practice in connection with a consumer transaction," Ind. Code § 24-5-0.5-3(a), but expands the definition of "deceptive act" to specifically include CSOA and MRPFA violations, Ind. Code §§ 24-5-0.5-3(b)(28), (35).

 

Neither the HLPA or DCSA contain express attorney exemptions.  However, the defendant law firm argued that the underlying violation of the HLPA and DCSA falls within the scope of the MRPFA and CSOA, thus triggering exemption under those statutes. 

 

However, because the Indiana Supreme Court failed to find any law firm exemption under either of those statutes, it held that no exemption extends to these ancillary claims. Further, because the law firm's owner-officer was never licensed as an attorney in the State of Indiana, the Court held the individual lawyer could not claim exemptions contained in the CSOA or MRPFA, nor extend them to the HLPA and DCSA.

 

Accordingly, the denial of the motion for summary judgment filed by the defendant law firm and its owner-officer 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: Cal App Ct (2nd Dist) Holds Res Judicata Did Not Bar TILA Action Based on Prior Contract Action

The Court of Appeals of California, Second District, recently held the dismissal of a borrower's breach of contract claim in a prior lawsuit did not bar a claim in subsequent lawsuit for violation of the federal Truth in Lending Act, 15 U.S.C. § 1601, et seq. ("TILA"), even if the breach of contract and TILA claims were based on the same set of underlying facts, because the right to full disclosures under TILA was a distinct primary right from the common law rights in contract.

 

However, although the Appellate Court determined that the dismissal based on the doctrines of res judicata and issues preclusion was reversible error, the dismissal was affirmed because the borrower's claims, including the TILA cause of action, were barred by the statute of limitations or otherwise failed to state a valid cause of action.  

 

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

 

In the first lawsuit, the borrower's complaint asserted causes of action for breach of contract, temporary restraining order and preliminary injunction, violation of the California's unfair competition law in Bus. & Prof. Code § 17200, et seq. ("UCL"), specific performance, and equitable rescission.  The borrower alleged that the lender failed to disclose fees when she refinanced the loan, and it added additional sums for "escrow option insurance" when her loan was subsequently modified.  The borrower claimed that these undisclosed sums made the loan unaffordable.

 

The trial court sustained the defendants' demurrer based on several deficiencies in the complaint.  The borrower filed an amended complaint that was virtually identical to the original complaint which, once again, did not attach any of the alleged agreements or describe their terms in any greater detail.  The court sustained the defendants' demurrer to the amended complaint without leave to amend.  The Appellate Court affirmed.  The California Supreme Court denied the borrower's request for review.

 

The borrower then filed a new complaint, this time omitting the alleged breach of contract claim, and instead asserting causes of action for violation of TILA, the UCL, fraudulent omission/concealment, and injunctive relief.  The general allegations in the complaint were identical to those in the prior lawsuit. 

 

The borrower alleged that the lender violated TILA by failing to make required disclosures with respect to the "escrow option insurance," which was supposedly surreptitiously added to her monthly loan payment obligation.  She also alleged that the lender's violation of TILA was an unlawful business practice in violation of the UCL, and the lender's alleged failure to disclose the "escrow option insurance" in the loan modification agreement constituted fraudulent concealment.  According to the borrower, had she known the true facts, she would have considered other financing options, and thus requested injunctive relief preventing the sale of the property.

 

The lender demurred, contending that the borrower's new complaint was barred as a matter of law by the doctrines of claim preclusion and issue preclusion. 

 

The lender argued that the borrower was asserting the same primary right in both actions (claim preclusion), and the issues alleged had been actually litigated and decided against the borrower on the merits (issue preclusion).  The lender also argued that the TILA and fraud causes of action were untimely; the borrower lacked standing to assert a UCL claim because she failed to allege she had lost money or property as a result of the lender's actions; and the claim for injunction was improper because injunctive relief is a remedy and not a cause of action. 

 

In her opposition, the borrower emphasized that she had not pleaded either violation of TILA or fraud in her prior lawsuit. 

