FYI: 7th Cir Rules Depositing Named Plaintiff's Full Monetary Relief With Trial Court Did Not Moot Putative Class Action

The U.S. Court of Appeals for the Seventh Circuit recently concluded that a putative class representative's unaccepted deposit of payment with the trial court under Fed. R. Civ. P. 67 by the defendant does not moot the representative's individual claim or disqualify him from serving as a class representative. 

 

The Seventh Circuit described the issue as a variation of the one presented in Campbell-Ewald Co. v. Gomez, 136 S. Ct. 663 (2016).  As you may recall, in that case, the Supreme Court concluded that an unaccepted settlement offer or offer of judgment does not moot a plaintiff's case.  The specific issue in Campbell-Ewald addressed an offer of judgment under Rule 68. 

 

In this case, after the plaintiff rejected the defendant's offer of judgment, the defendant deposited with the district court under Rule 67 an amount it believed to be the plaintiff's maximum possible damages plus fees and costs. 

 

The Seventh Circuit held that the variation in this case produced the same result as in Campbell-Ewald – an unaccepted offer to a putative representative does not moot representative's individual claim or the claims of the class. 

 

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

 

The plaintiff dental company received an unsolicited fax from defendant advertising defendant's dental products.  As you may recall, the federal Telephone Consumer Protection Act, 47 U.S.C. § 227, et seq. ("TCPA") generally prohibits unsolicited faxes, unless one of several exceptions applies, such as a previous business relationship or use of certain approved ways to obtain the fax number.  The TCPA also requires the sender to include opt-out notice in clear and conspicuous language. 

 

The plaintiff filed a complaint against the defendant, seeking statutory damages under the TCPA for the two alleged violations (lack of consent and omission of the opt-out notice), injunctive relief banning future violations, and certification of a class (to be represented by plaintiff) of all those who had similarly received faxes from defendant.

 

Shortly after plaintiff filed its lawsuit, the defendant made an offer of judgment under Fed. R. Civ. P. 68.  The offer was for $3,005 plus accrued costs, and it included an agreement to have the requested injunction entered against it.  Two days after the defendant made the offer of judgment, the Supreme Court of the United States issued its ruling in Campbell-Ewald, in which it held that "an unaccepted settlement offer or offer of judgment does not moot a plaintiff's case." 

 

The plaintiff rejected the offer of judgment because it did not provide relief to the other members of the purported class. 

 

The defendant then filed a motion for leave to deposit $3,600 with the trial court under Rule 67. This sum, according to the defendant, represented what it regarded as the maximum possible damages the plaintiff could receive under the TCPA, plus $595 for fees and costs.  The defendant argued that depositing the plaintiff's maximum damages with the court and acquiescing to the injunction made the plaintiff's claim moot, and that the trial court should thus enter judgment in the plaintiff's favor on the moot claims for $3,600 plus the injunction. 

 

Over the plaintiff's objection, the trial court granted the defendant's motion.  The plaintiff appealed.

 

On appeal, the defendant first argued that the Seventh Circuit did not have jurisdiction over the appeal because there was no longer any case or controversy between the parties.  In essence, according to the defendant, the forced settlement mooted the case.

 

The Court rejected this argument, and noted that even though the trial court entered the order granting the defendant leave to deposit the money with the court, the trial court also ordered relief on the merits.  By issuing an order on the merits, the Seventh Circuit concluded that the defendant did not moot the case.  Instead, according to the Court, this was more akin to accord and satisfaction or payment, both of which are affirmative defenses that would not moot the case altogether.

 

The Seventh Circuit then analyzed Campbell-Ewald and certain language from that case that may have caused the defendant to believe it could moot the plaintiff's case.  In particular, even though the Supreme Court in Campbell-Ewald did not distinguish between unaccepted Rule 68 settlement offers and other unaccepted settlement or contract offers, it provided the following ruling:

 

In sum, an unaccepted settlement offer or offer of judgment does not moot a plaintiff's case, so the District Court retained jurisdiction to adjudicate Gomez's complaint. That ruling suffices to decide this case. We need not, and do not, now decide whether the result would be different if a defendant deposits the full amount of the plaintiff's individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount. That question is appropriately reserved for a case in which it is not hypothetical.

