FYI: Cal App Ct (1st Dist) Rejects Servicer's Attempt to Condition Reinstatement on Payment of Deferred Amounts

The Court of Appeal of the State of California, First Appellate District, recently held that California Civil Code § 2924c permits a borrower to reinstate a modified home mortgage loan by paying only the past due modified payments and associated fees and charges, and that a servicer cannot lawfully condition reinstatement of a loan on the payment of amounts that were deferred in the loan modification.  

 

In so ruling, the Appellate Court rejected the servicer's argument that the loan modification agreement allowed it to nullify the modification upon the borrower's default and to require payment of the earlier default according to the original terms.

 

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

 

The borrowers (Borrowers) obtained a loan modification that adjusted the principal balance, reduced the interest rate and monthly payments, and deferred accrued and unpaid interest and principal, fees, and foreclosure expenses. 

 

The modification provided that failure to make modified payments as scheduled would be an event of default, the modification would be null and void at the lender's option, and the lender would have the right to enforce the loan according to the original terms.

 

The servicer (Servicer) recorded a notice of default stating that the borrowers would have to pay the four missed monthly payments and associated late charges and fees, plus all the sums that had previously been deferred under the loan modification, in order to avoid foreclosure.

 

The Borrowers asserted four causes of action against the Servicer: violation of California Civil Code § 2924c, violation of California Business and Professions Code § 17200, et seq. (UCL), breach of contract, and breach of the covenant of good faith and fair dealing. 

 

The trial court granted the Servicer's motion for summary judgment and denied the Borrowers' cross-motion for partial summary judgment. 

 

The Borrowers appealed the trial court's grant of summary judgment to the Servicer on their causes of action for violation of section 2924c and the UCL.

 

As you may recall, section 2924c(a)(1) provides that when a mortgage loan is accelerated as a result of a homeowner's default, the homeowner can reinstate the loan by paying all amounts due, "other than the portion of principal as would not then be due had no default occurred."  

 

In other words, the homeowner can cure the default and reinstate his or her loan by paying the amount of the default, including fees and costs resulting from the default, rather than the entire accelerated balance. 

 

The Borrowers argued that under section 2924c, the Servicer "could not lawfully condition reinstatement of their loan on the payment of amounts that were deferred in the loan modification."  They argued that requiring them to pay the deferred balance, instead of just the missed payments plus costs, "essentially requires them to waive their right of reinstatement with respect to the modified loan."

 

The Servicer argued that the loan modification gave it the option to enforce the original loan terms if the Borrowers defaulted on the modified loan, and because the under the original loan pre-modification the deferred amounts were due and owing, the deferred amounts could properly be required as a condition of reinstatement under section 2924c.b

 

The Appellate Court began its analysis by observing that the default was the failure to make payments on the modified loan.  Section 2924c gave the Borrowers the opportunity to cure their precipitating default by making up those missed payments and paying the associated fees and charges. 

 

In the Appellate Court's view, demanding the deferred amounts after the loan was modified meant that the Borrowers would have been in default throughout the term of the modified loan even if they timely made every required monthly payment. 

 

If the Borrowers had made all of their modified payments, as the Appellate Court explained, the Servicer could not have claimed the deferred amounts until the end of the loan. 

 

Thus, the Appellate Court concluded that the Servicer failed to demonstrate that the Borrowers could not prevail on their claim that Servicer violated section 2924c, and the trial court erred in granting summary judgment to the Lender on this claim.

 

Because the Servicer "failed to show that its conduct was consistent with section 2924c," the Appellate Court also held it was an error to grant summary judgment on the UCL cause of action predicated on the violation of section 2924c.

 

Accordingly, the Appellate Court reversed the judgment and 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

 

 

 

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FYI: NJ Sup Ct Holds Invalidity of Transaction as a Whole Does Not Negate Arbitration Agreement

The Supreme Court of New Jersey held that where a plaintiff challenges the validity of a transaction as a whole and not specifically the arbitration agreement that is included as part of a transaction, the plaintiff must arbitrate their claims because an arbitration agreement is severable and enforceable, notwithstanding a plaintiff's general claims about the invalidity of the transaction as a whole.

 

Accordingly, the judgment of the appellate court was reversed and the trial court orders compelling arbitration were reinstated.

 

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

 

The plaintiffs ("Plaintiffs") each purchased cars from the defendant car dealerships ("Dealerships").  As part of their purchases, the Plaintiffs each signed several agreements (collectively, "Sales Contracts"), including an arbitration agreement ("Arbitration Agreements"). 

