FYI: 7th Cir Rejects Plaintiff's FDCPA Arguments Regarding "Consumer" Debt

The U.S. Court of Appeals for the Seventh Circuit affirmed entry of judgment on the pleadings against a former condominium association board director's claim that the association's attorneys' request for fees in a separate state-court action filed by the association against the former director violated the federal Fair Debt Collection Practices Act, 15 U.S.C. 1692, et seq. ("FDCPA").

 

In so ruling, the Court agreed that the former board director failed to state a cause of action under the FDCPA because the attorneys' fees at issue and authorized under the association's "Restated Declaration" agreement for violations of the board's rules or obligations did not constitute a "debt" under the FDCPA's limited, consumer-protection-focused definition.

 

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

 

The board director ("Former Board Director") of a condominium association (the "Association") was removed by the board in 2015 and sued by the Association in Illinois state court for a slew of allegedly unauthorized actions taken leading to and following his removal, and seeking to enjoin him from interfering with board decisions or holding himself out as a director (the "State Court Action").  The State Court Action complaint invoked the Association's "Restated Declaration" agreement which provided that owners who violated the board's rules or obligation would be subject to payment of damages, costs and attorneys' fees for misconduct. 

 

The Former Board Director denied wrongdoing and filed a slew of lawsuits against the Association, its lawyers and condominium residents in state court-- 385 separate filings in total which were dismissed with prejudice and wherein the Former Board Director ordered to pay over $700,000 in fees and sanctions. 

 

While the State Court Action was pending, the Former Board Director also filed suit in federal court against the Association's counsel (the "Association's Counsel"), alleging that the attorney's application for fees in the State Court Action violated the FDCPA.

 

The Association's Counsel moved for judgment on the pleadings.  After initially staying the Former Board Director's federal proceedings under Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976), the trial court held that the motion did not cause conflict with the State Court Action, and granted the Association's Counsel's motion for judgment on the pleadings.  In so ruling, the trial court concluded that the Former Board Director failed to state a claim under the FDCPA because the requested attorneys' fees were not a "debt" within the meaning of the FDCPA. After the Former Board Director's motions to vacate the judgment and request for leave to amend the complaint, the instant appeal ensued.  

 

On appeal, the Seventh Circuit sought to determine whether the attorneys' fees sought by the Association's Attorney in the State Court Action constituted a "debt" within the meaning of the FDCPA. 

It was undisputed that the Association's State Court Action requested that the court impose a financial obligation on the Former Board Director by requiring him to pay fees.  However, the Court noted that to determine whether the demand qualifies as a "debt," under the FDCPA ""[t]he crucial question is the legal source of the obligation." Franklin v. Parking Revenue Recovery Servs., Inc., 832 F.3d 741, 744–45 (7th Cir. 2016). 

 

The Former Board Director argued that any obligation to pay the Association's Counsel's attorneys' fees was a consumer debt because but for his condominium purchase he never would have served on the association board; but for his board service, he never would have become ensnared in the State Court Action; and but for the State Court Action, he never would have found himself on the receiving end of the Association's Counsel's legal demand to pay attorneys' fees.  The Former Board Director cited the Seventh Circuit's ruling in Newman v. Boehm, Pearlstein & Bright, Ltd., to support his argument, in which the Court held that assessments imposed by a homeowners' association on its members could create a "debt" under the FDCPA. See 119 F.3d 477, 481 (7th Cir. 1997).

 

Reviewing Congress' limited definition of "debt" under the FDCPA to consumer debt, the Court determined that the attorneys' fees at issue did not  "aris[e] out of" a consumer transaction as Congress employed that requirement in defining "debt" (15 U.S.C. § 1692a(5)) and therefore fell outside the scope of the statute. 

 

More specifically, the Seventh Circuit held, the obligation for the Former Board Director arose out of his alleged wrongdoings as a board member, and not from a consensual consumer transaction within the meaning of the FDCPA, and the Association's Counsel's invocation of the Restated Declaration in the State Court Action did not change the analysis, nor could it be connected to the Former Board Director's condominium purchase to constitute a consumer transaction or an obligation qualifying as a consumer debt.

 

The Seventh Circuit further rejected the Former Board Director's argument under Newman, because the resident members' obligations to pay assessments in that action arose directly from the association's declaration and bylaws to which the members consented upon purchasing their condominiums, but here the Former Board Director's obligation to pay attorneys' fees arose from his actions as a board member. 