 

The defendant argued that this language offered a roadmap for mooting the plaintiff's claim and destroying the plaintiff's ability to serve as a class representative, and that depositing the money under Rule 67 was the appropriate vehicle for accomplishing those results.

 

The Seventh Circuit analyzed the specific language of Rule 67, which provides:

 

(a) Depositing Property. If any part of the relief sought is a money judgment or the disposition of a sum of money or some other deliverable thing, a party—on notice to every other party and by leave of court—may deposit with the court all or part of the money or thing, whether or not that party claims any of it. The depositing party must deliver to the clerk a copy of the order permitting deposit.

 

(b) Investment and Withdrawing Funds. Money paid into court under this rule must be deposited and withdrawn in accordance with 28 U.S.C. §§ 2041 and 2042 and any like statute. The money must be deposited in an interest-bearing account or invested in a court-approved, interest-bearing instrument.

 

The Court observed that sections 2041 and 2042 do not give any party an unrestricted right to remove money from the court's registry. Section 2041 permits "the delivery of [deposited] money to the rightful owners upon security, according to agreement of parties, under the direction of the court," and section 2042 begins with the statement that "[n]o money deposited under section 2041 of this title shall be withdrawn except by order of court."

 

Based on this language, the Seventh Circuit concluded that "Rule 67 is not is a vehicle for determining ownership; that is what the underlying litigation is for."  Thus, according to the Court, defendant did not effectuate the hypothetical mentioned in Campbell-Ewald of "deposit[ing] the full amount of the plaintiff's individual claim in an account payable to the plaintiff."

 

Because the Court did not find a distinction between trying to force a settlement under Rule 68 and Rule 67, and because the defendant's action of depositing the money with the trial court under Rule 67 did not address the circumstances the Supreme Court in Campbell-Ewald suggested may have produced a different result, the Court concluded that plaintiff's claim was not moot.  As a result, according to the Court, plaintiff was not barred from seeking class treatment.

 

Finally, the Seventh Circuit concluded that it could not rule as a matter of law that the $3,600 deposited with the trial court was sufficient to compensate plaintiff for its damages and the lost opportunity to represent the putative class.

 

Accordingly, the Seventh Circuit reversed the trial court's judgment and remanded the matter.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
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FYI: 8th Cir Holds Borrower's Post-Foreclosure Modification Allegations Not Time-Barred

The U.S. Court of Appeals for the Eighth Circuit recently reversed the dismissal of a borrower's lawsuit against his mortgagee for failing to restore his title after a non-judicial foreclosure and subsequent execution of a loan modification agreement, holding that the borrower's claims were not time-barred and accrued only when he tried to sell the home more than five years after the modification agreement.

 

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

 

A borrower refinanced his home mortgage loan in 2003, and defaulted in 2008. The loan servicer gave the borrower notice and held a non-judicial foreclosure sale under Missouri law, at which the mortgagee made the winning bid.

 

A deed conveying title of the encumbered property to the mortgagee was recorded in 2008 and then the mortgagee sued to evict the borrower.  A few months later, the borrower and mortgagee entered into an oral agreement to reinstate the mortgage by paying $6,600 and the eviction proceeding was halted.  

 

However, the parties did not address how the borrower's title would be restored.  The parties then signed a loan modification agreement, which once again did not specify how the borrower's title would be restored.

 

In 2013, the borrower moved and decided to sell the home. However, his real estate broker discovered during a title search that the home was still titled in the mortgagee's name.

The borrower then sued the servicer in Missouri state court.

 

The mortgagee intervened and removed the case to federal court, "seeking an order setting aside the deed from the foreclosure sale and enforcing the modified loan — in other words, judicial permission to proceed as if everything happened the way it was supposed to occur."

 

The borrower sought damages instead of accepting a deed back to him because he no longer resided in the subject property, which had deteriorated and been declared a nuisance.

