FYI: 11th Cir Refuses to Compel Arbitration via "Court-Evicting" Amendment

The U.S. Court of Appeals for the Eleventh Circuit recently held that a bank could not enforce an arbitration clause inserted into an amended customer account agreement during the pending litigation incident to the sale and acquisition of the bank, because the plaintiff was actively opposing arbitration and the bank failed to notify the plaintiff's counsel and the court of the purportedly "court-evicting" amendment.

 

In so ruling, the Eleventh Circuit concluded that the bank "failed to demonstrate the requisite meeting of the minds to support a finding that the parties agreed through the February 2013 amendment to arbitrate their then-pending claims." 

 

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

 

The plaintiff had a checking account and a debit card with a bank.  The plaintiff alleged that the bank impermissibly rearranged the order of debt-card transactions so as to process larger transactions before smaller transactions.  Through this practice, according to the plaintiff, the bank more quickly drove account balances to zero, and maximized the number of separate overdrafts and overdraft fees on his account.

 

The plaintiff and other account holders sued the bank in a multi-district litigation. 

 

During discovery, the defendant acquired the bank and issued a new version of its customer account agreements in 2012.  The defendant bank relied upon a provision in the 2008 agreement authorizing the bank's successors to step into the bank's shoes and also authorized the bank to make changes to the terms of the agreement.  However, the defendant's 2012 agreement did not include an arbitration provision.

 

The defendant moved to compel arbitration, arguing that the 2008 agreement and its arbitration provision should apply.  The plaintiff resisted, arguing that the defendant's more recent 2012 agreement wholly superseded the 2008 agreement.  The trial court denied the motion to compel.

 

Shortly after the trial court entered its order, the defendant bank sent account holders an amended agreement inserting an arbitration provision into the otherwise operative 2012 agreement. 

 

The amendment purported to become effective February 2, 2013.  It contained language suggesting that the amendment might have retroactive effect upon existing claims.  The February 2013 amendment indicated that the defendant deemed account holders to accept the amendment if the account holders failed to opt out and continued to use their accounts.  The plaintiff neither opted out nor ceased using his account.

 

In December 2014, the defendant bank filed a new motion to compel arbitration based upon the February 2013 amendment to the 2012 agreement.

 

Prior to this motion, the defendant bank's counsel had not sought to enforce the arbitration provision from the February 2013 amendment, and did not send the February 2013 amendment to plaintiff's counsel during the window of time the account agreement designated for its account holders to accept or opt out of the proposed amendment.  Moreover, the defendant bank's counsel did not attempt to supplement the record or notify the court or opposing counsel regarding the proposed amendment.

 

The plaintiff opposed the new motion to compel arbitration.  He argued that the defendant bank had waived the right to rely upon the arbitration provision in the February 2013 amendment by failing to raise it at an earlier time. 

 

In August 2015, the trial court denied the motion to compel arbitration.  This appeal followed.

 

On appeal, the Eleventh Circuit determined that the bank's motion "failed to demonstrate the requisite meeting of the minds to support a finding that the parties agreed through the February 2013 amendment to arbitrate their then-pending claims."  The Eleventh Circuit reached this conclusion for two related reasons.

 

First, the Eleventh Circuit explained that the bank supposedly distributed the proposed, purportedly retroactive amendment directly to the plaintiff, even though the Court noted that the bank purportedly knew the plaintiff was an adverse litigant actively represented by counsel as to the very issued raised in the amendment.

 

Second, the Court explained, at the time the plaintiff failed to opt out of the proposed amendment, he was forcefully and consistently resisting arbitration of the pending litigation.  The Eleventh Circuit stated that it could not ignore the bank's counsel's failure to direct its purportedly court-evicting proposed amendment through known litigation counsel.

 

As support for its ruling, the Eleventh Circuit applied the "common sense" rule establish in Russell v. Citigroup, Inc., 748 F.3d 677 (6th Cir. 2014), where the Sixth Circuit held that the defendant bank's failure to communicate the new employment agreement "requiring arbitration of individual claims but not class actions" to the plaintiff's attorney meant that the parties could not have intended the agreement to be retroactive in a manner that would evict the pending action from the court.  Russell, 748 F.3d at 681.

