FYI: 11th Cir Reverses Trial Court's Use of Fee Multiplier in Fee-Shifting Case

In a class action arising from a data breach at a retailer that resulted in the theft of millions of consumers' credit card information, the U.S Court of Appeals for the Eleventh Circuit recently held that the fee arrangement included as part of the settlement was a fee-shifting contract and the constructive common fund doctrine did not apply, reversing as an abuse of discretion the trial court's use of a fee multiplier in a fee-shifting case.

 

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

 

A class of banks sued a retailer after a data breach in 2014 to recover their losses resulting from the theft of the credit card information for "tens of millions" of consumers.

 

The case settled and as part of the settlement, the retailer agreed that the reasonable attorney's fees of the class counsel "would be paid separate from and in addition to the class fund, but the parties left the amount of those fees undetermined."

 

The trial court awarded $15.2 million in fees using the lodestar method, finding the class counsel's hours to be reasonable and applying a multiplier of 1.3 to account for the risk the case presented. The trial court also compared this amount to an award using the percentage method "as a cross-check to ensure the amount of fees was reasonable."

 

The retailer appealed, arguing that the trial curt "abused its discretion by applying a multiplier and by compensating Class Counsel for certain time spent … litigating about a private dispute resolution process."  The class counsel cross-appealed, arguing that the trial court incorrectly "conducted the percentage cross-check."

 

The Eleventh Circuit began by explaining that the "main issue underlying the appeal is whether the fee arrangement outlined in the settlement should be characterized as a constructive common fund or as a fee-shifting contract. We hold that this is a contractual fee-shifting case, and the constructive common-fund doctrine does not apply." 

 

The Court then engaged in a "thorough review of the facts" because "[d]isputes over attorney's fees are fact-intensive inquiries."

 

The data breach occurred in 2014 when hackers installed malware on the retailer's self-checkout kiosks. The hackers then offered the credit card information "for sale on a black-market website." Soon thereafter consumers began reporting fraudulent transactions on their credit cards.

 

Consumers and banks "filed over 50 class actions" which were consolidated in the U.S. District Court for the Northern District of Georgia, "where the District Court split the litigation into two tracks: one for consumers and one for the banks." This appeal before the Eleventh Circuit arose from the bank track.

 

The banks' consolidated complaint included claims for negligence, negligence per se, and "for violations of state consumer-protection statutes on behalf of eight state-specific subclasses[,]" alleging that as the result of the retailer's failure to "secure its data[,]" the banks were "forced to cancel the reissue the compromised cards, investigate claims of fraudulent activity, and reimburse customers for fraudulent charges (among other things)." The bank class sought monetary damages for the cost of these responses, as well as declaratory and injunctive relief to force the retailer to improve its security measures.

 

After denying in part the retailer's motion to dismiss the complaint, the parties engaged in discovery. While the case progressed, the banks, the retailer, and the credit card brands (e.g., Visa and Mastercard) entered into "the card-brand recovery process[,] which the Court described as essentially a private dispute resolution arrangement based on contracts with merchants (like the retailer) that outline the terms for accepting credit and debit cards as payment.

 

The Court described the card-brand recovery process as follows: Visa and Mastercard contract with banks "that issue their branded cards to customers. In turn, the banks have contracts with the merchants who accept cards as payment. These contracts include regulations for protecting payment-card data against the threat of a data breach [and] also establish procedures for merchants to reimburse the banks for losses in the event that card information is compromised in a data breach."

 

After going through the process, Visa and Mastercard together assessed $120 million against the retailer to be paid to banks.  The retailer Depot agreed "to pay the full amount plus a premium … in exchange for the banks releasing their claims against" the retailer.

 

The larger banks, the retailer, Visa and Mastercard achieved a settlement where the retailer would pay the full amount of the assessment, plus about a 10% premium payable to the banks that release their claims.

 

Class counsel objected to the proposed deal, accusing the retailer of improperly offering "misleading and coercive" releases without the court's permission. "Specifically, the offers did not say how much the banks would receive from the settlement or whether the banks would still receive their share of the assessments even if they did not agree to the settlement."  Accordingly, class counsel filed a motion "to vacate the releases, to send curative notices to class members, and to protect class members from misleading settlement attempts going forward."

