FYI: 9th Cir Upholds Judgment for Deceptive Disclosures Against Online Lender

The U.S. Court of Appeals for the Ninth Circuit held that an online payday lender's "loan note" violated § 5 of the Federal Trade Commission Act ("FTC Act") because, although it was "technically accurate", the lender's online loan portal made it difficult to discern the loan terms and therefore likely to mislead consumers about the terms of the loan.

 

Accordingly, the Ninth Circuit affirmed the trial court's summary judgment and relief order in favor of the FTC.

 

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

 

The defendant owner ("Owner") controlled a series of companies that offered high-interest payday loans to borrowers.  The loans were offered exclusively through a number of proprietary websites. 

 

Potential borrowers would enter personal information into one of the Owner's websites, and approved borrowers would be directed to a webpage that disclosed the loan's terms and conditions by hyperlinking to seven documents, including the Loan Note and Disclosures ("Loan Note"), which provided the essential terms of the loan as mandated by the federal Truth in Lending Act ("TILA").

 

Borrowers could open the Loan Note if they chose, but they could also ignore the document and electronically sign their names by clicking a button that said: "I AGREE Send Me My Cash!"

 

In April 2012, the FTC filed a lawsuit against [the Owner] and his businesses alleging their business practices violated § 5 of the FTC Act prohibition against "unfair or deceptive acts or practices in or affecting commerce."  15 U.S.C. § 45(a)(1).

 

Specifically, the FTC alleged that the Owner violated § 5 because the terms disclosed in the Loan Note did not reflect the terms that the Owner actually enforced.  Thus, the FTC asked the court to permanently enjoin the Owner from engaging in consumer lending and to disgorge "ill-gotten monies."

 

The parties agreed to bifurcate the proceedings in the trial court into a "liability phase" and a "relief phase."

 

During the liability phase, the FTC moved for summary judgment on the FTC Act claim, which the trial court granted. 

 

In the relief phase, the trial court enjoined the Owner from assisting "any consumer in receiving or applying for any loan or other extension of Consumer Credit," and ordered the Owner to pay approximately $1.27 billion in equitable monetary relief to the FTC. 

 

The trial court then directed the FTC to direct as much money as practicable to "direct redress to customers," and then to "other equitable relief . . . reasonably related to the Defendants' practices alleged in the complaint," and then to "the U.S. Treasury as disgorgement." 

 

The Owner subsequently appealed both the entry of summary judgment and the relief order.

 

On appeal, the Owner first argued that the trial court erred in granting the motion for summary judgment finding him liable for violating § 5 of the FTC Act.

 

As you may recall, to prevail on a claim under § 5, the FTC must show that a representation, omission, or practice is "likely to mislead consumers acting reasonably under the circumstances."  This consumer-friendly standard does not require the FTC to provide "[p]roof of actual deception," only that the "net impression" of the representation would be likely to mislead – even if such representation "also contains truthful disclosures."  

 

The FTC argued that the Loan Note was likely to mislead borrowers about the terms of the loan.  Specifically, although the top third of the Loan Note contained the so-called "TILA box," which contained the "amount financed," "finance charge," total of payments," and "annual percentage rate," the fine print below the TILA box was essential to understanding the loan's terms. 

 

The densely packed text below the TILA box set out two alternative payments scenarios: (1) the "decline-to-renew" option, and (2) the "renewal" option.

 

Importantly, borrowers hoping to exercise the decline-to-renew option had to navigate through an online customer-service portal and affirmatively choose to "change the Scheduled" payment, and agree to "Pay Total Balance."  This had to be done at least three business days before the next scheduled payment.

 

Alternatively, borrowers who did nothing would default to the "renewal" option, which would end up costing the borrow significantly more than the amount listed in the TILA box. 

 

Based on these facts, the Ninth Circuit agreed with the FTC "that the Loan Note was deceptive because it did not accurately disclose the loan's terms." 

 

In reaching its conclusion, the Court noted that "under the terms that [the Owner] actually enforced, borrowers had to perform a series of affirmative actions in order to decline to renew the loan and thus pay only the amount reported in the TILA box."

 

Further, "the fine print's oblique description of the loan's terms fails to cure the misleading 'net impression' created by the TILA box."