 

Additionally, the Eleventh Circuit analyzed North Carolina law, as the state's contract law determined the existence and contours of the parties' agreements.

 

Under North Carolina law, in the absence of a wholly integrated and signed document spelling out the parties agreement, the parties' intent is determined by examining what the parties communicated to one another through words and actions.  See, e.g., Dasher v. RBC Bank (USA), 745 F.3d 1111, 1116 (11th Cir. 2014); Chappell v. Roth, 548 S.E.2d 499, 500 (N.C. 2001); Creech v. Melnik, 495 S.E.2d 907, 911-12 (N.C. 1998).

 

According to the Eleventh Circuit, the bank unilaterally proposed the February 2013 amendment to add an arbitration provision and invited its account holders to opt out if they did not wish to be bound by the amendment.  Although the plaintiff was silent in his response, his counsels actions, in the Eleventh Circuit's view, "clearly and simultaneously evinced an ongoing resistance to arbitration."

 

In other words, the Eleventh Circuit determined that the defendant bank could not show that the plaintiff accepted the addition of the arbitration provision, or that he agreed specifically that the arbitration provision could be applied retroactively to evict his pending litigation, because the defendant "knew in no uncertain terms that [the plaintiff] was contesting arbitration and that he was represented by counsel specifically employed for the purpose of handling the matter of the overdraft litigation."

 

By its purported failure to communicate through counsel for the plaintiff, the Eleventh Circuit concluded that the defendant bank failed to establish that the plaintiff agreed to the addition of the arbitration provision in the February 2013 amendment. 

 

Accordingly, the Eleventh Circuit affirmed the trial court's denial of the motion to compel arbitration.

 

 

 

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: 6th Cir BAP Holds Constructive Notice Did Not Bar Bankruptcy Trustee's Challenge to Defectively Executed Mortgage

The Bankruptcy Appellate Panel of the Sixth Circuit recently held that the constructive notice provisions of section 1301.401 of the Ohio Revised Code do not limit a bankruptcy trustee's avoidance powers as a hypothetical judgment lien creditor under section 544(a)(1) of the federal Bankruptcy Code.

 

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

 

In 2013, two debtors (Debtors) filed a petition for Chapter 7 bankruptcy protection.   Debtors' schedules listed the subject property and three mortgages against the subject property, two of which were held by the same mortgagee (Lender).

 

In 2014, the bankruptcy trustee ("trustee") filed an adversary action seeking to avoid Lender's first mortgage.  Notably, both parties agreed that the acknowledgment clause in the first mortgage was defective and did not substantially comply with the requirements of O.R.C. § 5301.01.  Thus, trustee alleged that the mortgage was avoidable under 11 U.S.C. § 544(a)(1) and 11 U.S.C.544(a)(3) and Ohio law. 

 

Lender moved for judgment on the pleadings in its favor as to the adversary proceeding shortly after filing an answer.  The bankruptcy court then entered an agreed order that stayed the proceeding pending the resolution of the following questions of law in In re Messer, 50 N.E.3d 495 (Ohio 2016) that were certified to the Ohio Supreme Court:

 

1) Does O.R.C. § 1301.401 apply to all recorded mortgages in Ohio?

2) Does O.R.C. § 1301.401 act to provided constructive notice to the world of a recorded mortgage that was deficiently executed under O.R.C. § 5301.01?

 

The Ohio Supreme Court ultimately answered both questions in the affirmative.  Thereafter, an opinion was issued by the bankruptcy court in Messer.  Notably, with reference to O.R.C. § 1301.401, the Messer court held that "[w]hether one claims the status of a hypothetical judgment lien creditor or a bona fide purchaser, constructive notice under state law precludes avoidance through Section 544 of the Code."

