FYI: 9th Cir Holds City of LA's FHA "Discriminatory Lending" Claims Failed for Lack of "Robust" Causal Link

The U.S. Court of Appeals for the Ninth Circuit recently affirmed a trial court's summary judgment ruling in favor of a bank and against the City of Los Angeles ("City") on the City's claims that the bank violated section 3605(a) the federal Fair Housing Act ("FHA") through alleged discriminatory lending practices, and that the bank was unjustly enriched.

 

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

 

As you may recall, section 3605(a) of the FHA makes it unlawful for financial institutions "to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race [or] color." 42 U.S.C. § 3605(a).

 

The City alleged both disparate impact and disparate treatment theories of discrimination, but primarily presented evidence to support disparate impact.  The City also sued the bank for alleged unjust enrichment.

 

The trial court entered summary judgment in favor of the bank and against the City on all claims.  This appeal followed.

 

Initially, the Ninth Circuit observed that to establish a prima facie disparate impact claim the City must demonstrate a statistical disparity and show that a policy or policies caused the disparity.  Tex. Dep't of Hous. & Cmty. Affairs v. Inclusive Cmtys. Project, Inc., 135 S. Ct. 2507, 2523 (2015).  Further, the City must show a "robust" causal link between the policy and the disparity.  Id.  If the City fails to demonstrate a causal connection, then it "cannot make out a prima facie case of disparate impact." Id.

 

The Ninth Circuit did not analyze whether the City showed a statistical racial disparity, because it found that the City did not show the required "robust" causal link necessary between any disparity and the banks's facially-neutral policy.  

 

The City alleged three facially-neutral policies caused a disparity: (1) the bank's compensation plan allegedly provided incentives to its loan officers to issue higher-cost loans; (2) the bank's marketing supposedly targeted low-income borrowers; and (3) the bank allegedly did not properly monitor its loans for any disparities.

 

The Ninth Circuit determined that the City did not show how that the first two policies were causally connected to the alleged racial disparity in a "robust" way, as required, because the policies "would affect borrowers equally regardless of race."

 

Additionally, the Ninth Circuit rejected the City's third claim that the bank did not adequately monitor any loans for disparities because this was "not a policy at all."

 

Thus, the Ninth Circuit held that the trial court correctly entered summary judgment in favor of the bank and against the City on the City's FHA claim because there was no genuine issue of material fact "as to a policy with a robust casual connection to any racial disparity."

 

The Ninth Circuit next turned to the City's unjust enrichment claim.  As you may recall, under California law, a court may award unjust enrichment "where the defendant obtained a benefit from the plaintiff by fraud, duress, conversion, or similar conduct." Durell v. Sharp Healthcare, 108 Cal. Rptr. 3d 682, 699 (Ct. App. 2010).

 

The Ninth Circuit concluded that the City's claimed lost tax revenue and increased spending on services did not confer any benefit upon the bank, as required to prevail on an unjust enrichment claim.  Thus, the Ninth Circuit held that the trial court correctly determined that there was no genuine issue of triable fact as to the City's unjust enrichment claim.

 

Accordingly, the Ninth Circuit affirmed the trial court's judgment order in favor of the bank and against the City.

 

 

 

 

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: SCOTUS Holds Kentucky's "Clear Statement Rule" Violates Fed Arbitration Act

The Supreme Court of the United States recently concluded that Kentucky's "clear-statement" rule violates the Federal Arbitration Act ("FAA") by singling out arbitration agreements and treating them differently from other contracts. 

 

The Kentucky Supreme Court had held that the arbitration agreements at issue were invalid because the individuals who entered into the agreements did so under a power of attorney, and the powers of attorney at issue did not specifically entitle the representatives to enter into an arbitration agreement. The Kentucky Supreme Court reasoned that, because the Kentucky Constitution declares the rights of access to the courts and trial by jury to be "sacred" and "inviolate," an agent could deprive her principal of such rights only if expressly provided in the power of attorney.  Thus, the "clear-statement" rule was applied. 

 

The Supreme Court of the United States disagreed, holding that the clear-statement rule fails to put arbitration agreements on an equal plane with other contracts, and that by requiring an explicit statement before an agent can relinquish her principal's right to go to court and receive a jury trial, the court had adopted a legal rule that singled out arbitration agreements for disfavored treatment in violation of the FAA.  Accordingly, the Supreme Court reversed the holding of the Kentucky Supreme Court.

