FYI: 9th Cir Rules Letter's 'Benefits' of Paying Time-Barred Debt Not Misleading Under FDCPA, CFPB to Address SOL Disclosures

The U.S. Court of Appeals for the Ninth Circuit recently held that a collection letter offering payment options on a time-barred debt and listing "benefits" of paying the debt was not deceptive or misleading under the federal Fair Debt Collection Practices Act.

 

Meanwhile, the CFPB is expected to take up the issue of time-barred debt disclosures early next year.

 

The Ninth Circuit's opinion is available at:  Link to Opinion

 

Consumer Not Mislead by "Will Not Sue" Disclosure

 

The consumer received a letter that offered three payment options, two of which involved monthly payments. The letter then listed "benefits" to paying the debt, including saving money, stopping collection communications, and obtaining "peace of mind."

 

The letter contained the following statute-of-limitations (SOL) disclosure about two-thirds of the way down the first page: "The law limits how long you can be sued on a debt and how long a debt can appear on your credit report. Due to the age of this debt, we will not sue you for it or report payment or non-payment of it to a credit bureau."

 

The consumer argued that the letter was deceptive or misleading under 15 U.S.C. § 1692e because (1) the SOL disclosure said that the creditor "will not sue," instead of conveying that the collector could not sue as a matter of law; (2) the letter did not warn the recipient that a payment could revive or restart the statute of limitations; and (3) the letter touted various "benefits" to paying the debt but did not inform the consumer that the best option for dealing with a time-barred debt is to ignore it. The Ninth Circuit rejected each argument.

 

The Court held that the least sophisticated consumer would not be deceived or misled by the SOL disclosure because the statement that the collector "will not sue" was immediately preceded by a sentence explaining that "[t]he law limits how long you can be sued on a debt…" Therefore, the Court found that a consumer would naturally conclude that the debt was time barred. The Court also noted that nothing in the letter falsely implied that the collector could sue the consumer; and the Court specifically pointed out that the letter did not include a "settlement offer," which other circuits found could falsely imply that the debt is enforceable in court.

 

The consumer resided in Idaho, where a partial payment on a time-barred debt can restart the statute of limitations. However, the card agreement between the original creditor and the consumer provided that Nevada law governed the account. Under Nevada law, a partial payment on a time-barred debt will not restart the limitation period.

 

Not Required to Disclose "Partial Payment" Can Revive SOL

 

The consumer asserted that a revival warning was required regardless of which state's law applied. If Idaho law applied, then he could lose the protection of the statute of limitations by making a payment on his debt. If Nevada law applied, he argued that a payment, even if it did not restart the limitation period, would leave him in a worse position because he would be forced to argue complicated choice-of-law issues in response to a lawsuit.

 

The Court disagreed and explained that while the FDCPA requires collectors to give certain disclosures, such as the "Mini-Miranda" and the disclosures required by 15 U.S.C. § 1692g, "nothing in the FDCPA requires debt collectors to disclose that partial payments on debts may revive the statute of limitations in certain states."

 

"Benefits" of Payment Language Not Deceptive

 

Finally, the Court rejected the consumer's argument that the letter was deceptive because it listed "benefits" to paying the time-barred debt and failed to convey that consumers have the option of paying nothing. The Court noted that in most states, including Idaho and Nevada, the running of the statute of limitations does not extinguish the debt, it merely forecloses a judicial remedy. Therefore, there is "nothing inherently deceptive or misleading in attempting to collect a valid, outstanding debt, even if it is unenforceable in court."

 

The Court explained that because in most states a time-barred debt is still legally owed, it is not deceptive to say that the consumer will save money by paying a discounted amount. Also, collectors are not obligated to inform consumers that they do not have to pay their debt to stop communications because they can also stop communications by exercising their rights under 15 U.S.C. § 1692c(c). Finally, saying that a consumer can obtain "peace of mind" by paying the debt does not imply a threat of suit when the communication also discloses that the creditor will not sue the consumer.

 

Ruling Aligns With 6th and 11th Circuits, But Not 7^th Circuit

 

The SOL disclosure at issue in this case is one that was mandated by the FTC and the CFPB in consent orders, and it is substantially similar to those required by legislation in California, Connecticut, and Texas. Furthermore, the Sixth Circuit and the Eleventh Circuit have each noted that the use of a similar SOL disclosure could remedy any false implication that a time-barred debt is enforceable in court.

 

On the other hand, the Seventh Circuit has held that using only the second sentence of the disclosure (informing the consumer that the creditor will not sue) is insufficient without the first sentence informing the consumer that "the law limits how long you can be sued on a debt." The Seventh Circuit also found that "the FDCPA prohibits a debt collector from luring debtors away from the shelter of the statute of limitations without providing an unambiguous warning that an unsophisticated consumer would understand."

