FYI: Cal App Ct (2nd Dist) Rejects Claim That Loan Assignment During Default Was Void

The Court of Appeal for the Second District of California recently affirmed the dismissal of a borrower's claims for wrongful foreclosure alleging that the assignment of his mortgage to the foreclosing entity was invalid.

 

In so ruling, the Second District rejected the borrower's argument that a mortgage cannot be assigned to another entity while the loan is in default as illogical and incorrect, in part because this reasoning would allow borrowers to prevent lenders from assigning debt by refusing to make payments.

 

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

 

A borrower took out a mortgage loan secured by a deed of trust to his home (the "Loan").  After the initial lender was closed and placed into receivership by the federal government, the FDIC as receiver transferred the Loan to a new entity ("Assignor"), who in turn assigned the Loan to yet another entity ("Assignee") and recorded the assignment. 

 

Thereafter, a substitution of trustee was recorded declaring that Assignee was substituted for a new trustee ("Trustee") on the Loan.  The Assignee and Trustee foreclosed the Borrower's home in April 2017.

 

The borrower filed a wrongful foreclosure action against the Assignee and Trustee alleging that they had no rightful claim to foreclose on his home on the basis that: (i) the initial lender sold his mortgage to entities that were not named defendants to the foreclosure, and; (ii) that the Loan was not legally transferred, conveyed or assigned to Assignee because the borrower defaulted on the Loan nearly eight years prior to the time of assignment. 

 

The trial court sustained the Assignee and Trustee's demurrer to the borrower's complaint and the instant appeal followed.

 

On appeal, the appellate court reviewed the Borrower's chief argument that a financial institution may not validly assign a mortgage loan to another entity while the loan is in default, and that such an assignment is "void." 

 

Under California law, it is not enough for a homeowner merely to allege a mortgage assignment was voidable. See, e.g., Yhudai v. IMPAC Funding Corp. (2016) 1 Cal.App.5th 1252, 1256.  Rather, the homeowner must allege facts supporting a legally viable theory as to why the challenged assignment is void as a matter of law. See, e.g., Kalnoki v. First American Trustee Servicing Solutions, LLC (2017) 8 Cal.App.5th 23, 44; cf. Yvanova v. New Century Mortgage Corp. (2016) 62 Cal.4th 919, 929–930 [distinguishing between void and 4 voidable contracts].

 

Here, the Appellate Court noted that complaint asserted without any logical basis or supporting legal authority that a borrower, by refusing to pay, can prevent a lender from assigning the debt. 

 

Examining the Borrower's argument that the assignment was void, the Second District was unpersuaded by this "strange suggestion," concluding that the Borrower's argument was legally incorrect because he did not explain how the assignments were void as a matter of law.  See, e.g., Mendoza, supra, 6 Cal.App.5th at pp. 811– 820.). 

 

The other five claims raised in the borrower's complaint failed for not being within the jurisdiction of the appellate court (federal claims dismissed upon removal as invalid and remanded to state court), forfeited as not raised in the opening brief (claims for violation of Civil Code section 2934 or for cancellation of written instruments), or for want of an underlying claim (claim for unfair competition).

 

Because the Borrower failed to provide a logical basis for his argument suggesting that the assignment of his mortgage loan while in default was void, nor any supporting legal authority, the Second District concluded that the trial court's judgment sustaining the demurrer without leave to amend was proper, and affirmed the 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

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Email: rwutscher@MauriceWutscher.com

 

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FYI: 9th Cir Holds Attorneys' Fees May Be Included in CAFA "Amount in Controversy"

The U.S. Court of Appeals for the Ninth Circuit recently vacated an order sua sponte remanding to state court a putative class action removed under the federal Class Action Fairness Act.

 

In so ruling, the Ninth Circuit held:

 

1.         When a notice of removal plausibly alleges a basis for federal court jurisdiction, a federal trial court may not remand the case back to state court without giving the defendants an opportunity to demonstrate that the jurisdictional requirements were satisfied;

 

2.         The amount in controversy may be based on reasonable assumptions tied to the allegations in the complaint;

 

3.         When a statute or contract provides for the recovery for attorneys' fees, prospective attorneys' fees must be included in the assessment of the amount in controversy; and

 

4.         The defendants' summary judgment motion in state court, asserting that the plaintiffs' claims were barred by a release from a prior class action settlement, did not defeat federal court jurisdiction. 

 

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

 

An employee filed a putative class action against her employer in state court, alleging that the employer failed to compensate its employees for wages and missed meal breaks and failed to issue accurate itemized wage statements, all in violation of state wage and hour laws.