 

The trial court sustained the defendants' demurrer without leave to amend.  In so ruling, it found that "[t]he 'primary right' of Plaintiff in both actions—the right to be free from increased loan payments that were not agreed to—is the same, which means the present proceeding is on the same 'cause of action' as the prior proceeding."  The trial court also ruled the claims were barred by collateral estoppel because her claims "all involve the same underlying issue—the validity of the increased loan payments that Plaintiff allegedly did not agree to," and that issue had been litigated and decided.  Moreover, the trial court held that the TILA and fraud claims were time barred; the borrower lacked standing to bring a UCL claim; and the cause of action for injunctive relief was not a valid cause of action.  The borrower appealed.

 

First, the Appellate Court had to determine if the borrower's TILA cause of action was subject to claim preclusion or issue preclusion.

 

As you may recall, the doctrine of res judicata has two aspects — claim preclusion and issue preclusion.  DKN Holdings LLC v. Faerber (2015) 61 Cal.4th 813, 824; Boeken v. Philip Morris USA, Inc. (2010) 48 Cal.4th 788, 797.

 

Claim preclusion prevents relitigation of the same cause of action in a second suit between the same parties or parties in privity with them.  Claim preclusion arises if a second suit involves (1) the same cause of action (2) between the same parties [or those in privity with them] (3) after a final judgment on the merits in the first case.  DKN Holdings, 61 Cal.4th at 824.  The bar applies if the cause of action could have been brought, whether or not it was actually asserted or decided in the first lawsuit.  Busick v. Workermen's Comp. Appeals Bd. (1972) 7 Cal.3d 967, 974.

 

Issue preclusion prohibits the relitigation of issues argued and decided in a previous case even if the second suit raises a different cause of action.  The doctrine applies "(1) after final adjudication (2) of an identical issue (3) actually litigated and necessarily decided in the first suit and (4) asserted against one who was a party in the first suit or one in privity with that party."  DKN Holdings, 61 Cal.4th at 825.  The doctrine differs from claim preclusion in that it operates as a conclusive determination of issues; it does not bar a cause of action.  Id.

 

The Appellate Court held that the trial court erred in its ruling because different primary rights may be violated by the same wrongful conduct.  As support, the Appellate Court relied on Agarwal v. Johnson (1979) 25 Cal.3d 932, 954-955, which held that an employer's racially discriminatory conduct may violate distinct primary rights under federal civil rights law and state tort law regarding defamation and intentional infliction of emotional distress.

 

In this case, although the borrower's contract and TILA claims were largely based on the same set of underlying facts, the Appellate Court determined that the two actions do not involve the same primary rights 

 

The Appellate Court held that the primary right at issue in the borrower's TILA cause of action was the right to full disclosure of the material terms of the loan and the subsequent loan modification.  This was, according to the Appellate Court, a federal statutory right distinct from the common law right to have enforced only those contractual terms which the borrower had agreed to (the claim presented by her initial lawsuit).  Thus, the Appellate Court concluded that the doctrine of claim preclusion did not bar the TILA cause of action.

 

Notably, the opinion was silent on whether the borrower could have, or should have, raised the TILA cause of action in the first lawsuit.  In fact, in the new complaint, the borrower alleged that she discovered the material omissions by May 2012 – well before she filed the original lawsuit in July 2013. 

 

Turning next to issue preclusion, the Appellate Court held that the prior ruling on the merits of the borrower's contract claim did not preclude the TILA cause of action.  This is because the adequacy of the disclosures at closing and in the loan modification agreement were neither actually litigated nor determined in the prior lawsuit.  Instead, the trial court sustained the demurrer because the borrower failed to allege sufficient facts to state a valid cause of action.  Thus, the Appellate Court concluded that the trial court erred by applying the doctrine of issue preclusion to dismiss the TILA claim.

 

However, the Appellate Court agreed with the trial court that the TILA cause of action was untimely under the statute of limitations. 

 

As you may recall, most TILA actions must be filed "within one year from the date of the occurrence of the violation."  15 U.S.C. § 1640(e).  A violation of TILA based on specific disclosures, however, may be brought within three-years.  Id.; 15 U.S.C. § 1639.  The violations here allegedly occurred in 2007 and 2010.  The borrower's current lawsuit was not filed until August of 2015.  Under either the one year or three-year statute of limitations, the borrower's claim was untimely.  Therefore, the Appellate Court concluded the untimely TILA cause of action was properly dismissed. 

 

Next, the trial court had determined that the borrower lacked standing because she could not show any loss of money or property as a result of the allegedly unlawful business practices.  The Appellate Court disagreed. 

