FYI: 11th Cir Holds Failure to File Proof of Claim in Receivership Does Not Extinguish Security Interest

The U.S. Court of Appeals for the Eleventh Circuit recently held that a court cannot extinguish a secured creditor's state-law security interests for failure to file a proof of claim during the administration of an equity receivership over entities involved in a Ponzi scheme.

 

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

 

The U.S. Securities and Exchange Commission filed an action seeking the appointment of an equity receiver following the collapse of a Ponzi scheme.  The trial court appointed a receiver to "marshal and safeguard" the defendants' assets for the benefit of investors.

 

The trial court entered an order setting-up a claims administration process, which required that investors and non-investors file a proof of claim by a claim bar date providing the amount owed and supporting documents. The order did not distinguish between secured and unsecured creditors.

 

A bank that held mortgages securing loans against three properties under the receiver's control filed a proof of claim as to one of the properties, but not the other two, by the claims bar date.

 

The bank filed a motion seeking a determination that it did not have to file a proof of claim to preserve its security interests in all three properties or, alternatively, an order allowing it to file a late claim as to the two properties for which it had not filed a proof of claim based on excusable neglect under Federal Rule of Civil Procedure 60(b). The trial court never ruled on the motion.

 

Later, the receiver file a motion seeking: a) a determination that the bank's failure to submit proofs of claim for the two properties for which no claims were filed extinguished the bank's security interests; and b) release of the proceeds of the sale of one of the two such properties.

 

Reasoning that even secured creditors cannot ignore court orders and the bank's failure to comply by the claims bar date extinguished its lien rights, the trial court granted the receiver's motion, finding that the bank's "security interests in the two properties were not preserved due to its failure to submit Proofs of Claim." In addition, the trial court held that the bank's Rule 60(b) motion was "untimely and insufficient." The bank appealed.

 

On appeal, the Eleventh Circuit first rejected the receiver's argument that the bank's appeal was untimely because it was filed more than one year after the trial court's order establishing the claims filing process. The Court found this argument lacked merit because the "order establishing the claims filing procedure cannot be characterized as a 'final trial court judgment that ends the ligation on the merits and leaves nothing for the court to do but execute the judgment.'" In addition, the bank was contesting the voiding of its security interest, not the claims procedure.  Because the order was not final, the bank had no notice that the trial court would extinguish its liens automatically if it did not file a proof of claim. Thus, the first order from which the bank could appeal was the trial court's order granting the receiver's motion.

 

The Eleventh Circuit then turned to the question of whether the bank's security interests were properly terminated by the trial court, holding that while courts have inherently 'broad powers and wide discretion to determine relief in an equity receivership[,]" a court "does not have authority to extinguish creditor's pre-existing state law security interest…."

 

The Court reasoned, citing Supreme Court precedent, that "[it] is axiomatic that security interests in property are determined by state law, … and that 'a receiver appointed by a federal court takes property subject to all liens, priorities, or privileges existing or accruing under the laws of the state.'"

 

Because "there [was] minimal authority with respect to a district court's authority, in the context of a receivership, to extinguish a secured creditor's pre-existing state law security interest by operation of its own claims administration process[,]" the Court looked to its own prior bankruptcy rulings for guidance, finding them "both analogous and instructive" because "[a]fter all, a primary purpose of both receivership and bankruptcy proceedings is to promote the efficient and orderly administration of estates for the benefit of creditors."

 

The Eleventh Circuit explained that in a bankruptcy case, "a secured creditor's lien remains intact through the bankruptcy, regardless of whether the creditor files a proof of claim." The Court cited its own 2003 decision in In re Bateman for the proposition that "'[a]n unsecured creditor is required to file a proof [of] claim for its claim to be allowed, but filing is not mandatory for a secured creditor. In fact, a secured creditor need not do anything during the course of the bankruptcy proceeding because it will always be able to look to the underlying collateral to satisfy its lien.'"

 

The Court held that, although "[a] secured creditor certainly may file a proof of claim in a receivership action, in turn submitting itself to the jurisdiction of the receivership, and entitling itself to access of the general pool of receivership assets for any unsecured portion of its debt[,] … a federal district court cannot order a secured creditor to either file a proof of claim and submit its claim for determination by the receivership court, or lose its secured state-law property right that existed prior to the receivership."

