FYI: 9th Cir Holds FDCPA Preempts State Judgment Execution Laws

The U.S. Court of Appeals for the Ninth Circuit recently held that the federal Fair Debt Collection Practices Act (FDCPA) preempted state judgment execution law insofar as it permitted debt collectors to execute on FDCPA claims.

 

In so ruling, the Court held that debt collectors cannot evade the restrictions of the by obtaining a collection judgment against the debtor, and then forcing the debtor's FDCPA claims to be auctioned, acquiring the claims, and dismissing them. 

 

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

 

The debtor incurred a medical debt, and then failed to pay it as agreed.  A debt collector sought to collect on that debt.  The debt collector sent the debtor a letter, along with a summons and state court complaint.  The complaint stated that the debtor could "[d]ispute the validity of this debt" within 30 days, but that failing to do so would result in a presumption of validity.  However, separately, in small print, the summons indicated that in order to defend the lawsuit, the debtor must file a formal written response with the court within 20 days.

 

The debtor filed suit and alleged that the debt collector had violated the FDCPA by stating that the debtor could dispute the debt within 30 days of receipt, when the actual summons required the filing of an answer within 20 days.

 

The debt collector obtained a state court judgment against the debtor for the outstanding medical debt, plus costs, prejudgment interest, and attorneys' fees.  The debt collector then requested that the state court issue a writ of execution and direct the sheriff to collect all "claims for relief, causes of action, things in action, and choses in action in any lawsuit pending," including the debtor's rights in the FDCPA lawsuit. 

 

The state court issued the writ.  The sheriff sold the debtor's interests in the FDCPA lawsuit.  And, the debt collector acquired the debtor's interests in the FDCPA lawsuit as the successful bidder.

 

The debt collector then moved to dismiss the FDCPA lawsuit for lack of standing.  The trial court granted the debt collector's motion and dismissed the FDCPA lawsuit.  This appeal followed.

 

On appeal, the debt collector argued that because the FDCPA does not speak directly to the execution of claims, there can be no federal preemption. 

 

As you may recall, federal law pre-empts state law where it directly conflicts with the state law.  Such conflict occurs when the operation of state law "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress," or when it" interferes with the methods by which the federal statute was designed to reach [its] goal."

 

The Ninth Circuit rejected the debt collector's argument and explained that conflict preemption exists where there is an actual conflict, even when Congress has not made an express statement of pre-emptive intent. 

 

The Ninth Circuit then noted that the FDCPA's purpose is "to protect vulnerable and unsophisticated debtors from abuse, harassment, and deceptive debt collection practices" and that section 1692n of the FDCPA does expressly preempt state laws "to the extent that those laws are inconsistent" with the FDCPA.

 

The Ninth Circuit found that the FDCPA preempted the state's claim execution law insofar as it permitted debt collectors to execute on FDCPA claims.  The Ninth Circuit reasoned that to allow otherwise would thwart enforcement of the FDCPA and undermine its purpose.

 

 

 

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: Fla App Ct (5th DCA) Reverses Foreclosure Due to Lack of Evidence of Effect of Merger of Original Plaintiff

The Florida District Court of Appeal, Fifth District recently reversed a final foreclosure judgment in favor of a mortgagee, holding that the mortgagee did not establish that the original foreclosure plaintiff acquired the note by virtue of a merger, and did not establish the relationship between the original foreclosure plaintiff and the originating lender.  Accordingly, the Court held, the mortgagee did not properly establishing standing as to the original foreclosure plaintiff, as required.

 

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

 

In 2004, a bank ("Originator") extended a mortgage loan to borrower.  Servicing of the loan was transferred, and in 2009 the new servicer ("Filing Servicer") alleged that borrower defaulted on the loan and filed a foreclosure complaint against borrower. The complaint attached an unindorsed copy of the note.  Borrower answered the complaint, denied that the Filing Servicer owned the note, and alleged a lack of standing affirmative defense.