 

CFPB Likely to Propose Disclosures in 2020

 

Further clarity might come in the form of supplemental CFPB rulemaking. The Bureau's Notice of Proposed Rulemaking released in May 2019 did not address time-barred debt disclosures but the NPRM noted that the Bureau planned to test disclosures and might issue a disclosure proposal at a later date. Earlier this month, Director Kraninger told a group of state attorneys general that the Bureau intends to release a Supplemental Notice of Proposed Rulemaking on this issue "very early in 2020."

 

 

 

 

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 So-Called "910 Claims" To Be Treated Like Other Allowed Secured Claims

The Bankruptcy Appellate Panel for the U.S. Court of Appeals for the Sixth Circuit ("Sixth Circuit BAP") recently reversed a lower bankruptcy court's ruling that rejected an objection to the confirmation of debtors' chapter 13 plan asserted by the holder of a claim relating to vehicle financing incurred within 910 days of the bankruptcy petition (a "910 claim").

 

In so ruling, the Sixth Circuit BAP held that a creditor's objection to confirmation must be sustained when a chapter 13 plan fails to provide that the holder of a 910 claim retains the lien securing its claim until the earlier of payment of the underlying debt determined under non-bankruptcy law or discharge under section 1328.

 

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

 

In March 2017, a consumer financed the purchase of a used vehicle through financing provided by a creditor (the "Creditor").  In July 2018 — less than 910 days after purchase of the vehicle — the consumer and his wife ("Debtors") filed for chapter 13 bankruptcy petition. 

 

The proposed Chapter 13 plan listed the Creditor's claim secured by the vehicle valued at $10,000 (the "910 claim") under Official Form 113, Section 3.3 ("Secured claims exclude from 11 U.S.C. 506"), which provided for monthly plan payments to the Creditor. 

 

Unlike Section 3.2 ("Request for valuation of security, payment of fully secured claims, and modification of undersecured claims"), Section 3.3 does not discuss lien retention for claims treated thereunder.  Thus, the proposed plan did not include language addressing the Creditor's retention of its lien and did not include a nonstandard plan provision I Section 8.1 concerning retention of the Creditor's lien.

 

The Creditor timely filed the 910 Claim secured by the vehicle, and objected to the confirmation of Debtor's plan, contending that it did not provide that the lien upon the vehicle would be retained until the Debtors paid their entire debt under non-bankruptcy law or received their discharge under Section 1328 (the "Lien Retention Language").  In November 2018, the bankruptcy court confirmed the Debtor's plan subject to resolution of the Creditor's objection.

 

Thereafter, the bankruptcy court overruled the Creditor's objection, holding that although the Creditor held a secured claim that was not subject to bifurcation under section 506 of the bankruptcy code owing to the so-called "hanging paragraph" in § 1325(a) (stating that section 506 does not apply to claims where the collateral for the debt is a motor vehicle for debtor's personal use, the creditor has a purchase money security interest securing the debt, and the debt was incurred within the 910 days preceding the date of the filing of the petition) the court was "not convinced that this means § 1325(a)(5) applies to a 910-day claim exactly as it would to any other allowed, secured claim."

 

After the Creditor's motion for reconsideration was denied, the creditor appealed the order overruling its objection to the 6th BAP.

 

On appeal, the lone issue presented to the BAP was whether an objection to confirmation must be sustained when a chapter 13 plan fails to provide that the holder of a '910 claim' retain[s] the lien securing its claim until the earlier of payment of the underlying debt determined under non-bankruptcy law or discharge under section 1328.

 

Initially, the Sixth Circuit BAP cited its holding in holding in Shaw v. Aurgroup Fin. Credit Union, 552 F.3d 447 (6th Cir. 2009)  which rejected the debtor's proposal to bifurcate (i.e. cramdown) a 910 claim, holding that the "hanging paragraph" of § 1325(a)(5) cannot be bifurcated.  Shaw, 552 F.3d at 451–52.

 

Here, as in Shaw, there was no dispute that the Creditor holds a valid 910 claim.  Thus, the Court noted, the imperative question was whether the Debtor's plan properly treated the 910 claim under one of the three available options under section 1325(a)(5).  Shaw, 552 F.3d at 462 (bankruptcy courts have no discretion to confirm a plan if fails to satisfy the provisions of section 1325(a)(5) in treating a secured claim).