 

After the Messer opinion was issued, Debtors filed an amended complaint and Lender filed another motion for judgment on the pleadings. In light of the ruling in Messer, Lender argued that O.R.C. § 1301.401 impaired trustee's power to avoid recorded mortgages based on defects in their execution as: (1) a hypothetical bona fide purchaser ("BFP") under § 544(a)(3); and (2) a hypothetical judicial lien creditor ("JLC") under § 544(a)(1). However, the bankruptcy court disagreed and denied Lender's motion for judgment on the pleadings.

 

In so ruling, the bankruptcy court stated that "while O.R.C. § 1301.401 deems the recording of a defectively executed mortgage to provide constructive notice, such notice does not affect the priority of liens involving a defectively executed mortgage" noting that "a long line of Ohio case law and subtle distinctions in the recording statutes compel a different result." 

 

The bankruptcy court reasoned that, under Ohio law, notice – or lack thereof – is imperative to obtaining BFP status, but is irrelevant to prioritizing a defectively executed mortgage with other liens.  In other words, a "defectively executed mortgage derives no efficacy from being recorded and is not valid against subsequent properly executed and recorded lien even if the subsequent lienholder has notice."  Citing White v. Denman, 16 Ohio 59 (1847), the bankruptcy court noted that public policy favors those who comply with the recording statutes, and therefore, the important factor in the lien priority dispute is determining which lien is the first in time that strictly adhered to the recording statutes. 

 

Thus, contrary to the ruling in Messer, the bankruptcy court here held that trustee retained the power to avoid Lender's defectively executed mortgage as a hypothetical JLC under § 544(a)(1).

 

Lender appealed the interlocutory order and the Sixth Circuit Bankruptcy Panel granted leave in order to resolve the split between the lower courts.

 

The Panel explained that state law determines the extent of a bankruptcy trustee's avoidance powers under 11 U.S.C. § 544.  Therefore, a "trustee can prevail only if, under Ohio law, a person with the status described in § 544 (a)(1), (2), or (3) as of the commencement of the case could avoid [the mortgagee's] interest in the Debtors' property under the mortgage."

 

As you may recall, O.R.C. § 1301.401 provides in relevant part that the "recording . . . of any document . . . shall be constructive notice to the whole world of the existence and contents of either document as a public record and of any transaction referred to in that public record . . . [and] [a]ny person contesting the validity or effectiveness of any transaction referred to in a public record is considered to have discovered that public record any transaction referred to in the record as of the time that the record was first filed . . . or tendered . . . for recording." 

 

The Panel noted that the Ohio Supreme Court held that the act of recording a mortgage provides constructive notice of the existence of the mortgage and its contents even if it is defectively executed under O.R.C. § 1301.401. Thus, the Panel agreed with the Messer court's holding that a bankruptcy trustee may no longer avoid mortgages as a BFP under § 544(a)(3) and Ohio law when a defective mortgage is recorded.

 

However, the Panel disagreed with the Messer court's holding that a bankruptcy trustee may no longer avoid mortgages as a hypothetical JLC under § 544(a)(1) and Ohio law when a defective mortgage is recorded.

 

The Panel explained that O.R.C. § 1301.401 addresses constructive notice, but not whether a defective mortgage is entitled to be afforded priority over subsequent properly perfected liens.  The Panel thus found that JLCs are different than BFPs, noting that neither the Bankruptcy Code nor Ohio law requires a judgment creditor to lack notice of an unrecorded or defective lien in order to obtain a superior lien on a judgment debtor's property.

 

In so finding, the Panel disagreed with the Lender's contention that O.R.C. § 1301.401 defeated the trustee's status as a JLC because a JLC is always subordinate to a BFP.  The Panel explained that a "person's very status as a BFP presumes they have taken their interest for value without notice of any prior interests."  Thus, if a properly perfected judicial lien existed, a subsequent party could not obtain BFP status.  Therefore, the Panel held, the fact that trustee cannot obtain BFP status due to the constructive notice provisions of O.R.C. § 1301.401 does not defeat its ability to step into the shoes of a hypothetical JLC.