 

The Owner argued that the Loan Note was not deceptive because it was "technically accurate," but the Ninth Circuit explained that "the FTC Act's consumer-friendly standard does not require only technical accuracy."  

 

The Owner next argued that the court's narrow focus on the Loan Note failed to capture the "net impression" on borrowers.  The Court disagreed, ruling that the Owner "wrongly assumes that non-deceptive business practices can somehow cure the deceptive nature of the Loan Note."  Instead, the FTC "must show only that a specific 'representation' was 'likely to mislead.'"

 

Finally, the Owner argued that summary judgment was inappropriate because he demonstrated a genuine issue of material fact.  Specifically, the Owner pointed to deposition testimony from consumers that they had not read the disclosures but understood them upon reading them at their depositions, and his expert's testimony. 

 

The Ninth Circuit again disagreed, ruling that because proof of "actual deception" is unnecessary to establish a violation, and the Owner could be liable if the Loan Note "possesses a tendency to deceive."  The Court further ruled that the Owner's expert testimony was insufficient to create a question of fact.

 

Thus, the Ninth Circuit held "that the Loan Note was likely to deceive a consumer acting reasonably funder the circumstances," and therefore "the trial court did not err in entering summary judgment against [the Owner] as to the liability phase."

 

With respect to the relief phase, the Owner argued that the FTC improperly used § 13(b) to pursue penal monetary relief under the guise of equitable authority, because  § 13(b) provides only that trial courts may enter "injunction[s]."  15 U.S.C. § 53(b). 

 

Although the Ninth Circuit found the argument to have "some force," it concluded that it was "foreclosed by our precedent," which had "repeatedly held that § 14 'empowers trial courts to grant any ancillary relief necessary to accomplish complete justice, including restitution.'"

 

The Owner requested that the Court revisit its precedent in light of the Supreme Court's decision in Kokesh v. SEC, 137 S. Ct. 1635 (2017), wherein the Court determined that a claim for "disgorgement imposed as a sanction for violating the federal securities law" was a "penalty" within the meaning of the federal catch-all statute of limitations.

 

The Owner argued that Kokesh severs the line of reasoning that links "injunctions" to "equitable monetary relief." 

 

However, the Ninth Circuit explained that a "three-judge panel may not overturn prior circuit authority unless it is 'clearly irreconcilable with the reasoning or theory of intervening higher authority,'" which threshold the Court determined was not met. 

 

Further, the Owner argued that the trial court abused its discretion in calculating the amount of the award, because the $1.27 billion judgment overstated his unjust gains.  The Ninth Circuit again disagreed, ruling that "the trial court did not abuse its discretion when calculating the amount it ordered [the Owner] to pay." 

 

Finally, the Owner challenged the trial court's decision to enjoin him from engaging in consumer lending, but Ninth Circuit again could not "find fault with the trial court's decision to enter a permanent injunction." 

 

Accordingly, the Ninth Circuit affirmed the judgment of the trial court in its entirety. 

 

 

 

 

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 Sup Ct Holds Mortgagee's 2nd Action on Note After Foreclosure Barred by "Single Refiling Rule"

The Supreme Court of Illinois recently held that a bank's suit for breach of a promissory note — a third attempt to collect from the same defendant borrowers based on the same default of the promissory note — was barred by Illinois' 'single refiling rule.' 

 

In so ruling, the Supreme Court concluded that, although the first lawsuit sought relief of foreclosure of the mortgage that secured the loan, and the second and third lawsuits were for breach of the underlying promissory note, that all three suits asserted the same cause of action under the mortgage and the note, importantly, because the first action also sought a deficiency judgment under the note.

 

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

 

After two borrowers ("Borrowers") defaulted on their mortgage loan (the "Loan"), the mortgage lender filed a foreclosure complaint in Cook County, Illinois (the "First Lawsuit") seeking "judgment of foreclosure and sale" and "personal judgment for deficiency, if sought."

 

The Loan was acquired by a successor bank ("Bank") who voluntarily dismissed the foreclosure action on April 2, 2013, and filed a new suit against the Borrowers on April 16, 2013 (the "Second Lawsuit") for breach of the promissory note evidencing the Loan, and alleging the same date of default as the First Lawsuit.  After the Bank's motion to continue trial was denied two years later on April 3, 2015, the Bank voluntarily dismissed the Second Lawsuit on the same day.