 

As you may recall, a debtor's proposed plan must accommodate each allowed, secured creditor in one of three ways under § 1325(a)(5): (1) by obtaining the creditor's acceptance of the plan; (2) by surrendering the property securing the claim; or (3) by permitting the creditor to both retain the lien securing the claim and a promise of future property distributions (such as deferred cash payments) whose total "value, as of the effective date of the plan, . . . is not less than the allowed amount of such claim." § 1325(a)(5); Till v. SCS Credit Corp., 541 U.S. 465, 468, 124 S. Ct. 1951, 158 L. Ed. 2d 787 (2004). 

 

Here, Creditor did not accept the treatment of its claim under Debtors' proposed plan (which would satisfy § 1325(a)(5)(A)) and Debtors did not surrender the Vehicle (which would satisfy § 1325(a)(5)(C)). Therefore, Debtors' plan was required to satisfy § 1325(a)(5)(B) to achieve confirmation over Creditor's objection. 

 

Although Debtors' plan included deferred cash payments to Creditor in equal monthly amounts, satisfying § 1325(a)(5)(B)(ii) and (iii), it failed to "provide that" Creditor retains its lien on the Vehicle as § 1325(a)(5)(B)(i)(I) requires.  See 11 U.S.C. § 1325(a)(5)(B) ("the plan must provide that (I) the holder of such claim retain the lien securing such claim until the earlier of—(aa) the payment of the underlying debt determined under non-bankruptcy law; or (bb) discharge under section 1328… "). 

 

Thus, the Sixth Circuit BAP concluded that the bankruptcy court erred in confirming Debtors' plan over Creditor's objection based on the statute's plain language and the Sixth Circuit's prior holding in Shaw, because the plan failed to satisfy § 1325(a)(5) by not treating the 910 Claim in full compliance with § 1325(a)(5)(B). 

 

Lastly, the BAP rejected the Debtors' argument that inclusion of Lien Retention Language in a nonstandard provision in Debtors' plan to address the Creditors' objection violated Rule 9009(a), as the rule does not prohibit a chapter 13 plan, crafted from Official Form 113, from containing a nonstandard provision affording a 910 claimant lien retention rights in accordance with § 1325(a)(5)(B)(i)(I).

 

Accordingly, the bankruptcy court's order overruling the Creditor's objection to the confirmation of Debtors' chapter 13 plan was reversed, and the case was remanded for further proceedings.

 

 

 

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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FYI: 5th Cir Rejects Borrower's Texas Foreclosure Statute of Limitations Challenge

The U.S. Court of Appeals for the Fifth Circuit recently affirmed judgment against a borrower for quiet title claims brought against the owner and servicer of her mortgage loan, and entered judgment of foreclosure in the loan owner and servicer's favor on their counterclaims for foreclosure against the borrower.

 

In so ruling, the Fifth Circuit concluded that the foreclosure was not barred under Texas's four-year statute of limitations, because the borrower's successive bankruptcy filings did not terminate the action with respect to the property of the bankruptcy estate, as section 11 U.S.C. 362(c)(3)(A) on the Bankruptcy Code terminates the automatic stay only with respect to the debtor.

 

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

 

In 2005, a borrower ("Borrower") and her then-husband purchased a property with a purchase-money mortgage.  The Borrower's ex-husband was awarded the home after a divorce, subject to a lien that required him to convey the home to Borrower in the event of default.

 

On October 1, 2013, the mortgage loan servicer (the "Mortgagee") mailed Borrower a notice of default, as no payment had been made on the loan since March 2011.  A subsequent notice of acceleration was mailed to Borrower in March 2014, setting a foreclosure sale of the property for May 6, 2014.

 

The day before the scheduled foreclosure sale, the Borrower filed suit in Texas state court asserting various claims relating to the pending foreclosure sale and requesting a temporary restraining order, which was granted on the same date and cancelled the foreclosure sale.  After the temporary restraining order expired, the Mortgagee removed the Borrower's action to federal court, where the action was subsequently dismissed with prejudice by stipulation of the parties.

 

In June 2015, the Borrower received a second notice of acceleration letter, setting a foreclosure sale for July 7, 2015.  On January 4, 2016, the Borrower filed her first bankruptcy petition, which was dismissed later that month for failure to timely file her plan and/or schedules.  Over the next three years, three additional acceleration letters were mailed to the Borrower scheduling foreclosure sales, all of which were thwarted by new bankruptcy petitions filed by the Borrower.

 

Before her last bankruptcy matter was dismissed, the Borrower filed suit in state court to quiet title to her property, arguing that the Mortgagee's right to foreclose was barred by Texas's statute of limitations to foreclose on real property.  The quiet title action was removed to federal court by the Mortgagee, who filed a counterclaim for foreclosure. 

 

Ruling upon the parties' respective motions for summary judgment, the trial court entered final judgment against the Borrower and in the Mortgagee's favor, holding that the statute of limitations had not expired, and ordering foreclosure.  The Borrower appealed judgment and underlying magistrate's report and recommendation and order on same.