 

In a previous decision, the Appellate Court had held that "the existence of an enforceable obligation, without more, ordinarily constitutes actual injury or injury in fact."  Sarun v. Dignity Health (2014) 232 Cal.App.4th 1159, 1167.  Here, the borrower had alleged that she paid money to the bank in excess of what she should have owed.  According to the Appellate Court, these allegations were sufficient to allege injury in fact to confer standing to assert a UCL cause of action. 

 

However, an action to enforce the UCL must be commenced within four years after the cause of action accrued.  Bus. & Prof. Code § 17208.  Because both the refinancing and the loan modification occurred more than four years before the new lawsuit was filed in August 2015, the Appellate Court concluded that the borrower's UCL claim was time-barred.

 

Relatedly, the borrower's fraudulent concealment claim, like her TILA and UCL claims, was based on the alleged nondisclosure of material terms of the loan refinancing and loan modification.  A cause of action for fraud is governed by a three-year statute of limitations.  Code of Civ. P. 338(d).  Because the borrower alleged that she discovered the alleged fraud when her loan was supposedly forensically examined in May 2011, the cause of action filed in August of 2015 was barred by the three-year statute of limitation. 

 

Finally, the Appellate Court ruled that the borrower's request for injunctive relief was properly dismissed because she failed to allege any valid cause of action.

 

Accordingly, the Appellate Court affirmed the order dismissing the action.  

 

 

 

 

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: Maryland High Court Holds Defendant Waived Arbitration by Filing Collection Action, No Prejudice Required for Waiver

The Court of Appeals of Maryland, the state's highest court, recently held that a debt collector waived its contractual right to arbitrate the claims against it when it chose to litigate the collection action outside of arbitration.

 

The Court also held that a finding of prejudice was not required under Maryland law to find waiver of the right to arbitrate.

 

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

 

A consumer opened a credit card account in 2003. The account agreement contained an arbitration provision that permitted either party to elect mandatory, binding arbitration for any claim.  

 

In 2007 the consumer stopped making payments on the account and the creditor sold the account to a debt buyer. The debt buyer filed suit in small claims court to collect the outstanding balance.  The small claims court entered a default judgment against the consumer for $4,520.54.

 

At the time of the default judgment the debt buyer was not licensed to collect debts in Maryland. In 2013 the Maryland Court of Special Appeals issued an opinion allowing debtors to collaterally attack a judgment obtained by unlicensed collection agencies and holding that a judgment entered in favor of an unlicensed debt collector is void as a matter of law.

 

Shortly thereafter, the consumer here filed a putative class action complaint in Maryland state court asserting that the small claims court default judgment entered against him was void under the new opinion from the Court of Special Appeals.  The consumer asserted claims for declaratory and injunctive relief, pre- and post-judgment costs, unjust enrichment, and violations of the state consumer debt collection act and consumer protection act. 

 

The debt buyer moved to compel arbitration pursuant to the arbitration provision in the account agreement and under Maryland's state arbitration laws.  The trial court held an evidentiary hearing on the existence of an arbitration agreement between the parties.

 

The consumer argued that the debt buyer waived its right to arbitrate when it brought the collection lawsuit against the consumer in small claims court. Incidentally, neither party argued that the question of waiver of arbitration was for the arbitrator to decide instead of the court.

 

The trial rejected the consumer's argument and granted the motion to compel arbitration.  The consumer appealed to the Court of Special Appeals, which is an intermediate appellate court in Maryland, and it affirmed.

 

The Maryland Court of Appeals granted certiorari to answer the question of whether the debt buyer waived its contractual right to arbitrate, which depended on two questions of law: (i) whether the debt buyer had the option to arbitrate the collection action under the account agreement, and, if so, (2) whether, under Maryland law, the collection lawsuit was "related" to the class action lawsuit.

 

As you may recall, under Maryland state law, implied waiver occurs when a party takes an "action inconsistent with an intention to insist upon enforcing the arbitration clause."

 

The Court of Appeals rejected the argument that the arbitration provision excluded claims filed in small claims court, reasoning that "claims filed in small claims court are not subject to arbitration" meant that the collection action was subject to arbitration up until it was filed as a lawsuit in small claims court. After the collection action was filed, the Court held, the account agreement restricted arbitration of that claim. Thus, the Court held that by choosing to litigate the collection claim, the debt buyer implicitly waived its right to arbitrate that claim and any other claim "related" to it.