 

The parties filed cross-motions for summary judgment and the trial court granted the mortgagee's motion, finding that the borrower's claims were time-barred by Missouri's five-year statute of limitations. The borrower appealed.

 

The central question before the Eighth Circuit was whether the borrower's claims accrued in 2008 or 2013.

 

The Eighth Circuit explained that under Missouri law, claims generally accrue "when the damage … is sustained and is capable of ascertainment." In addition, however, in cases involving fraud, the claim does not accrue until "discovery … of the facts constituting fraud."

 

The Appellate Court concluded that it need not decide which standard applied because it found that the borrower's "claims were all timely even under the usual, easier to trigger 'capable of ascertainment' standard."

 

The Eighth Circuit rejected the mortgagee's, and trial court's, reasoning that the borrower could have discovered the status of title more than five years before filing suit, rejecting such a literal approach in reliance on a Missouri Supreme Court opinion holding that the phrase "capable of ascertainment" means when the "plaintiff has sufficient knowledge to be put on 'inquiry notice' of the wrong and damages…."

 

Relying on its interpretation of the Missouri Supreme Court's ruling, the Eighth Circuit held that "the statute of limitation on [borrower's] claims only started running 'when a reasonable person would have been put on notice that an injury and substantial damages may have occurred and would have undertaken to ascertain the extent of the damages.'"

 

Because the Eight Circuit found that the mortgagee could not point to anything that would have led a reasonable person to inquire why his title was not restored, the party asserting the defense bears the burden of proof, and all seemed well until the borrower tried to sell his home, the Court concluded the borrower had not duty to inquire and that his lawsuit was timely.

 

Thus, the trial court's summary judgment in favor of the mortgagee was reversed and the case remanded "for consideration of the merits of [borrower's] 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

 

 

 

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FYI: 2nd Cir Rejects FACTA "Credit Card Expiration Date" Claim, Citing Spokeo and Joining with 7th Cir

The U.S. Court of Appeals for the Second Circuit recently joined the Seventh Circuit in holding that printing a credit card expiration date on an otherwise properly redacted receipt does not constitute an injury in fact sufficient to establish Article III standing to bring a claim alleging a bare procedural violation of the federal Fair and Accurate Credit Transactions Act of 2003 ("FACTA").  

 

Accordingly, the Second Circuit affirmed the ruling of the trial court dismissing the plaintiff's amended complaint.

 

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

 

The plaintiff' ("Plaintiff") brought suit against the defendant restaurant ("Restaurant") alleging a willful violation of FACTA based on receiving a receipt from the Restaurant that contained her credit card's expiration date.  Even after amendment, the Plaintiff's allegations were otherwise devoid of any specific factual allegations concerning her interactions with the Restaurant or any consequences that stemmed from the display of her credit card's expiration date.

 

Instead, the Plaintiff alleged that by "knowingly and recklessly" printing card expiration dates on receipts, the Restaurant "created a real, non-speculative harm in the form of increased risk of identity theft." 

 

The trial court dismissed Plaintiff's amended complaint with prejudice, concluding that she lacked standing to bring claims for violations of FACTA's requirements.

 

On appeal, the Second Circuit discussed both the Supreme Court of the United States's ruling in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016) and its own prior ruling in Strubel v. Comenity Bank, 842 F.3d 181 (2d Cir. 2016), and noted that "the key inquiry here is whether [Plaintiff's] alleged bare procedural violation . . . presents a material risk of harm to the underlying concrete interest Congress sought to protect in passing FACTA."  

 

The Second Circuit found it dispositive that Congress clarified FACTA in the Credit and Debit Card Receipt Clarification Act of 2007 ("Clarification Act") stating that "[e]xperts in the field agree that proper truncation of the card number, . . . regardless of the inclusion of the expiration date, prevents a potential fraudster from perpetrating identity theft or credit card fraud."  The Court stated that "[t]his makes clear that Congress did not think that the inclusion of a credit card expiration date on a receipt increases the risk of material harm of identity theft." 