 

On July 30, 2015, the Bank filed yet another action against the Borrowers (the "Third Lawsuit") for breach of the promissory note evidencing the Loan and unjust enrichment, again asserting the same date of default as the First and Second Lawsuits. 

 

The Borrowers moved to dismiss, arguing that the Third Lawsuit violated Illinois' "single refiling rule," section 13-217 of the Illinois Code of Civil Procedure.   The trial court denied the Borrowers' motion to dismiss, concluding that the pending Third Lawsuit was the first refiling of the breach of promissory note action—both distinct from the First Lawsuit seeking to foreclose the mortgage which secured the Loan.  The Borrowers reasserted their "single refiling rule" argument as an affirmative defense, but it was stricken by the trial court.  The Bank was eventually granted summary judgment and an award of $308,192.56 in damages for the Borrowers breach of the promissory note. 

 

The Borrowers appealed the entry of summary judgment.

 

On appeal, the Illinois Appellate Court vacated the trial court's order and dismissed the Complaint, concluding that although the mortgage and note are distinct contracts, all three lawsuits arose from the same operative facts and based on the same default of the note, and thus, constitute the same causes of action for the purposes of the single refiling rule.  See LSREF2 Nova Investments III, LLC v. Coleman, 2015 IL App (1st) 140184 (foreclosure complaint that seeks a deficiency judgment arises out of both the mortgage and the note). 

 

Although the Bank initially distinguished Coleman in the trial court by noting that in that case, the first lawsuit had reached a final adjudication on the merits, rather than a voluntary dismissal like the First Lawsuit here, the appellate court found that final adjudication was a component of res judicata, not the single refiling rule. 

 

The Supreme Court of Illinois granted the Bank's petition for leave to appeal.

 

The Supreme Court had previously interpreted the "single refiling rule," section 13-217 to allow "one, and only one, refiling of a claim" (Flesner v. Youngs Development Co., 145 Ill. 2d 252,254 (1991)), but it had not yet spoken on the issue as to whether two complaints state the same claim depends how the plaintiff labels the complaint. 

 

The Court adopted the analysis used in Illinois Appellate Courts to determine whether two suits assert the same cause of action for the purposes  of the single refiling rule as they use for res judicata.  This test, adopted by the Supreme Court in River Park, Inc. v. City of Highland Park, 184 Ill. 2d 290, 311 (1998) treats separate claims as the same cause of action "if they arise from a single group of operative facts."

 

Citing River Park, the Supreme Court rejected the Bank's initial argument that a foreclosure proceeding is quasi in rem, but breach of note is in personam, under the transactional test which treats two claims as identical "if they arise from a single group of operative facts, regardless of whether they assert different theories of relief." River Park, Inc., 184 Ill. 2d at 311.  The Supreme Court disagreed with the Bank's argument that the facts shared between the foreclosure and breach of note complaints derive from the Illinois Mortgage Foreclosure Law form complaint, because the Foreclosure Law does not require a plaintiff to seek a deficiency judgment, as the Bank did in the First Lawsuit Here.  735 ILCS 5/1504, et seq.  The Supreme Court further ruled that the Bank could not avoid the single refiling rule by claiming that the First Lawsuit only requested relief of personal judgment for a deficiency "if sought."

 

In rejecting the Bank's reliance upon LP XXVI, LLC v. Goldstein, 349 Ill. App. 3d 237 (2004) (res judicata did not bar plaintiff's suit because the mortgage, note and guaranty were separate transactions) and Turczak v. First American Bank, 2013 IL App (1st) 121964 (lender can proceed in separate suits to enforce mortgage and underlying promissory note), the Supreme Court concluded that Coleman distinguished its facts from those in Goldstein and Turczak. 

 

Unlike Coleman and the instant matter, Goldstein arose from the defendant's guaranty that specifically waived the argument raised by Borrowers here and did not address a situation in which the lender sought a remedy under the same instrument in three separate suit, and the first lawsuit in Turczak only sought default judgment—and thus, did not seek to adjudicate the parties' rights under the disputed instrument.

 

Though Goldstein and Turczak both rely on Farmer City State Bank v. Champaign National Bank, 138 Ill. App. 3d 847, 852 (1985) to demonstrate that a plaintiff may pursue remedies under a mortgage and a note either consecutively or concurrently, the Supreme Court held that it need not overturn Farmer City to rule in Borrowers' favor to reach its conclusion.  Here, the Bank's predecessor sought relief under the mortgage and note concurrently, which was not inappropriate at the time it was filed. 