 

Thus, the Eleventh Circuit reversed the trial court's order granting the receiver's motion seeking to extinguish the liens for failing to file proofs of claim as to the two properties, 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

 

 

 

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

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

 

 

FYI: 7th Cir Rules Stating Intent Not to Sue in Letter Collecting "Time-Barred" Debt Violates FDCPA Without Proper Disclosures

The U.S. Court of Appeals for the Seventh Circuit recently held that a debt buying company's letter to collect a debt subject to the defense of an expired limitations period violated the federal Fair Debt Collection Practices Act because it failed to disclose that 1) a payment or promise can revive the limitations period; and, 2) the law limits or prohibits the debt collector from suing to collect the debt.

 

The Court  reached this decision even though the letter stated: "Because of the age of your debt, we will not sue you for it and we will not report it to any credit reporting agency."

 

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

 

Affirming the trial court's ruling in favor of the plaintiff consumer, the Seventh Circuit found the letter to be deceptive because it did not inform the consumer that a payment (or promise to pay) may restart the limitations period.

 

As a result, the Court reasoned, had the letter's recipient made a payment or promise to pay, he could have been sued to collect the debt, putting the debtor "in a much worse legal position than he would have been in before taking the step."

 

Because the letter did not disclose the "significant risk of losing the protection of the statute of limitations," the letter was "deceptive as a matter of law."

 

The Court also found that the letter's statement, "we will not sue you," was deceptive because it gave "the impression" that the debt collector chose not to sue, and not that it is prohibited by law from doing so.

 

The Seventh Circuit pointed out that the debt collector's verbiage was taken from a "2012 consent decree." Although the decision does not cite to the consent decree, it is believed the court was referring to the 2012 consent decree made between the Federal Trade Commission and Asset Acceptance, LLC.

 

Under that consent decree, letters sent by Asset Acceptance to collect debt subject to an expired limitations period were required to state: "The law limits how long you can be sued on a debt. Because of the age of your debt, we will not sue you for it."

 

But the letter at issue in this case omitted the first sentence of the disclosure. The Court determined that the omission created a "deliberate ambiguity," concealing from the debtor that law prohibited the collector "from suing to collect this debt or even from threatening to do so."

 

 

 

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

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

 

FYI: CD Cal Cites Lack of Clear Regulatory Guidance in Dismissing ADA Claims Relating to Website Accommodations for Visually-Impaired

The U.S. District Court for the Central District of California recently dismissed a claim brought under the federal Americans with Disabilities Act ("ADA") brought by a visually-impaired plaintiff who alleged that the defendant pizza company's website did not permit users to complete their purchases using a screen-reading software program.  The plaintiff also alleged that the company's mobile app did not allow him to access the menu on his iPhone using a particular software. 

 

In dismissing the action without prejudice, the Court concluded that there were no regulations clarifying what web accessibility accommodations are required under the ADA.  Thus, the Court held, it was uncertain whether the company's web accessibility accommodations complied with the ADA.  In so ruling, the Court expressly called on Congress, the Attorney General, and the Department of Justice to issue regulations setting minimum web accessibility standards.

 

A copy of the opinion is attached.

 

The plaintiff brought the lawsuit against a retail pizza company, alleging the company's website and mobile app were not accessible to and independently usable by plaintiff and other blind or visually-impaired people using "screen readers." 

 

In particular, the plaintiff alleged the company's website did not allow users to complete their purchase using the screen-reading software program Job Access With Speech ("JAWS").  The plaintiff also alleged the company's mobile app did not permit him to access the menus and applications on his iPhone using the "VoiceOver" software program.  The plaintiff alleged that the website and mobile app failed to comply with version 2.0 of W3C's Web Content Accessibility Guidelines ("WCAG 2.0") under the ADA. 

 

The plaintiff brought claims under the ADA and California's Unruh Civil Rights Act ("UCRA"). 

 

The Court noted that the company's website and mobile app included accessibility banners that directed users who access the website using screen readers to call a specific toll free number if they need any assistance.  The Court also noted that the toll free phone number is staffed by a live representative who can assist blind or visually-impaired individuals.  The banners also indicated customers can call their local store directly to make purchases or ask questions.

 

The company moved for summary judgment on all of plaintiff's claims, asserting that dismissal was warranted for several reasons. 

 

First, according to the company, websites and mobile apps do not constitute "places of public accommodation" under the ADA.  Next, the company asserted the lawsuit violates fundamental principles of due process because the ADA, its implementing regulations, and the Department of Justice's ("DOJ") website all failed to indicate whether complying with WCAG 2.0 constitutes compliance with the ADA. 

