FYI: 2nd Cir Rules in Favor of Mortgagee on New York Pre-Foreclosure Notice and Filing Issues

The U.S. Court of Appeals for the Second Circuit recently affirmed summary judgment in a mortgagee's favor against borrower claims that it failed to comply with pre-foreclosure notice and filing requirements of the New York Real Property Actions and Proceedings Law.

 

With the benefit of guidance from answers to two certified questions to the New York Court of Appeals, the Second Circuit held that:

 

- The mortgagee's deviation of its routine procedures by mailing the requisite RPAPL § 1304 90-day pre-foreclosure notice nearly a year after the default, and not "upon default," was immaterial, and coupled with the borrowers' claim the notice was not received, inadequate to rebut the presumption that the notice was properly prepared and mailed; and

 

-  Because the New York Court of Appeals concluded that under RPAPL § 1306 is satisfied as long as one borrower is listed on the pre-foreclosure filing, the mortgagee's omission of information as to the co-borrower was immaterial.

 

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

 

After husband and wife co-borrowers ("Borrowers") ceased making payments on their mortgage loan, the mortgagee ("Mortgagee") initiated foreclosure proceedings in federal court, which resulted in entry of summary judgment in the Mortgagee's favor.

 

The Borrowers appealed to the Second Circuit, arguing that the Mortgagee failed to prove compliance with pre-foreclosure notice and filing requirements of the New York Real Property Actions and Proceedings Law ("RPAPL") §§ 1304, and 1306, respectively.

 

As to the first argument, the Borrowers argued that the Mortgagee did not adequately establish that it had served them with notice at least ninety days before commencing the foreclosure action, as required. See N.Y. Real Prop. Acts. Law § 1304(1)–(2). 

 

Under New York law, lenders may create a rebuttable presumption of compliance with section 1304 by submitting "proof of a standard office mailing procedure designed to ensure that items are properly addressed and mailed, sworn to by someone with personal knowledge of the procedure" (Citibank, N.A. v. Conti- 6 Scheurer, 98 N.Y.S.3d 273, 277 (N.Y. App. Div. 2d Dep't 2019)), but its recipients may rebut the presumption by denying receipt and "showing that [the] routine office practice was not followed or was so careless that it would be unreasonable to assume that the notice was mailed." Nassau Ins. Co. v. Murray, 386 N.E.2d 1085, 1086 (N.Y. 1978).

 

In the trial court, the Mortgagee submitted copies of the 90-day notices coupled with an affidavit from its employee explaining the Mortgagee's standard procedures to create, mail and store data regarding the 90 day pre-foreclosure notice as required by section 1304, and that the Mortgagee's standard practice is to create the notice upon default.

 

The trial court held that the affidavit was sufficient under state law to create a presumption that the § 1304 notices had been mailed, but the Second Circuit was hesitant to affirm on this basis, noting that the Borrowers' denial of receipt, coupled with an undisputed deviation from the Mortgagee's standard procedure in that the notices were generated and mailed nearly a year after the date of default and not "upon default," may be adequate to rebut the presumption of mailing. 

 

Because the Second Circuit found no authority from the New York Court of Appeals establishing the quantum of evidence necessary to rebut the presumption of mailing that is established by a showing of a standard procedure, it determined that it required guidance from the New York Court of Appeals to answer this dispositive question.

 

In support of their claims that the Mortgagee failed to comply with RPAL's pre-foreclosure filing requirements under § 1306(2), the Borrowers argued that the Mortgagee's filing with state regulators was inadequate because it did not include certain information as to all borrowers on the loan. 

 

The Borrowers and Mortgagee did not dispute that the section 1306 filing was timely submitted and included the "name, address, [and] last known telephone number" of the co-borrower wife, as required under § 1306(2), but did not include this information as to the co-borrower husband. 

Observing that neither the New York Court of Appeals nor the Appellate Division opined as to whether section 1306 required a lender to file specified information about all borrowers on a multi-borrower loan, the Second Circuit determined that this argument, too, turned on an question to be answered by New York state's highest court.