 

The employer removed the case to federal court alleging minimum diversity jurisdiction under the federal Class Action Fairness Act (CAFA). 

 

As you may recall, a federal trial court has original jurisdiction under CAFA if:  (1) any member of the class is a citizen of a state different from any defendant, (2) the class contains at least 100 members, and (3) the amount in controversy exceeds $5,000,000.  28 U.S.C. § 1332(d)(2), (d)(5)(B).

 

To show minimum diversity, the employer alleged that it was a citizen of Maryland and Delaware and the employee was a citizen of California.  To satisfy the class size requirement, the employer provided a declaration stating that it employed at least 2193 nonexempt employees during the period defined in the complaint.

 

To satisfy the amount in controversy requirement, the employer relied on its employee data (e.g., number of nonexempt employees, hourly rate of pay, and number of workweeks worked by putative class members), and then made assumptions about the frequency of the violations alleged in the complaint.

 

Using assumed violation rates, the employer alleged a potential amount in controversy exceeding $15 million, with its most "conservative estimate" totaling over $5.5 million, including attorneys' fees (which the employer asserted should be included to in the calculation).

 

After the employer filed the notice of removal, the trial court issued an order sua sponte remanding the case to state court.  The trial court stated that the employer's calculations of the amount in controversy was " unpersuasive"  and rested on "speculation and conjecture."

 

The trial court faulted the employer for not offering evidentiary support for its assumptions, and concluded that "prospective attorneys' fees are too speculative" to be included in the amount in controversy.

 

The litigation proceeded in state court.  The employer filed a motion for summary judgment, arguing that a release from a related class action settlement barred all of the employee's claims.

 

The employer filed a timely petition for permission to appeal under 28 U.S.C. § 1453(c)(1), which the Ninth Circuit granted.

 

The employer argued that the trial court imposed an erroneous burden of proof by sua sponte remanding the case to state court without allowing it an opportunity to support its allegations with evidence.

 

The Ninth Circuit observed that "when a defendant seeks federal-court adjudication, the defendant's amount-in-controversy allegation should be accepted when not contested by the plaintiff or questioned by the court."  Dart Cherokee Basin Operating Co., LLC v. Owens, 574 U.S. 81, 87 (2014).

 

The appellate court noted that the trial court did not conclude that the employer's allegations were implausible.  Instead, the trial court stated that the employer failed to meet its burden of proving the amount in controversy with evidence. 

 

The Ninth Circuit also noted that a notice of removal "need not contain evidentiary submissions."  Dark Cherokee, 574 U.S. at 84.  "[W]hen a defendant's assertion of the amount in controversy is challenged and both sides submit proof, the court decides by a preponderance of the evidence whether the amount-in-controversy requirement has been satisfied."  Id., at 88.

 

Thus, the appellate court held that the trial court's sua sponte order deprived the employer of "a fair opportunity to submit proof."

 

Next, the employer argued that the trial court erred in disallowing its assumptions in its estimate of the amount in controversy.

 

The Ninth Circuit explained that a removing defendant is permitted to rely on "a chain of reasoning that includes assumptions."  Ibarra v. Manheim Invs., Inc., 775 F.3d 1193, 1199 (9th Cir. 2015).  However, "assumptions cannot be pulled from thin air but need some reasonable ground underlying them."  Id.

 

The employee alleged that the employer " routinely" failed to provide overtime wages and compensation for rest and meal breaks.  The employer assumed six minutes of unpaid overtime per day and one missed rest break per week.

 

The employer assumed that 100% of wage statements were inaccurate because the employee alleged that "[n]ot one of the paystubs that Plaintiffs received complied with Labor Code § 226b."

 

Based on the allegations in the complaint, and noting that the amount in controversy was merely an estimate of the total amount in dispute, the Ninth Circuit determined that the trial court mischaracterized the employer's assumptions as being "speculation and conjecture."

 

The employer also argued that the trial court erred by "refusing to consider prospective attorneys' fees in the amount in controversy."

 

The Ninth Circuit agreed, stating that "[w]e have long held (and reiterated [in early 2018]) that attorneys' fees awarded under fee-shifting statutes or contracts are included in the amount in controversy."  Fritsch v. Swift Transp. Co. of Ariz., LLC, 899 F.3d 785, 794 (9th Cir. 2018).

 

Because the complaint sought recovery of attorneys' fees, and because there was no dispute that at least some of the California wage and hour laws in the complaint entitle a prevailing plaintiff to an award of attorneys' fees, the Ninth Circuit held that the trial court should not have excluded prospective attorneys' fees from the amount in controversy.