 

Whether the collection claim was "related" to the class action claim depended on whether "all parts of the dispute [are] deemed to be interrelated" under Charles J. Frank, Inc. v. Associated Jewish Charities of Baltimore, Inc., 294 Md. 443 (1982).  

 

The Court of Appeals found that the existence of the consumer's class action claims depended entirely on the debt buyer having filed the collection lawsuit.  Thus, the Court held, the claims were related because they were all part of "one basic issue."  The Court noted similar rulings in Nevada and Utah state courts.  

 

Thus, the Court held that the debt buyer implicitly waived its right to arbitrate the consumer class action that was based on the debt buyer's collection lawsuit when it chose to litigate the collection claim instead of arbitrate.

 

On an issue of first impression, the Court of Appeals also analyzed whether a finding of prejudice was required to find waiver of the right to arbitrate, and held that Maryland law did not require it.

 

Accordingly, the Court of Appeals reversed the grant of the motion to compel arbitration.

 

 

 

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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INVITATION: CCFL's Spring 2017 Conference | May 15-16, 2017 | Loyola Law School in Chicago

You are cordially invited to join us at the Conference on Consumer Finance Law's Spring 2017 conference in Chicago.

 

Details of price, dates, accommodations, topics, and speakers are in the attached brochure, and are available online at:

 

http://www.ccflonline.org/conference/

 

Hope to see you there!

 

 

 

 

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   |   Michigan   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

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FYI: Ill App Ct (1st Dist) Holds Mortgagee's Affidavit for Alternative Service Fatally Deficient

The Appellate Court of Illinois, First District, recently vacated a default foreclosure judgment in favor of a mortgagee and against a borrower because the mortgagee's affidavit in support of its motion for alternative service did not establish the required due diligence demonstrating the investigation made to determine the borrower's whereabouts, and the trial court therefore lacked personal jurisdiction over the borrower.

 

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

 

A mortgagee initiated a foreclosure action against a borrower based upon a mortgage loan between the parties.  The mortgagee was not able to personally serve the borrower.  After several unsuccessful attempts, the mortgagee filed a motion for alternative service.

 

In in support of its motion for alternative service, the mortgagee submitted two affidavits of process servers documenting their unsuccessful attempts to serve the borrower's husband at the subject property and a due diligence affidavit.  The mortgagee's due diligence affidavit documented unsuccessful attempts to serve the borrower at the vacant subject property and noted that the mortgagee knew "of no other address, location, or avenue of discovery to pursue at this time to successfully execute service upon" the borrower. 

 

The trial court granted the mortgagee's motion for alternative service. The mortgagee then carried out the alternative service, and the trial court entered judgment in favor of the mortgagee in July 2014. The subject property was sold at judicial sale in November 2014. The trial confirmed the sale in February 2015.

 

Subsequently, the borrower filed a timely petition under section 2-1401 of the Illinois Code of Civil Procedure to quash service and to vacate the judgment. 

 

As you may recall, Section 2-1401 allows for relief from final orders and judgments more than 30 days but less than two years after their entry. 735 ILCS 5/2-1401.

 

The borrower's petition alleged that the borrower and her husband moved to a new address in January 2012 and that if the mortgagee had conducted due diligence, then it could have found her at the new address.

 

The trial court denied the borrower's 2-1401 petition.  This appeal followed.

 

The Appellate Court began by examining the requirements for service.  Section 2-203 of the Illinois Code of Civil Procedure allows for service of process by leaving a copy of the summons with the defendant personally, or by leaving a copy at the defendant's usual place of abode with a family member or a person residing there age 13 or older, along with mailing the summons to that address. 735 ILCS 5/2-203.

 

If personal or abode service is impractical, then a plaintiff may request leave to use alternative service.  735 ILCS 5/2-203.1.  A section 2-203.1 motion for alternative service must include an affidavit, stating the investigation made to determine the defendant's whereabouts and why service is impractical under section 2-203, "including a specific statement showing that a diligent inquiry as to the location of the individual defendant was made and reasonable efforts to make service have been unsuccessful." Id.

 

The First District analyzed the mortgagee's affidavits in support of alternative service and determined that the mortgagee "failed to conduct any type of inquiry into where defendant may be living after finding the Subject Property vacant."