 

Because the Borrowers' arguments turned on unsettled questions of state law, on January 28, 2020 the Second Circuit issued its first opinion, certifying two questions to the New York Court of Appeals:

 

(1) "Where a foreclosure plaintiff seeks to establish compliance with RPAPL § 1304 through proof of a standard office mailing procedure, and the defendant both denies receipt and seeks to rebut the presumption of receipt by showing that the mailing procedure was not followed, what showing must the defendant make to render inadequate the plaintiff's proof of compliance with § 1304?", and

 

(2) "Where there are multiple borrowers on a single loan, does RPAPL § 1306 require that a lender's filing include information about all borrowers, or does § 1306 require only that a lender's filing include information about one borrower?"

 

After the New York Court of Appeals rendered its opinion on the two certified questions on March 30, 2021 (CIT Bank N.A. v. Schiffman, No. 11, 2021 WL 1177940 (N.Y. Mar. 30, 2021), the Second Circuit issued the instant opinion.

 

As to the § 1304 notification question, the New York Court of Appeals held that the presumption of mailing, once established by proof of a routine office practice, may be rebutted by a denial of receipt plus "proof of a material deviation from an aspect of the office procedure that would call into doubt whether the notice was properly mailed, impacting the likelihood of delivery to the intended recipient." Id. at *3.

 

In other words, "the crux of the inquiry is whether the evidence of a defect casts doubt on the reliability of a key aspect of the process such that the inference that the notice was properly prepared and mailed is significantly undermined. Minor deviations of little consequence are insufficient." Id.

 

Here, while the notice was created on November 18, 2015, rather than upon the Borrowers' default in December 2014, the Second Circuit concluded that merely creating the notice later than it would have been in the ordinary course was immaterial as to whether it was properly prepared and mailed. 

 

Accordingly, under the guidance provided by the New York Court of Appeals' answer to its certified question, the Second Circuit concluded that the Borrowers failed to rebut the presumption that the Mortgagee mailed, and the Borrowers received, the required § 1304 notices. 

 

Answering the second certified question as to whether the prefiling requirements under RPAPL § 1306 require information about all borrowers, the New York Court of Appeals concluded that "[a]lthough the statute does not specify whether information must be supplied [to the Superintendent] concerning each party when there are multiple individuals or entities on a single loan" … it "is satisfied as long as one borrower is listed."  CIT, 2021 WL 1177940, at *4.

 

Thus, the Mortgagee's omission of information as to the co-borrower husband in its section 1306 was irrelevant, because it timely submitted the filing with all required information about the co-borrower wife in compliance with the statute.

 

Accordingly, following the well-reasoned opinion of the New York Court of Appeals answering its certified questions, the Second Circuit concluded that summary judgment was appropriate because no genuine dispute existed that the Mortgagee complied with the pre-foreclosure requirements of RPAPL §§ 1304 and 1306, and affirmed the trial court's judgment.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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: Cal App Ct (4th Dist) Holds Rosenthal Act May Apply to Foreclosures, "Continuing Violation" Doctrine May Apply

The Court of Appeal of the State of California, Fourth Appellate District, recently reversed in part and affirmed in part a trial court's judgment sustaining the defendant loan servicer's and loan owner's demurrer (motion to dismiss) based on res judicata.

 

In the nonpublished portion of this opinion, the Court held that, as to three of the plaintiffs' causes of action — including their California Rosenthal Act cause of action — the trial court erred by sustaining the demurrer based on res judicata.

 

As to the remaining three causes of action, the plaintiffs did not articulate any reason why res judicata did not apply, and therefore forfeited any such contention.

 

However, in the published portion of this opinion, the Court held that the Rosenthal Act could apply to a nonjudicial foreclosure, and that the continuing violation doctrine may apply to Rosenthal Act claims.  The Court also concluded that the federal court opinions the defendants relied upon were superseded by controlling decisions of the Supreme Court of the United States, the Ninth Circuit, and the California Courts of Appeal.

 

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

 

In an action filed in December 2018, the plaintiffs alleged that the defendants, a group of financial institutions, attempted to collect a debt secured by the plaintiffs' home, despite having no legal right to do so.