 

The trial court found "that the release offers were misleading and coercive[,]" but did not vacate the releases, instead allowing "Class Counsel to pursue discovery relating to the release offers."

 

After a flurry of discovery disputes and motions, the trial curt "stayed discovery pending settlement negotiations."

 

Eventually, most of the larger banks representing 70-80% of the compromised payment cards accepted the releases, and the retailer "paid these banks a total of $14.5 million (a premium on top of the $120 million in assessments)."

 

The parties returned to the litigation and engaged in 3 rounds of mediation, which resulted in a proposed settlement agreement that was presented for the trial court's approval.

 

The proposed class definition excluded "those banks that released their claims against [the retailer] by accepting the release offers[,]" but included "smaller banks who did not contract directly with the card brands[.]" The smaller banks were not excluded from the class "because Class Counsel contest[ed] the validity of their releases…."

 

The retailer also "agreed to pay $25 million into a settlement fund" to "be used to pay any taxes due and to pay any service awards to class representatives", and the remainder of the fund would be distributed to class members who had not released their claims."  The retailer also "agreed to pay up to $2.25 million to some of the smaller banks," "to adopt security measures to protect its data[,]" and to "pay the 'reasonable attorneys' fees, costs and expenses' of Class Counsel." The attorney's fees would not be paid "from the 25 million set aside for class members."

 

The trial court approved the settlement agreement and reserved ruling on the amount of attorney's fees. The parties then bitterly contested which method should be used, "the percentage method or the lodestar method." Under the percentage method, "courts award counsel a percentage of the class benefit[,] [which] generally includes any benefits resulting from the litigation that go to the class. In the Eleventh Circuit, "courts typically award between 20-30%, known as the benchmark range."

 

"Under the lodestar method, courts determine attorney's fees based on the product of the reasonable hours spent on the case and a reasonable hourly rate. … The product is known as the lodestar. Sometimes courts apply to the lodestar a multiplier, also known as an enhancement or an upward adjustment, to reward counsel on top of their hourly rates."

 

Class Counsel argued that the trial court "had discretion to choose either the lodestar or the percentage method" and "requested $18 million in fees."  The retailer on the other hand argued that the trial court "had to use the lodestar method, and based on its calculations, a reasonable fee would be about $5.6 million."

 

After a hearing, the trail court adopted the lodestar approach, awarding about $11.7 million, and then applied "the same multiplier used in the consumer-track settlement, 1.3, to arrive at a reasonable fee of $15.2 million." The trial court also "employed the percentage method as a cross-check on the lodestar."  The parties agreed that "the class benefit should include the $5 million settlement fund, the $2.25 million [the retailer] agreed to pay to some smaller banks", and $710,000 in expenses.

 

The trial court agreed with class counsel's argument that the class benefit should include the $14.5 million premiums that the retailer paid to banks in exchange for releases as part of the card-brand recovery process, "finding that they were 'substantially motivated by the pendency of this litigation.'"

 

The trial court refused to "include any attorney's fees in the class benefit, because this was not a 'true common fund analysis.'" In sum, the total "class benefit equaled about $42.5 million." Because "an attorney's fee of $15.3 million is slightly more than a third of the class benefit," the trial court "concluded that the percentage crosscheck supported the reasonableness of the fee award."

 

The retailer appealed the attorney's fee award, arguing first that it was an abuse of discretion for the trial court to apply a multiplier. The retailer also argued that "it was an abuse of discretion to compensate Class Counsel for time spent litigating about the card-brand recovery process."  In addition, the retailer argued that "it was an abuse of discretion to compensate Class Counsel for time spent soliciting class representatives."  Lastly, the retailer argued that the trial court's order improperly "fails to provide sufficient detail for meaningful appellate review."

 

Class Counsel cross-appealed, arguing that if the retailer's appeal was successful and the case remanded, the trial court should "include attorney's fees in the class benefit when it performs the percentage method—either as a cross-check or in the first instance."