 

The company's third argument was that the plaintiff could not establish violations of any applicable accessibility standards.  Fourth, according to the company, the UCRA claims fail because plaintiff could not establish the company intentionally discriminated against him.  The company's fifth argument was that plaintiff's UCRA's claims fail because the company did not have notice of the barriers plaintiff claims exist.  The company's final argument asserted the matter should be stayed because the DOJ had not issued any accessibility regulations addressing the websites and mobile apps of private businesses. 

 

The Court first address the company's argument that websites and mobile apps do not constitute "places of public accommodation" under the ADA.  In analyzing the background of the ADA and legal precedent interpreting it, the Court rejected the argument that websites and mobile apps do not need to comply with the ADA. 

 

Although the company raised several other arguments, the remainder of the Court's opinion addressed the company's argument that the lawsuit violates fundamental principles of due process because the ADA, its implementing regulations, and the DOJ's website all failed to indicate whether complying with WCAG 2.0 constitutes compliance with the ADA. 

 

The Court quickly established that the ADA regulations specifically reference "screen reader software" and "other effective methods of making visually delivered materials available to individuals who are blind or have low vision" as forms of accommodations under the ADA. 

 

According to the company, however, other than the acknowledgement that accommodations for web access exist, there was no concrete guidance addressing the accessibility standards a website must meet, or any standards established that companies operating websites must meet.  More specifically, the company argued that there were no regulations, guidelines or rules establishing that it had to comply with the WCAG 2.0. 

 

Responding to the company's argument, the Court observed that "the DOJ has consistently stated its view that the ADA's accessibility requirements apply to websites belonging to private companies."  The Court determined that the true inquiry was whether the DOJ had issued any guidance regarding the specific type of access at issue in this case.

 

The Court noted that the DOJ had issued a Notice of Proposed Rulemaking ("NOPR") in 2010 intended to address requirements for public accommodations via the internet and websites accessible to individuals with disabilities.  Within the NOPR, the DOJ acknowledged the creation of WCAG, but stated that "a clear requirement that provides the disability community consistent access to Web sites and covered entities clear guidance on what is required under the ADA does not exist."  Since the 2010 NOPR, the DOJ has not issued any final rule regarding web access.

 

The company relied on the fact that no final rule regarding web access had been issued to assert that plaintiff's allegations that the company failed to comply with certain accessibility standards would violate the company's due process rights.  In support of its argument, the company relied on the Ninth Circuit's ruling in United States v. AMC Entertainment, where that Court concluded that a specific provision within an ADA regulation was too vague to put the defendant on notice of whether it was required to retroactively incorporate a comparable viewing angle requirement in movie theaters. After criticizing the government for having "ample opportunity" to clarify the provision at issue but failing to do so, the Ninth Circuit concluded: "We decline to require AMC to have determined the precise meaning of the regulation when the government did not do so." 

 

The Court here found the ruling from AMC was analogous to the facts of this case.  "Here, too, Plaintiff seeks to impose on all regulated persons and entities a requirement that they 'compl[y] with the WCAG 2.0 Guidelines' without specifying a particular level of success and without the DOJ offering meaningful guidance on this topic.  This request flies in the face of due process." 

 

The Court rejected the plaintiff's argument that because the DOJ has issued several "Statements of Interest" and entered into several consent decrees and settlements requiring compliance with WCAG 2.0, so too must the company. 

 

In addition, the Court observed that the ADA requires "reasonable accommodations," and does not require entities to provide the best available accommodation.  The Court then determined that the plaintiff failed to articulate why the company providing a telephone hotline for the visually-impaired, or its use of a technical standard other than WCAG 2.0, would not qualify as a reasonable accommodation. 

 

The Court granted the company's motion and dismissed each of plaintiff's claims without prejudice pursuant to the primary jurisdiction doctrine, which allows the Court to stay proceedings or dismiss a complaint without prejudice pending the resolution of an issue within the special competence of an administrative agency. 

 

The Court then expressed the significance of establishing regulations and guidelines addressing the constantly-present issue of web accessibility.  "The Court concludes by calling on Congress, the Attorney General and the Department of Justice to take action to set minimum web accessibility standards for the benefit of the disabled community, those subject to Title III [of the ADA], and the judiciary." 

 

 

 

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

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

 

FYI: 2nd Cir Holds Payoff Statement With Unaccrued Estimated Fees and Costs Could Comply With FDCPA

The U.S. Court of Appeals for the Second Circuit ("Second Circuit") recently held that a debt collector violated the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. ("FDCPA"), when it sent a payoff statement containing unaccrued fees and costs without providing any information as to how those fees were calculated or any basis for those fees and costs.