 

Plaintiff argued that the Clarification Act maintained FACTA's prohibition on printing credit card expiration dates on receipts, which reflects Congress's continued belief that the action poses a material risk of harm.  However, although the Second Circuit acknowledged the Clarification Act maintained FACTA's prohibition, it "decline[ed] to draw plaintiff's proposed inference, because in the same Act, Congress expressly observed that the inclusion of expiration dates did not raise a material risk of identity theft."

 

Moreover, the Second Circuit noted that "Congress could not have been clearer in stating that '[t]he purpose of this Act is to ensure that consumers suffering from any actual harm to their credit or identity are protected while simultaneously limiting abusive lawsuits that do not protect consumers but only result in increased costs to business and potentially increase prices to consumers.'" 

 

Based on this clarification of FACTA, the Second Circuit held that "a plaintiff must allege that, at a minimum, the bare procedural violation presents a risk of real harm to her concrete interest." 

 

The U.S. Court of Appeals for the Seventh Circuit reached the same conclusion in Meyers v. Nicolet Rest. of De Pere, LLC, 843 F.3d 724, 727 (7th Cir. 2016).

 

The Second Circuit thus joined the Seventh Circuit in ruling that "[i]n these circumstances, it is hard to imagine how the expiration date's presence could have increased the risk that [plaintiff's] identity would be compromised." 

 

Accordingly, the ruling of the trial court dismissing the amended complaint 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

 

 

 

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.

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FYI: 9th Cir Holds Bankruptcy Cram Down Valuations to Use "Replacement Value" Not "Foreclosure Value"

The U.S. Court of Appeals for the Ninth Circuit recently held that for cram-down valuations, 11 U.S.C. § 506(a)(1) requires the use of "replacement value" based upon the adoption of the replacement value standard in Associates Commercial Corp. v. Rash, 520 U.S. 953, 956 (1997).

 

In so ruling, the Ninth Circuit interpreted Rash to instruct that valuation of collateral in a cram-down must be based on the debtor's desires (i.e., the proposed use of the collateral in the debtor's plan of reorganization), and without consideration of the value that the secured creditor would realize in an immediate sale. 

 

Accordingly, this ruling effectively shifts the risk in cram-down valuations to the secured creditor regardless of the type of debtor and the nature of the property.  

 

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

 

A real estate developer ("Developer") obtained financing from various lenders to fund the development of an apartment complex in Phoenix, Arizona.  The bulk of the financing came from a loan that was guaranteed by the United States Department of Housing and Urban Development ("HUD"), and funded through bonds issued by the Phoenix Industrial Development Authority.  The City of Phoenix and the State of Arizona provided the balance of the funding secured by junior liens.

 

To secure financing and tax benefits, Developer entered into agreements requiring the apartment complex be used for affordable housing.  

 

Developer defaulted on the loan with HUD and a bank ("Bank") purchased the loan from HUD.  In connection with the sale, HUD released its regulatory agreement.  However, the loan sale agreement confirmed that the property remained subject to the other "covenants, conditions and restrictions." 

 

Bank began foreclosure proceedings and a receiver was appointed.  The receiver agreed to sell the apartment complex to a third party in December 2010.  But, before the sale could close, Developer filed a Chapter 11 bankruptcy petition.  Over Bank's objection, Developer sought to retain the complex in its proposed plan of reorganization, exercising the "cram-down" option in 11 U.S.C. § 1325(a)(5)(B).

 

As you may recall, a successful cram-down allows the reorganized debtor to retain collateral over a secured creditor's objection, subject to the requirement in § 506(a)(1) that the debt be treated as secured "to the extent of the value of such creditor's interest" in the collateral.  The value of that claim is "determined in light of the purpose of the valuation and of the proposed disposition or use of such property."  Id.

 

The central issue in the reorganization was the valuation of Bank's collateral – i.e., the apartment complex.  Developer argued that the complex should be valued as low-income housing based on its intended use, while Bank argued that the complex should instead be valued based on its replacement value, which was a higher value because the complex would no longer be used as low-income housing after foreclosure. 

 

Bank's expert valued the complex at $7.74 million, under the assumption that a foreclosure would remove any low-income housing requirements.  Bank's expert also opined that the value of the property was only $4,885,000 if those requirements remained in place.  Developer's expert valued the property at $2.6 million with the low-income housing restrictions in place, and at $7 million without. 