 

On appeal, the sole issue before the Fifth Circuit was whether the statute of limitations expired on the Mortgagee's right to foreclose.  Here, the statute of limitations issue turned on the length of the Borrower's bankruptcy stays.

 

As you may recall, under Texas foreclosure law "[a] person must bring suit for the recovery of real property under a real property lien or the foreclosure of a real property lien not later than four years after the day the cause of action accrues."  Texas Civil Practice and Remedies Code § 16.035(a). Similarly, "[a] sale of real property under a power of sale in a mortgage or deed of trust that creates a real property lien must be made not later than four years after the day the cause of action accrues." Id.  The lien and power of sale become void after four years from accrual.  Id.

 

Texas common law tolls the statute of limitations during a bankruptcy stay, but the federal Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) limits the automatic stay for debtors who have filed for bankruptcy within the past year, providing that if a case was pending within the preceding 1-year period but was dismissed, "the stay… with respect to any action taken with respect to a debt or property securing such debt or with respect to any lease shall terminate with respect to the debtor on the 30th day after the filing of the later case . . . ."  11 U.S.C. § 362(c)(3)(A).

 

Courts have been divided on the interpretation of the code's phrase "respect to the debtor," but the Fifth Circuit had not yet addressed the issue. 

 

The majority view, adopted by three bankruptcy courts in the Fifth Circuit, interprets the provision to terminate the stay as to actions against the debtor but not as to actions against the bankruptcy estate.  The minority view, adopted by the First Circuit as a matter of first impression in the courts of appeals, "reads the provision to terminate the whole stay," concluding that the provision is ambiguous, and the legislative history evidences an intent for the provision to terminate the stay in its entirety.  See, e.g., In re Reswick, 446 B.R. 362, 371 (B.A.P. 9th Cir. 2011) (resorting to legislative history after determining the language in § 362(c)(3)(A) is ambiguous); Smith v. Me. Bureau of Revenue Servs., 590 B.R. 1, 9-10 (D. Me. 2018) (discussing how minority view courts examine the legislative history of the BAPCPA).

 

Here, the Fifth Circuit found no such ambiguities in § 362(c)(3)(A).  Read in conjunction with section 362 of the Bankruptcy Code, which defines the scope of the automatic stay, the Fifth Circuit noted that § 362(a)(1)-(3) operate as stays of actions in three distinct categories: against the debtor, the debtor's property, and property of the bankruptcy estate.  In re Smith, 910 F.3d at 580, citing § 362(a). 

 

Notably, § 362(c)(3)(A) provides that "the stay under [§ 362(a)] . . . shall terminate with respect to the debtor," and makes no mention of the bankruptcy estate.   Moreover, the next section, §362(c)(4)(A)(i), provides that the stay does not go into effect upon the filing of the later case for debtors who have had two or more cases pending in the prior year. 

 

The Fifth Circuit reasoned that Congress' use of a qualified in § 362(c)(3)(A) could only be interpreted as "impl[ying] a limitation upon the scope of the termination of the automatic stay."  See, e.g., In re Williford, No. 13-31738, 2013 WL 3772840, at *3 (Bankr. N.D. Tex. July 17, 2013) (discussing § 362(c)(4)(A)(i)'s language in relation to § 362(c)(3)(A)'s).  The Court further stated that its plain meaning interpretation does not substantially harm creditors, who can obtain judicial relief by motion under § 362(d) if a debtor is abusing the automatic stay.  In re Scott–Hood, 473 B.R. at 136 n.3.

 

Having determined that the plain language and statutory construction of § 362(c)(3)(A) does not terminate the automatic stay with respect to property of the bankruptcy estate, the Fifth Circuit applied this holding to the facts at bar. 

 

Here, Borrower argued that the statute of limitations began to accrue on March 26, 2014 when the Mortgagee mailed the first notice of acceleration, and thus expired on March 26, 2018.  Tex. Civ. P. & Rem. Code § 16.035(a).  However, under the interpretation of section 362(c)(3)(A) that the Court adopted, the statute of limitation was tolled for at least 269 days over the course of the Borrower's four bankruptcy proceedings, each of which was filed within one year of each other. 

 

Thus, because the Mortgagee's counterclaim for judicial foreclosure was filed within the 269-day tolling period (179 days after March 26, 2018), the statute of limitations was tolled and did not bar Mortgagee's claim for judicial foreclosure.

 

Accordingly, the trial court's entry of judgment of foreclosure in Mortgagee's favor and against Borrower for her quiet title claims was affirmed.