 

The Seventh Circuit also concluded that the trial court did not err in denying the Former Board Director's request to amend his complaint because the proposed amendment would not result in stating a viable legal claim.  See Heng v. Heavner, Beyers & Mihlar, LLC, 849 F.3d 348, 354 (7th Cir. 2017).  Lastly, the Court denied the Former Board Director's motions to strike ruling and orders for him to pay fees and sanctions in the State Court Action that were attached as exhibits to the Association's Counsel's appellate brief, concluding that the Court was permitted to take judicial notice of these public records.  See Tobey v. Chibucos, 890 F.3d 634, 647–48 (7th Cir. 2018) (collecting cases).

 

Accordingly, judgment on the pleadings entered in the Association's Counsel's favor 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

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Email: rwutscher@MauriceWutscher.com

 

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FYI: 5th Cir Holds CFPB Structure is Constitutional

The U.S. Court of Appeals for the Fifth Circuit recently held that the restrictions on the President's removal authority under the Consumer Financial Protection Act, allowing for the removal of the Director only for "inefficiency, neglect of duty, or malfeasance in office", are valid and constitutional.

 

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

 

As you may recall, Congress created the Consumer Financial Protection Bureau ("CFPB")  in response to the 2008 financial crisis and tasked it with implementing and enforcing preexisting consumer-protection statutes. The CFPB is headed by a single CFPB director appointed for a five-year term by the President with the advice and consent of the Senate and removable by the President for "inefficiency, neglect of duty, or malfeasance in office."

 

The CFPB filed a civil enforcement action against two payday lenders and their owner (Payday Lenders) in the U.S. District Court for the Southern District of Mississippi.  The CFPB alleged that the Payday Lenders had engaged in unfair, deceptive, or abusive acts.

 

The Payday Lenders filed a motion to dismiss alleging that the CFPB is unconstitutionally structured, and as a result, any enforcement action it initiates is void from its inception.

 

In reviewing the Payday Lenders motion, the trial court examined the ruling of the U.S. Court of Appeals for the District of Columbia Circuit in PHH Corporation v. CFPB, 881 F.3d 75 (D.C. Cir. 2018), and denied the motion, holding that "the [CFPB] is not unconstitutional based on its single-director structure" and certified its order for interlocutory appeal.

 

The Fifth Circuit heard oral argument but withheld ruling pending the en banc court's resolution of Collins v. Mnuchin, 938 F.3d 553 (5^th Cir. 2019).

 

Collins held that the Federal Housing Finance Agency ("FHFA") violated the Constitution's separation of powers and is "too insulated from executive control because it is funded through annual assessments on the [government-sponsored entities ("GSEs")], is free of any formal executive control, and is led by a single director removable only for cause."

 

The Collins court distinguished PHH, noting that while the Executive Branch has no authority over the FHFA, it "can directly control the CFPB's actions through the [Financial Stability Oversight Council ("FSCO")]."

 

The Fifth Circuit then heard a second round of oral argument where the Payday Lenders argued that the structure of the CFPB violates the separation of powers doctrine arguing that because the Bureau is led by a single director removable by the President only for cause, it denies the Executive Branch its due.

 

The Fifth Circuit found no support for this argument in constitutional text or in Supreme Court decisions and upheld the constitutionality of the CFPB's structure.

 

The Fifth Circuit noted that the Supreme Court of the United States "has, without exception, upheld for-cause protection for officers so long as removal authority remains in the hands of the President or his at-will agent." Further noting, the Supreme Court has struck down officer removal restrictions three times, "each where the removal power has been held by Congress or given to someone other than the President."

 

The Court distinguished Collins where it found that the FHFA's single-member leadership, in conjunction with for-cause removal protection and other features, unconstitutionally insulated the FHFA noting in the present matter the "FSOC's veto provides the Executive Branch with 'an emergency brake to hold the CFPB accountable,' the Executive Branch holds no formal control over the FHFA."

 

Finally, the Fifth Circuit concluded that "[t]he President can remove the CFPB Director only for 'inefficiency, neglect of duty, or malfeasance in office,' a broad standard repeatedly approved by the Supreme Court. That alone is enough to decide this case. If there is any threat of undue concentration of power, the Office of President is its beneficiary" finding "neither the text of the Constitution nor the Supreme Court's previous decisions support the Appellants' arguments that the CFPB is unconstitutionally structured, the district court is 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

 

 

 

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FYI: Ill Sup Ct Holds Complete Tender Before Class Cert Moots Putative Class Action

The Supreme Court of Illinois recently held that an effective tender made prior to a class certification motion which satisfies the named plaintiff's individual claim, moots her interest in the litigation, and ends the matter.