 

The bankruptcy court held that under § 506(a)(1), the value of the property was $2.6 million because Developer's plan of reorganization called for continued use of the complex as low-income housing.  The bankruptcy court also declined to include in the value of the complex the tax credits available to Developer.  Bank then elected to treat its claim as fully secured under 11 U.S.C. § 1111(b).

 

The bankruptcy court confirmed the plan of reorganization, which provided for payment in full of Bank's claim over 40 years.  The reorganization plan required the junior lienholders to relinquish their liens, but provided for payment of their unsecured claims in full, without interest, at the end of the 40 years.

 

The bankruptcy court found the plan fair and equitable under 11 U.S.C. § 1129(b)(1) because Bank retained its lien, would receive an interest rate equivalent to the prevailing market rate, and could foreclose (and therefore obtain the property without the restrictive covenant) should Developer default on the reorganization.  And, based on Developer's financial projections, the bankruptcy court found the plan feasible under 11 U.S.C. § 1129(a)(11).

 

After confirmation, a third party ("Investor) invested $1.2 million in the complex.  Bank then obtained a stay of the plan of reorganization from the district court pending appeal.  The district court affirmed the bankruptcy court's valuation of the complex with the low-income housing restrictions in place, but held that the tax credits should have been considered.  Both parties appealed.

 

After the various appeals were consolidated, the Ninth Circuit initially reversed the bankruptcy court's order approving the plan of reorganization, holding that the court should have valued the apartment complex without the affordable housing requirements.  In re Sunnyslope Hous. Ltd. P'ship, 818 F.3d 937, 940 (9th Cir. 2016).  More specifically, the Ninth Circuit initially held that under § 506(a)(1), replacement cost "is a measure of what it would cost to produce or acquire an equivalent price of property" and that "the replacement value of a 150-unit apartment complex does not take into account the fact that there is a restriction on the use of the complex."

 

The Ninth Circuit then granted Developer's petition for rehearing en banc to resolve three issues:  (1) whether the bankruptcy court erred by valuing the apartment complex assuming its continued use after reorganization as low-income housing, (2) whether the plan of reorganization was fair, equitable, and feasible, and (3) whether the district court errored in now allowing Developer to withdraw its § 1111(b) election.

 

First, the Ninth Circuit analyzed the bankruptcy court's valuation with the restrictive covenants.

 

The Ninth Circuit previously established that, "[w]hen a Chapter 11 debtor or a Chapter 13 debtor intends to retain property subject to a lien, the purpose of a valuation under section 506(a) is not to determine the amount the creditor would receive if it hypothetically had to foreclose and sell the collateral."  In re Taffi, 96 F.3d 1190, 1192 (9th Cir. 1996) (en banc).  "The foreclosure value is not relevant" because the creditor "is not foreclosing."  Id.  In Taffi, the Ninth Circuit noted that its decision was consistent with the approached of all but one circuit – the Fifth Circuit — which had adopted a foreclosure-value standard in In re Rash, 90 F.3d 1036 (5th Cir. 1996) (en banc).  See In re Taffi, 96 F.3d at 1193. 

 

The Supreme Court of the United States in In re Rash reversed the Fifth Circuit, holding consistent with Taffi, that "§ 506(a) directs application of the replacement-value standard," rather than foreclosure value.  Rash, 520 U.S. 953, 956 (1997).  In so ruling, the Supreme Court held that the value of collateral under § 506(a)(1) is "the cost the debtor would incur to obtain a like asset for the same 'proposed … use.'"  Id. at 965. 

 

Thus, according to the Ninth Circuit, in Rash the Supreme Court held that, in a reorganization involving a cram down, the proper guide was the replacement value.  Therefore, the essential inquiry is to determine the price that a debtor in Developer's position would pay to obtain an asset like the collateral for the particular use proposed in the plan of reorganization.  Id. 

 

However, Bank alternatively argued that the property should be valued at its "highest and best use" – that is, housing without any low-income restrictions. 