 

The Sixth Circuit Bankruptcy Panel also held that Lender's reliance on Kellner v. Fifth Third Bank (In re Durham) 493 B.R. 506 (Bankr. S.D. Ohio 2013) was misplaced.  In Durham, the bankruptcy trustee also sought to avoid a bank's unrecorded mortgage as a hypothetical JLC under § 544(a)(1).  There, however, the mortgagee filed a state foreclosure action and obtained a decree of foreclosure prior to the filing of the bankruptcy petition. Thus, the Panel noted that Ohio's codified doctrine of lis pendens distinguished the case. 

 

Under O.R.C. § 2703.26, "[w}hen a complaint is filed, that action is pending so as to charge a third person with the notice of its pendency.  While pending, no interest can be acquired by third persons in the subject of this action, as against plaintiff's title."  The Panel noted that O.R.C. § 2703.26 has been held to prevent all third parties, not just subsequent BFPs, from acquiring an interest in the property during the pendency of a foreclosure action. Thus, the Panel continued, the doctrine of lis pendens at issue in Kellner also barred the trustee in that case from avoiding the mortgage as a hypothetical JLC.

 

Here, however, the Panel found that the doctrine of lis pendens was inapplicable, and therefore, the basic rule that an unrecorded mortgage does not take priority over a bankruptcy trustee as a hypothetical JLC applied.  Thus, the Panel found that trustee as JLC takes priority over and may avoid the lender's mortgage.

 

The Sixth Circuit Bankruptcy Panel also considered the issue of whether the newly enacted O.R.C. §5301.07 applied retroactively to limit trustee's avoidance powers as a hypothetical JLC.  Notably, O.R.C. §5301.07, which became effective April 6, 2017, deems instruments that have been recorded for more than four years as cured from defects in the making, execution, and acknowledgment of the instruments.  Thus, applying O.R.C. §5301.07 retroactively would have cured the acknowledgment defect in the first mortgage at issue giving Lender priority over trustee as a hypothetical JLC.

 

However, O.R.C. §5301.07 provides that the statute shall be given retroactive effect unless "to do so would affect any accrued substantive right or vested rights in any person or in any real property instrument."  The Panel found that under § 544(a)(1) a trustee "steps into the shoes" of a hypothetical JLC that perfected its lien as of the date of the filing of the petition.  Thus, trustee's rights accrued prior to the enactment date of O.R.C. §5301.07, and therefore, it could not be applied retroactively.

 

Accordingly, the Sixth Circuit Bankruptcy Panel affirmed the bankruptcy court's denial of Lender's motion for judgment on the pleadings.

 

 

 

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: SD Fla Holds Servicer's Calling System Was Not an "ATDS" Under TCPA

The U.S. District Court for the Southern District of Florida recently held that a dialing system that required calls to be manually dialed, could not place calls without human input, and could not dial predictively, or store or produce telephone numbers independently – which in this case was the Avaya X1 Platform -- was not an automatic telephone dialing system ("ATDS") under the federal Telephone Consumer Protection Act, 47 U.S.C. § 227, et seq. ("TCPA"). 

 

Accordingly, the Court entered summary judgment in favor of the defendant mortgage loan servicers.

 

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

 

Upon transfer of her mortgage loan to a new servicer, a borrower ("borrower") sent debt validation demand letters to the defendant servicer and its agent (collectively, "defendant servicers" or "servicers").

 

The borrower alleged that the defendant servicers failed to respond to her demands, and continued collection efforts by instituting foreclosure proceedings, mailing collection notices every month, and placing calls to the borrower, including 53 calls placed by the servicer over the course of 8 months.

 

The defendant servicers contended that they responded to the borrower's debt validation requests.  They also acknowledged placing phones to a voice-over IP telephone "MagicJack" number — which was not registered in the borrower's name — for some of the calls at issue, and then placed subsequent calls to the borrower's cell phone, after she provided the cell phone number as her best contact number in her request for mortgage assistance.