 

The employee argued that the employer's summary judgment motion in state court defeated federal court jurisdiction, because it argued that her claims were barred by a release from a prior class action settlement.

 

The Ninth Circuit disagreed, explaining that post-filing developments do not defeat jurisdiction if jurisdiction was properly invoked as of the time of filing of the complaint.  Further, the strength of any defense indicated the likelihood of the plaintiff prevailing, but is irrelevant to determining the amount at stake in the litigation.

 

The employee also suggested that jurisdiction was defeated because she stipulated that the amount in controversy did not exceed $5,000,000.

 

However, the U.S. Supreme Court has held that when "a class-action plaintiff stipulates, prior to certification of the class, that he, and the class he seeks to represent, will not seek damages that exceed $5 million in total," the trial court should ignore the stipulation when assessing the amount in controversy.  Std. Fire Ins. Co. v. Knowles, 568 U.S. 588, 590, 596 (2013).

 

Accordingly, the Ninth Circuit vacated the trial court's order refusing federal court jurisdiction, 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: 11th Cir Reverses Injunctive Class Certification Because Actual Relief Was Damages

The U.S. Court of Appeals for the Eleventh Circuit recently reversed a trial court's certification of an injunction class, holding that the injunctive relief sought by the class was improper because the true relief sought was really damages.

 

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

 

In 2012, Florida's law requiring automobile insurance policies must provide personal injury protection ("PIP") benefits up to $10,000 was amended so that "not every injured motorist will be eligible to access all $10,000 in benefits." Coverage is capped at $2,500 unless the injured motorist has an "emergency medical condition" ("EMC") as defined by the statute.

 

Two chiropractic clinics and a medical provider who treated injured motorists insured by the defendant insurer "who thereafter assigned their insurance benefits to the providers" sued the insurer and two of its underwriters in Florida state court, alleging that they "denied PIP benefits in an illegal manner" because they "relied on negative EMC determinations from non-treating providers to limit coverage to $2,500, and that Florida law allows only treating providers to make negative EMC determinations."

 

The insurer defendant removed the case to federal court pursuant to the federal Class Action Fairness Act, "which grants federal jurisdiction over certain class actions where the amount in controversy exceeds $5 million and there is minimal diversity."

 

The Second Amended Complaint "asserted two counts: one for declaratory and injunctive relief and another for damages based on breach of contract."

 

The plaintiffs "moved to certify two classes: an injunction class under Federal Rule of Civil Procedure 23(b)(2) for count one, and a damages subclass under Rule 23(b)(3) for count two."

 

The trial court "refused to certify the damages subclass — which, under rule 23(b)(3), would require the court to find predominance and superiority — because doing so would necessitate individualized assessments and case management. But it certified the injunction class, in part because" the plaintiffs "assured it that once the legal issue is determined, there will be no more supervision required to determine individual damages."

 

The insurer sought leave to file "an interlocutory appeal of the injunction class certification[,]" which was granted. The sole issue raised in the appeal was "whether the injunction class should have been certified" because plaintiffs did not appeal the "denial of certification of the damages subclass…."

 

The Eleventh Circuit began by analyzing Federal Rule of Civil Procedure 23, "which lays down the ground rules for certifying a class action. To win certification under Rule 23, every class must present a named plaintiff who has standing to bring the claim. … Every class must be 'adequately defined and clearly ascertainable[,]' … [a]nd every class must satisfy the four requirements of Rule 23(a): numerosity, commonality, typicality, and adequacy of representation."

 

However, after Rule 23(a) is satisfied, the remaining provisions of Rule 23 differ depending on what type of class the plaintiff purports to represent. "For an injunction class under Rule 23(b)(2), the plaintiff must show that 'the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.' … For a damages class under Rule 23(b)(3), the plaintiff must show that 'questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.'"

 

The plaintiffs argued that it was "not seeking any damages award at all (at least not as a class)[,]" but instead wanted a declaration that the insurer's "practice of relying on non-treating physicians is unlawful, along with an injunction."

 

In response, the Eleventh Circuit explained that "[t]he problem with this argument is that the injunction … requested is not an injunction at all, and its declaratory request is both minimal and unconnected to members of [the] class." This is because the "requested relief is not designed to address the treatment of future claims; it would instead … 'restore claimants to the claims-handling process free of the improper cap on PIP benefits imposed by [the insurer].' … This strategy of converting its claim for damages into a claim for injunctive relief sidesteps the Rule 23(b)(3) problems by shaving away all the issues that would require individualized determinations. But what the damages-to-injunction strategy cannot manage to do is request relief that would prevent future injury rather than redress past harms."