 

The Ninth Circuit rejected the argument because absent foreclosure, the very event that the Chapter 11 plan sought to avoid, Developer cannot use the property except as affordable housing, nor could anyone else.  In fact, Rash expressly instructed that a § 506(a)(1) valuation cannot consider what would happen after a hypothetical foreclosure—the valuation must instead reflect the property's "actual use."  Id., at 963.

 

Next, Bank attempted to distinguish Rash by arguing that foreclosure value is greater than replacement value in this case.  But, as the Ninth Circuit explained, Rash implicitly acknowledged that this outcome might occasionally be the case, and the Supreme Court nonetheless adopted a replacement-value standard.  Id., at 960.  Thus, following the Supreme Court's guidance in Rash, the Ninth Circuit was unconvinced that the foreclosure value should be used in place of replacement value.

 

Bank also argued that the low-income housing requirements do not apply to its security because HUD released its regulatory agreement, and all other covenants are junior to its lien.  The Ninth Circuit again disagreed because while the junior liens were subordinate to Developer's, it was undisputed the restrictions they impose continue to run with the land absent foreclosure.  Thus, according to the Court, the low-income housing requirements were properly considered in determining the value of the collateral.

 

Additionally, Bank's amici argued that valuing the collateral with the low-income restrictions in place would discourage future lending on like projects. 

 

The Ninth Circuit disagreed because "while the protection of creditors' interests is an important purpose under Chapter 11, the Supreme Court has made clear that successful debtor reorganization and maximization of the value of the estate are the primary purposes."  In re Bonner Mall P'ship, 2 F.3d 899, 916 (9th Cir. 1993).  Allowing the debtor to "rehabilitate the business" generally maximizes the value of the estate.  Id.

 

Here, Bank bought the Developer's loan at a substantial discount knowing the risk that the property would remain subject to the low-income housing requirements.  Thus, the Ninth Circuit concluded that valuing Bank's collateral with those restrictions in mind did not subject the lender to more risk than it consciously undertook.

 

Next, the bankruptcy court ruled that Developer's plan was fair and equitable because Developer retained its lien and received the present value of its allowed claim over the term of the plan.

 

As you may recall, the cram-down provision in 11 U.S.C. § 1129(b) requires that the reorganization plan be "fair and equitable."  The secured creditor must retain its lien, § 1129(b)(2)(A)(i)(I), and receive payments over time equaling the present value of the secured claim, § 1129(b)(2)(A)(i)(II). 

 

The interest rate chosen must ensure that the creditor receives the present value of its secured claim through the payments contemplated by the plan of reorganization.  Till v. SCS Credit Corp., 541 U.S. 465, 469 (2004).

 

The question before the Ninth Circuit was whether the plan provided payments equal to the present value of the secured claim.

 

Bank argued that it did not receive the present value of its secured claim because the interest rate adopted in the plan, 4.4%, is lower than the original rate on its loan.  However, the bankruptcy court determined that the 4.4% interest rate on the plan payments would result in Bank receiving the present value of its $3.9 million security over the term of the reorganization plan.  The relevant national prime rate was 3.25%, and the bankruptcy court adjusted that rate upward to account for the risk of non-payment.  The bankruptcy court also heard testimony that the market loan rate for similar properties was 4.18%. 

 

Additionally, plan confirmation requires a finding that the debtor will not require further reorganization.  11 U.S.C. § 1129(a)(11).  The debtor must demonstrate that the plan "has a reasonable probability of success."  In re Acequia, 787 F.2d 1352, 1364 (9th Cir. 1986).

 

In this case, the record showed that Developer would be able to make plan payments, and expert testimony confirmed that the collateral would remain useful for 40 years – the term of the plan.  The bankruptcy court also found that the balloon payment feasible because it was secured by property whose value exceeded the value of the remaining Developer's claim. 

 

Thus, the Ninth Circuit affirmed the bankruptcy court determination with respect to plan fairness and feasibility.

 

Turning to Bank's final argument regarding its § 1111(b) election, the Appellate Court found no error in the bankruptcy court's ruling.