 

Before addressing the four arguments raised by the retailer, the Eleventh Circuit addressed the "preliminary question on which much of the subsequent analysis turns: whether this is a common fund or fee-shifting case."

 

The Court first explained the so-called traditional "American Rule" under which "[e]ach litigant pays his own attorney's fees, win or lose, unless a statute or contract provides otherwise." However, "[t]here are three exceptions to the American Rule: (1) when a statute grants courts the authority to direct the losing party to pay attorney's fees; (2) when the parties agree in a contract that one party will pay attorney's fees; and (3) when a court orders one party to pay attorney's fees for acting in bad faith. … These exceptions—when on party pays for the other's attorney's fees—describe fee-shifting cases."

 

The Court then reasoned that although some courts, including the Eleventh Circuit, "have described common-fund cases as an exception to the American Rule[,] … [t]hat is incorrect."

 

"A common-fund case is when 'a lawyer who recovers a common fund for the benefit of persons other than himself or his client is entitled to a reasonable attorney's fee from the fund as a whole. … This is typical in class actions … [and] [c]ommon fund cases are consistent with the American Rule, because the attorney's fees come from the fund, which belongs to the class. In this way, the client, not the losing party, pays the attorney's fees."

 

The, the Eleventh Circuit noted, "the key distinction between common-fund and fee-shifting cases is whether the attorney's fees are paid by the client (as in common-fund cases) or by the other party (as in fee-shifting cases)."  After applying this standard, the Court concluded that it was dealing with "a fee-shifting case."

 

First, the Eleventh Circuit noted, the settlement agreement provides that the retailer "will pay the attorney's fees. … Even more explicit, the agreement goes on to state that '[a]ny award of attorney's fees, costs and expenses shall be paid separate from and in addition to the Settlement Fund.' That sounds like fee shifting."

 

The Court rejected Class Counsel's argument that the fee-shifting arrangement in the settlement agreement should be treated "as a constructive common fund[,]" explaining that although "courts will often classify the fee arrangement as a 'constructive common fund' that is governed by common-fund principles even when the agreement states that fees will be paid separately[,] … [b]ased on a proper understanding of the doctrine of constructive common funds, we find that it does not apply to this case."

 

This, the Eleventh Circuit held, is because "the rationale for the constructive common fund is that the defendant negotiated the payment to the class and the payment to counsel as a 'package deal.'.. But this package-deal reasoning does not apply here. Put simply, there was no package: [the retailer] did not negotiate the attorney's fees simultaneously with the settlement fund. The fees were left entirely to the District Court's discretion."

 

The Court held "that the constructive common fund does not apply when the agreement provides that attorney's fees will be paid by the defendant separately from the settlement fund, and the amount of those fees is left completely undetermined. We construe the settlement agreement here as a fee-shifting arrangement."

 

Turning to the issues raised on appeal by the retailer, first, the Eleventh Circuit agreed with the retailer's argument "that it was error for the District Court to enhance Class Counsel's lodestar based on risk."  After reviewing the precedent from the Supreme Court of the United States dealing with statutory fee-shifting cases decreeing that "courts could not use a multiplier in statutory fee-shifting cases to account for risk," the Court considered whether those precedents applied in "a contractual fee-shifting arrangement", concluding that the Supreme Court's "prohibition on enhancements for risk applies to contractual fee-shifting cases when courts use the lodestar method.

 

Thus, the Eleventh Circuit held that the trial court "abused its discretion in applying a multiplier on the basis of the 'exceptional risk that class counsel took in litigating this case.'"

 

Turning to the second issue raised on appeal -- whether the trial court "abused its discretion by compensating Class Counsel for the time spent litigating about the card-brand recover process" -- the Court reasoned that because in Class Counsel's fees derived from a contract and not a fee-shifting statute with "prevailing party" language, "the question is simply whether the time spent was reasonable, which is the standard set in the agreement."

 

"Time spent is reasonable, and thus compensable, if it would be proper to charge the time to a client."  Using this standard, the Court concluded that "it was firmly within the District Court's discretion to compensate Class Counsel for time spent challenging the release offers."  "To hold otherwise would be to say, as a matter of law, that it is unreasonable for Class Counsel to ever oppose a settlement."