 

Specifically, the Appellate Court found that the mortgagees due diligence affidavit did not fulfill section 2-203.1's requirements because it did "not identify any type of investigation into [borrower's] current location, let alone an honest and well-directed one as permitted by the circumstances."

 

Moreover, the First District noted that the mortgagee's due diligence affidavit ignored that on December 2, 2012, the mortgagee served the borrower's husband at the borrower's new address that the mortgagee purportedly could not find.  Despite this, the mortgagee made no attempt to serve the borrower at this address.  The Appellate Court found that this oversight supported its conclusion that the mortgagee did not conduct the required due diligence.

 

Thus, the Appellate Court held, while section 2-203.1 contains no required "magic words" to demonstrate due diligence, the affidavit must at least "set forth facts that demonstrate a diligent inquiry as to the location of the defendant."  Here, the Court noted, the affidavit failed to identify any "effort to obtain an alternate address for {borrower] and is therefore fatally defective."

 

The First District ruled that the trial court erred in denying the section 2-1401 petition because the affidavit attached to the motion for alternative service did not establish the required due diligence. 

 

Thus, the Appellate Court ruled, the mortgagee did not properly serve the borrower, the trial court did not have personal jurisdiction over the borrower, and the judgment was void.  U.S. Bank National Ass'n v. Johnston, 2016 IL App (2d) 150128 ("[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.")

 

Accordingly, the First District reversed the trial court's judgment in favor of the mortgagee and remanded the case for further proceedings consistent with its decision.

 

 

 

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   |   Michigan   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

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FYI: 5th Cir Holds No Wrongful Foreclosure Without Completed Foreclosure Sale, Substitute Trustee Fraudulently Joined

The U.S. Court of Appeals for the Fifth Circuit recently affirmed a trial court's denial of a mortgagor's motion for remand because the non-diverse substitute foreclosure trustee was improperly joined in order to defeat diversity jurisdiction.

 

The Fifth Circuit also affirmed the trial court's summary judgment ruling in favor of the trustee and loan servicer because the foreclosure sale never took place, and therefore the mortgagor could not state a cause of action for wrongful foreclosure under Texas law.

 

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

 

The mortgagor purchased a home with her husband in 2004 in Grand Prairie, Texas.  Her husband signed the promissory note, but the plaintiff mortgagor did not. She did, however, sign the deed of trust.

 

The plaintiff mortgagor filed for divorce, and the state court awarded her exclusive use of the property on a temporary basis.

 

The husband defaulted on the loan and failed to cure the default, and the substitute trustee sent a notice of acceleration and notice of substitute trustee sale to the property address.

 

One day before the scheduled foreclosure sale, the plaintiff filed suit in Texas state court "alleging wrongful foreclosure and requesting a temporary restraining order and injunctive relief and, in the alternative, reformation of the deed of trust. She also alleged that she did not receive proper notice of the foreclosure sale and that she was not given an opportunity to cure the default."

 

The state court issued a temporary restraining order stopping the foreclosure sale. The mortgagee, substitute foreclosure trustee, and servicer defendants then removed the case to federal court on the basis of diversity jurisdiction, even though the substitute trustee was a non-diverse defendant, arguing that the substitute foreclosure trustee was "improperly joined for the sole purpose of defeating diversity" as the foreclosure sale never took place.

 

The trial court disregarded the substitute foreclosure trustee's joinder for purposes of determining jurisdiction, concluded that removal was proper and dismissed all claims against the substitute foreclosure trustee with prejudice.

 

The trial court later granted summary judgment in favor of the mortgagee and servicer, reasoning that because no foreclosure had actually occurred, there was no wrongful foreclosure in violation of the Texas statute governing the procedure for noticing a foreclosure sale. In addition, the trial court found that the fact the plaintiff's name was misspelled on the deed of trust and that the Dallas County document number was incorrect on the notice of substitute trustee sale did not cause her any confusion or harm. Thus, the trial court also denied the plaintiff's request for injunctive relief and for reformation of the deed because her substantive claim failed on the merits.

 

The plaintiff moved for reconsideration or, alternatively, to refer the case to the bankruptcy court because she had filed for Chapter 7 relief in 2012. The trial court denied the motion, reasoning that plaintiff's claims arose after she filed bankruptcy and thus were not part of the bankruptcy estate. The plaintiff appealed.