 

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

 

The plaintiffs in this case were the wife and daughter of two individuals who had been moved into defendant's nursing home.  Both plaintiffs held a power of attorney for their respective family member that gave them broad authority to manage their family member's affairs.  Upon moving their family members into the nursing home, the plaintiffs executed arbitration agreements providing that any claims arising from the family member's stay at the facility would be resolved through binding arbitration. 

 

When the family members passed away, their estates (represented by the plaintiffs) filed tort claims against the defendant nursing home.  The nursing home moved to dismiss the suits, asserting the claims were governed by the arbitration agreements.  The trial court denied the motions, and the Kentucky Court of Appeals upheld the trial court's ruling. 

 

The Kentucky Supreme Court consolidated the cases and affirmed the rulings of the lower courts.  According to the Kentucky Supreme Court, the Kentucky Constitution declares the rights of access to the courts and trial by jury to be "sacred" and "inviolate," and because the plaintiffs' powers of attorney did not include specific language authorizing plaintiffs to waive those constitutional rights, the plaintiffs were not authorized to enter into the arbitration agreements.

 

The Supreme Court of the United States accepted the defendant nursing home's petition for certiorari. 

 

You may recall that the FAA requires courts to place arbitration agreements "on equal footing with all other contracts." DIRECTV, Inc. v. Imburgia, 577 U. S. ___, ___, 136 S. Ct. 463, 468, 193 L. Ed. 2d 365, 372 (2015) (quoting Buckeye Check Cashing, Inc. v. Cardegna, 546 U. S. 440, 443, 126 S. Ct. 1204, 163 L. Ed. 2d 1038 (2006)); see also 9 U. S. C. §2. 

 

The FAA makes arbitration agreements "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U. S. C. §2.

 

According to the Supreme Court of the United States, that provision establishes an equal-treatment principle: A court may invalidate an arbitration agreement based on "generally applicable contract defenses" like fraud or unconscionability, but not on legal rules that "apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue." AT&T Mobility LLC v. Concepcion, 563 U. S. 333, 339, 131 S. Ct. 1740, 179 L. Ed. 2d 742 (2011). 

 

The Supreme Court of the United States was clear in its interpretations of the FAA: it preempts any state rule that discriminates on its face against arbitration, and it supersedes any rule that indirectly attempts to accomplish the same goal by disfavoring contracts that have characteristics specific to arbitration agreements.

 

The Court's prior decision in Concepcion set the precedent for its ruling in this matter.  In Concepcion, the Court analyzed a hypothetical state law declaring unenforceable any contract that "disallow[ed] an ultimate disposition [of a dispute] by a jury." Id., at 342, 131 S. Ct. 1740, 179 L. Ed. 2d 742. Even though the law might avoid referring to arbitration by name, according to the Court, it would still rely on "the uniqueness of an agreement to arbitrate as [its] basis"—and thereby violate the FAA.  Id., at 341, (quoting Perry v. Thomas, 482 U. S. 483, 493, n. 9, (1987)).

 

Applying the ruling from Concepcion to this matter, the Supreme Court of the United States concluded that Kentucky's clear-statement rule fails to put arbitration agreements on an equal plane with other contracts. "Such a rule is too tailor-made to arbitration agreements—subjecting them, by virtue of their defining trait, to uncommon barriers—to survive the FAA's edict against singling out those contracts for disfavored treatment."

 

The Supreme Court of the United States took issue with the Kentucky Supreme Court's suggestion that the clear-statement rule could apply equally to other contracts that involve the waiver of constitutional rights.  The Supreme Court of the United States held that "[n]o Kentucky court, so far as we know, has ever before demanded that a power of attorney explicitly confer authority to enter into contracts implicating constitutional guarantees. Nor did the opinion below indicate that such a grant would be needed for the many routine contracts—executed day in and day out by legal representatives—meeting that description."

 

The Court also rejected the plaintiffs' argument that the clear-statement rule only applies to contract formation, not enforcement issues.  According to plaintiffs, the FAA has no application to contract formation issues.  The Court, however, observed that the language of the FAA and case law interpreting it proved otherwise. 

 

First, the FAA states that an arbitration agreement must ordinarily be treated as "valid, irrevocable, and enforceable." 9 U. S. C. §2.  Thus, according to the Court, the FAA applies not only the "enforce[ment]" of arbitration agreements, but also about their initial "valid[ity]." 