 

In so ruling, the Second Circuit was careful to note that a payoff statement may contain estimated fees and costs if the information in the statement would allow the least sophisticated consumer to determine the minimum amount she owed at the time of the notice, what she needed to pay to resolve the debt in the future, and how the debt collector calculated the fees and costs.

 

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

A law firm ("Debt Collector") filed a foreclosure complaint against the borrower ("Borrower").  The Debt Collector attached a notice to the complaint which contained the following language:  "the amount of the debt is stated in the complaint hereto attached," and also that "the debt … will be assumed valid … unless the debtor, within thirty (30) days after receipt of this notice, disputes the validity of the debt."  However, the foreclosure complaint did not state the amount of the debt.

 

The Borrower sent a request for verification of the debt.  In its response, the Debt Collector provided a payoff statement with the "Total Amount Due" of $205,261.79 (the "Debt Validation Letter").  Below the statement of the amount due, the Debt Validation Letter added the following language:

 

"To provide you with the convenience of an extended 'Statement Void After' date, the Total Amount due may include estimated fees, costs, additional payments and/or escrow disbursements that will become due prior to the 'Statement Void After' date, but which are not yet due as of the date of this Payoff Statement is issued.  You will receive a refund if you pay the Total Amount Due and those anticipated fees, expenses, or payments have not been incurred."

 

Notably, the Debt Validation Letter did not indicate what those estimated fees, costs, or additional payments were or how they were calculated.

 

As you may recall, FDCPA requires a debt collector, within five days after the initial communication with a consumer in connection with the collection of any debt, to send the consumer a written notice containing among other things the amount of the debt.  15 U.S.C. § 1692g(a).

 

Here, the Borrower alleged that the filing of the foreclosure complaint was an initial communication, and that the Debt Collector violated the FDCPA because the complaint did not provide the total amount due.  Alternatively, the Borrower alleged that the Debt Validation Letter did not satisfy section 1692g because the amount due included unaccrued and unspecified fees and costs.

 

The trial court held that the foreclosure complaint was not an attempt to collect a debt within the meaning of section 1692g, and dismissed the complaint.  The Borrower appealed.

 

As you may recall, section 1692g(d) states that "[a] communication in the form of a formal pleading in a civil action shall not be treated as an initial communication for purposes of [section 1692g(a)]." 

 

Nevertheless, the Borrower argued that the Debt Collector was not required to attach the notice to the foreclosure complaint, and therefore it was not considered part of the "formal pleading" as contemplated in the statute. 

 

The Second Circuit rejected this argument because the Borrower's interpretation would render section 1692g(d) superfluous.  Thus, the Second Circuit held that the exclusion provided by 1692g(d) extended to exhibits attached to the foreclosure complaint.

 

The Borrower then argued that the Debt Validation Letter was an attempt to collect a debt, even though it was sent in response to Borrower's request for validation of the debt. 

 

In Hart, the Second Circuit held that the letter in question was unambiguously sent in connection with the collection of a debt because: (1) the letter directed the recipient to mail payments to a specified address, (2) the letter referred to the FDCPA by name, (3) the letter informed the recipient he had to dispute the debt validity within thirty days, and (4) most importantly, the letter contained a disclaimer stating that the communication was an attempt to collect a debt.  Hart v. FCI Lender Servs., 797 F.3d 219 (2nd Cir. 2015). 

 

Applying the factors in Hart, the Second Circuit determined that the Debt Validation Letter in this case was analogous to the letter in Hart.  Therefore, even though Debt Collector sent the Debt Validation Letter in response to the Borrower's request, the Court held that the communication was sent in connection with the collection of a debt and was subject to the requirements in section 1692g.

 

Next, to determine whether the Debt Collector had violated section 1692g, the Second Circuit analyzed the debt validation letter under the "least sophisticated consumer" standard. 

 

Here, the Court noted that the Debt Validation Letter did not specify what the estimated fees, costs, and additional payments were.  In the view of the Second Circuit, this made it impossible for an unsophisticated consumer to dispute the amount of the debt. 

 

The Second Circuit concluded that the Debt Validation Letter did not comply with section 1692g, because the correspondence provided no indication as to what the unaccrued fees were or how they were calculated. 

 

The Second Circuit was careful to limit its ruling to the facts in this case. 

 

Here, the Court noted, he Debt Validation Letter omitted crucial information that would allow a least sophisticated consumer to determine the minimum amount she owed at the time of the notice, what she needed to pay to resolve the debt at any given moment in the future, and how the total balance would increase based on the estimated fees and costs. 

 

However, the Second Circuit noted that a payoff statement could satisfy section 1692g if the statement provides adequate disclosure for how the creditor arrived at the total amount due.

