FYI: 9th Cir Rules Mortgage Underwriters Not Exempt Under FLSA

The U.S. Court of Appeals for the Ninth Circuit recently held that mortgage underwriters were not exempt under the federal Fair Labor Standards Act ("FLSA") and were therefore entitled to overtime compensation for hours worked in excess of forty per week.

 

After analyzing the specific details of the underwriters' responsibilities, the Ninth Circuit panel concluded that, because the underwriters' primary job duty did not relate to their employer bank's management or general business operations, the administrative employee exemption to the FLSA's overtime requirements did not apply. 

 

Recognizing that there was a split between the Second Circuit and Sixth Circuit as to whether the underwriters are exempt, the Ninth Circuit adopted the Second Circuit's conclusion that "the job of underwriter falls under the category of production rather than administrative work," and, thus, the administrative exemption under the FLSA does not apply.

 

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

 

The Plaintiff and the other members of the class were mortgage underwriters for the defendant bank ("Bank").  The Bank sold mortgage loans to consumers seeking to purchase or refinance homes, and then the Bank would resell the funded loans on the secondary market. 

 

The mortgage loan application process was streamlined.  A loan officer or broker worked with a borrower to select a particular loan product. A loan processor then ran a credit check, gathered further documentation, assembled the file for the underwriter, and ran the loan through an automated underwriting system. The automated system then applied certain guidelines based on the information input and then returned a preliminary decision.

 

From there, the file went to a mortgage underwriter, who verified the information put into the automated system and compared the borrower's information against the applicable guidelines, which are specific to each loan product.  The underwriters were responsible for thoroughly analyzing complex customer loan applications and determining borrower creditworthiness in order to ultimately decide whether the Bank will accept the requested loan. The underwriters could impose conditions on a loan application and refuse to approve the loan until the borrower satisfied those conditions.

 

The decision as to whether to impose conditions is ordinarily controlled by the applicable guidelines, but the underwriters could include additional conditions. They could also suggest a "counteroffer" — which would be communicated through the loan officer — in cases where a borrower did not qualify for the loan product selected, but might qualify for a different loan.

 

Underwriters could also request that the Bank make exceptions in certain cases by approving a loan that did not satisfy the guidelines.  After an underwriter approved a loan, it was sent to other Bank employees who finalized the loan funding. According to the underwriters, whether a loan was funded ultimately depended on factors beyond their control. Another group of Bank employees then sold the funded loans in the secondary market.

 

Initially, the trial court denied cross motions for summary judgment and set the case for trial. But later, on the parties' joint motion for reconsideration, the trial court concluded that the underwriters qualified for the administrative exemption under the FLSA, based on the finding that their primary duty included "quality control" or similar activities directly related to the Bank's general business operations.  Thus, the trial court granted summary judgment in favor of the Bank.  Plaintiff appealed.

 

As you may recall, the FLSA requires employers to compensate its employees time and a half of their regular pay for all hours worked over forty in a week.  Under the FLSA, certain employees "employed in a bona fide executive, administrative, or professional capacity" are exempt from the overtime requirements. See 29 U.S.C. § 213(a)(1).

 

The Ninth Circuit recognized that the exemptions under the FLSA are to be narrowly construed, and the employer bears the burden of establishing they apply.  According to the Court, the FLSA "is to be liberally construed to apply to the furthest reaches consistent with Congressional direction", and the exemptions "are to be withheld except as to persons plainly and unmistakably within their terms and spirit."

 

In assessing whether the administrative exemption applied, the Court relied on the Department of Labor's ("DOL") regulations interpreting the FLSA. In order for the administrative exemption to apply, the employee must (1) be compensated not less than $455 per week; (2) perform as her primary duty "office or non-manual work related to the management or general business operations of the employer or the employer's customers;" and (3) have as her primary duty "the exercise of discretion and independent judgment with respect to matters of significance." 29 C.F.R. § 541.200(a). An employee's primary duty is "the principal, main, major or most important duty that the employee performs." 29 C.F.R. § 541.700(a).

 

At issue in this case was the second requirement.  In order to satisfy that requirement, an employee's primary duty must involve office or "non-manual work directly related to the management policies or general business operations" of the Bank or the Bank's customers. See 29 C.F.R. § 541.200. "An employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment." 29 C.F.R. § 541.201(a).

 

This has commonly been referred to as the "administrative-production dichotomy." Its purpose is "to distinguish 'between work related to the goods and services which constitute the business' marketplace offerings and work which contributes to 'running the business itself.'" DOL Wage & Hour Div. Op. Ltr., 2010 DOLWH LEXIS 1, 2010 WL 1822423, *3 (Mar. 24, 2010).  According to the Ninth Circuit, "[t]his requirement is met if the employee engages in 'running the business itself or determining its overall course or policies,' not just in the day-to-day carrying out of the business' affairs."

 

The Court observed that the Second Circuit and Sixth Circuit had reached conflicting rulings on whether the administrative exemption applied to mortgage underwriters.  According the Second Circuit, "the job of underwriter . . . falls under the category of production rather than of administrative work."  Davis v. J.P. Morgan Chase & Co., 587 F.3d 529, 535 (2d Cir. 2009).

 

On the other hand, the Sixth Circuit concluded that mortgage underwriters are exempt administrators, explaining that they "perform work that services the Bank's business, something ancillary to [the Bank's] principal production activity." Lutz v. Huntington Bancshares, Inc., 815 F.3d 988, 995 (6th Cir. 2016).  The Sixth Court determined mortgage underwriters performed "administrative work because they assist in the running and servicing of the Bank's business by making decisions about when [the Bank] should take on certain kinds of credit risk, something that is ancillary to the Bank's principal production activity of selling loans." Id. at 993.

 

Turning the facts of this case, the Ninth Circuit agreed with the reasoning of the Second Circuit, and concluded that the underwriters "did not decide if the Bank should take on risk, but instead assess whether, given the guidelines provided to them from above, the particular loan at issue falls within the range of risk the Bank has determined it is willing to take."

 

The Court continued, "assessing the loan's riskiness according to relevant guidelines is quite distinct from assessing or determining the Bank's business interests. Mortgage underwriters are told what is in the Bank's best interest, and then asked to ensure that the product being sold fits within criteria set by others."

 

The Ninth Circuit also cited to the DOL's regulations to support its conclusion.  "The financial-services industry example also includes descriptors that do not correspond with the underwriters' primary duty, which aims more at producing a reliable loan than at 'advising' customers or 'promoting' the Bank's financial products." See 29 C.F.R. § 541.203(b).  The Court emphasized that underwriters do not "advis[e] customers at all, nor do they market[], servic[e] or promot[e] the employer's financial products."

 

The Court then summarized its ruling as follows:

 

"We conclude that where a bank sells mortgage loans and resells the funded loans on the secondary market as a primary font of business, mortgage underwriters who implement guidelines designed by corporate management, and who must ask permission when deviating from protocol, are most accurately considered employees responsible for production, not administrators who manage, guide, and administer the business."

 

The trial court had granted the Bank's motion for summary judgment on the basis that the underwriters performed work related to "quality control."  The Ninth Circuit, however, concluded that the record evidence did not support such a conclusion.

 

The Court concluded that the underwriters' primary duty did not go to the heart of the Bank's internal operations, but instead went to the marketplace offerings and were related to the production side of the Bank's business.  

 

Accordingly, the Ninth Circuit reversed the trial court's granting of summary judgment in favor of the bank and remanded with instructions to enter summary judgment in favor of the plaintiff class.

 

 

 

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: 7th Cir Divided Panel Holds Debt Collector Liable Under FDCPA Despite Changes in Underlying Law at Issue

In a deeply divided opinion, the U.S. Court of Appeals for the Seventh Circuit, in an en banc review, reversed its previous opinion, Oliva v. Blatt, Hasenmiller, Leibsker & Moore, LLC, 825 F.3d 788, 791 (7th Cir. 2016), holding this time that a debt collector that relied upon circuit precedent interpreting the federal Fair Debt Collection Practices Act (FDCPA) venue provision was not protected by the bona fide error defense. 

 

In so ruling, the Court also held that for purposes of compliance with the FDCPA, reliance on court precedent is permitted, but only if there can be no doubt whatsoever as to the accuracy of the prior court's interpretation of the law.

 

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

 

As you may recall, the FDCPA requires that a debt collector who sues to collect a consumer debt must sue in the "judicial district or similar legal entity" where the debtor lives or signed the contract in question. 15 U.S.C. § 1692i.  In 1996, the Seventh Circuit interpreted "judicial district" to mean a county court, such that when debt collectors were filing suit in Cook County, they could file suit in any of the county's six municipal districts as long as the debtor resided in Cook County or had signed the underlying contract there. Newsom v. Friedman, 76 F.3d 813, 819 (7th Cir. 1996). 

 

In 2013, relying on Newsom, a debt collection law firm filed suit against a debtor in the First Municipal District of Cook County in downtown Chicago. The debtor did not reside in that district at the time the lawsuit was filed, although he had been a student there when he opened the account and had worked in downtown Chicago.  

 

While the lawsuit was pending, the Seventh Circuit issued a new ruling in Suesz v. Med-1 Solutions, LLC, 757 F.3d 636, 638 (7th Cir. 2014) (en banc), in which it held that the "judicial district or similar legal entity" in § 1692i is "the smallest geographic area that is relevant for determining venue in the court system in which the suit is filed," which can be smaller than a county if the court system there uses smaller districts. The Suesz Court explained that § 1692i "should prevent debt collectors from choosing venues that are inconvenient for the debtor and/or particularly friendly to the debt collector", and noted that the "venue provision applies even where the debt collector's venue selection is permissible as a matter of state law."  The Suesz Court further explained that "§ 1692i must be understood not as a venue rule but as a penalty on debt collectors who use state venue rules in a way that Congress considers unfair or abusive".  

 

Thus, Suesz overruled Newsom. Eight days later the debt collector dismissed the pending lawsuit against the debtor.

 

The debtor then sued the debt collector under the FDCPA alleging that the debt collector had violated the venue provision in  § 1692i. The parties filed cross-motions for summary judgment and the trial court ruled in favor of the debt collector reasoning that it had shown that its violation of the venue provision was the result of a bona fide error in relying on incorrect circuit precedent. The trial court rejected the debtor's argument that Suesz should apply retroactively.

 

The debtor appealed and the Seventh Circuit affirmed, concluding that the safe harbor of the bona fide error defense prevented retroactive application of Suesz. That original holding by the Seventh Circuit would have overruled a string of trial court cases in the U.S. District Court for the Northern District of Illinois in which Suesz was held to retroactively apply to venue under § 1692i. The debtor requested an en banc review asserting that the ruling conflicted with Suesz and the Supreme Court's ruling in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 559 U.S. 573, 576 (2010), which held that the bona fide error defense does not apply to mistakes of law.

 

The debt collector argued that the FDCPA's bona fide error defense protected it from liability when it relied in good faith on Newsom in choosing the venue for the collection lawsuit. In addressing that argument, the appellate court read Jerman to mean that a debt collector's own mistaken interpretation of the law prevented application of the bona fide error defense. The panel, however, read Jerman more broadly, concluding that the bona fide error defense does not apply where a debt collector relies in good faith on a court's reasonable but mistaken interpretation of the law.  

 

The Seventh Circuit panel explained that Jerman offered no indication that some mistakes of law were protected and others were not. In doing so, the panel removed the Jerman holding from its context and applied it more broadly to decide that the bona fide error defense does not apply where a debt collector relies in good faith on reasonable court precedent where the precedent is later overruled.  The panel adopted the reasoning in Jerman that because there can be different interpretations of the FDCPA, a "broad exception for good-faith legal errors...would allow debt collectors to resolve all legal uncertainty in their own favor…" which runs against the purpose of the FDCPA. The panel concluded that the FDCPA puts "the risk of legal uncertainty on debt collectors, giving them incentives to stay well within legal boundaries." 

 

The panel further justified its holding by explaining that, although court precedent may be considered "the law," the statute itself is the controlling law even where judges mistakenly interpret it, which is why an overruling of precedent can be retroactive. The panel explained that Suesz was applied retroactively because, while civil rulings are permitted to have a prospective-only effect "to avoid injustice or hardship to civil litigants who have justifiably relied on prior law," it was not persuaded to give Suesz a prospective-only effect because doing so "would be impermissible unless the law had been so well settled before the overruling that it had been unquestionably prudent for the community to rely on the previous legal understanding."  

 

Essentially, the Seventh Circuit reasoned that reliance on court precedent is permitted but only if there can be no doubt whatsoever as to the accuracy of the court's interpretation of the law.

 

The debt collector also argued that the debtor had signed the underlying contract in the First District such that venue there was proper, but the trial court did not address that argument in its ruling, and therefore the appellate court did not address it either. 

 

The Seventh Circuit panel attempted to mitigate the harsh consequences of its ruling by pointing out that the FDCPA permits a court, when determining damages, to consider the extent to which the non-compliance was intentional. 15 U.S.C. § 1692(b)(1).

 

Accordingly, the trial court's judgment in favor of the debt collector was vacated and the case was remanded for further proceedings.

 

The dissent vehemently disagreed, pointing out that the panel majority's ruling had created "an unprecedented new rule—one that punishes debt collectors for doing exactly what the controlling law explicitly authorizes them to do at the time they do it." 

 

The dissent accused the majority panel of repeatedly misread the Supreme Court's and the Seventh Circuit's prior rulings on multiple issues, including its interpretation and application of Suesz and Jerman, pointing out that the debt collector's choice of venue was lawful when made based on Newsom. The dissent continued that the debt collector met each of the three elements of the bona fide error defense — its violation was unintentional despite its maintenance of reasonable procedures to avoid the error and resulted from its good faith mistake of complying with the controlling law of Newsom. The dissent noted that while retroactive application of Suesz may have created a cause of action for retroactive violations, it did not "retroactively proscribe the application of the bona fide error defense." 

 

The dissent further disagreed with the panel majority on its interpretation of Jerman, pointing out that the Jerman Court held that the bona fide error defense does not apply only where a debt collector incorrectly interprets the FDCPA, not where the debt collector follows established precedent interpreting the statute. The dissent reasoned that a court's mistaken interpretation of the FDCPA cannot be attributed to the debt collector who follows it. 

 

The dissent neatly summed up the panel majority's dissonant ruling: the debt collector "correctly interpreted (and did not violate) Newsom's controlling determination of the legal requirements of § 1692i, but incorrectly interpreted (and violated) § 1692i itself," which doesn't make any sense and should not prevent the application of the bona fide error defense.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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FYI: 3rd Cir Holds Single Unsolicited Automated Call Enough to Confer Standing

The U.S. Court of Appeals for the Third Circuit recently held that a consumer satisfied the concreteness requirement for constitutional standing and asserted a valid cause of action under the federal Telephone Consumer Protection Act ("TCPA"), where she alleged she received one unsolicited prerecorded phone call to her cell phone.

 

Accordingly, the Third Circuit reversed the order of the trial court granting the defendant's motion to dismiss.    

 

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

 

The plaintiff consumer ("Consumer") alleged that she received an unsolicited call on her cell phone from the defendant fitness company ("Company").  The Consumer did not answer the call, but the Company left a prerecorded promotional offer that lasted one minute on her voicemail.  The Consumer alleged the phone call and message violated the TCPA's prohibition on nonconsensual prerecorded calls to cellular telephones.

 

The Company filed a motion to dismiss, which was granted by the trial court.  In so ruling, the trial court found that: (1) a single solicitation was not "the type of case that Congress was trying to protect people against," and (2) the Consumer's receipt of the call and voicemail caused her no concrete injury.

 

The Consumer appealed. 

 

On appeal, the Third Circuit first noted two questions were presented: (1) does the TCPA prohibit the conduct alleged by the Consumer, and (2) if it does, is the harm alleged sufficiently concrete for Article III standing.

 

As to the first question, the Company argued that the TCPA does not prohibit a single prerecorded call to a cell phone if the phone's owner was not charged for the call. 

 

As you may recall, the TCPA provides that it shall be unlawful for any person "to make a call . . . using any automatic telephone dialing system or an artificial or prerecorded voice . . . to any telephone number assigned to a . . . cellular telephone service, . . . or any service for which the called party is charged for the call . . ." 47 U.S.C. § 227(b)(1).

 

The Company argued that the structure of this provision limits the scope of "cellular telephone service" to cell phone services where "the called party is charged for the call."  The Company further asserted that when Congress passed the TCPA, it was primarily concerned with the costs of those calls.

 

The Third Circuit disagreed, noting that the Company's "reading of section 227(b)(1) is strained." 

 

Quoting the Eleventh Circuit, the Third Circuit stated: "[t]he rule of the last antecedent requires the phrase 'for which the called party is charged for the call,' [in § 227(b)(1)], to be applied to the words or phrase immediately extending to or including others more remote."  Osorio v. State Farm Bank, F.S.B., 746 F.3d 1242, 1257 (11th Cir. 2014).

 

The Third Circuit also found support in section 227(b)(2)(C), which provides that the Federal Communications Commission ("FCC") "may . . . exempt from the requirements of paragraph (1)(A)(iii) of this subsection calls to a telephone number assigned to a cellular telephone service that are not charged to the called party."  The Third Circuit noted that if "cell phone calls not charged to the recipient were not covered by the general prohibition, there would have been no need for Congress to grant the FCC discretion to exempt some of those calls." 

 

The Court therefore held that "the TCPA provides [the Consumer] a cause of action for the conduct she alleged." 

 

With respect to the question of whether the Consumer alleged a sufficiently concrete injury to establish constitutional standing to sue, the Third Circuit first noted the issue implicates the Supreme Court's decision in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016).

 

In discussing the Spokeo decision generally, the Third Circuit found it significant that the Supreme Court "noted that 'intangible injuries can nevertheless be concrete.'"  The Third Circuit further referred to its own ruling in In re Horizon Healthcare Services Inc. Data Breach Litigation, 846 F.3d 635 (3d Cir. 2017) wherein it applied Spokeo to a claim for inadequate protection of personal information in violation of the Fair Credit Reporting Act.

 

In summarizing the rule from Horizon, the Third Circuit stated: "When one sues under a statute alleging 'the very injury [the statute] is intended to prevent,' and the injury 'has a close relationship to a harm . . . traditionally . . . providing a basis for a lawsuit in English or American courts,' a concrete injury has been pleaded.  We do not, and need not, conclude that intangible injuries falling short of this standard are never concrete.  Rather, we simply observe that all intangible injuries that meet this standard are concrete."  (Internal citations omitted). 

 

Applying this standard to the facts of the case, the Third Circuit determined that "Congress squarely identified [the] injury" at issue because the "nuisance and invasion of privacy" resulting from a single prerecorded telephone call is the type of harm Congress sought to prevent in enacting the TCPA. 

 

The Third Circuit then turned to the historical inquiry, and determined that the Consumer satisfied that test as well.  In so ruling, the Third Circuit noted that the Ninth Circuit "has opined that TCPA claims closely relate to traditional claims for invasion of privacy, intrusion upon seclusion, and nuisance," which have long been valid claims in American courts. 

 

The Third Circuit then determined that intrusion upon the seclusion best fit the circumstances of the case, because the consumer's privacy is invaded by the phone calls.  The Court noted that although two or three calls would not traditionally be actionable under an intrusion upon the seclusion claim, Congress intended the TCPA to elevate a harm that, while "previously inadequate in law," was of the same character of previously existing "legal cognizable injuries."

 

Accordingly, the Third Circuit held "that [the Consumer] alleged a concrete, albeit intangible, harm. . ."  The Court further held "that the TPCA provides [the Consumer] with a cause of action, and that her injury satisfies the concreteness requirement for constitutional standing." 

 

 

 

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: Ill Fed Ct Holds No "Bad Faith Denial Of Coverage" Against Title Insurers in Illinois

The U.S. District Court for the Northern District of Illinois recently held that a title insurer may exclude coverage under the exception for defects "created, suffered, assumed, or agreed to by the insured claimant" without intentional or wrongful conduct by the insured. 

 

In so ruling, the Court also held that the Illinois statute for bad faith denial of coverage by insurers did not apply to title insurers.

 

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

 

In 2007, a developer ("Developer") sought to purchase real estate in Yorkville, Illinois, to build a shopping center.  The lender ("Bank") and Developer entered into a construction loan agreement which was secured by a construction mortgage, security agreement, assignment of rights and leases and fixture filing on the property.

 

As part of the project, Developer sold land to an anchor tenant ("Tenant") pursuant to a purchase agreement.  Under that purchase agreement, Developer agreed to reimburse Tenant for a portion of a special tax imposed on the property by Yorkville.  The purchase agreement also provided lien rights to Tenant should Developer fail to timely pay the reimbursement, and stated that Developer's obligation shall be a covenant running with the land and bind Developer's successors and assigns.

 

The purchase agreement, development agreement, and the mortgage were recorded in that order.  A title insurer ("Title Insurer") provided title insurance to Bank for the transaction.

 

Developer defaulted under the construction loan agreement and Bank sued for foreclosure in state court.  With respect to the Tenant, the foreclosure complaint alleged that Tenant's rights were subordinate and inferior to the liens and interest of the Bank.  Tenant counterclaimed for a declaration of its rights under the agreements that ran with the land and were binding on Developer's successors and assigns.  The parties filed cross motions for summary judgment. 

 

The state court in the foreclosure held that Bank's mortgage had priority, Tenant's tax reimbursement and lien rights were personal between Developer and Tenant, did not run with the property, and would be foreclosed and terminated upon entry of final order of foreclosure. 

 

The state appellate court affirmed in part and reversed in part, agreeing that Bank's mortgage had priority over any lien of Tenant, but concluded that Tenant's tax reimbursement and lien rights were covenants that ran with the land binding on Bank and its successors, and were not extinguished, because Bank had actual knowledge of the tax reimbursement and lien rights before Bank recorded the mortgage, and because the mortgage was recorded after the memorandum of agreement and memorandum of development agreement.  

 

As a result of the state appellate court ruling, Bank filed a complaint in federal court against the Title Insurer.  Bank alleged that due to the state appellate court ruling, it sold the mortgaged property for $1,780,000 less than what it would have sold without the tax obligation.  Title Insurer, which represented Bank in the state court action against Tenant, denied coverage and refused to indemnify Bank because it claimed that Bank's loss was excluded from the policy.

 

Bank's complaint asserted a claim for breach of contract (Count I), and a claim titled "bad faith" (Count II).  Title Insurer answered Count I, moved to dismiss Count II, and raised a number of affirmative defenses, and filed a counterclaim for declaratory judgment and/or "reformation of the policy to reflect the bargained for coverage."

 

Bank moved to strike and/or dismiss Title Insurer's counterclaim and first affirmative, both of which asserted that the underlying policy excluded Bank's claims.

 

The Title Insurer's motion to dismiss argued that § 155 of the Illinois Insurance Code, which provides a cause of action against insurers for bad faith denial of coverage, did not apply because the Insurance Code specifically exempted title insurance companies.  See 215 ILCS 5/451.  Moreover, the Title Insurer argued that Illinois law does not provide an independent tort claim for breach of good faith and fair dealing.  See Voyles v. Sandia Mortgage Corp., 196 Ill.2d 288, 297-98 (2001). 

 

The Court granted the Title Insurer's motion and dismissed Count II.

 

Next, Bank's motion to strike and dismiss the counterclaim and first affirmative defense, argued that: 1) the counterclaim should be stricken because it was duplicative of Title Insurer's first two affirmative defenses, and 2) neither the first affirmative defense nor Count I of the counterclaim, both of which sought to avoid coverage based on an exclusion for encumbrances, stated a cause of action because Title Insurer did not allege that Bank's intentional misconduct or inequitable behavior created the tax encumbrances at issue.  The Court rejected both arguments.

 

First, the Court determined that Bank suffered no prejudice by having to respond to the counterclaim, even if the counterclaim was duplicative of Title Insurer's first two affirmative defenses.  The issue of whether the exclusion applied was the key issue in this case.  The Court held that striking the counterclaim as redundant will not remove the issue, and would not save plaintiff any time or money. 

 

Second, the Court held that the title insurance policy excluded from coverage "defects, liens, encumbrances, adverse claims or other matters (a) created, suffered, assumed, or agreed to by the insured claimant."   Title Insurer's affirmative defense and counterclaim alleged that Bank was aware: (1) of the documents created the tax encumbrance; (2) that the documents provided for the encumbrance to run with the land; and (3) the documents that created the encumbrance were intended to be and were recorded prior to Bank's mortgage. 

 

Because the tax encumbrance was recorded before the mortgage, the Court held that the foreclosure could not extinguish it.   

 

The Court also held that the exclusion could be applied without intentional or wrongful conduct by Bank to create the encumbrance.  By agreeing to the order of recordation, the Court found that the Bank implicitly agreed that the encumbrance for tax reimbursements would survive a foreclosure. 

 

Accordingly, the Court granted Bank's motion to dismiss Count I and denied its motion to strike and dismiss Title Insurer's counterclaim and first affirmative defense.

 

 

 

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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and

 

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