 

In addition, the Court cited to prior opinions that addressed the validity of arbitration agreements where issues of duress and fraud were raised. According the Court, addressing those defenses would not have been necessary if, as plaintiffs argue, the FAA did not apply to contract formation.

 

Furthermore, according to the Court, adopting the argument of the plaintiffs would lead to states undermining the FAA by declaring powers of attorney incapable of authorizing the entering into arbitration agreements – even if the authority granted by the power of attorney was incredibly broad. Going even one step further, the Court reasoned, would lead to states completely eviscerating the FAA by declaring everyone incompetent to execute arbitration agreements.  Accordingly, the Supreme Court refused to adopt the plaintiffs' argument. 

 

In reversing the Kentucky Supreme Court, the Supreme Court of the United States concluded: "The Kentucky Supreme Court specifically impeded the ability of attorneys-in-fact to enter into arbitration agreements. The court thus flouted the FAA's command to place those agreements on an equal footing with all other contracts."

 

The powers of attorney at issue were not identical.  For one of them, the lower court concluded it was broad enough to authorize the plaintiff to execute an arbitration agreement.  As to that matter, the Supreme Court of the United States reversed the Kentucky Supreme Court's decision and held that the arbitration agreement was enforceable.  With regard to the other power of attorney, there was an issue of whether the clear-statement rule may have influenced the Kentucky Supreme Court's declaration that that power of attorney was insufficiently broad to give plaintiff the authority to execute an arbitration agreement. 

 

As a result, the Supreme Court of the United States vacated the Kentucky Supreme Court's ruling, and remanded the matter to the trial court for an assessment of the scope of the authority contained in the power of attorney without consideration of the clear-statement rule.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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FYI: 9th Cir Amends and Reinforces Its Ruling That Foreclosure Trustees Are Not FDCPA "Debt Collectors"

The U.S. Court of Appeals for the Ninth Circuit recently amended its opinion in Ho v. ReconTrust Co, maintaining and affirming its prior ruling that the trustee in a California non-judicial foreclosure did not qualify as a debt collector under the federal Fair Debt Collection Practices Act (FDCPA).

 

The amendments to the prior ruling among other things add that a California mortgage foreclosure trustee meets the FDCPA's exclusion from the term "debt collector" for entities whose activities are "incidental to … a bona fide escrow arrangement" at 15 U.S.C. § 1692a(6)(F).

 

The Ninth Circuit also removed its prior discussion of Sheriff v. Gillie, 136 S. Ct. 1594 (2016), replacing it with a discussion of foreclosure being a "traditional area of state concern" not to be superseded by federal law without "clear and manifest purpose of Congress," which the Court found lacking here.

 

Splitting from the Fourth and Sixth Circuits and ruling against the position argued by the CFPB in an amicus curiae brief, the Ninth Circuit explained that the California foreclosure trustee defendant was not attempting to collect money from the plaintiff when it sent her a notice of default and notice of sale so that its activities did not qualify as debt collection.  

 

This holding affirms the leading case of Hulse v. Owen Federal Bank, 195 F. Supp. 2d 1188 (D. Or. 2002), which has been the subject of much debate concerning whether non-judicial foreclosure constitutes debt collection.

 

The Ninth Circuit also vacated the trial court's dismissal of the TILA rescission claim based on its recent ruling that a claim for rescission under TILA does not require that a plaintiff allege the ability to repay the loan.

 

A link to the amended opinion is available at: Link to Opinion

 

The plaintiff took out a loan to buy a house and the loan was secured by a deed of trust. There are three parties to a deed of trust: (i) the lender, who is the trust beneficiary, (ii) the borrower, who as the trustor holds equitable title to the property, and (iii) the trustee, who is an agent for the lender and the borrower, holds legal title to the property, and is authorized to sell the property if the borrower fails to pay the loan.

 

The plaintiff missed payments on her mortgage and the trustee initiated a non-judicial foreclosure under California law. As required by the statute, the trustee mailed to plaintiff a notice of default stating how much plaintiff owed on the loan, that she had the right bring the account into good standing, and that it could be sold without any court action.  

 

When plaintiff didn't pay, the trustee mailed a notice of sale informing plaintiff that the house would be sold if she did not pay.  The sale never took place because the plaintiff received a loan modification.