 

Accordingly, the Second Circuit vacated the order and judgment of dismissal, and remanded the case to trial court for further proceedings consistent with its ruling.

 

 

 

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

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

 

FYI: Ill App (2d Dist) Holds Mortgagee Could Not Collect Deficiency From Rents Owed to Other Mortgagees

The Appellate Court of Illinois, Second District, recently held that a mortgagee with a foreclosure judgment could not collect on the deficiency against rents from other properties owned by the mortgagor, because the mortgagee's foreclosure judgment was not superior to the prior recorded mortgages for the other properties which contained assignment-of-rent clauses, and the other mortgagees had executed forbearance agreements to enforce those assignment-of-rents clauses.

     

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

     

In 2013, a bank, acting as the assignee of the FDIC ("Foreclosing Bank"), foreclosed on four mortgages on several lots owned by a home builder ("Builder") and, on August 24, 2014, obtained a $1.5 million judgment ("Judgment").  In 2014, in post-judgment proceedings, the Bank sought to obtain information from the Builder to enforce the deficiency judgment.

 

Over one year later, in 2015, the Foreclosing Bank caused a third-party enforcement proceeding to be issued to a property management company owned by the Builder's wife ("Property Management Company") that managed properties owned by the Builder. Once such a third-party enforcement proceeding is issued, it becomes a lien on the judgment debtor's assets held by the recipient of the proceeding.

     

The Property Management Company responded that it did not hold any assets belonging to the Builder as it was merely an agent that managed properties and that any rents it collected belonged to the mortgagees for the properties it managed (the "Managed Properties"). Then, three of those mortgagees intervened in the post-judgment proceedings ("Other Mortgagees") and claimed that their interests in the rents for the Managed Properties were superior to the Foreclosing Bank's interest due to the assignment-of-rent provisions in their recorded mortgages and because of the forbearance agreements they had entered into that transmitted rents on those properties directly to the Secured Lenders. 

      

A flurry of motion practice ensued. The Foreclosing Bank argued that the Other Mortgagees first had to obtain actual possession of the properties or constructive possession through a receiver. The trial court rejected that argument and held that the forbearance agreements were enforceable contract modifications that predated the Foreclosure Judgment and the third-party citations and were voluntarily entered into in lieu of foreclosure and/or receivership. Thus, the Builder had contracted away its right to receive rents on those properties and the transmittal of rents to the Other Mortgagees did not violate the restraining component of the third-party citations to discover assets.

     

The trial court further held that this did not violate the common law rents-and-profit doctrine, which requires actual or constructive possession by a lender by court authorization to prevent a mortgagor or its tenants without resources for maintenance or repair, because the property repair and maintenance and management expenses were deducted from the rents before they were transmitted to the Other Mortgagees. The parties filed motions for reconsideration and clarification and, after the trial court issued its ruling that affirmed its previous holding, the Foreclosing Bank filed this appeal.

     

On appeal, the Foreclosing Bank, relying on case law, argued that the Other Mortgagees had no lien on the collected rents while it had the only perfected judgment lien (via its citation to discovery assets), and that the Other Mortgagees' mortgages and rent-assignment agreements were irrelevant until the Other Mortgagees were granted constructive or actual possession through appointment of a receiver or as mortgagees in possession. 

 

The Appellate Court rejected those arguments in a complex 20-page analysis, including an analysis of the effect of the Illinois Conveyances Act on the Foreclosing Bank's cited case law, the highlights of which appear below.

     

The Appellate Court found that Section 31.5 of the Illinois Conveyances Act, 765 ILCS 5/31.5(b), provided that "an assignment of rents is perfected upon recording and provides that the assignee has a superior claim to the rents" against anyone whose claim or interest arises or is perfected after that.  Thus, the Other Mortgagees' recorded mortgages that contained assignment-of-rents provisions had a superior interest in the rents over the Foreclosing Bank. 

      

The Foreclosing Bank argued that the mere recording of the mortgages containing the assignment of rents provisions did not entitle the Other Mortgagees to the rents.  Rather, the Foreclosing Bank argued, the Other Mortgagees had to enforce their liens by obtaining court authorization to collect the rents as required by §31.5(d) of the Illinois Conveyances Act. 

 

However, the Appellate Court pointed out that, under §31.5(d), the Other Mortgagees could enforce the assignments "through applicable law, unless the parties agreed otherwise." 765 ILCS 5/31.5(b). Thus, the Court held, once the Other Mortgagees had perfected their liens on the rents, they also had to take action to enforce those liens either "through applicable law", such as by foreclosing on the liens, or as "the parties agreed otherwise", which they did by electing to skip foreclosure and entering into the forbearance agreements that transmitted the rents directly to the Other Mortgagees. It is important to note here that in Illinois there is no legal requirement that forbearance agreements be recorded.