 

On appeal, the plaintiff argued that the trial court erred by denying her motion to remand and finding that joinder of the substitute foreclosure trustee was improper because she had a valid wrongful foreclosure claim against the substitute foreclosure trustee under the Texas statute governing the procedure for noticing a foreclosure sale.

 

The Fifth Circuit rejected this argument, reasoning that "[a] substitute trustee has a duty under the deed of trust to 'act with absolute impartiality and fairness to the grantor in performing the powers vested in him by the deed of trust.' … [However,] breach of a trustee's duty does not constitute an independent tort; rather, it yields a cause of action for wrongful foreclosure. … A claim for wrongful foreclosure, however, cannot succeed, however, when no foreclosure has occurred."

 

The Fifth Circuit agreed with the trial court that because the plaintiff could not state a cause of action against the substitute trustee in state court, its joinder as defendant was improper, and the trial court correctly denied the motion to remand the case to state court.

 

The Appellate Court then turned to the trial court's grant of summary judgment in the defendants' favor, reasoning that "[b]ecause the case was removed to federal court based on diversity jurisdiction, the district court applied the substantive laws of Texas in analyzing whether summary judgment was appropriate."

 

Under Texas law, a wrongful foreclosure claim requires: "(1) a defect in the foreclosure sale proceedings; (2) a grossly inadequate selling price; and (3) a causal connection between the defect and the grossly inadequate selling price." However, relying upon an unpublished opinion, the Fifth Circuit held that "a party cannot 'state a viable claim for wrongful foreclosure' if the party 'never lost possession of the Property.'"

 

Noting that "courts in Texas do not recognize an action for attempted wrongful foreclosure[,]" the Fifth Circuit agreed with the trial court that because the foreclosure sale never took place, the plaintiff had no cause of action for wrongful foreclosure. Because the foreclosure sale never occurred, the Court did not find it necessary to address whether the notice of foreclosure was proper under the Texas Property Code.

 

Accordingly, the trial court's judgement 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: 3rd Cir Holds HPA's Auto-Term Date for PMI Uses Original Value, Not Modification Value

The U.S. Court of Appeals for the Third Circuit recently held that the calculation of the private mortgage insurance (PMI) automatic termination date under the federal Homeowners Protection Act, 12 U.S.C. § 4901 et seq. (HPA) for modified loans is tied to the initial purchase price of the home, not the updated property value used for a borrower's modification. 

 

In so ruling, the Third Circuit rejected several arguments set forth by trade group amici, including reliance on Fannie Mae Servicing Guidelines that allow mortgage servicers to use the estimated value of the property used for a loan modification to calculate the new PMI auto-termination date.

 

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

 

As you may recall, private mortgage insurance protects the owner or guarantor of mortgage debt from a borrower's risk of default. Normally, lenders require borrowers to pay at least 20% of a home's purchase price in cash and finance 80% of the home's purchase price. If borrowers cannot pay at least 20%, then they must purchase mortgage insurance. Once the balance due on the loan falls below 80% of the home's purchase price, mortgage insurance is no longer necessary.

 

In the HPA, Congress set national standards for mortgage insurance termination. The HPA requires mortgage servicers to among other things:  (1) provide periodic notices to a borrower/mortgagor regarding mortgage insurance obligations;  (2) automatically terminate mortgage insurance on a statutorily defined schedule; and  (3) grant a borrower's request to cancel his mortgage insurance once certain conditions are met. See 12 U.S.C. §§ 4901-03.

 

Under the HPA, mortgage servicers must automatically terminate mortgage insurance for a fixed-rate loan on "the date on which the principal balance of the mortgage . . . is first scheduled to reach 78 percent of the original value of the property securing the loan." 12 U.S.C. § 4901(18)(A). The "original value" of a home is defined as "the lesser of the sales price of the property securing the mortgage, as reflected in the contract, or the appraised value at the time at which the subject residential mortgage transaction was consummated." 12 U.S.C. § 4901(12). 

 

The HPA also addresses the auto-termination date for loans that have been modified:  "If a mortgagor and mortgagee (or holder of the mortgage) agree to a modification of the terms or conditions of a loan pursuant to a residential mortgage transaction, the cancellation date, termination date, or final termination shall be recalculated to reflect the modified terms and conditions of such loan."  See 12 U.S.C. § 4902(d).