 

Turning to the third issue on appeal, the Court held that "it was not an abuse of discretion to pay Class Counsel for their time spent finding and vetting class representatives." This is because "[s]electing proper class representatives is an important part of what class counsel does. And counsellors should be paid for work reasonably done on behalf of their clients."

 

On the fourth issue raised by the retailer -- the trial court's order "does not allow for meaningful review[,]" the Court disagreed, holding that "we are not left in doubt about what the District Court decided and why."

 

Having "held that the District Court abused its discretion by applying a multiplier to account for risk," the Court turned to class counsel's cross-appeal challenging "the way the District Court performed the cross-check."

 

The Eleventh Circuit held that courts "often use a cross-check to ensure that the fee produced by the chosen method is in the ballpark of an appropriate fee."

 

"As the percentage method awards class counsel a percentage of the class benefit, the first step is to determine what constitutes the class benefit." Class counsel argued that "the District Court should have included the attorney's fees in the class benefit."  The retailer countered "that the District Court should not have included in the class benefit the $14.5 million premium that [the retailer] paid to banks in exchange for releases as part of the card-brand recovery process."

 

The Court reasoned that "[w]hile Class Counsel is correct that attorney's fees are generally included in the class benefit in common-fund cases, it does not make sense to do so in fee-shifting cases." This is because "there is no constructive common fund in this case because the parties left the amount of attorney's fees completely undetermined. Instead, they negotiated a pure fee-shifting arrangement. For this reason, Class Counsel's argument to include attorney's fees in the class benefit fails. Conceptually, if the fees are paid separately, they never belonged to the class, so they should not be included in the class benefit."

 

Turning to the retailer's argument that "the District Court should not have included the $14.5 million premiums it paid to banks in exchange for releases[,]" the Court explained that "[c]ounsel is entitled to compensation for its efforts that create, enhance, preserve, or protect a common fund."  Thus, the Eleventh Circuit held, "the question is whether Class Counsel deserves credit for the $14.5 million premiums that [the retailer] paid to putative class members to settle their claims."

 

The Court rejected the retailer's argument "that the releases were unrelated to the class litigation[,]" concluding that the "District Court was well within its discretion to conclude that the release payments were 'substantially motivated by the pendency of this litigation.'"

 

The Eleventh Circuit reasoned that "a rule establishing that class counsel can get no credit for settlements with putative class members done before the class as a whole settles would entrench the very unjust enrichment and collective-action problem that class actions are designed to solve. Plus, '[t]here is no question … that federal courts may award counsel fees based on benefits resulting from litigation efforts even where adjudication on the merits is never reached, e.g., after a settlement.'"

 

Therefore, the Eleventh Circuit affirmed the trial court's ruling "in all respects except one: it was an abuse of discretion to use a multiplier to account for risk in a fee shifting case." The trial court's judgment was therefore affirmed in part, vacated in part 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: 2nd Cir Holds FDCPA's SOL Starts When Plaintiff is "Injured"

The U.S. Court of Appeals for the Second Circuit recently affirmed the dismissal of a claim under the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. (FDCPA), holding that an FDCPA violation occurs, for the purposes of the FDCPA's one year statute of limitations, when an individual is injured by the allege unlawful conduct.

 

In so ruling, the Second Circuit clarified that in Benzemann v. Citibank N.A., 806 F.3d 98 (2d Cir. 2015) it did not intend to expand the FDCPA's statute of limitations by requiring individuals to be injured and receive "notice of the FDCPA violation."

 

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

 

In April 2008, the debt collector sent a restraining notice referencing a 2003 judgment against a debtor to a bank.  The notice named the debtor as the judgment debtor, but it incorrectly listed plaintiff's social security number and address.

 

The bank froze the plaintiff's account.  After plaintiff's attorney notified the debt collector of the error, the debt collector withdrew the restraining notice and the bank lifted the freeze.