     

The Appellate Court observed that "a judgment creditor can establish an entitlement to collect rents by obtaining possession of a mortgagor's property before the mortgagee holding a previously recorded rent assignment takes steps to enforce its rights through foreclosure," including by gaining possessor status or by "the appointment of a receiver." 

 

The Court noted that the Foreclosing Bank could have taken steps to supplant the Other Mortgagees' priority positions for the rents by seeking a turnover of the rents or an appointment of a receiver.  But the Foreclosing Bank did not and, instead, had "an unenforced citation lien that cannot not trump an assignment of rents."

      

A citation lien can only reach assets in the possession or control of a judgment debtor or belonging to the judgment debtor but in the possession or control of a third-party citation respondent. 735 ILCS 5/2-1402(a); 735 ILCS 5/2-1402(m). Here, the rents belonged to the Other Mortgagees because of the forbearance agreements entered into to enforce their perfected liens.  Thus, the Court held, no citation lien could attach to the rents collected by the Property Management Company.

     

The Appellate Court rejected the Foreclosing Bank's other arguments as well.  It held that the Illinois Mortgage Foreclosure Law would not be superfluous if trial court's interpretation of the Illinois Conveyances Act was upheld because the foreclosure law applied to mortgagees seeking to foreclose.  The Other Mortgagees had not sought to foreclose but to perfect and enforce liens for rent.

 

The Court also rejected the Foreclosing Bank's argument that the Illinois Conveyances Act was ambiguous and a mere clarification of common law such that the court should reach the opposite outcome. Instead, the Court held that the Illinois Conveyances Act was not ambiguous, but, even if it was, the common law rents-and-profits doctrine, which requires actual or constructive possession of the property through court action before collecting rent, would protect mortgagees' interests in the rents and ensure proper property maintenance because the forbearance agreements required the Other Mortgagees to apply the rents to maintenance and repairs.

      

The Appellate Court rejected the Foreclosing Bank's co-mingling argument, that the Property Management Company collected the rents and co-mingled them with the Builder's assets thereby negating the liens, pointing out that the Property Management Company was acting as an agent for the Other Mortgagees under the forbearance agreements, not the Builder's agent. 

 

The Foreclosing Bank's prove-up argument also failed.  The Foreclosing Bank asserted that by not requiring the Other Mortgagees to prove up the existence or amount of the liens, the one of the Other Mortgagees got a double recovery because it took title to the property through a foreclosure and maintained the right to collect future rents. The Appellate Court pointed out that this mortgagee's purchase of the property after foreclosure extinguished only the mortgage, not the lien on the rents. In re Randall Plaza Center Associates, L.P., 326 B.R. 133, 141 (Bankr. N.D. Ill. 2005).

 

Accordingly, pursuant to § 31.5 of Illinois' Conveyances Act, the Appellate Court held that the Other Mortgagees' claims to the rents from the Builder's other properties took lien priority over the foreclosure judgment, and any lien created by the citation to discover assets because the Other Mortgagees recorded their mortgages, which contained assignment-of-rent clauses, and enforced them through forbearance agreements that resulted in rents being directly transmitted to the Other Mortgagees, and the Foreclosing Bank failed to seek appointment of a receiver or a turnover order.

 

 

 

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

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

 

FYI: 9th Cir Holds FDCPA §1692f(6) Applies to Non-Judicial Foreclosures

The U.S. Court of Appeals for the Ninth Circuit recently reversed the dismissal of an FDPCA claim arising out of a non-judicial foreclosure.  The Ninth Circuit ruled that section 1692f(6) of the FDCPA applies to non-judicial foreclosure activity. 

 

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

 

Two borrowers refinanced a loan secured by their home and executed a note and deed of trust.  The lender assigned the note to a purchaser of the subject loan (the "loan owner").  Later, the lender assigned the deed of trust to the loan owner and caused a notice of default to be recorded.  The borrowers subsequently filed a Chapter 7 bankruptcy petition, and eventually received a discharge from the bankruptcy court.

 

A substitute foreclosure trustee recorded another notice of default.  The borrowers, the servicer of the subject loan, and the loan owner mediated the borrowers' default with a Nevada foreclosure mediator.  At the mediation, the servicer and the loan owner allegedly could not produce the original loan documents.  The mediation office stated that it would not issue a Certificate of Foreclosure, based upon the mediator's recommendation.