 

However, she sued the trustee anyway claiming that it had violated the FDCPA by misrepresenting the amount of the debt and sought to rescind the mortgage transaction under TILA for purported fraud.  

 

The trial court granted the trustee's motion to dismiss, and the plaintiff appealed arguing that the notice of default and notice of sale were attempts to collect a debt because both threatened foreclosure unless plaintiff paid the mortgage.

 

As you may recall, the FDCPA defines the term "debt" to mean "any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment." 15 U.S.C. § 1692a(5). 

 

The Ninth Circuit interpreted this to be "synonymous" with the word "money" such that the trustee would only be liable if it attempted to collect money, directly or indirectly, from the plaintiff.  The Court found that the trustee did not do so because the "object of a non-judicial foreclosure is to retake and resell the security, not to collect money from the borrower" as California's non-judicial foreclosure law does not permit deficiency judgments following the foreclosure.  Thus, the non-judicial foreclosure extinguishes the debt, and any action taken to advance the non-judicial foreclosure is not an attempt to collect a debt as defined by the FDCPA.

 

The Ninth Circuit rejected the plaintiff's argument that the possibility of repossession of the property may induce the debtor to pay off the debt explaining that such an "inducement exists by virtue of the lien, regardless of whether foreclosure proceedings actually commence."  This is contrary to the Sixth Circuit's ruling in Glazer v. Chase Home Fin. LLC, 704 F.3d 453 (6h Cir. 2013) (holding that all "mortgage foreclosure is debt collection" under the FDCPA), and the Fourth Circuit's ruling in Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373 (4th Cir. 2006) (similar).

 

The Ninth Circuit noted that the Fourth Circuit "was more concerned with avoiding what it as viewed a "loophole in the [FDCPA]" than with following the [FDCPA's] text", and that the Sixth Circuit's ruling "rests entirely on the premise that "the ultimate purpose of foreclosure is the payment of money.""  

 

The Ninth Circuit distinguished its reasoning by pointing out that the FDCPA defines "debt" as an "obligation of the consumer to pay money", whereas a trustee in a California non-judicial foreclosure collects money from the purchaser, not the consumer, so that the money is not "debt" as defined by the FDCPA.

 

Rather, the Court held, sending notices of default and sale under California's non-judicial foreclosure law fits into the FDCPA's exception of enforcement of a security interest, at 15 U.S.C. § 1692a(6)(F). The Ninth Circuit explained that entities whose principal purpose is the enforcement of security interests can be debt collectors under the FDCPA but that "the enforcement of security interests is not always debt collection." This is consistent with the Fourth and Sixth Circuits' premise that an entity does not become a "debt collector" where its "only role in the debt collection process is the enforcement of a security interest."

 

The Ninth Circuit also differentiated its reasoning by pointing out that the trustee's right to enforce the security interest as a non-debt collector under the 1692a(6)(F) exception necessarily implied that the trustee must also be able to take the statutorily-required steps leading up to the sale as a non-debt collector, including sending the notice of default and notice of sale.  Such communications are necessary to effect the enforcement of the security interest and do not convert it into debt collection.  

 

The Court further held that a trustee's role under California law as the holder of legal title means that the trustee functions as an escrow, which further satisfies the 1692a(6)(F) exclusion from "debt collector" of an entity whose activities are "incidental to …a bona fide escrow arrangement." The Ninth Circuit also pointed out that the notices of default and sale protect the debtor by informing her of her rights and of the impending foreclosure and are not for the purpose of harassing the debtor into paying a debt she might not otherwise pay.

 

Concerning the TILA claim, the Court held that after the plaintiff's TILA claims had been dismissed, it had ruled that a mortgagor did not need to allege her ability to repay the loan in order to state a rescission claim under TILA. Thus, the plaintiff's TILA claims were reinstated.

 

The Ninth Circuit's holding distinguishes debt collection from the actions taken to initiate and facilitate a non-judicial foreclosure by pointing out that those actions do not constitute an attempt to collect money from the consumer because the purpose of a non-judicial foreclosure in California is to retake and resell the security on the loan resulting in collection of money from the purchaser of the property.

 

Thus, non-judicial foreclosure under California law falls under the FDCPA's 1692a(6)(F) exclusion from the definition of "debt collector."

 

 

 

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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