 

As you may recall, § 1111(b) of the Bankruptcy Code allows a secured creditor to elect to have its claim treated as either fully or partially secured.  An election affects the treatment of the unsecured portion of the claim under the plan and the procedural protections afforded to the creditor.  11 U.S.C. § 1129(a)(7)(B).  In absence of a contrary order by the bankruptcy court, the creditor must make this election before the end of the disclosure statement hearing.  Fed. R. Bankr. P. 3014.

 

Bank argued that the bankruptcy court erred in not allowing it to make a second election after the district court remanded and required the tax credits to be added to the valuation.  When Bank made its election, the plan provided for 40 years of payments of principal and interest providing the creditor with the present value of its $2.6 million secured claim, with a final balloon payment covering the remainder of the debt. 

 

However, after remand, according to the Ninth Circuit, the only difference to Bank was that its annual payments will be more and the balloon payment at the end of the 40 years will be less.  Thus, the Appellate Court held that allowing a second election would not only provide Bank with a second bite at the apple, it would not make a material difference in the outcome of the election.

 

Accordingly, the Ninth Circuit affirmed the judgment of the district court.

 

 

 

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: 9th Cir BAP Affirms Dismissal of "Wrongful Securitization" Allegations

The Bankruptcy Appellate Panel of the U.S. Court of Appeals for the Ninth Circuit recently affirmed the dismissal of an adversary proceeding without leave to amend, holding that:

 

(a) the debtors failed to state a claim for wrongful foreclosure under California law;

 

(b) the debtors failed to state a claim for breach of contract or breach of the implied covenant of good faith and fair dealing because they were not third-party beneficiaries of the Pooling and Servicing Agreement;

 

(c) the debtors failed to state a claim for breach of the deed of trust or breach of the implied covenant of good faith and fair dealing by executing the notice of default; and

 

(d) the debtors failed to state a claim for violating § 2923.5 of California's Civil Code or for violating California's unfair competition law.

 

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

 

Husband and wife borrowers obtained a loan to purchase their home in Livermore, California. The loan was secured by a Deed of Trust, which named a title company as trustee and a national bank as both lender and beneficiary.

 

The bank sold the Note and Deed of Trust and the purchaser deposited both into a mortgage-backed securities trust pursuant to a Pooling and Servicing Agreement ("PSA"), which named another national bank as trustee.  The language of the trust required the transfer of assets into the trust within 90 days after the trust pool's start date, but the Note and Deed of Trust allegedly were not deposited into the trust until 2012.

 

A third-party default services company recorded a Notice of Default against the borrowers' property acting as agent or trustee for the beneficiary. The trustee then recorded Substitution of Trustee naming the default services company as trustee, after which the default services company recorded a Notice of Trustee's Sale.

 

The borrowers filed for bankruptcy shortly thereafter, but failed to pay as required by their reorganization plan, and the bank originally named as trustee filed a motion for relief from stay, which the bankruptcy court granted.

 

The borrowers then filed an adversary proceeding, alleging that the transfer of the Deed of Trust into the trust was void because it breached the PSA ninety-day transfer requirement. They also alleged breach of the Deed of Trust and supposed violation of two California statutes.

 

The bankruptcy court dismissed the adversary complaint without leave to amend. The borrowers appealed to the district court, which affirmed the dismissal. They then appealed the Ninth Circuit.

 

On appeal the Ninth Circuit was presented with two questions: "(1) whether the bankruptcy court correctly concluded that the [borrowers'] Adversary Complaint failed to state a claim and (2) whether the bankruptcy court erred in denying the [borrowers] leave to amend."

 

The Ninth Circuit first addressed the borrower's claim for wrongful foreclosure, explaining that under California law a residential borrower "has standing to claim a nonjudicial foreclosure was wrongful because an assignment by which the foreclosing party purportedly took a beneficial interest in the deed of trust was not merely voidable but void. … Unlike a voidable transaction, a void one cannot be ratified or validated by the parties to it even if they so desire."