 

The loan's servicer allegedly sent the borrowers a letter stating:  "You are in default under the terms and conditions of the mortgage loan for failure to pay the required installments when due.  [The servicer] intends to enforce the provision of the Note and related security instrument[] … If you do not pay the full amount of the default, [the servicer] may accelerate the entire sum of both principal and interest due and payable, and invoke any remedies provided for in the Note and security instrument, including but not limited to the foreclosure sale of the property."

 

Thereafter, counsel for the borrowers allegedly demanded repeatedly that the servicer cease all foreclosure efforts, and that either the servicer or the loan owner prove that it had possession of the note.

 

The borrowers filed suit against the servicer and the loan owner alleging purported violations of the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. ("FDCPA"), intentional infliction of emotional distress, and purported violation of the Nevada Deceptive Trade Practices Act ("DTPA").  Specifically, the borrowers alleged violations of sections 1692c(a)(2), 1692d, 1692e, and 1692(f)(6) of the FDCPA.

 

The defendants moved to dismiss the borrowers' complaint.  The trial court granted the motion to dismiss and held that the borrowers could not state a claim for relief under the FDCPA because the defendants' alleged conduct was all related to non-judicial foreclosure activities, and therefore not debt collection.

 

On appeal, the Ninth Circuit first noted its recent ruling in Ho v. ReconTrust Co. where it held that enforcing a security interest does not involve collecting a debt, which "for the purposes of the FDCPA, debt is synonymous with money."  Ho v. ReconTrust Co., 840 F.3d 618, 621 (9th Cir. 2016).  Instead, the "object of a non[-]judicial foreclosure is to retake and resell the security, not to collect money ... Thus, actions taken to facilitate a non-judicial foreclosure … are not attempts to collect 'debt' as that term is defined by the FDCPA."  Id.

 

The Ninth Circuit followed Ho and affirmed the trial court's dismissal of the borrowers' claims for purported violation of sections 1692c(a)(2), 1692d, and 1692e of the FDCPA because defendants had not attempted to collect a money debt.

 

However, the Ninth Circuit also found that section 1692a(6) of the FDCPA provides a more expansive definition of "debt collector" for the purposes of section 1692f(6).  In particular, section 1692a(6) states that "[f]or the purpose of section 1692f(6)" a debt collector also includes a security interest enforcer.

 

The Ninth Circuit then stated that "Ho held that while the FDCPA regulates security interest enforcement activity, it does so only through Section 1692f(6)."

 

As you may recall, section 1692f(6) prohibits:  "[t]aking or threatening to take any nonjudicial action to effect dispossession or disablement of property if – (A) there is no present right to possession of the property claimed as collateral through an enforceable security interest; (B) there is no present intention to take possession of the property; or (C) the property is exempt by law from such dispossession or disablement."

 

The Ninth Circuit reversed the trial court's dismissal of the borrowers' claim for purported violation of section 1692(f)(6) of the FDPCA against the servicer.  The Ninth Circuit found that the borrowers had alleged that the servicer threatened to take nonjudicial action to dispossess the borrowers of their home without a legal ability to do so.  The Ninth Circuit then held that section 1692f(6) prohibits such conduct.

 

However, the Ninth Circuit affirmed the trial court's dismissal of the borrowers' purported claims for intentional infliction of emotional distress.  The Ninth Circuit found that the borrowers failed to allege conduct which was "outside all possible bounds of decency" and "regarded as utterly intolerable in a civilized community," which is required to state a claim for intentional infliction of emotional distress.

 

Finally, the Ninth Circuit affirmed the trial court's dismissal of the borrowers' purported DTPA claim and held that the real estate loans do not fall within the DTPA, which governs transactions relating to "goods and services" because a real estate loan is neither a good nor a service.  See Nev. Rev. Stat. §§ 598.0915-598.0925, 598.0934.       

 

 

 

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

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

 

FYI: SD Fla Dismisses Consumer's Claims for Failure to Provide Advance Notice and Opportunity to Cure

The U.S. District Court for the Southern District of Florida recently held that a consumer's failure to comply with a provision in the mortgage requiring notice and a reasonable opportunity to cure required the dismissal of the consumer's claims.

 

As alternative grounds, the Court held that the reinstatement letter from the defendant mortgagee's attorney complied with the formal requirements of the federal Real Estate Settlement Procedures Act ("RESPA"), and the mortgagee was not a debt collector as defined by the federal Fair Debt Collection Practices Act ("FDCPA").