 

The Court further explained that this "attempt to excise all the damages-based problems with certification thus runs into a fundamental issue: its creative conception of injunctive relief is not a viable theory of recovery under Rule 23(b)(2) … [because] [a]s we have said, an injunction must be geared toward preventing future harm … [and] [e]verything about [plaintiffs'] claim—from its theory of standing to its request for relief to its class definition—looks back at past harms."

 

After examining each part of plaintiffs' claim, the Eleventh Circuit concluded that "[s]imply put, this class is not suitably crafted for prospective relief. … In the end, the retrospective nature of [plaintiffs'] class and claim make clear that an injunction is not the right remedy in this case—indeed, it is not really the remedy that [the] class is seeking. And because an injunction is not the right remedy, Rule 23(b)(2) is not the right path to class certification: 'the policies underlying the requirements of (b)(3) should not be subverted by recasting and bifurcating every class suit for damage as one for final declaratory relief of liability under (b)(2), followed by a class suit for damages under (b)(3).'"

 

Finally, the Eleventh Circuit ruled, the "request for declaratory relief does not save this class … [because] [f]or one thing, like an injunction, declaratory relief requires a likelihood of future harm."

 

Because an injunction was not the right remedy "for the class as certified[,]" the trial court's certification of the class under Rule 23(b)(2) was reversed and the case remanded.

 

 

 

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 FCRA Preempts State Common Law Claims, Joins 2nd and 7th Cirs

The U.S. Court of Appeals for the Sixth Circuit recently affirmed a judgment in favor of the furnisher of credit information in an action filed under the federal Fair Credit Reporting Act, 15 U.S.C. § 1681, et seq. (FCRA) and other claims under state common law.

 

In so ruling, the Sixth Circuit held that the FCRA's preemption provisions apply to state common law claims concerning a furnisher's reporting obligations, joining similar rulings by the Seventh and Second Circuits. 

 

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

 

The plaintiffs owned several investment properties and obtained a $300,000 commercial line of credit ("Credit Line") from a bank to further their investment efforts.   

 

In June 2013, the plaintiffs sought a loan from the bank to convert a vacant former hotel into 26 apartment units and two commercial spaces.  The plaintiffs submitted cost estimates with their application to the bank.

 

On July 23, 2013, the plaintiffs and the bank executed a Commercial Loan Agreement through which the bank extended plaintiffs a commercial loan for the renovation project ("Construction Loan").  The Commercial Loan Agreement did not contain any promise that the bank would extend additional loans to plaintiffs.  However, the plaintiffs believed that the bank would loan any extra funds needed to complete the renovation because they discussed the possibility of cost overruns before entering into the contract. 

 

The plaintiffs claimed that the bank told them they could obtain additional financing because of their long standing relationship with the bank, and they relied on this assurance in deciding to financing the project through the bank.

 

In early November 2013, the plaintiffs informed the bank that they may need an additional $400,000 to complete the renovation.  In response to the bank's request for a breakdown for the additional funds, the plaintiffs submitted a revised estimated cost of $1,654,648.65, or approximately $712,000 above the total cost for the project they had represented in their original loan application.

 

While reviewing the plaintiffs' updated financial information, the bank discovered that plaintiffs had incurred additional debt in the period since the bank first approved the Construction Loan and that plaintiffs had failed to disclose this new debt.  The bank denied plaintiffs' request for an additional $650,000.

 

The Credit Line was scheduled to mature on June 24, 2014.  On June 17, 2014, the bank notified plaintiffs that because their request to renew the Credit Line was still pending, the bank would not require them to repay the balance and they would only require plaintiffs to continue to make interest payments until the bank rendered a determination about whether to renew the Credit Line.

 

Unlike the previous years, the bank failed to extend the Credit Line's maturity date during the review period, and its computer system transmitted delinquency reports to the credit bureaus in July and August 2014 that allegedly damaged plaintiffs' credit score.

 

The plaintiffs obtained financing from a different lender and used the proceeds to pay off their loans with the bank and to complete the renovation project.  However, the bank's automated computer system continued to report plaintiffs' entire prior payment history, including the fact that they had previously been delinquent on the loans.

 

The bank told plaintiffs it would resolve the issue. 