 

 

 

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

 

 

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FYI: 2nd Cir Holds False Claims Act Applies to Loans Made By the FRBs

The U.S. Court of Appeals for the Second Circuit recently held that the federal False Claims Act ("FCA") applies to persons who present false or fraudulent loan applications to Federal Reserve Banks because the latter are "agents of the United States" within the meaning of the FCA and the loan money is provided by the United States to advance a Government program or interest within the meaning of the FCA.

 

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

 

Two individuals (the "relators") who were former employees of a federally-chartered bank and a savings and loan association that were acquired in October 2006 by another federally-chartered bank, filed an action under the FCA in November 2011 alleging that the acquiring holding company and its federally-chartered bank presented fraudulent applications for emergency loans to several Federal Reserve Banks ("FRBs") that misrepresented their financial condition. The relators alleged they were terminated in 2006 because they questioned the allegedly illegal business practices of their employers.

 

In October of 2008, the acquired bank "requested billions of dollars in loans from two of the emergency lending facilities operated by the Fed: the Discount Window and the Term Auction Facility ('TAF')." Despite this, the bank could not "survive as a standalone entity," and it merged into the acquiring bank in December of 2008. The acquiring bank then borrowed "$15 billion in January 2009 and $30 billion in February 2009. … at an interest rate of 0.25%."

 

"The Discount Window is a standing facility through which the Fed makes short-term loans to depository institutions. … The terms of these loans depend on a borrower's financial condition[.]"

 

"The TAF was a temporary facility created by the Board on December 12, 2007, to increase liquidity in financial markets at the outset of the financial crisis. The program's goal was to address the reluctance of financial institutions to borrower from the Discount Window at that time. … Only firms in a generally sound condition are eligible to participate."

 

The defendants moved to dismiss and the trial court granted the motion, "holding that relators' complaint failed to allege false claims under the FCA." The relators appealed and the Second Circuit affirmed. The relators then "petitioned for certiorari and, the Supreme Court vacated [the Second Circuit's] decision … and remanded the case for further consideration …."

 

On remand, the Second Circuit "vacated the trial court's judgment and remanded the case 'for the trial court to determine, in the first instance, whether the relators have adequately alleged the materiality of the defendants' alleged misrepresentations.'"

 

On remand to the trial court, the relators amended their complaint and defendants again moved to dismiss. In May 2018, "the trial court granted the motion, holding that loan requests made to FRBs are not 'claims' within the meaning of the FCA because (1) FRBs are neither part of the government, nor agents of the government, and (2) the United States does not 'provide … the money … requested or demanded' by banks that borrow from the Fed's emergency lending facilities." The relators appealed again.

 

In the second appeal, the Second Circuit reviewed "the trial court's grant of defendants' Rule 12(b)(6) motion to dismiss de novo, 'accepting all factual claims in the complaint as true and drawing all reasonable inferences in the plaintiff's favor.'"

 

The Court explained that "the Fed is comprised of twelve FRBs, which are separately incorporated banks dispersed geographically throughout the country, and a Board, which is based in Washington, D.C. and is an independent agency within the executive branch."

 

Under the Federal Reserve Act ("FRA") and "regulations promulgated by the Board[,]" FRBs can extend credit at a preferred "'primary credit rate' as a backup source of funding to a depository institution … that is in generally sound financial condition,' … and at a higher, 'secondary credit rate' … to a depository institution that is not eligible for primary credit …."

 

"But the FRBs are not permitted to extend credit through the Discount Window to those institutions that are insolvent or to those that are borrowing for the purpose of lending to a person who is insolvent."

 

First, the Second Circuit discussed the FCA's background and statutory framework, explaining that the FCA was adopted as the result of congressional investigations into the sale of worthless or over-priced goods to the War Department during the Civil War. "The Act was passed in sum and substance 'to stop this plundering of the public treasury."

 

"[T]he FCA imposes liability on any person who either 'knowingly presents … a false or fraudulent claim for payment or approval,' … or 'knowingly makes … a false record or statement material to a false or fraudulent claim[.] … The term 'claim' means any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property, that— (i) is presented to an officer, employee, or agent of the United States; or (ii) is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government's behalf or to advance a Government program or interest …."

 

The Court then concluded that "[r]equests made to FRBs for loans from the Fed's emergency lending facilities are 'claim[s]' within the meaning of the False Claims Act[,]" reasoning that the statute's language "reflects a broad legislative purpose that is most faithfully effectuated by recognizing that the FCA applies, in some cases, to functional instrumentalities of the government and to agents pursuing its ends."