 

In this case, the borrower purchased her home for $553,330, but only needed to borrower $497,950 at a fixed interest rate.  Because the loan-to-purchase price ratio was more than 80%, the mortgage lender required borrower to obtain PMI.  Under the HPA, borrower's loan-to-value ratio would reach 78% of the original value in March of 2016.

 

After the housing market crashed, the borrower had trouble making her mortgage payments.  As a result, borrower received a loan modification pursuant to the Home Affordable Mortgage Program ("HAMP") that reduced her principal balance to $463,737. 

 

Under the HPA, when the borrower modified her loan, the mortgage servicer was required to update the PMI auto-termination to reflect the "modified terms and conditions" to which the parties "agree[d.]"  Pursuant to the loan's modified amortization schedule, the loan-to-value would reach 78% in July of 2014.  The servicer, however, informed borrower that her PMI would automatically terminate in November of 2026.  As a result of extending the borrower's PMI auto-termination date, the borrower would have paid an additional $30,339.60 in PMI premiums.

 

When pressed by the borrower, the servicer explained that it extended the PMI auto-termination date because it substituted the estimated value of the property used for the loan modification (the Broker's Price Opinion ("BPO")) for that of the original value.  The substantially lower value of the property used for the loan modification ($420,000) caused the date where the loan-to-value reached 78% to be extended 10 years.

 

The borrower brought a putative class action against the servicer, alleging that by using the BPO to calculate the PMI auto-termination date, rather than the original appraised value, the servicer violated the HPA.  The servicer moved to dismiss the complaint, asserting that it did not violate the HPA because the BPO was supposed to be used to calculate the PMI auto-termination date.  The trial court denied the servicer's motion, but certified for appeal the question of whether the original value or the BPO used for the modification should be used to calculate the new PMI auto-termination date.

 

On appeal, the Third Circuit held that the HPA required calculation of the PMI auto-termination date on the basis of the original appraised value, which under the HPA here was the purchase price, not the BPO used for the modification. In doing so, the Court addressed several arguments that the servicer (and several mortgage lending and banking trade groups organizations) made in support of using the BPO to calculate the new PMI auto-termination date.

 

The Third Circuit first addressed the plain language of the HPA.  In particular, the HPA establishes that the termination date is "the date on which the principal balance of the mortgage, based solely on the initial amortization schedule for that mortgage, and irrespective of the outstanding balance for that mortgage on that date, is first scheduled to reach 78 percent of the original value of the property securing the loan[.]"  See 12 U.S.C. § 4901(18)(A). 

 

The Court stated "[s]imply put, a homeowner's termination date is when she will have paid down her loan's principal balance to the point that it equals 78% of her home's original value." 

 

In addressing the application of the HPA provision applicable to loan modifications, the Court stated "we ask which terms or conditions of [borrower's] loan she and [servicer] agreed to modify; then we recalculate her termination date to reflect the modified terms and conditions."  The Court concluded that the borrower and the servicer expressly agreed to modify the principal balance, which produced a new amortization schedule.  According to the Third Circuit, however, the borrower and servicer never agreed to replace the original value with the BPO. 

 

The servicer argued that the substitution of the BPO was permissible because it was a "term" or "condition" of the modification that the HAMP rules required.  In addressing the HAMP rules, the Court concluded that although the HAMP Handbook requires the servicers to obtain an assessment of the current value of the property for the modification, the HAMP Handbook says nothing about using the BPO to calculate the PMI auto-termination date. The Court further concluded that use of the BPO was not a "condition" of the modification, and rejected the servicer's argument that the borrower impliedly agreed to substitute the BPO for the original value. 

 

In addressing the legislative history of the HPA, the Court rejected the servicer's argument that the HPA's statutory structure and legislative history supported its interpretation that the BPO should be used to calculate the new PMI auto-termination date. 