 

In so ruling, the Court explained that the ruling of the Supreme Court of the United States in Campbell-Ewald Co. v. Gomez, 577 U.S. ___, 136 S. Ct. 663 (2016), dealt with offers of judgment, but here there was a complete tender of the amounts claimed.

 

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

 

Two tenants brought two putative class action claims and individual claims in state court against their prior landlord. The tenants did not file a class certification motion with their complaint.

 

Count I of the tenants' complaint prayed for judgment in an amount to be proven at trial but not less than an amount equal to such class member's security deposit, plus costs, attorney fees.

 

The day after the landlord was served with the complaint, its attorney sent tenants' counsel a letter indicating that he had been retained by the landlord "to tender a full, unconditional, and complete settlement of [plaintiffs'] individual claim set forth in Count I of the proposed class action complaint" along with a cashier's check of $1,290.00, representing tenants maximum individual recovery as prayed for in Count I of the complaint.

 

The tenants did not deposit or cash the check.

 

The landlord then moved to dismiss count I pursuant to Barber v. American Airlines, Inc., 241 Ill. 2d 450 (2011), arguing that it "made a full and unconditional tender of all sums due to Plaintiffs" and move two dismiss count II for failure to state a claim. The motion did not address count III.

 

Tenants responded Barber was no longer valid law following Campbell-Ewald, and even if it were valid, that the landlord's tender was insufficient and moved to amend count II. Tenants amended count II but failed to attach any exhibits to its amended complaint.

 

The trial court dismissed count I, finding that it was bound by precedent in Barber and that the landlord made an adequate tender.

 

The landlord moved to dismiss the amended complaint generally and count II specifically.  The trial court dismissed the first amended complaint as deficient for lacking the written instruments on which the claims were founded and dismissed count II for failure to state a claim.

 

The tenants appealed. The appellate court help that the landlord made a valid tender and the trial court "properly dismissed Count I as moot." As for count II, the appellate court noted that plaintiffs did not argue for reversal of the failure to state a claim, and affirmed dismissal and reinstated count III as the third count was not based on a written instrument.

 

The tenants then appealed to the Supreme Court of Illinois raising two issues (1) that Barber is no longer good law after Campbell-Ewald; and (2) that the trial court erred in dismissing all counts based on defendant's tender as to only the first count.

 

The Supreme Court of Illinois noted that the Barber rule holds that "when a defendant tenders the full amount requested by a plaintiff purporting to represent a class before the named plaintiff files a class-certification motion, the plaintiff's claim becomes moot." Barber, 241 Ill. 2d at 456-57.

 

The Court examined Wheatley, which held that when the named plaintiffs received the relief they demanded it was "clear that the interests of the named representative plaintiffs are moot because there is no longer a controversy between them and the [Defendant]."  Wheatley v. Board of Education of Township High School District 205, 99 Ill. 2d 481, 485-86 (1984).

 

When the Supreme Court of Illinois considered a similar situation in Barber, the Court noted that "Wheatley teaches that the important consideration in determining whether a named representative's claim is moot is whether that representative filed a motion for class certification prior to the time when the defendant made its tender."

 

Finally, the Court examined Ballard which held "that Barber contains no explicit requirement for the class certification motion, other than the timing of its filing" and "the focus of Barber is on the timing of the plaintiff's filing [and not the merits of] a motion for class certification".   Ballard RN Center, Inc. v. Kohll's Pharmacy & Homecare, Inc., 2015 IL 118644.

 

The Supreme Court of Illinois noted the difference between an offer (a willingness to do something) and a tender which "is an unconditional offer of payment consisting of the actual production of a sum not less than the amount due on a particular obligation."

 

The Court noted that, in Campbell-Ewald, the Supreme Court of the United States that a plaintiff's "individual claim was not made moot by the expired settlement offer," and "a would-be class representative with a live claim of her own must be accorded a fair opportunity to show that certification is warranted."

 

However, here, the Court noted the defendant "unconditionally tender[ed]" a "[c]ashier's check in the amount of $1,290.00 representing [plaintiffs'] maximum individual recovery under 765 ILCS 715/2 as prayed for in Count I of the complaint" and "[a]ll court costs and reasonable attorney's fees as allowed by the court that Plaintiffs incurred in pursuing Count I of the complaint."

 

The Supreme Court of Illinois rejected Plaintiffs argument that tender was conditional because it limited recovery on costs and attorney fees to what would be "allowed by the court" and did not include payment for the costs and attorney fees.

 

The Court reaffirmed Wheatley, Barber, and Ballard and held that an effective tender made before a named plaintiff purporting to represent a class files a class certification motion satisfies the named plaintiff's individual claim and moots her interest in the litigation.

 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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and

 

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