 

However, because the FCA "does not reach frauds directed at private entities that only incidentally lead to payments with money provided by the government[,]" the Court reasoned that "[t]he overarching question in this case, therefore, is whether a fraudulent loan request made to one of the FRBs is an effort to defraud a private entity or an effort to defraud the United States. … The specific questions are whether (1) FRB personnel are 'officer[s]' or 'employee[s]' … of the United States … ; (2) the FRBs, in operating the Fed's emergency lending facilities, are 'agent[s] of the United States' …; or (3) fraudulent loan requests knowingly presented to one or more of the FRBs are 'claim[s]' under the FCA because the 'money … requested' is 'provided' by the United States …."

 

Addressing each question in turn, the Second Circuit first concluded that "FRB personnel are not 'officer[s]' or 'employee[s] … of the United States' within the meaning of § 3729(b)(2)(A)(i)" because "[t]he FRBs are not part of any executive department or agency … [n]or do they have the authority to promulgate regulations with the force and effect of law. Instead, they are corporations … that operate 'under the supervision and control of a board of directors,' which 'shall perform the duties usually appertaining to the office of directors of banking associations.'" The Court thus "agree[d] with defendants that fraudulent loan requests made to the FRBs do not qualify as claims under the first clause of § 3729(b)(2)(A)(i)."

 

Turning to the second question, the Court concluded that "the alleged fraudulent loan applications [were] nonetheless 'claims' under the FCA [because] the FRBs act as 'agents of the United States' under § 3729(b)(2)(A)(i) when operating the Fed's emergency lending facilities." The Court cautioned, however that it did so "on a narrow reading where we confine ourselves to only to the circumstances at hand, which require use to determine the meaning of the FCA in the context of extending emergency credit."

 

In light of the purpose of the FCA, the Second Circuit saw "no reason to depart from the plain meaning of the phrase 'agent of the United States' [because] … [f]raud during a national emergency against entities established by the government to address that emergency by lending and spending billions of dollars is precisely the sort of fraud that Congress meant to deter when it enacted the FCA."

 

Turning to the third question, the Court also concluded that "the alleged fraudulent loan applications are 'claims' under the FCA because the United States 'provides' the money 'requested' by borrowers from the Fed's emergency lending facilities within the meaning of § 3729(b)(2)(A)(ii) and the money requested is to be spent to advance a Government program or interest."

 

The Second Circuit rejected the argument of amici and defendants that "the Fed's emergency lending facilities do not qualify as money requested or demanded by the U.S. because the FRBs are not funded by the United States Treasury[,]" reasoning that "the FCA nowhere limits liability to requests involving 'Treasury Funds.' … The text of the FCA is deliberately broad, including 'any request or demand … for money or property … whether or not the United States has title to the money or property,' as long as 'the United States Government … provides or has provided any portion of the money or property requested or demanded.'"

 

The Court found that the government provided the money because "the FRBs are the issuers of base money. They do not lend out preexisting funds; they create 'funds' in the most elemental sense. They perform this function on behalf of the United States, as federal instrumentalities. When banks request loans from the FRBs, the FRBs extend those loans by increasing these reserves. …These new reserves are created ex nihilo, at a keystroke. They are promises by the FRBs to pay Federal Reserve notes (dollar bills) to the banks on demand. … The FRBs' promises to pay notes serve as money or legal tender because they must be accepted by the Treasury and by other banks as payment. … Had Congress not delegated this power to the Fed, the FRBs would be unable to extend the loans at issue in this case. And we see no reason why Congress's decision to separate the FRBs from the Board and the Board from the Treasury Department should alter our conclusion that the United States is the source of the purchasing power conferred on the banks when they borrow from the Fed's emergency lending facilities."

 

The Second Circuit reasoned that "[t]he loans in this case are also money provided by the United States in a further sense. The Board puts Federal reserve notes into circulation by supplying them to the FRBs, which are the actual direct issuers. … Thus, when banks like [the defendant and the bank it acquired by merger] withdraw the proceeds of loans requested from (and extended by) the FRBs, the banks quite literally receive money 'provided' by the Board, i.e., money made available and/or supplied by the United States."

 

Accordingly, the Court "disagree[d] with the trial court that fraudulent loan requests made to the FRBs do not qualify as claims under § 3729(b)(2)(A)(ii)(I)" of the FCA, vacated the lower court judgment, and remanded the case for further proceedings.

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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FYI: 7th Cir Reduces Punitive Damage Award Against Mortgage Servicer by Over 80%

The U.S. Court of Appeals for the Seventh Circuit recently reversed as excessive a jury's award of $3,000,0000 in punitive damages against a mortgage servicer for inadequate recordkeeping, misapplication of payments, and poor customer service.

 

However, the Court affirmed the jury's award of $582,000 in compensatory damages and remanded the case to the trial court with instructions to reduce the punitive damages award to $582,000, a 1:1 ratio of compensatory to punitive damages.

 

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

 

A borrower filed a Chapter 13 bankruptcy case and complied with the reorganization plan by curing her mortgage default and making 42 monthly payments. The loan servicer provided her with statements showing she was not only current, but had actually paid more than what was required. Accordingly, the bankruptcy court granted her a discharge.

 

Unfortunately, despite this, the servicer tried to collect money that was not actually owed after the bankruptcy discharge.

 

One problem was that an employee mistakenly treated the discharge as a dismissal of the bankruptcy case, which meant that the bankruptcy stay had been lifted and no obstacle remained to collecting the borrower's allegedly delinquent amount owed.

 

Another problem was that the servicer "manually set the due date for [debtor's] plan payments to September 2013. … That manual setting took place in a bankruptcy module that overrode and hid [the servicer's] active foreclosure module, which instead reflected that [the debtor] had not made a single valid payment in 2013, as each check was being placed into a suspense account and not being applied to the loan." By incorrectly treating the bankruptcy discharge as a dismissal, the foreclosure module was re-activated. If this had not occurred, "then someone in [the servicer's] bankruptcy department would have reconciled the plan payments with the suspense accounts before closing both modules."

 

The borrower repeatedly provided paperwork showing she was current and requested an explanation. The servicer maintained its position and refused to provide an explanation.

 

The servicer began rejecting the borrower's payments in September of 2013 "because each payment was not enough to cure her supposed default." It also filed a foreclosure action in state court.

 

The borrower filed suit in federal court, seeking "damages under four legal theories: breach of contract, for the refused payments; the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692, for the false collection letters; the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. § 2601, for the inadequate responses to [debtor's] inquires; and the [Illinois Consumer Fraud and Deceptive Business Practices Act (ICFA)]."

 

The state UDAP claim "related to [the servicer's] false oral and written statements regarding [debtor's] default and its unfair practices in violation of consent decrees that [the servicer] previously had entered with various regulatory bodies. These decrees addressed, among other things, its inadequate recordkeeping, misapplication of payments, and poor customer service. Among the steps [the servicer] had consented to take was to track Chapter 13 plan payments accurately and to reconcile its accounts on discharge or dismissal."

 

The case went to trial and the jury awarded the debtor "substantial damages for the pain, frustration, and emotional torment [the servicer] put her through." Specifically, the jury awarded "$500,000 in compensatory damages based on three causes of action that could not support punitive damages" and $3,000,000 in punitive damages plus an additional $82,000 in compensatory damages under the ICFA.

 

The servicer filed three post-trial motions. "The first, a motion for new trial, objected to the admission of the consent decrees. The second, a request for judgment as a matter of law, challenged the sufficiency of the evidence on every count other than the FDCPA claim[, arguing that] that the award of punitive damages was not supported by sufficient evidence. The third motion, to amend the judgment, argued that the punitive damage amount was excessive, in violation of the Due Process Clause."

 

The trial court denied all three motions.

 

On appeal to the Seventh Circuit, the servicer challenged only the punitive damages award, which it argued was "so large that it deprives the company of property without due process of law."

 

The Appellate Court first addressed the servicer's "argument that there was insufficient evidence for the jury to award punitive damages at all[,]" explaining that "[u]nder Illinois law, punitive damages may be awarded only if 'the defendant's tortious conduct evinces a high degree of moral culpability, that is, when the tort is 'committed with fraud, actual malice, deliberate violence or oppression, or when the defendant acts willfully, or with such gross negligence as to indicate a wanton disregard of the rights of others.' … When the defendant is a corporation, … the plaintiff must demonstrate also that the corporation itself was complicit in its employees' tortious acts."

 

The Seventh Circuit rejected the servicer's argument, finding that "[w]e are not sure how many  human errors a company like [the servicer] gets before a jury can reasonably infer a conscious disregard of a person's rights, but we are certain [the servicer] passed it."

 

This is because the servicer "still has offered no real explanation for any of the errors its employees made, and never acted to correct its mistakes. This 'unwilling[ness] to take steps to determine what occurred' warranted punitive damages under the ICFA. The utter lack of explanation also supports a finding of corporate complicity" because it amounted to the company's ratification of its employees' errors and refusal to correct them. "The jury was not required to accept [the servicer's] bare assertion that this was a unique case — especially considering the consent decrees implying it was not — and could have inferred that this is just how [the servicer] does business. For that Illinois law permits punitive damages."

 

Turning to the servicer's argument that the punitive damages award was unconstitutionally excessive, the Seventh Circuit reasoned that while the federal constitution was the outer limit on a state court's award of punitive damages, "[a] federal court, however, can (and should) reduce a punitive damages award sometime before it reaches the outermost limits of due process."

 

The Court then embarked upon an "[e]xacting de novo review of the jury's award, in which [it] consider[ed] three guideposts: the degree of reprehensibility, the disparity between the harm suffered and the damages awarded, and the difference between the award and comparable civil penalties."

 

After reviewing each guidepost, the Seventh Circuit concluded that "the $3,000,000 awarded here exceeds constitutional limits and must be reduced to $582,000." "The number of opportunities [the servicer] had to fix its mistakes is the core fact that justifies punishment in this case." In addition, the Court found that the servicer's actions were more than negligent, they amounted to "reckless indifference" to the borrower's rights, "including those rights that originated from her bankruptcy."

 

However, $3,000,000 was too much because although the servicer's "conduct was reprehensible, [it was] not to an extreme degree. It caused no physical injuries and did not reflect an indifference to [the debtor's] health or safety." Also, the Court found that there was no evidence that that servicer "was acting maliciously, though the number of squandered chances it had to correct its mistakes comes close. These factors then point toward a substantial punitive damages award, but not one even approaching the $3,000,000 awarded here."

 

The Seventh Circuit then turned to address the "disparity between the harm to the plaintiff and the punitive damages awarded. … This guidepost is often represented as a ratio between the compensatory and punitive damages awards."

 

Although the Supreme Court of the United States has not provided strict rules clarifying how to calculate this ratio, it has provided general guidelines, including that "few awards exceeding a single-digit ratio 'to a significant degree' will satisfy due process. … Second, the ratio is flexible. Higher ratios may be appropriate when there are only small damages, and conversely, '[w]hen compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit.' … Third, the ratio should not be confined to actual harm, but also can consider potential harm."

 

Applying these factors, reasoned that "$582,000 is a considerable compensatory award for the indifferent, not malicious, mistreatment of a single $135,000 mortgage. Moreover, nearly all this award reflects emotional distress damages that 'already contain [a] punitive element.' … A ratio relative to this denominator, then, should not exceed 1:1."

 

Analyzing the final "guidepost," "the disparity between the award and 'civil penalties authorized or imposed in comparable cases[,]'" the Court agreed with the servicer that the "$50,000 monetary penalty authorized by the ICFA" could not support a punitive damages award of $3,000,000 because the servicer's "actions are not so reprehensible that they might justify an award equal to the maximum penalty for  60 intentional violations. Notably, we see no evidence that [the servicer's] action in this case were either intentional or fraudulent, only indifferent. This aspect of the guidepost thus points to a lower award."

 

Finally, the Seventh Circuit agreed the trial court correctly considered the possibility that the servicer could lose its license to service mortgages under the Illinois Residential Mortgage License Act (RMLA). First, it reasoned that "the ICFA too, allows, the attorney general to seek 'revocation, forfeiture or suspension of any licenses … of any person to do business,' … and though that may give way here to the more specific provisions of the RMLA, that law allows revocation of licenses for violation of 'any … law, rule or regulation of [Illinois] or the United States,' … presumably including the ICFA as well as RESPA."

 

Second, the Court reasoned that while Illinois is not likely to take away [the servicer's] business license for deceptively saying one customer owes a few thousand dollars on a $135,000 mortgage, no matter how unjustified the error[,] … like a criminal penalty, this weapon in Illinois's arsenal has 'bearing on the seriousness with which a State views the wrongful action.' … This seriousness would be exaggerated by comparing the award here with the loss of [the servicer's] license but would be unduly minimized by limiting an award to only the $50,000 civil penalty."

 

The Court concluded that after "[c]onsidering all the factors together, we are convinced that the maximum permissible punitive damages award is $582,000. An award of this size punishes [the servicer's] atrocious recordkeeping and service of [borrower's] loan without equating its indifference to intentional malice. It reflects a 1:1 ratio relative to the large total compensatory award and a roughly 7:1 ratio relative to the $82,000 awarded on the ICFA claim alone, both of which are consistent with the Supreme Court's guidance in [State Farm Mut. Auto Ins. Co. v.] Campbell. It is equivalent to the maximum punishment for less than 12, not 60, intentional violations of the ICFA, though it is also a miniscule amount compared to the value of [servicer's] business license."

 

On the final issue presented, "whether the Seventh Amendment mandates an offer of a new trial after determining the constitutional limit on the punitive damages award[,]" the Court "agree[d] with every circuit to address this question that the constitutional limit of a punitive damage award is a question of law not within the province of the jury, and thus a court is empowered to decide the maximum permissible amount without offering a new trial."

 

The Seventh Circuit accordingly remanded the case to the trial court "to amend its judgment and reduce the punitive damages award to $582,000."

 

 

 

 

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.

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