 

In October 2014, the bank updated its reporting to indicate that plaintiffs had paid off their loans and were no longer delinquent.  Despite the update, the bank reported that plaintiffs were delinquent in September, October, and November of 2014, even though plaintiffs had paid off the entire balance of their loans in early September. 

 

In September 2015, the bank sent a second update to the credit bureaus indicating that plaintiffs had paid off the loans.  The bank told plaintiffs that it had resolved the issue.

 

The borrowers filed a complaint alleging that the bank: violated the FCRA by willfully and/or negligently failing to investigate their complaints and to correct its reporting; breached its duty of good faith and fair dealing; tortuously interfered with plaintiffs' business relationships by deliberating reporting false information; and made fraudulent misrepresentations that it would loan additional funds to complete the renovation.

 

The bank removed the case to federal court.  After discovery, the bank moved for summary judgment on all claims.  The plaintiffs filed a motion for partial summary judgment on their claim that the bank breached its duty of good faith and fair dealing.

 

The trial court granted the bank's motion for summary judgment and denied the plaintiffs' motion for partial summary judgment. 

 

This appeal followed.

 

As you may recall, section 1681s-2(b) of the FCRA imposes two obligations on furnishers of information:  "(1) to provide accurate information, and (2) to undertake an investigation upon receipt of a notice of dispute regarding credit information that is furnished."  Downs v. Clayton Homes, Inc., 88 Fed. Appx 851, 853 (6th Cir. 2004)

 

The FCRA creates a private right of action for consumers to enforce the requirements under section 1681s-2(b) only if the consumer files a dispute with a consumer reporting agency to trigger the furnisher's duty to investigate.  Merritt v. Experian, 560 Fed. Appx. 525, 528-29 (6th Cir. 2014).

 

The plaintiffs never filed a dispute with a consumer reporting agency.  Instead, they argued that by dismissing their FCRA claims despite the bank's representation that it would remedy the problem, the trial court undermined the pro-consumer purposes of the FCRA.

 

The Sixth Circuit disagreed, finding that "the FCRA protects both consumers and furnishers" by requiring that a consumer file a dispute with a consumer reporting agency.  The consumer reporting agency can then screen the complaint and provide notice of the dispute to a furnisher if warranted. 

 

Thus, the Sixth Circuit held that the trial court properly granted summary judgment in favor of the bank on plaintiffs' FCRA claims.

 

The plaintiffs also argued that the trial court erred in ruling that the FCRA preempted their state common law claims.  They further assert that the bank breached the duty of good faith and fair dealing, and tortuously interfered with their business relationships because the bank deliberately harmed their credit score.

 

As you may recall, the FCRA provides that "[n]o requirement or prohibition may be imposed under the laws of any State with respect to any subject matter regulated under [section 1681s-2 of this title], relating to the responsibilities of persons who furnish information to consumer reporting agencies."  15 U.S.C. § 1681t(b)(1)(F).

 

Because the plaintiffs' common law claims of breach of the duty of good faith and fair dealing and tortious interference with contractual relationships arose from the bank's reporting incorrect information to the credit bureaus, the trial court had held that FCRA preempted these claims.

 

On appeal, the plaintiffs cited Miller v. Wells Fargo & Co., 2008 WL 793676 (W.D. Ky. Mar. 24, 2008), arguing that FCRA preempts state statutory claims but not state common law claims.

 

The Sixth Circuit observed that, although a handful of trial courts have followed this "statutory approach", two Courts of Appeals that have addressed the issue both explicitly rejected the "statutory approach", and held that FCRA also preempts state common law claims.  Purcell v. Bank of Am., 659 F.3d 622 (7th Cir. 2011); Macpherson v. JPMorgan Chase Bank, N.A., 665 F.3d 45 (2nd Cir. 2011).

 

Like the Seventh Circuit in Purcell and the Second Circuit in Macpherson, the Sixth Circuit concluded that the FCRA preempts state statutory and common law causes of action concerning a furnishers reporting of consumer credit information.

 

Thus, the Sixth Circuit held that the trial court properly dismissed plaintiffs' claims for breach of the duty of good faith and fair dealing and tortious interference with contractual relationships.

 

The Sixth Circuit noted that the FCRA did not preempt plaintiffs' fraudulent misrepresentation claim because it did not arise from the bank's reporting obligations as a furnisher of consumer credit information.  However, Court held that the plaintiffs forfeited this issue on appeal because they failed to discuss the trial court's reasoning for granting the bank's motion for summary judgment on this claim.

 

Accordingly, the Sixth Circuit affirmed the trial court's judgment in favor of the bank.

 

 

 

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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