 

The borrower filed suit against the defendant servicers alleging violations of the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. ("FDCPA"), the Florida Consumer Collection Practices Act, Fla. Stat. § 559.55 et seq. ("FCCPA") and the federal Telephone Consumer Protection Act, 47 U.S.C. § 227, et seq. ("TCPA").  However, the action was stayed for nearly two years pending resolution of a final judgment of foreclosure entered in December 2015 in a related foreclosure proceeding, after multiple appeals to Florida state appellate courts, Florida Supreme Court, and United States Supreme Court were al denied or dismissed.

 

After the stay of litigation was lifted, the defendants moved for entry of summary judgment.

 

The borrower's FCCPA and FDCPA claims alleged that the defendant servicers used prohibited practices in order to collect a debt that was allegedly non-existent or invalid.  The servicers argued that the claims were barred by collateral estoppel as a result of the entry of final judgment against the borrower in the underlying foreclosure proceedings. 

 

The trial court agreed that the borrower's FCCPA claims were entirely premised upon the purported invalidity of the debt, and barred by res judicata as a result of the adjudication of the foreclosure action. 

 

The borrower argued that her FDCPA claims did not attack the validity of the debt, but were premised upon the servicers' filing the state foreclosure action, placing telephone calls and mailing collection notices following receipt of her debt validation demands.  Specifically, the borrower argued that the collection notices sent by the servicer defendants were intended to oppress or harass, and that the defendants used false and misleading representations in their debt collection efforts.

 

To the extent any of the borrower's FDCPA claims challenged the validity of the debt, the Court held that those claims were similarly barred by collateral estoppel.  Moreover, the Court also held that any challenge to the servicers' response to the debt validation requests was not adequately plead, and it was undisputed that the servicers provided a timely response to the request.  Thus, no genuine issue of material fact remained regarding borrower's FDCPA claims, and the Court held that summary judgment was proper as to these claims.

 

Lastly, the defendant servicers argued that the borrower's TCPA claims failed because (i) they did not use an auto-dialer, (ii) any calls received on a line not owned by borrower were not actionable, and (iii) the borrower consented to receive calls on her cell phone.

 

As you may recall, to make a claim under the TCPA, a plaintiff must show that "(1) a call was made to a cell or wireless phone, (2) by the use of any automatic dialing system or an artificial or prerecorded voice, and (3) without prior express consent of the called party."  Augustin v. Santander Consumer USA, Inc., 43 F. Supp. 3d 1251, 1253 (M.D. Fla. 2012).

 

First, the Court noted that the calls placed to the "MagicJack" number did not violate the TCPA because the borrower did not own the number, and thus was not a called party charged for the call as required for protection under the TCPA.  47 U.S.C. § 227(b)(1)(A)(iii)

 

Next, the Court examined whether or not the calls to the borrower's cell phone were placed using an automatic telephone dialing system ("ATDS").

 

As you may recall, the TCPA makes it unlawful to call a cell phone using an ATDS or prerecorded voice, which it defines as equipment that has the capacity to store or produce telephone numbers to be called using a random or sequential number generator and dial the stored numbers. 47 U.S.C. § 227(a)(1); 47 U.S.C. § 227(b)(1)(A).

 

The calling servicer admitted some calls were placed to the borrower using an autodialer, but because they were placed to numbers other than her cell phone, they were not subject to the TCPA.

 

Pursuant to declaration and deposition testimony provided by an employee of the servicer, the forty-four calls placed to the borrower's cell phone during the relevant time frame were placed through the Avaya X1 Platform, which operates separately from Bayview's servicing platform. 

 

The servicer's witness asserted that the Avaya platform's primary function is to permit a user to dial phone calls using a computer keyboard and mouse, and that calls must be manually dialed and cannot be placed without human input.  In addition, the platform does not have the ability to store telephone numbers, dial predictively, or produce telephone numbers independently. 

 

Accordingly, the Court concluded that the servicer's dialing equipment used to place calls to the borrower's cell phone was not an ATDS as defined by the TCPA, and summary judgment was entered in the servicers' favor as to the borrower's TCPA claims.

 

For the foregoing reasons, summary judgment was granted in the defendant servicers' favor, and against the borrower.

 

 

 

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   |   Massachusetts   |   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

 

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and

 

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