 

The Arbitration Agreements provided that "[i]f either you or we file a lawsuit . . . or other action in a court, the other party has the absolute right to demand arbitration following the filing of such action."  They further provided that "[t]his agreement applies to all claims and disputes between you and us."

 

Following the sales, Plaintiffs brought separate lawsuits against the respective Dealerships, each alleging that the Dealerships engaged in deceptive and unconscionable practices, including misrepresentations and concealment in the buying process.  Based on the alleged wrongful conduct, Plaintiffs asserted claims under New Jersey consumer fraud statutes, the federal Truth in Lending Act, and for common law fraud.

 

After the Dealerships moved to dismiss each case and compel arbitration, the trial courts granted the motions and ordered arbitration.

 

Plaintiffs appealed and the appellate court consolidated the cases.  The appellate court then reversed the orders of the trial courts.  In reaching its decision, the appellate court applied the summary judgment review standard to the motions to compel arbitration and concluded that under the Third Circuit's ruling in Guidotti v. Legal Helpers Debt Resolution, L.L.C., 716 F.3d 764 (3d Cir. 2013), the trial courts should have conducted an evidentiary hearing to resolve, as a threshold issue, whether the parties entered into an enforceable contract. 

 

The New Jersey Supreme Court then granted the Dealerships' petitions for certification. 

 

The central issue before the New Jersey Supreme Court was "whether plaintiffs should be compelled to address their claims before an arbitrator."

 

Plaintiffs argued that because their Sales Contracts were invalid, either in the formation or because they were effectively rescinded through the contract's cancellation, then the Arbitration Agreements also could not be enforced because they were part of the overall invalid Sales Contracts.

 

The Dealerships argued that the question of the enforceability of the Arbitration Agreements was a question for the arbitrator to decide and not the courts because the Plaintiffs did not issue a challenge specifically to the arbitration provisions.

 

In analyzing the issue, the New Jersey Supreme Court noted that "[i]n applying the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1 to 16, the United States Supreme Court has provided substantial guidance on the question of whether arbitration should be compelled in situations such as we address in this case."

 

Moreover, "New Jersey case law acknowledges the preeminence of the national policy established by Congress through the FAA as well as the Supreme Court's holdings interpreting and implementing that policy." 

 

Thus, "we look to the Supreme Court's decisions to guide us in the enforcement of arbitration agreements according to their terms."

 

First, the New Jersey Supreme Court reviewed the decision in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S. Ct. 1801 (1967), wherein the Supreme Court of the United States ("SCOTUS") "held that when a plaintiff raises a claim of fraud in the inducement of a contract as a whole – rather than fraud in the making of the arbitration agreement itself – the FAA requires that the dispute be resolved by the arbitrator." 

 

SCOTUS's determination in Prima Paint "recognized that arbitration agreements are severable from the rest of the contract and that the arbitration agreement may be valid separate and apart from the contract as a whole, provided that a party has not challenged the arbitration agreement itself." 

 

Further, "[SCOTUS] reaffirmed the Prima Paint rule more recently in" Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 126 S. Ct. 1204 (2006) and Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 130 S. Ct. 2772 (2010).

 

The New Jersey Supreme Court noted that "Plaintiffs do not dispute the validity of the arbitration agreement itself nor do they dispute the delegation provision within it that delegates the question of arbitrability to the arbitrator." 

 

Instead, "they have continuously maintained that the contract was the product of fraudulent inducement and that the arbitration agreement – within that sales contract – is thus also invalid."

 

Thus, based on SCOTUS precedent, the New Jersey Supreme Court had "no doubt that the arbitration agreements in plaintiffs' contracts . . . are entitled to enforcement."

 

Further, "the argument that either plaintiff did not understand the import of the arbitration agreement and did not have it explained to her by the dealership is simply inadequate to avoid enforcement of these clear and conspicuous arbitration agreements that each signed."

 

Accordingly, the New Jersey Supreme Court held that the Plaintiffs "must arbitrate their claims as to the enforceability of the overall sales contract," as well as "their various statutory and common law claims." 

 

Moreover, "because plaintiffs here challenge the contract as a whole rather than the arbitration agreement itself, we hold that the Guidotti summary judgment standard does not apply in this instance."

 

 

 

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 Reverses Dismissal in Short-Term Cash Advance Class Action Involving Two Definitions of "APR"

The U.S. Court of Appeals for the Sixth Circuit recently reversed the dismissal of a breach of contract claim in a putative class action involving short-term cash advance loans, finding that the contract at issue was ambiguous because it provided two inconsistent definitions of "annual percentage rate ("APR")" that could not be reconciled.