 

The Court rejected the borrowers' argument that the assignments of the Deed of Trust were void, relying on three California Courts of Appeal opinions all holding that "such an assignment is merely voidable" because "an unauthorized act by the trustee is not void but merely voidable by the beneficiary." Thus, the Ninth Circuit found that the district court correctly dismissed the wrongful foreclosure claim.

 

Turning to the borrowers' claim for breach of contract of the PSA or breach of the implied covenant of good faith and fair dealing under the PSA, the Ninth Circuit rejected the borrowers' argument that they were third-party beneficiaries of the PSA, relying on "numerous California appellate courts [that] have held, borrowers, … are not third-parties [sic] beneficiaries of the PSA." Accordingly, the Court concluded that "the district [court] correctly ruled that the [borrowers] failed to state a claim for either breach of the express agreement or the related breach of the implied covenant of good faith and fair dealing under the PSA."

 

The Ninth Circuit next rejected the borrowers' argument that the lender/beneficiary bank breached the Deed of Trust because it did not sign the Notice of Default and its agent, the default services company, "could not record the Notice of Default because the Notice was issued three months before [the default services company] was substituted as Trustee."

 

The Court reasoned that their argument lacked merit because the express terms of the Deed of Trust did not require the lender/beneficiary bank "to execute the Notice of Default, but rather, it can cause the Trustee to execute a written notice of default."  Because "a substitution of trustee was recorded naming [the default services company] as Trustee, … [it] had the authority to issue the Notice of Default [under Cal. Civ. Code § 2934a(d)]" which provides that "[o]nce recorded, the substitution shall constitute conclusive evidence of the authority of the substituted trustee or his or her agents to act pursuant to this section."

 

The Ninth Circuit also rejected the borrowers' argument that the bank breached the implied covenant of good faith and fair dealing "by obscuring the identity of the true holder of the beneficial interest making it impossible for them to know to whom to make their mortgage payments" because they "have not alleged that their payments were not accurately credited, that they sustained any damages, or that they were not in default. Having failed to identify any prejudice, the district court properly dismissed their claims."

 

The Court then addressed the borrowers' claim that the substituted trustee violated Cal. Civ. Code § 2923.5, which provides that "[a] mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent may not record a notice of default until either thirty days after initial contact with the borrower or thirty days after satisfying the due diligence requirements."

 

Because the Notice of Default was signed by the substitute trustee as agent for the lender/beneficiary bank, a substitution of trustee was thereafter recorded, and "[t]he only remedy for noncompliance with [Section 2923.5] is the postponement of the foreclosure sale[,]" the Court concluded that the district court correctly dismissed the borrowers' claim under section 2923.5.

 

Turning to the borrowers' remaining claim that defendants violated California's unfair competition law ("UCL"), which "prohibits unlawful, unfair, deceptive, untrue or misleading advertising[,]" the Ninth Circuit found that the borrowers "failed to establish standing to bring a claim under the UCL."

 

The Ninth Circuit reasoned that in order to have standing to bring a UCL claim, "the plaintiff must '(1) establish a loss or deprivation of money or property sufficient to qualify as injury in fact, i.e., economic injury, and (2) show that the economic injury was the result of, i.e., cause by, the unfair business practice …."  The Court noted that a plaintiff fails "to satisfy this causation requirement if he or she would have suffered 'the same harm whether or not a defendant complied with the law.'"

 

The Court concluded that the borrowers lacked standing because "they cannot establish the second prong." Their "home would have been foreclosed regardless of the alleged deficiencies in the timing of the assignments of the [Deed of Trust] and Substitution of Trustee. [They] have not disputed that they stopped making payments, causing the loan to go into default." Because it was the borrowers' default "that triggered the lawful enforcement of the power of sale clause in the deed of trust, and the triggering of the power of sale clause subjected [the borrowers'] home to nonjudicial foreclosure, not any procedural deficiencies in the assignment … they do not  have standing to pursue a claim under the UCL."

 

Finally, the Ninth Circuit found that the district court correctly dismissed the borrowers' claims without leave to amend "because any amendment would be futile."

 

The Ninth Circuit affirmed the district court's dismissal of the borrowers' claims without leave to amend.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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