 

The Supreme Court of Illinois stated that lenders may pursue a claim under the mortgage and note either consecutively or concurrently; however, a lender may not assert a claim under the mortgage and the note concurrently by seeking a foreclosure and a deficiency judgment, and then assert a claim under the note consecutively twice more, as the Bank did here. 

 

In response to the Bank's concerns that its ruling would limit all available remedies and require lenders to file one suit under all possible instruments, the Supreme Court stated that this is avoided by focusing on the remedy sought, and that although foreclosure complaints often share facts with other suits a lender may bring, the shared facts are not necessarily "operative facts" under the transactional test.  River Park, Inc., 184 Ill. 2d at 311. 

 

The Supreme Court further noted that because its opinion does not hold that the mortgage and note constitute the same transaction, claims under those instruments need not be litigated at the same time for the purposes of the single refiling rule, and that "this reasoning also applies to other instruments besides the note and the mortgage, such as a guaranty or a loan modification agreement."

 

Therefore, the Supreme Court of Illinois concluded that the Third Lawsuit constituted a third attempt by the Bank to collect from the Borrowers based upon the same default, and thus, was barred by the "single refiling rule."  Accordingly, the appellate court opinion's was affirmed, and the trial court's entry of summary judgment in the Bank's favor was vacated.

 

 

 

 

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: Cal App Ct (4th DCA) Rules Servicer and Investor Did Not Violate HBOR

The Court of Appeals of California, Fourth District, recently affirmed summary judgment awarded in favor of the mortgage servicer and loan owner defendants on the borrowers' claims for alleged violations of the California Homeowner Bill of Rights (HBOR), finding that the defendants properly contacted the borrowers and provided them with the required foreclosure information before recording the notice of default. 

 

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

 

The plaintiffs ("Borrowers") obtained a loan in 2007, secured by their residence.  In 2013, the Borrowers defaulted and entered into a loan modification agreement with the loan owner ("Owner").  The Borrowers then defaulted on the loan modification agreement.

 

On March 10, 2014, the then mortgage servicer ("Servicer") sent the Borrowers a letter that contained documents that outlined their eligibility and the protections contained in the federal Servicemembers Civil Relief Act.  Between March 18 and November 22, 2014, the Servicer spoke to the Borrowers multiple times regarding the status of their mortgage account, their financial situation, foreclosure avoidance options, and on at least three occasions provided them with a toll free number for the Department of Housing and Urban Development (HUD).

 

The Borrowers submitted a complete loan application to the Servicer in March 2014, but the Servicer denied the application.  The Borrowers did not appeal this denial.

 

The Servicer informed the Borrowers via letter on November 26, 2014 that they could request copies of their payment history and the note, the name of the entity that "holds the loan," and any "assignments of mortgage or deed of trust required to demonstrate" the right to foreclose.

 

On January 14, 2015, the Servicer recorded a notice of default for the loan stating the amount that the Borrowers had to pay to bring their account current.  The notice of default included a declaration averring that the Servicer had contacted the Borrowers.

 

On April 28, 2015, the Servicer recorded a notice of trustee's sale against the property.

 

The Borrowers last made a payment on the loan in October 2013. The trustee's sale had not occurred as of June 19, 2017. The borrowers filed suit against the Owner and Servicer.  The operative complaint sought to enjoin the sale and alleged that defendants violated the HBOR (Cal. Civ. Code,  §§ 2923.55, 2923.6) and California Business and Professions Code § 17200 by not contacting the Borrowers before recording the notice of default and properly informing them about their foreclosure alternatives.

 

The defendants moved for summary judgment supported by a declaration arguing that the undisputed facts demonstrated that they did not violate the HBOR or section 17200. The trial court granted the Defendants motion for summary judgment.  This appeal followed.

 

Initially, the Appellate Court observed that the HBOR, "effective January 1, 2013, was enacted 'to ensure that, as part of the nonjudicial foreclosure process, borrowers are considered for, and have a meaningful opportunity to obtain, available loss mitigation options, if any, offered by or through the borrower's mortgage servicer, such as loan modifications or other alternatives to foreclosure.'" Civ. Code, § 2923.4, subd. (a).