 

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

 

The defendant bank ("Bank") created a short-term cash advance program for eligible customers who held checking accounts with Bank.  Specifically, Bank would deposit loans up to $1,000.00 directly into customers' accounts, and Bank would then automatically pay itself back along with a 10% transaction fee, after a customer's direct deposit posted or thirty-five days (35) passed, whichever occurred first (the "Program"). 

 

The Program's governing contract (the "Contract") disclosed the Program's APR as one hundred and twenty percent (120%) in all cases. 

 

The plaintiff borrowers ("Borrowers") held checking accounts with Bank and obtained loans through the Program, which they paid back in less than thirty days after receiving their respective loans. 

 

Borrowers proceeded to file a putative class action against Bank asserting, among other things, claims for breach of contract and violations of the federal Truth in Lending Act, 15 U.S.C. § 1601 ("TILA").  In support of their breach of contract claim, Borrowers alleged that Bank breached the terms of the Contract "by charging [Borrowers] and the other [c]lass members APRs in excess of 120% on Early Access Loans," and "by failing to provide an accurate APR summary for Early Access Loans on monthly bank statements."

 

Bank subsequently moved to dismiss Borrowers' complaint, which the trial court granted in part and dismissed their breach of contract claim.  In dismissing the breach of contract claim, the trial court held that the Contract "unambiguously disclosed the method for calculating APR despite admitting that the result 'may be misleading.'"

 

Borrowers thereby filed a motion for reconsideration, which the trial court denied without prejudice due to ongoing settlement negotiations.  However, settlement negotiations subsequently stalled, leading Borrowers to move for an entry of final judgment as to their dismissed breach of contract.  The trial court granted Borrowers' motion, certified the breach of contract claim for entry of a final judgment, and stayed the remainder of the litigation pending the instant appeal. 

 

After addressing various procedural arguments not relevant here, the Sixth Circuit reviewed whether the trial court correctly dismissed Borrowers' breach of contract claim.

 

Borrowers argued that Bank breached the Contract "by charging them APRs in excess of 120% on Early Access Loans" while Bank disagreed contending it adhered to the Contract's definition of APR. 

 

As a result, the Court examined the Contract's definition of APR and concluded the Contract defined APR in two separate ways.  First, the Contract stated that "APR is a measure of the cost of credit, expressed as a yearly rate," as the term APR is defined by Regulation Z (the "APR Definition").  See 12 C.F.R. § 226.14(a). 

 

However, the Contract separately provides a formula (the "APR Formula") whereby "[t]he Annual Percentage Rate is calculated by dividing the transaction fee by the Advance amount and multiplying the quotient by the number of statement cycles within a year…[f]or example, $100 Advance with a $10 transaction fee = $10/$100 = 0.1% X 12 cycles = 120% APR."

 

Borrowers argued the APR Definition and the APR Formula were inconsistent because the APR Formula could not produce an APR expressed as a yearly rate as required by the APR Definition.  Rather, Borrowers argued, the APR Formula produces an APR of 120% no matter the length of the loan meaning "it is untethered to a year or any other time period." 

 

The Sixth Circuit determined the APR Formula to be static, "and always the same regardless of the length of the loan."  Thus, the Court determined that any APR produced using the APR Formula could not be "expressed as a yearly rate."  Indeed, the Court noted the APR Definition could never be consistent with the APR Formula.

 

Bank separately urged the Court to find the Contract to be unambiguous as a matter of law because the Contract "unambiguously provided for a flat transaction fee of 10 percent" and the "calculation of the APR merely reflected, and did not change, the flat transaction fee."  The Sixth Circuit rejected this argument explaining it would require the Court to incorrectly ignore "the contract's definition of APR as 'a measure of the cost of credit, expressed as a yearly rate.'"

 

Because the APR Definition and APR Formula found in the Contract were inconsistent with each other and could not be reconciled, the Sixth Circuit found the Contract to be ambiguous raising a question of fact to be resolved by the trial court on remand.  See e.g., Roth Steel Prods. v. Sharon Steel Corp., 705 F.2d 134, 153–54 (6th Cir. 1983).

 

Accordingly, the Sixth Circuit reversed the trial court's judgment dismissing Borrowers' breach of contract claim and remanded the matter "for further proceedings consistent with this opinion."

 

 

 

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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