 

In 2012, the trial court granted the Filing Servicer's motion to substitute its successor by merger ("Second Servicer") as plaintiff.  In 2014, the trial court granted the Second Servicer's motion to substitute a new servicer ("Mortgagee") as plaintiff. 

 

The Mortgagee filed an amended complaint alleging the same 2009 default date, its status as holder of the note, and attaching a copy of the note that contained an undated blank indorsement from the Originating Bank.  The borrower again raised lack of standing as a defense to the amended complaint. 

 

At trial, the Mortgagee called a foreclosure mediation specialist employee as its witness.  The trial court admitted the original note with the same blank indorsement from the Originating Bank as the copy attached to the amended complaint into evidence.  

 

The Mortgagee's witness did not know when the Originating Bank indorsed the note, and the Mortgagee did not introduce any evidence demonstrating when the Originating Bank indorsed the note.  The Mortgagee's witness testified that the Filing Servicer change its name in April 2009.

 

Over borrower's objection that Mortgagee lacked standing, the trial court entered a final judgment of foreclosure in favor of the Mortgagee.  This appeal followed.

 

As you may recall, in Florida the party seeking to foreclose must demonstrate that it had standing to foreclose "at the time the lawsuit was filed."  McLean v. JP Morgan Chase Bank Nat'l Ass'n, 79 So. 3d 170, 173 (Fla. 4th DCA 2012).  The Fifth DCA noted that "a person entitled to enforce the note and foreclose on a mortgage is the holder of the note, a non-holder in possession of the note who has the rights of a holder, or a person not in possession of the note who is entitled to enforce" the note has standing to foreclose. Gorel v. Bank of N.Y. Mellon, 165 So. 3d 44, 46 (Fla 5th DCA 2015) (citing ' 673.2011, Fla. Stat. (2013)).

 

The Fifth DCA found that the original foreclosure complaint did not demonstrate its holder status because it only attached a copy of an unindorsed note payable to the Originator. Indeed, the Mortgagee conceded that attaching the indorsed note to its Amended Complaint and introducing it into evidence at trial did not retroactively demonstrate standing to foreclose when the Filing Servicer filed suit.

 

Instead, the Mortgagee argued that a merger between the Originator and the Filing Servicer established the Filing Servicer's standing to foreclose when it filed the original complaint.  "[T]o prove standing to foreclose based upon a merger, the surviving entity must prove that it 'acquired all of [the absorbed entity's] assets, including [the] note and mortgage, by virtue of the merger.'" Vogel v. Wells Fargo Bank, N.A., 192 So. 3d 714, 716 (Fla. 4th DCA 2016).

 

However, the Mortgagee's witness did not offer testimony explaining "why the copy of the note attached to the complaint . . . did not reflect the [i]ndorsements" and did not know when the blank indorsement was placed on the note. The Mortgagee's witness testified about incorporating business records, but did not testify regarding the transfer of the note pursuant to the merger. 

 

Thus, the Fifth DCA concluded that the Mortgagee did not prove that the merger gave the Filing Servicer standing to foreclose when the complaint was filed.

 

The Fifth DCA also noted that the asserted merger did not establish the Filing Servicer's standing to foreclose because the merger involved an affiliate of the Originator and the Filing Servicer, but the copy of the note attached to the complaint at the time the foreclosure was filed listed the Originator as the payee.  The Servicer did not explain the relationship between the Originator and its affiliate that merged with the Filing Servicer.

 

Thus, the Fifth DCA rejected the Mortgagee's argument that the Filing Servicer acquired possession of the note when it merged with the affiliate of the Originator that may never have held the note.

 

The Servicer also argued that the affiliate of the Originator had standing to foreclose because it was the original mortgage servicer.  The Fifth DCA disagreed finding that "the servicer relationship alone does not demonstrate standing to foreclose." Thus, because none of the Mortgagee's predecessors "had standing to foreclose at the inception of the case, the trial court erred by finding that [Mortgagee] acquired standing to foreclose."

 

The Fifth DCA therefore reversed the final foreclosure judgment, and remanded for entry of an involuntary dismissal.

 

 

 

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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