 

On December 6, 2011, the debt collector sent the bank a second restraining notice containing similar information and the bank again froze plaintiff's accounts.  Plaintiff's again contacted the bank, and the bank lifted the freeze on December 15, 2011. 

 

On December 14, 2012, plaintiff filed a complaint alleging, among other things, violation of the FDCPA.

 

As you may recall, a FDCPA claim must be filed "within one year from the date on which the violation occurs."  15 U.S.C. § 1692k(d).

 

The trial court dismissed the FDCPA as untimely, concluding that the alleged violation occurred when the debt collector mailed the restraining notice on December 6, 2011.  The plaintiff filed a timely appeal.

 

On the first appeal, the Second Circuit concluded that the trial court erred because "where a debt collector sends an allegedly unlawful restraining notice to a bank, the FDCPA violation does not "occur" for the purposes of the [statute of limitations] until the bank freezes the debtor's account."  Benzemann v. Citibank N.A., 806 F.3d 98, 103 (2d Cir. 2015)

 

The Second Circuit also observed that "the FDCPA violation here did not 'occur' until [the bank] froze [plaintiff's] account because it was only then that he had a complete cause of action and notice of the FDCPA violation."  Id.

 

Because the record was unclear as to whether the bank froze plaintiff's accounts on December 13 or December 14, the Second Circuit remanded for further proceedings.  The Second Circuit also directed the trial court to consider, if it finds that the accounts were frozen on December 13, 2011, whether the FDCPA's statute of limitations is subject to the common law "discovery rule."

 

After remand, the bank's records indicated that it "blocked" the plaintiffs' accounts on December 13, 2011.  Plaintiff produced evidence indicating that he had problems accessing his account on December 13, 2011, and learned of the debt collector's restraining notice on December 14, 2011 when he called the bank to access his account.

 

The debtor collector moved for summary judgment.

 

The trial court found that the alleged FDCPA violation occurred when the bank froze plaintiff's accounts on December 13, 2011, and because plaintiff filed suit on December 14, 2012, one year and one day later, his FDCPA claim was untimely.

 

The trial court also found that it did not need to determine whether the discovery rule applied to FDCPA claims because the outcome of this case would be the same, as the evidence indicated that plaintiff knew the bank had frozen his accounts on December 13, 2011.

 

This appeal followed.

 

The plaintiff argued that his FDCPA claim was timely because the statute of limitations commenced when he receive notice of the violation, i.e., when he learned of the debt collector's restraining notice on December 14, 2011.

 

The Second Circuit acknowledged that in the first appeal it observed that the FDCPA's statute of limitations commenced when an individual is injured by unlawful conduct and receives "notice of the FDCPA violation." 

 

However, the Second Circuit explained that the first appeal merely considered whether an FDCPA violation can occur, for the purposes of the statute of limitations, before the victim was injured.  The Second Circuit explained that it did not examine whether the triggering of the statute of limitations also required notice of the FDCPA violation.

 

The Second Circuit stated that it intended to tether the commencement of the FDCPA limitations period to the date of injury "as indicated in its instructions to the district court on remand to determine the date of the freeze" to avoid an anomaly where the statute of limitations begins to run before an FDCPA plaintiff can file suit. 

 

Moreover, in the Second Circuit's view, the plaintiff's interpretation undermines the policies that statute of limitations serve, which is to encourage putative plaintiffs to diligently prosecute their claims. 

 

Thus, the Second Circuit clarified that it did not intend in the first appeal to expand the FDCPA's statute of limitations by requiring individuals to receive "notice of the FDCPA violation."

 

Next, the Second Circuit addressed plaintiff's argument that his claim was timely under the common law discovery rule.

 

As you may recall, under the discovery rule "a plaintiff's cause of action accrues when he discovers, or with due diligence should have discovered, the injury that is the basis of the litigation."  Guilbert v. Gardner, 480 F.3d 140, 149 (2d Cir. 2007).

 

The Second Circuit noted that it had never decided whether the discovery rule applied to FDCPA claims, and declined to address this issue here, because the plaintiff's claim here would be time barred even under the discovery rule. 

 

As the Second Circuit explained, the trial court correctly determined that the plaintiff discovered his injury on the same day that the bank froze his accounts, and therefore his FDCPA claim was untimely even if the discovery rule applied to FDCPA claims.

 

Finally, the Second Circuit rejected plaintiff's equitable tolling argument because he discovered that the bank froze his account on December 13, 2011 and began investigating the incident that evening, but then waited just over one year to file his lawsuit.

 

In the Second Circuit's view, the plaintiff had the necessary information within twenty-four hours to file a lawsuit and nothing prevented him from bringing a timely action.

 

Accordingly, the Second Circuit 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

 

 

 

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FYI: 9th Cir Holds No FCRA Violation by CRA When Dispute Did Not Come "Directly" From Consumer

The U.S. Court of Appeals for the Ninth Circuit held that where a company sent dispute letters to a credit reporting agency ("CRA") on behalf of a consumer, but the consumer did not identify the items to be disputed, review the letters, or otherwise play any role in preparing the letters, the letters did not come "directly" from the consumer, and the CRA was not required to conduct a reinvestigation under section 1681i of the federal Fair Credit Reporting Act ("FCRA").

 

As a result, the Ninth Circuit held that the CRA did not violate section 1681i, and also did not act unreasonably and therefore did not violate section 1681e(b).

 

Accordingly, the Ninth Circuit affirmed the trial court's order granting summary judgment in favor of the defendant CRA.

 

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

 

A consumer ("Consumer") hired a credit repair organization ("Company") to perform "credit repair services."  The Company thereafter sent a letter to a credit reporting agency ("CRA") asserting that several items in the Consumer's credit file were inaccurate, and asking the CRA to conduct a reinvestigation to verify the items' accuracy.

 

The Consumer had no input on the preparation of the letter, and did not review the letter before it was sent.  

 

After receiving the letter, the CRA sent a letter to the Consumer stating that it had "received a suspicious request in the mail" and "determined that it was not sent by [the Consumer]."  The CRA further informed the Consumer that it would "not be initiating any disputes based on the suspicious correspondence."  Finally, the CRA explained that the Consumer could call the CRA or visit its website if he believed the information in his credit file was inaccurate or incomplete. 

 

The Consumer did neither.  Instead, the Company sent several more letters to the CRA on the Consumer's behalf.  However, the Consumer again had no input on the drafting of the letters, and did not review them before they were sent.  The CRA did not initiate a reinvestigation after receiving the letters.

 

The Consumer thereafter filed a complaint alleging that by failing to take action in response to the letters, the CRA supposedly violated two provisions of FCRA.  Specifically, section 1681i, which requires consumer reporting agencies to reinvestigate disputed items, and section 1681e(b), which requires CRAs to use reasonable care in preparing consumer reports.

 

The CRA moved for summary judgment, and the trial court granted the motion ruling that section 1681i only required the CRA to reinvestigate disputes that came from the Consumer directly.  The trial court also determined that the Agency did not violate section 1681e(b) because, in its view, that statute did not apply to reinvestigation procedures at all. 

 

The matter was then appealed. 

 

On appeal, the Ninth Circuit first analyzed the application of section 1681i, which provides in relevant part that CRAs must "conduct a reasonable reinvestigation" when an item in the consumer's file "is disputed by the consumer and the consumer notifies the agency directly . . . of such dispute."

 

The Ninth Circuit observed that the question therefore was "whether those letters came 'directly' from [the Consumer]."

 

In concluding that they did not, the Court considered the "unambiguous meaning of the word 'directly,'" which it noted is defined by Merriam-Webster's Third New International Dictionary as "without any intervening agency or instrumentality or determining influence."

 

Thus, the Ninth Circuit determined that "to notify a consumer reporting agency of a dispute 'directly,' a letter must come from the consumer and be sent to the agency." 

 

However, in this case the Consumer "played almost no part in submitting the dispute letter to [the CRA]."  Specifically, he "did not identify the items to be disputed," and "did not review the letter [the Company] drafted before it sent it to [the CRA]."  Moreover, he testified that he had "absolutely no input" into the contents of the letter at all.

 

Under those facts, the Ninth Circuit held that "the letters did not come directly from [the Consumer]."  However, the Court cautioned that its "holding is limited to the facts before us," and "[w]e only hold that, in this case, where [the Consumer] played no role in preparing the letters and did not review them before they were sent, the letters sent by [the Company] did not come directly from [the Consumer]."

 

The Ninth Circuit therefore affirmed the ruling of the district court granting the CRA's motion for summary judgment on the section 1681i claim.

 

The Court next reviewed the claim under section 1681e(b), which provides in relevant part that CRAs must "follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom [a consumer report] relates."

 

The appellant argued that even if section 1681i did not require the Agency to conduct a reinvestigation, its refusal to reinvestigate nevertheless violated section 1681e(b) because it was unreasonable.

The Ninth Circuit disagreed, stating that "it would make little sense to use Section 1681e(b) to impose liability on [the CRA] for conduct that satisfied Section 1681i," because that "Section 1681i represents Congress's determination that a consumer reporting agency is only required to initiate a reinvestigation if a consumer notifies the agency of a dispute directly." 

 

Thus, "[i]t cannot be unreasonable for agencies to follow that guidance."  The Ninth Circuit therefore held that the Agency "did not act unreasonably and, as a result, did not violate Section 1681e(b)."

 

Accordingly, the Ninth Circuit affirmed the trial court's order granting summary judgment in favor of the CRA. 

 

 

 

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 Holds Non-Borrower Mortgagor Could Not Sue Under RESPA

The U.S. Court of Appeals for the Sixth Circuit ("Sixth Circuit") recently affirmed dismissal of a homeowner's claims under the federal Real Estate Settlement Procedures Act, 12 U.S.C. 2601, et seq. ("RESPA"), where the homeowner plaintiff only signed the mortgage, but not the note evidencing the loan.

 

The Sixth Circuit's holding reinforced that a plaintiff who does not have personal obligations under the loan agreement is not a "borrower," and thus cannot assert claims under RESPA, which extends causes of action only to "borrowers."

 

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

 

Husband and wife borrowers (collectively, "Borrowers") took out a loan secured by a mortgage on their new home ("Mortgage").  Both Borrowers executed the Mortgage, but only the husband ("Husband") executed the promissory note evidencing the loan (the "Note").  As is customary, the Mortgage expressly provided that anyone "who co-signs this [Mortgage] but does not execute the [Note]"— i.e., the wife ("Wife") — "is not personally obligated to pay the sums secured by this [Mortgage]."

 

The Borrowers later divorced and the Wife took title to the house.  The Husband died shortly thereafter.  Although she was not an obligor on the note, the Wife continued to make payments in an effort to keep the home, but eventually fell behind her payments.  After her loss mitigation efforts with the Mortgage loan's loan servicer ("Servicer") failed, the home was foreclosed upon and sold to a third-party buyer.

 

The Wife filed suit against the Servicer and third-party buyer, raising claims under various federal and state laws, including a claim against the Servicer under the Real Estate Settlement Procedures Act, 12 U.S.C. § 2601, et seq. ("RESPA") and its implementing regulations, 12 C.F.R. § 1024, et seq. ("Regulation X") for purportedly failing to properly review her requests for mortgage assistance before it foreclosed on her home. 

 

The trial court dismissed the Wife's RESPA claims against the Servicer, concluding that she was not a "borrower" because she was never personally obligated under the loan, and thus cannot state a cause of action under RESPA.   12 U.S.C. § 2605(f) ("Whoever fails to comply with any provision of this section shall be liable to the borrower . . . .").  The instant appeal followed.

 

On appeal, the sole question presented to the Sixth Circuit was whether the Wife had a cause of action under RESPA, having only co-signed the Mortgage, and not also the note evidencing the Loan. 

In contrast to a question of whether she has "statutory" or "prudential" standing, the appellate court noted that determination of whether a plaintiff has a cause of action is a "straightforward question of statutory interpretation."  Lexmark Int'l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 125-129 (2014).

 

As RESPA only authorizes "borrowers," to sue, the Sixth Circuit was tasked with determining whether the wife was a "borrower" — a term not defined under the statute, and which the court must give its ordinary meaning.  12 U.S.C. 2605(f); Taniguchi v. Kan Pac. Saipan, Ltd., 566 U.S. 560, 566 (2012). 

 

The Sixth Circuit initially reiterated the distinction between a loan and a mortgage: "under a loan, the lender gives you money now, and you promise to pay it back later. A mortgage is a separate document that provides extra assurance to the lender that you will pay them back—if you do not, the lender can take your house." 

 

Noting that contemporaneous dictionaries are useful to interpret the words of a statute, the Sixth Circuit cited definitions of the term from editions of standard English and legal dictionaries published around the relevant times RESPA and section 2605 were enacted (1974 and 1990, respectively), all of which illustrated that a "borrower" is personally obligated on a loan. 

 

Using the context of the term's use in the statute as another tool of interpretation also showed "borrower" to repeatedly refer to a relationship with a lender under terms of a loan, providing additional evidence that a "borrower" must be personally obligated on a loan, regardless of whether they signed a mortgage or own a home, and only a "borrower" can sue under RESPA. 

 

The Sixth Circuit found the Wife's arguments unconvincing. 

 

First, the Wife relied on the liberal construction canon to argue that a "remedial statute" like RESPA should be "construed broadly to effectuate its purpose."  While noting that the liberal construction canon had been invoked in prior RESPA cases, here, the Wife's reliance upon it was premised on two mistaken ideas: (1) that statutes have a singular purpose and (2) that Congress wants statutes to extend as far as possible in service of that purpose. 

 

Instead, the court acknowledged that statutes have many competing purposes, which Congress balances by negotiating and crafting statutory text, and court should not expand the text on the notion that "Congress 'must have intended something broader.'"  Dir., Office of Workers' Comp. Programs, Dep't of Labor v. Newport News Shipbuilding & Dry Dock Co., 514 U.S. 122, 135–36 (1995); Michigan v. Bay Mills Indian Cmty., 572 U.S. 782, 794 (2014) (citation omitted).  In this case, the Sixth Circuit cited helpful and legitimate tools of interpretation to define "borrower" and expanding the term to include the Wife would not be "broadly construing" RESPA, but rewriting it.  As such, the Wife's attempts to apply the liberal construction canon were rejected.

 

Next, the Wife proffered that recent regulations from the Consumer Financial Protection Bureau define "borrower" in § 2605(f) to include "successors in interest"—i.e., "a person to whom an ownership interest in a property securing a mortgage loan . . . is transferred from a borrower." 12 C.F.R. § 1024.30.  Although the Wife seems to meet this definition because her (former) Husband transferred his interest in the property to her after their divorce, she acknowledges that these regulations do not apply to her directly because they became effective in April 2018, after the events that led to her lawsuit. 12 C.F.R. § 1024.30; 81 Fed. Reg. 72,160-01. 

 

Because the text of the statute is clear and the Wife's argument relied solely upon these ancillary CFPB regulations (Regulation X and 12 C.F.R. 1026, Regulation Z), the Sixth Circuit rejected this argument as well.  Cf. Pereira v. Sessions, 138 S. Ct. 2105, 2113 (2018) (explaining that when the statute "supplie[s] a clear and unambiguous answer to the interpretive question at hand[,] . . . that is the end of the matter" (internal quotation marks and citation omitted)).

 

Lastly, the Wife argued that the court's interpretation would lead to RESPA violations going unremedied because no one in a "non-recourse" state — where the lender can only go after the home itself, and not seek deficiency judgment against a borrower's personal assets — would be able to sue under RESPA. 

 

However, the Sixth Circuit noted that this argument misinterprets the trial court's holding, and clarified that its interpretation turns only on whether the would-be plaintiff is personally obligated to repay the loan, and whether or not state law permits lenders to recover personal assets is irrelevant. 

 

Because the Wife was not personally obligated on the Loan, and thus, was not a "borrower" with standing to sue under RESPA, the trial court's dismissal of her RESPA claims against the Servicer was affirmed.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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