 

A copy of the opinion is attached.

 

The plaintiff obtained a purchase money mortgage loan. The parties later entered into a loan modification agreement .  The original lender subsequently assigned the note and mortgage to the current mortgagee.

 

The plaintiff consumer defaulted, and the mortgagee retained a law firm, which filed a foreclosure action. After the foreclosure case was filed, the loan was assigned back to the original lender, shortly after the loan went into default.  The original lender was substituted as the plaintiff in the foreclosure action.

 

The consumer retained counsel to defend the foreclosure action.  The consumer's counsel mailed the originating lender a request for information, to which the lender's attorney responded with a reinstatement letter that sought to collect $250 for estimated attorney's fees for a motion to dismiss that had not yet been filed and $1,094 for service of process fees ($360 per person served).

 

The plaintiff consumer filed this action, suing the originating lender (which both owned and serviced her mortgage loan), and the law firm that acted as its debt collector, alleging that they violated RESPA, the Florida Consumer Collection Practices Act ("FCCPA"), and the FDCPA.

 

The originating lender moved to dismiss or in the alternative to strike the amended complaint.

 

The Court first addressed the originating lender's argument that the consumer failed to state a claim under RESPA, the FCCPA and FDCPA because she failed to allege compliance with a contractual condition precedent in the mortgage.

 

As you may recall, Paragraph 20 of the mortgage requires the borrower to give the mortgagee notice and a reasonable amount of time to remedy any alleged breach of the mortgage before filing suit.

 

The Court reasoned that the consumer's claims of improper attorney's fees and excessive service of process fees arose out of the mortgage because the mortgage provides the basis for assessing such fees.  Because the consumer failed to allege she gave the required notice and opportunity to cure, the Court held she failed to comply with a condition precedent under the mortgage contract and her claims failed.

 

The Court refused to abate the lawsuit rather than dismissing it, reasoning that because the consumer's counsel had notice of the fees sought when the originating lender moved for summary judgment in the state court foreclosure action, well before plaintiff's counsel received the reinstatement letter, "[p]laintiff had ample time to provide notice and an opportunity to cure prior to filing suit in compliance with paragraph 20 without running afoul of the statute of limitations."

 

The Court also rejected the consumer's argument that it would have been futile to send the required notice because it was "unconvinced by Plaintiff's position that a party is relieved from its obligation to satisfy a mandatory contractual condition precedent prior to filing a lawsuit based upon that party's subjective belief that the other party would refuse to cure had it been given notice of the grievance and a reasonable period of time to take corrective action."

 

The Court went on to provide alternative grounds for its dismissal besides failure to comply with a contractual condition precedent.

 

First, the Court held that the law firm's reinstatement letter complied with RESPA because it "timely provided Plaintiff, in writing and in a clear and conspicuous manner, with the requested information and contact information for further inquiry." The Court added that the information provided was clear and conspicuous because it had been filed in affidavit form 3 months earlier in the foreclosure action, before the consumer's counsel requested reinstatement figures. In addition, the reinstatement letter stated that any overpayments would be refunded.

 

Next, the Court found that even if demanding payment of $250 for legal fees not yet incurred and for allegedly inflated process server fees violated the FDCPA and FCCPA, these allegedly inflated charges would not violate RESPA "because the letter is nonetheless fully compliant with the formal and substantive requirements of RESPA and its implementing regulations."

 

The Court then found that the originating lender could not be held liable under the FDCPA because it was not a "debt collector" as defined in subsection 1692a(6)(F)(ii).  The Court noted that only debt collectors, not the original lender or originator, are subject to the FDCPA.

 

The Court held that the FDCPA's "carve-out for the originator of the loan is disjunctive and applies" even though the loan at issue here was assigned to a third party and then re-assigned back to the original lender.

 

The Court held that the original lender was also not a debt collector for purposes of the FCCPA "because courts analyzing FCCPA claims are directed by statute that '[i]n applying and construing [§ 559.77(5) of the FCCPA] due consideration and great weight shall be given to the interpretations of the Federal Trade Commission and the federal courts relating to the federal Fair Debt Collection Practices Act."

 

The Court declined to address the originating lender's argument that the claims were barred by Florida's litigation privilege because "whether 'the conduct in question is inherently related to, and occur[ed] during an ongoing judicial proceeding' … in the context of this particular case appears to be a factual issue more appropriate for summary judgment or trial." In addition, the Court pointed out in a footnote that the litigation privilege, if applicable, would apply only the FCCPA claim because "Florida's litigation privilege 'does not bar federal claims."

 

 

 

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

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments