FYI: CCFL's Annual Consumer Financial Service Conference | Ft. Worth, TX | Nov. 2-3, 2017

Please join us at the Annual Consumer Financial Services Conference organized by The Conference on Consumer Finance Law.  The Conference will be hosted at the Texas A&M University School of Law, on November 2-3, 2017.

 

WHEN:  Nov. 2-3, 2017

WHERE:  Texas A&M University School of Law | Ft. Worth, Texas

CLE:  12.0 CLE Credits to Be Provided, including 1.0 hr of Ethics

PRICE:  $495 before Sept. 22, 2017

 

For more information, including as to registration, sponsorship, and hotel accommodations, please see:

https://www.ccflonline.org/conference/

Hope to see you there!

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   Michigan   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

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California Finance Law Developments 

 

FYI: 8th Cir Affirms Dismissal of Data Breach Class Action, But Not for Lack of Standing

The U.S. Court of Appeals for the Eighth Circuit recently affirmed the dismissal of a putative class action complaint alleging various causes of action relating to the cyber-theft of personally identifiable information, based in part on the plaintiffs failure to adequately allege any damages caused by the data breach or how the defendant breached the terms of its agreement .

 

A link to the opinion:  Link to Opinion

 

The defendant securities brokerage firm suffered an attack by hackers in which the hackers successfully accessed the firm's customer database extracting personally identifiable information ("PII") for potentially millions of customers including their names, addresses, social security numbers, telephone numbers, employer information and work history. 

 

Upon discovery of the attack, the firm alerted the appropriate authorities and following the investigation by law enforcement provided notice to all of its customers of the attack.  The firm also provided free identify repair, protection, credit monitoring and theft insurance for one year for its affected customers. 

 

The named plaintiff in this case was one of three independently filed class actions which were consolidated.  The consolidated complaint alleged causes of action against the firm for breach of contract, breach of implied contract, unjust enrichment, declaratory judgment and a violation of the Missouri Merchandising Practices Act ("MMPA"), Mo. Rev. Stat. 407.025. 

 

The firm moved to dismiss the consolidated complaint for failure to state a cause of action and for lack of subject matter jurisdiction, arguing that the plaintiffs lacked standing under Article III.  The lower court granted the firm's motion to dismiss for lack of subject matter jurisdiction because it concluded that the plaintiffs' did not suffer an injury in fact. 

 

The named plaintiff appealed (but notably, the other consolidated plaintiffs did not), and the firm filed its own cross-appeal urging the Eighth Circuit to dismiss the claims for failure to state a claim.

 

On review, the Eighth Circuit rejected the lower court's finding that the plaintiffs lacked standing, but nevertheless, affirmed the dismissal on grounds that the plaintiffs failed to state claims upon which relief can be granted.

 

As an aside, the plaintiff attempted to dismiss its appeal after the briefing had concluded in an attempt to join its other class plaintiffs (who did not join in the appeal) in an newly filed class complaint in California state court.  The Eighth Circuit denied plaintiff's motion as untimely. 

 

The Eighth Circuit's analysis began with the terms of the brokerage agreement ("Agreement") between the plaintiff and the firm.  Therein, the Court noted that the agreement provides that the plaintiff would pay the firm fees and commissions for purchases and sales of securities "on a per order basis."  The Agreement also contained a Privacy Policy and Security Statement which explained that the firm collected PII but would "maintain physical, electronic and procedural safeguards that comply with federal regulations to guard your nonpublic personal information" and that the firm complied "with applicable laws and regulations regarding the protection of personal information." 

 

The complaint alleged that the firm breached its contractual obligations in the Agreement by providing deficient cybersecurity.  For his damages, plaintiff alleged that a portion of the fees he paid to the firm were for "data management and security" and as a result of the deficient cybersecurity he received diminished services that he paid for under the Agreement. 

 

Plaintiff further alleged various damages resulting from the release and dissemination of the PII including increased risk of identity theft, financial costs for credit monitoring, decline in the value of his PII, and invasion of privacy.

 

In rejecting the determination that plaintiff lacked Article III standing, the Eighth Circuit that the plaintiff did have standing to pursue a breach of contract claim based upon the allegation that he did not receive the full benefit of the bargain with the firm due to the diminished services paid for data management and security.

 

The Court noted that prior Eighth Circuit precedent made clear that "a party to a breached contract has a judicially cognizable interest for standing purposes, regardless of the merits of the breach alleged."  Carlson v. Gamestop, 833 F.3d 903, 908 (8th Cir. 2016).  Further, the Court stated that it was crucial "not to conflate Article III's requirement of injury in fact with a plaintiff's potential causes of action."  Id. at 909.  Accordingly, the Court followed its precedent and determined that plaintiff had sufficiently alleged a concrete and particularized breach of contract and actual injury.

 

Nonetheless, the Eighth Circuit found that these allegations had no merit and dismissal for failure to state a claim was appropriate.  The Court noted that because the firm had filed its cross-appeal on its issue, it was appropriate for it to review the complaint on these grounds despite the lower court's refusal to address the issue. 

 

The Eighth Circuit found numerous defects in the complaint in determining that it failed to plausible state a claim. 

 

Initially, the Court noted that the representations of the firm in the Agreement concerning the maintenance of security to protect PII were merely in the nature of recitals.  Even assuming that these terms were enforceable obligations undertaken by the firm, the Court found that the complaint failed to allege any specific breach of any "applicable law of regulation" that the firm breached. 

 

Importantly, the Eighth Circuit commented that the Agreement does not affirmatively promise that it would not be hacked. 

 

Accordingly, the Court found that the implied premise in the complaint that because the data was hacked the firm's protections must have been inadequate to be a "naked assertion devoid of further factual enhancement" that could not survive a motion to dismiss.  Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

 

Moreover, the Eighth Circuit determined that the complaint failed to plausibly allege actual damages as required for a breach of contract claim.  There was no allegation in the complaint concerning specific actual damage resulting from the hack, and it was undisputed that since the data breach no customer had suffered fraud or identity theft that resulted in a financial loss in the more than two years between the hack and the filing of the complaint.  Prudently stated by the Court: "Massive class action litigation should be based on more than allegations of worry and inconvenience."

 

Further, the Court rejected the plaintiff's argument that the fees paid were in part for data security as the express terms of the Agreement were for the purchase and sale of brokerage services "on a per order basis."

 

Moving on to the other alleged claims, the Eighth Circuit found that the claims for unjust enrichment and implied contract also failed.  Similar to the inadequately alleged breach of contract claim, the Court found that that it was not articulated in the complaint how the firm failed to take industry leading security measures. 

 

For unjust enrichment, the plaintiff could not recover under this equitable theory when an express agreement covers the same subject matter. Additionally, the unjust enrichment claim also failed because it did not allege which specific portion of the brokerage fees went towards data protection

 

The Eighth Circuit quickly rejected plaintiff's declaratory judgment claim as it was "virtually unintelligible" because it simply requested that relief in the form of a declaration that the firm "stop its illegal practices" and comply with the terms of the Agreement.  The Court determined this was insufficient to meet the pleading standards under Iqbal and raised considerations under Article III.

 

Finally, the Court rejected the MMPA claims in the complaint.  As you may recall, the MMPA is the Missouri state consumer protection statute which provides a private right of action for any person who sustains an ascertainable loss in connection with the purchase or lease of merchandise as a result of deceptive and fraudulent practices.  Mo. Rev. Stat. 407.025(1).  As with the other claims, the Court found this claim wanting for many reasons. 

 

First, the complaint failed to plead its MMPA claim with the particularity required for claims sounding in fraud.  Second, the Court determined that the firm did not sell the plaintiff data security services, and as a result, any loss as a result of the data breach did not arise from the sale of the firm's brokerage services to the plaintiff.  Instead, the data security measures recited in the Agreement were in place to induce customers to provide their PII in order to obtain the brokerage services.  Third, the Court determined that the complaint did not plausibly state how the failure to discover the data breach was an unfair or deceptive act.

 

For all of these reasons, the Eighth Circuit affirmed the lower court's dismissal of the consolidated complaint. 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   Michigan   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

 

 

FYI: 9th Cir Holds Federal Foreclosure Bar Preempts Nevada HOA Superpriority Statute

The U.S. Court of Appeals for the Ninth Circuit recently held that the Federal Foreclosure Bar's prohibition on nonconsensual foreclosure of assets of the Federal Housing Finance Agency preempted Nevada's superpriority lien provision, Nev. Rev. Stat. § 116.3116, and invalided a homeowners association foreclosure sale that purported to extinguish Freddie Mac's interest in the property.

 

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

 

In 2013, an investor ("Purchaser") purchased a home at a homeowners association foreclosure sale for $10,500 and recorded a deed in his name.  Purchaser argued that Nevada's superpriority lien provision allowed the association to sell the home to him free and clear of any other liens.  The Federal Home Loan Mortgage Corporation ("Freddie Mac") claimed it had a priority interest in the purchased home. 

 

As you may recall, Freddie Mac is under Federal Housing Finance Agency ("FHFA") conservatorship, meaning the FHFA temporarily owned and controlled Freddie Mac's assets.  See 12 U.S.C. § 4617(b)(2)(A)(i) (FHFA acquired Freddie Mac's "rights, titles, powers, and privileges … with respect to [its] assets" for the life of the conservatorship). 

 

The Federal Foreclosure Bar's prohibition on nonconsensual foreclosure protected the FHFA's conservatorship assets.  12 U.S.C. § 4617(j)(3) ("No property of the [FHFA] shall be subject to levy, attachment, garnishment, foreclosure, or sale without the consent of the [FHFA], nor shall any involuntary lien attach to the property of the [FHFA].").

 

Purchaser sued to quiet title in Nevada state court.  Freddie Mac intervened and counterclaimed for the property's title, removed the case to federal district court, and moved for summary judgment.  The FHFA joined Freddie Mac's counterclaim.  Together the federal entities argued that Purchaser did not acquire "clean title" in the home because the Federal Foreclosure Bar preempted Nevada law, and invalidated any purported extinguishment of Freddie Mac's interest through the association foreclosure sale.  The trial court ruled in favor of the federal entities.

 

On appeal, Purchaser argued that the Federal Foreclosure Bar did not apply in this case, and even if it did, Freddie Mac lacked an enforceable property interest due to a split of the note and the security instrument. 

 

First, Purchaser argued that the Federal Foreclosure Bar did not apply to private homeowners association foreclosures generally, because it protected the FHFA's property only from state and local tax liens.

 

To determine whether the Federal Foreclosure Bar applied to private foreclosures, the Ninth Circuit began by examining the statute's structure and plain language.  The section titled "Property protection" in the Federal Foreclosure Bar did not expressly use the word "taxes."  12 U.S.C. § 4617(j)(3).  The statute did not limit "foreclosure" to a subset of foreclosure types.  Id. 

 

In the Ninth Circuit's view, a plain reading of the statute revealed that the Federal Foreclosure Bar was not focused on or limited to tax liens, and therefore the Federal Foreclosure Bar should apply to any property for which the FHFA served as conservator and immunized such property from any foreclosure without FHFA consent.  12 U.S.C. § 4617(j)(1), (3).

 

Purchaser citied F.D.I.C. v. McFarland, 243 F.3d 876 (5th Cir. 2001) as support for his argument that the Federal Foreclosure Bar applied only to tax liens.

 

In McFarland, the Fifth Circuit interpreted 12 U.S.C. § 1825(b)(2), a provision of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") that governed Federal Deposit Insurance Corporation ("FDIC") receiverships.  The FIRREA provision is worded identically to the Housing and Economic Recovery Act of 2008's ("HERA") Federal Foreclosure Bar except that the word "Corporation" appeared in the former where "Agency" appeared in the latter.  Compare 12 U.S.C. § 1825(b)(2) with 12 U.S.C. § 4617(j)(3).  The court in McFarland declined to extend § 1825(b)(2) to private foreclosures. 

 

The Ninth Circuit, however, distinguished McFarland and reasoned that the statutory framework in that case was different from the framework surrounding the Federal Foreclosure Bar.  Specifically, the Ninth Circuit found that the unlike § 1825, § 4617(j) did not include any language limiting its general applicability provision to taxes alone. 

 

Therefore, the Ninth Circuit held that the language of Federal Foreclosure Bar cannot be fairly read as limited to tax liens.

 

Purchaser then argued that that the Federal Foreclosure Bar did not apply in this case because Freddie Mac and the FHFA implicitly consented to the foreclosure when they took no action to stop the sale. 

 

The Ninth Circuit rejected this argument because the plain language of Federal Foreclosure Bar did not require the Agency to actively resist foreclosure.  See 12 U.S.C. § 4617(j)(3) (flatly providing that "[n]o property of the Agency shall be subject to … foreclosure, or sale without the consent of the Agency").

 

Thus, the Court concluded that the Federal Foreclosure Bar applied generally to private association foreclosures and specifically to this foreclosure sale.

 

Next, the Ninth Circuit addressed the issue of whether the Federal Foreclosure Bar preempted Nevada state law, which had triggered multiple lawsuits in Nevada. 

 

As you may recall, "[t]he Supremacy Clause unambiguously provides that if there is any conflict between federal and state law, federal law shall prevail."  Gonzales v. Rich, 545 U.S. 1, 29 (2005).  Preemption arises when "compliance with both federal and state regulations is a physical impossibility, or … state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress."  Bank of Am. v. City & Cty. Of S.F., 309 F.3d 551, 558 (9th Cir. 2002).

 

First, the Ninth Circuit determined that the Federal Foreclosure Bar did not demonstrate clear and manifest intent to preempt Nevada's superpriority lien provision through an express preemption clause.  Nevertheless, the Court found that the Federal Foreclosure Bar implicitly demonstrated a clear intent to preempt Nevada's superiority lien law. 

 

Nevada law allowed homeowners association foreclosures under the circumstances present in this case to automatically extinguish a mortgagee's property interest without the mortgagee's consent.  See Nev. Rev. Stat. § 116.3116.  Because the Federal Foreclosure Bar prohibited foreclosures on FHFA property without consent, in the Ninth Circuit's view, Nevada's law was an obstacle to Congress's clear and manifest goal of protecting the FHFA's assets in the face of multiple potential threats, including threats arising from state foreclosure law.

 

Therefore, as the two statues impliedly conflict, the Ninth Circuit held that the Federal Foreclosure Bar preempted the Nevada superpriority lien provision.

 

In addition, Purchaser argued that even if the Federal Foreclosure Bar applied to this case and was preemptive, Freddie Mac did not hold an enforceable property interest for "splitting" the note from the deed of trust, and failing to present sufficient evidence to establish its interest for purposes of summary judgment.

 

The Ninth Circuit rejected these arguments because Nevada law recognized that, in an agency relationship, a note holder remained a secured creditor with a property interest in the collateral even if the recorded deed of trust named only the owner's agent.  Although the recorded deed of trust here omitted Freddie Mac's name, Freddie Mac's property interest is valid and enforceable under Nevada law. 

 

Moreover, Freddie Mac introduced evidence showing that it acquired the loan secured by the subject property in 2007, and that the beneficiary of the deed of trust was Freddie Mac's authorized loan servicer. 

 

The Appellate Court concluded that the trial court correctly found Freddie Mac's priority property interest enforceable under Nevada law.  Accordingly, the Ninth Circuit affirmed the trial court's summary judgment in favor of Freddie Mac and the FHFA.

 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   Michigan   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments 

 

FYI: 8th Cir Reject's Borrower's Attempt to Hold Bank Liable for Alleged Bad Advice

The U.S. Court of Appeals for the Eighth Circuit recently rejected a debtor's attempt to hold a bank liable for allegedly faulty advice provided in connection with various lending transactions, holding that the debtor could not claim reliance on the bank's advice when debtor had an ability to investigate the details of the transaction for itself, and the agreement between parties stated that the debtor was not relying on any of the bank's representations in entering into the transaction.

 

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

 

In the late 1990s, the debtor ("Debtor") began borrowing money from the bank ("Bank") through floating-interest rate loans.  Bank and Debtor entered into corresponding interest rate swap agreements to fix the interest rate on the respective loans.  An interest rate swap allows a borrower to hedge his exposure to changes in the interest rate on a floating-rate loan. 

 

The swap agreements between Bank and Debtor were governed by an International Swap Dealers Association ("ISDA") Master Agreement.

 

In 2005, Debtor sought to borrow $4 million from Bank, but Debtor still owed Bank approximately $7.2 million on previous loans.  The parties considered refinancing Debtors' existing debt in conjunction with the new $4 million loan to execute one $11.2 million loan agreement.  Under this arrangement, Debtor and Bank would also execute a new $4 million swap, and the two pre-existing swap agreements for the $7.2 million loan would remain in effect.

 

Debtor's expert testified that this arrangement – having three separate swaps that terminate at different times – would have exposed Debtor to a floating interest rate before the $11.2 million loan matured.

 

Subsequently, Bank's loan officer reviewed the terms of the arrangement with Debtor.  The loan officer discovered that Bank was proposing a five year $11.2 million loan.  He informed Debtor that it "might want to fix the rate on the whole deal" – meaning execute one swap agreement for the entire loan – and that Debtor should let him know if it would like to pursue this option. 

 

Bank proposed that it would unwind the two existing swaps and execute one new swap on a notional principal amount of $11.2 million.  The parties would then execute one new $11.2 million loan and one new $11.2 million swap.

 

Debtor agreed to the terms and entered into an interest rate swap on a notional principal of $11.2 million to terminate on August 1, 2015 ("2005 Loan Agreement").  A few months later, Debtor and Bank entered into a floating-rate loan of $11.2 million with a stated maturity date of September 20, 2010 ("2005 Swap Agreement"). 

 

Under this arrangement, the 2005 Loan Agreement matured in 2010, five years before the 2005 Swap Agreement would terminate.

 

The 2005 Loan Agreement matured, Debtor failed to pay the balloon amount due, and Bank declared Debtor in default.  Pursuant to cross-default provisions in the Debtor's other loan agreements, Bank accelerated all other outstanding obligations owned.  Bank then sued Debtor alleging breach of contract and breach of guaranty.  In its answer, Debtor raised several affirmative defenses, including a fraud defense, and asserted counterclaims.

 

The jury found that Debtor did not breach any agreement with Bank, and the trial court entered judgment in favor of Debtor.  Bank appealed and Debtor cross-appealed.

 

On appeal, the Eighth Circuit previously determined that the jury verdict was against the great weight of the evidence and vacated the judgment, and remanded for a new trial on Bank's breach of contract claim.

 

On remand, Bank moved for summary judgment on all claims against the Debtors and affirmative defenses raised by Debtors.  The trial court granted Bank's motion for summary judgment because Debtors could not establish that it reasonably relied on Bank's alleged misrepresentations.  Because the trial court concluded that Debtor's setoff defense was identical to its fraud defenses, it also granted summary judgment for Bank on the setoff defense. 

 

This appeal followed.

 

Debtor raised two defenses based on the 2005 Loan Agreement and 2005 Swap Agreement (collectively, "2005 Agreements") -- fraudulent inducement, and fraudulent failure to disclose. 

 

Debtor argued that the mismatched terms in the ten year swap agreement and five year loan agreement exposed it to additional risk and caused it to pay more interest overall.  Debtor accused Bank of representing that the 2005 Agreements would be a better deal for Debtor and alleged that these representations were false.  Both defenses required Debtor to show that its reliance on Bank's allegedly fraudulent representation was reasonable. 

 

New York law applied to the transactions at issue.  As you may recall, New York courts consider three factors to determine reasonable reliance:  "the level of sophistication of the parties, the relationship between them, and the information available at the time of the operative decision."  JP Morgan Chase Bank v. Winnick, 350 F. Supp. 2d 393, 406 (S.D.N.Y. 2004).

 

First, the Eighth Circuit examined the level of sophistication of each party.

 

Before Debtor entered into the 2005 Agreements, it had experience with these types of agreements based on previous transactions with Bank.  During the discussion for these agreements, Debtor was represented by sophisticated business people, including a chief financial officer, a controller, and legal counsel.  Debtor also employed professionals, such as tax advisors and accountants, to assist it in operating its business.

 

Thus, the Eighth Circuit concluded that Debtor was a sophisticated party.

 

Next, on the relationship between Debtor and Bank, Debtor characterized Bank as a "longtime trusted advisor" and argued that it was reasonable for it to rely on Bank's representations about the 2005 Agreements.  However, the ISDA Master Agreement that governed the 2005 Swap Agreement stated that Debtor agreed that it was "not relying on any communication (written or oral) of the [Bank] as investment advice or as a recommendation to enter into [the swap agreement]." 

 

These facts, according to the Eighth Circuit, established that Bank was not a fiduciary of Debtor and Debtor can determine for itself whether it should enter into a particular transaction.

 

The Appellate Court then considered what information was available to Debtor at the time of the operative decision.  Because all relevant information was available to Debtor by the time it entered into 2005 Swap Agreement – that is, Debtor knew the 2005 Loan Agreement matured five years before the 2005 Swap Agreement would terminate – the Appellate Court held that Debtor, as a sophisticated party engaging in an arms-length transaction with a lender, cannot complain that it was induced into a five year loan when the terms were clear from the face of the agreement.

 

The Eighth Circuit also rejected Debtor's argument that Bank stood to profit more from the 2005 Swap Agreement than from the original promised deal.  In the view of the Appellate Court, the potential benefit to Bank had no bearing on Debtor's ability to investigate the details of the transaction and did not tend to show fraud.

 

Accordingly, the Appellate Court affirmed the judgment of the trial court in favor of the Bank and against the Debtor.

 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   Michigan   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments 

 

FYI: 11th Cir Holds Servicer Did Not Violate RESPA by Omitting Loan Owner's Phone Number, Damages Allegations Insufficient

In an unpublished ruling, the U.S. Court of Appeals for the Eleventh Circuit recently held that a mortgage servicer did not violate the federal Real Estate Settlement Procedures Act or its implementing regulation (at 12 C.F.R. § 1024.36(d)(2)(i)(A)) by failing to provide the loan owner's phone number in response to a borrower's request for information ("RFI").

 

In so ruling, the Court also held that:

 

1.  The borrower's allegation of having expended "certified postage costs of less than $100 for mailing" was not sufficient to meet the requirement of "actual damages" under RESPA at 12 U.S.C. § 2605; and

 

2.  The borrower's allegation that the servicer "has shown a pattern of disregard to the requirements imposed upon Defendants by Federal Reserve Regulation X" was not sufficient to meet the requirement of a "pattern or practice of noncompliance" under RESPA at 12 U.S.C. § 2605.

 

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

 

A borrower sent a RFI to a servicer requesting the loan owner's identity and contact information.  The servicer responded to the request identifying the loan owner and providing its contact information, but the servicer did not include the loan owner's phone number.

 

The borrower filed suit in state court against the mortgage servicer alleging that the servicer violated the federal Real Estate Settlement Procedures Act, 12 U.S.C. 2601 et seq. ("RESPA") because the servicer did not provide the loan owner's phone number in response to the RFI and that the servicer demonstrated a pattern of disregard to the requirements Regulation X imposed upon the servicer.  The borrower also alleged that he incurred the following actual damages: "certified postage costs of less than $100 for mailing" the RFI along with attorneys' fees and costs.

 

The servicer timely removed the matter to federal court, and then moved to dismiss arguing that borrower failed to state a claim.  The servicer first argued that Regulation X and RESPA did not require it to provide the loan owner's phone number in response to the RFI. The servicer also argued that the court should dismiss the claim for failure to allege actual damages or a pattern or practice of noncompliance as required under the relevant provisions of RESPA.

 

As you may recall, section 1024.36(d) of Regulation X requires that a servicer must respond:

 

"Not later than 10 days (excluding legal public holidays, Saturdays, and Sundays) after the servicer receives an information request for the identity of, and address or other relevant contact information for, the owner or assignee of a mortgage loan."

 

12 C.F.R. § 1024.36(d)(2)(i)(A).

 

The trial court observed that whether section 1024.36(d) requires a servicer to provide a loan owner's phone number in response to a RFI turns on whether "other relevant contact information" includes a phone number. 

 

Although Regulation X and RESPA do not define this phrase, this does not end the inquiry.  The trial court analyzed whether the phrase "has a plain and unambiguous meaning with regard to the particular dispute" because "[i]f the statute's meaning is plain and unambiguous, there is no need for further inquiry."  United States v. Silva, 443 F.3d 795, 797-98 (11th Cir. 2006).  This analysis also applies to Regulation X.  See, e.g., O'Shannessy v. Doll, 566 F. Supp. 2d 486, 491 (E.D. Va. 2008).

 

The trial court noted that the regulation requires a servicer to provide "contact information, including a telephone number, for further assistance," but this "inclusion is conspicuously missing from the applicable provision specifying the information that must be included in response to a request for the identity of the owner or assignee of the loan." 1024.36(d)(1)(i)-(ii). 

 

Thus, the trial court held that the plain language of § 1024.36(d) does not require a servicer to provide the phone number for the owner or assignee of a loan. 

 

The trial court found no contrary legal authority disputing its interpretation.  The trial court therefore declined to read a requirement into section 1024.36(d) that servicers must provide the loan owner's phone number in response to a RFI, and dismissed the borrower's claim with prejudice.

 

The trial court next turned to the servicer's motion to dismiss borrower's statutory damages claim.  As you may recall, under RESPA a borrower that proves a section 2605 violation may recover:

 

"(A) any actual damages to the borrower as a result of the failure; and

 

(B) any additional damages, as the court may allow, in the case of a pattern or practice of noncompliance with the requirements of this section, in an amount not to exceed $2,000."

 

12 U.S.C. § 2605(f)(1).

 

Damages are an essential element of a RESPA claim.  Renfroe v. Nationstar Mortgage, LLC, 822 F3d 1241, 1246 (11th Cir. 2016).  Moreover, "a plaintiff cannot recover pattern-or-practice damages in the absence of actual damages." Id. at 1247 n.4. 

 

The trial court recognized that shortly after Renfroe, the Supreme Court of the United States held that standing requires a plaintiff have "(1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision."  Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1547 (2016). Thus, "[t]o establish an injury in fact, a plaintiff must show that her or she suffered 'an invasion of a legally protected interest' that is 'concrete and particularized' and 'actual or imminent, not conjectural or hypothetical.'" Id. at 1548 (quoting Lujan v. Defs. Of Wildlife, 504 U.S. 555, 560 (1992)). Further, "Article III standing requires a concrete injury" for a "statutory violation." Id. at 1549.  Here, borrower did not suffer a "concrete injury in fact."  Thus, borrower "cannot assert a statutory violation."

 

The trial court also examined the borrower's claim that the servicer engaged in a pattern or practice of noncompliance with RESPA.  Pattern or practice suggests "a standard or routine way of operating."  McLean v. GMAC Mortgage Corp., 595 F. Supp. 2d 1360, 1365 (S.D. Fla. 2009), aff'd, 398 F. App'x 467 (11th Cir. 2010). Thus, a failure to respond to one or two qualified written requests does not constitute a "pattern or practice." Id.

 

Here, the borrower merely alleged that the servicer "has shown a pattern of disregard to the requirements imposed upon Defendants by Federal Reserve Regulation X."  This bare bones and conclusory allegation failed to allege "enough facts to state a claim to relief that is plausible on its face."  Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). 

 

Thus, the trial court concluded that borrower's complaint did not contain enough facts to plausibly allege that the servicer engaged in a pattern or practice of noncompliance with RESPA. 

 

Accordingly, the trial court dismissed the borrower's statutory damage claim because the borrower did not suffer a concrete injury in fact, and because the borrower did not sufficiently allege facts to state a claim that the servicer engaged in a pattern or practice of noncompliance with RESPA.

 

The borrower appealed.

 

The Eleventh Circuit found no merit in borrower's claim, and summarily affirmed the trial court's ruling in favor of the servicer and against the borrower for all the "reasons stated in in the District Court's dispositive order."

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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