 

The Third Circuit specifically analyzed the amendments to the HPA in 2000 where Congress intended for the amendments to eliminate "uncertainty relating to the cancellation and termination of [mortgage insurance] for . . . loans whose terms or rates are modified over the life of the loan." 146 Cong. Rec. H. 3578-02, H3579 (May 23, 2000).  The Court observed that Congress amended the HPA to address loan refinances, where the "original value" would be re-established because the refinance was a new "residential mortgage transaction."  See 12 U.S.C. § 4901(15).  Whereas, for loan modifications, the only change Congress made to the HPA was to address the language instructing the lender/servicer to recalculate the cancellation date, termination date, and final termination to reflect the modified terms and conditions.  See 12 U.S.C. § 4902(d).  The Court concluded that because Congress did not address the "original value" for loan modifications, it purposely intended for a different result between a loan modification and a refinance. 

 

The servicer's third argument relied exclusively on the Fannie Mae Servicing Guidelines, which expressly required the servicer to use the BPO and modified terms to re-calculate the PMI auto-termination date after a loan modification.  The Third Circuit rejected this argument for several reasons. 

 

First, the Court noted that the HPA contains a specific provision that anticipated the possibility of a conflict between the HPA and other pooling-and-servicing agreements that rely on the Servicing Guidelines, and explicitly provided that the HPA would take precedence: "The provisions of this chapter shall supersede any conflicting provision contained in any agreement relating to the servicing of a residential mortgage loan entered into by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or any private investor or note holder (or any successors thereto)." See 12 U.S.C. § 4908(b). The Third Circuit specifically held that "if the Servicing Guidelines would produce a result that departs from the [HPA's] text, there is a conflict, and per § 4908(b) the statute prevails."

 

Next, the Third Circuit concluded that the Fannie Mae Guidelines were not entitled to deference because (i) they were not consistent with the language contained in the HPA, and (ii) Fannie Mae was not an administrative agency and it did not administer or otherwise oversee the administration of the HPA. 

 

The Court then observed that the application of the Fannie Mae Guidelines would conflict with guidance offered by the Consumer Financial Protection Bureau (CFPB) in an August 2015 Compliance Bulletin.  In particular, the Compliance Bulletin at issue stated, in relevant part, "servicers should nonetheless remember that investor guidelines cannot restrict the [mortgage insurance] cancellation and termination rights that the [HPA] provides to borrowers."  See CFPB Bulletin 2015-03, Compliance Bulletin: Private Mortgage Insurance Cancellation and Termination, at 5, (Aug. 4, 2015).

 

The Third Circuit also rejected the servicer's reliance on the Fannie Mae Guidelines because Fannie Mae actually benefitted from mortgage insurance.  As a result, according to the Court, Fannie Mae "is not acting as an administrative agency neutrally interpreting laws for the marketplace; it is a market participant interpreting laws for the benefit of its shareholders and is not entitled to deference."  Thus, the Third Circuit held, the Guidelines were not persuasive. 

 

The servicer's final argument in support for using the BPO to calculate the new PMI auto-termination date was that the purpose of the HPA was to protect consumers from continuing to pay PMI after they had acquired 20% equity in the property.  Although the value of the borrower's property in this case had decreased, the servicer argued that using the "original value" for calculating the PMI auto-termination date for properties that had increased in value would actually cause those borrowers to pay PMI after they had acquired 20% equity in the property. 

 

The servicer contended that because most home values increase over time, most borrowers would benefit from using the BPO instead of the original value to calculate the PMI auto-termination date.  The Court rejected this rationale, and concluded that Congress, in enacting the HPA, "chose to prioritize predictability of consumers' mortgage insurance obligations over economic precision." 

 

The Third Circuit indicated there was inadequate support the servicer's argument that most property values increase over time, and that, as a result of the volatility of property values, the HPA attempted to "approximate the economic need for mortgage insurance in any particular case. This sacrifice of precision for predictability allows the [HPA] to provide both consumers and lenders with certainty as to their respective mortgage insurance obligations from the moment the original value is known and the amortization schedule is set."

 

In sum, the Court analyzed the issue of whether the original value or the BPO used for the modification is to be used for calculating the new PMI auto-termination date, and upheld the trial court's conclusion that the original value must be used in the calculation. 

 

In doing so, the Third Circuit expressly rejected reliance on the Fannie Mae Servicing Guidelines.  According to the Third Circuit, for servicers who were using the BPO value to calculate the new PMI auto-termination date based on the Guidelines, they will have to change their methods for calculating the new date.

 

 

 

 

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   |   Michigan   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

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

 

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The Consumer Financial Services Blog™

 

and

 

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