 

As you may recall, California has amended the HBOR since its passage, but when the Servicer recorded the notice of default, the HBOR required the Servicer to send a letter informing the Borrowers that they have the right to request certain loan documents before recording the notice of default.  See former Cal. Civ. Code, § 2923.55, subds. (a)-(b). A servicer or any other party also could not record the notice of default until 30 days after making initial contact with the borrower in person or by telephone to "assess" the borrower's financial situation and to "explore" foreclosure alternative options. Id. The servicer must inform the borrower during this initial contact that they may request an additional meeting to take place within 14 days and provide the borrower with HUD's toll-free phone number to find a HUD-certified housing counseling agency. Id.  A borrower may seek injunctive relief "to enjoin a material violation" of former section 2923.55, before anyone records a trustees deed upon sale. See former § 2924.12, subd. (a)(1).

 

The Borrowers argued on appeal that disputed material facts regarding whether Defendants complied with former section 2923.55 before recording the notice of default should have precluded summary judgment.  The Borrowers cited Mabry v. Superior Court (2010) 185 Cal.App.4th 208, 215, to argue that whether a defendant complied with section 2923.55's requirements is typically a "classic question of fact that" the trier of fact must resolve.

 

The Appellate Court noted that it construes the terms "assess" and "explore" narrowly "to avoid crossing the line from state foreclosure law into federally preempted loan servicing."  Mabry, 185 Cal.App.4th at 232.  Thus, it limits exploration "to merely telling the borrower the traditional ways that foreclosure can be avoided (e.g., deeds 'in lieu,' workouts, or short sales), as distinct from requiring the lender to engage in a process that would be functionally indistinguishable from taking a loan application in the first place." Id.

 

The Appellate Court found that the trial court correctly determined that the Defendants "satisfied the requirements of former section 2923.55" before recording the notice of default." 

 

Specifically, before recording the notice of default, the Servicer initiated at least 11 phone calls with the Borrowers, the husband borrower called and spoke to the Servicer eight more times, and the Servicer unsuccessfully tried to call the Borrowers an additional 35 times.  During the phone calls the Servicer discussed the following with the Borrowers: a loss mitigation review; their loan modification application; payment options; the HUD referral phone number; the possible sale of the property; and offered to conduct a loss mitigation meeting several times. This evidence "clearly establishes" that Defendants made a prima facie showing that they met "all of the contact and notice requirements of former section 2923."

 

The Appellate Court also found that Defendants made a prima facie showing that they "complied with the requirements of former section 2923.55, subdivision (b)(2) by fully reviewing and processing" the Borrowers' "loan modification application before recording the notice of default."

 

The burden then shifted to the Borrowers to come forward with evidence sufficient to give "rise to one or more triable issues of fact."  The husband borrower presented evidence that before the Servicer recorded the notice of default he did not recall any phone calls occurring or being offered a meeting to discuss foreclosure alternatives.  However, he did not actually deny the contacts or the contents or the discussions.  

 

The Appellate Court found this insufficient to create a triable issue of material fact "and entitled the defendants to summary judgment."

 

The Borrowers also argued that a material fact dispute remained because the Defendants did not initiate the contacts.  The Appellate Court rejected this argument because the evidence showed that the Servicer initiated multiple contacts and because former section 2923.55 did "not require that a lender initiate the contact; rather, the statute requires only that the lender make contact in some manner and provide the borrower with an opportunity to discuss the borrower's financial situation and possible options for avoiding foreclosure."  To hold otherwise would have elevated "form over substance." 

 

The Borrowers argument also failed because a violation of the statute's provisions must be "material" to support a claim for an injunction.  Thus, when "the purpose of the statute is met -- if the borrower has had an opportunity to have at least two substantive discussions with the lender regarding the borrower's financial situation and possible options for avoiding foreclosure -- then the fact that one or both of these discussions may have arisen as a result of the borrower initiating the telephone call with the lender or its agent cannot be considered to constitute a 'material' violation of the statute."

 

Finally, because the Borrowers' claims for violations of section 17200 are predicated on their failed HBOR claims the trial court correctly found that the defendants are also entitled to summary judgment of their alleged section 17200 claims.

 

Accordingly, the Appellate Court affirmed the trial court's judgment. 

 

 

 

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   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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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