 

The plaintiffs raised six causes of action: (1) violation of the Rosenthal Fair Debt Collection Practices Act (Rosenthal Act) (Civ. Code, § 1788 et seq.); (2) improper substitution of trustee (Civ. Code, § 2934a, subd. (a)); (3) unfair competition (Bus. & Prof. Code, § 17200); (4) negligent misrepresentation; (5) cancellation of instruments; and (6) intentional infliction of emotional distress.

 

The trial court sustained the defendants' demurrer to the entire complaint on the ground of res judicata, riling that the plaintiffs were asserting the same causes of action as in a prior federal action that they brought, unsuccessfully, against the defendants in 2016. The plaintiffs timely appealed.

 

The plaintiffs argued on appeal that their prior federal Fair Debt Collection Practices Act (FDCPA) cause of action and their present California Rosenthal Act cause of action were not the same, for several reasons. Of these, the Fourth Appellate District considered only their argument that their current Rosenthal Act cause of action arose out of "continuing violations" which occurred after the judgment in the 2016 federal action.

 

"[C]laim preclusion does not apply to claims that were not in existence and could not have been sued upon . . . when the allegedly preclusive action was initiated." Media Rights Technologies, Inc. v. Microsoft Corp. (9th Cir. 2019) 922 F.3d 1014, 1021.

 

The plaintiffs specifically alleged that defendants violated the Rosenthal Act "by engaging in abusive and oppressive conduct within one year of the filing of the Complaint through (i) unethical mismanagement of the escrow account; (ii) refusal to correct accounting errors or adequately responding to [the plaintiffs'] repeated disputes over several years; (iii) assessment of illegal fees; and improperly attempting to collect amounts that are not due to them."

 

The Fourth Appellate District determined that at least some of these alleged violations of the Rosenthal Act took place after the federal action was filed. Thus, the Court held that the Rosenthal Act cause of action was not barred by res judicata.

 

In addition, the unfair competition cause of action expressly incorporated "[t]he violations of law alleged in" the Rosenthal Act cause of action. Because at least some of these violations allegedly occurred after the complaint in the 2016 federal action was filed, the Fourth Appellate District also concluded that the unfair competition cause of action was not barred by res judicata.

 

The Appellate Court also noted that the cancellation cause of action sought to cancel the November 2018 notice of trustee's sale. As this instrument did not exist when the 2016 federal action was filed, the Court concluded that the plaintiffs could not have sought to cancel it in that action and res judicata did not apply.

 

Regarding the remaining causes of action, the plaintiffs only argued that they did not allege them in the 2016 federal action.

 

However, the Fourth Appellate District held that this does not prevent the application of res judicata. "Res judicata prevents litigation of all grounds for, or defenses to, recovery that were previously available to the parties, regardless of whether they were asserted or determined in the prior proceeding." (Brown v. Felsen (1979) 442 U.S. 127, 131.) Thus, the Court concluded that the plaintiffs forfeited any other argument regarding these causes of action.

 

Therefore, the Fourth Appellate District held that three causes of action — under the Rosenthal Act, for unfair competition, and for cancellation of instruments — were not barred by res judicata.

 

Next, the Court considered whether the demurrer to these causes of actions could have been sustained on alternative grounds.

 

The defendants also demurred to the Rosenthal Act cause of action on the ground that "[c]onduct undertaken in connection with the foreclosure of a deed of trust is not actionable under [the Rosenthal Act]."

 

The Fourth Appellate District observed that the Rosenthal Act is modeled on the federal FDCPA. It incorporates the FDCPA, in order that a violation of the FDCPA is per se a violation of the Rosenthal Act. (Civ. Code, § 1788.17.)

 

However, the Rosenthal Act is more extensive than the FDCPA. For example, the FDCPA does not apply to creditors seeking to collect their own debts; however, the Rosenthal Act does, "so long as they do so 'in the ordinary course of business, regularly.'" Huy Thanh Vo v. Nelson & Kennard, 931 F.Supp.2d 1080, 1090 (E.D. Cal. 2013) , quoting Civ. Code § 1788.2, subd. (c).

 

The defendants argued that the Rosenthal Act does not apply to foreclosure on a trust deed by citing several federal district court opinions. However, the Fourth Appellate District held that these opinions had been undermined by subsequent decisions of the Supreme Court of the United States, the Ninth Circuit, and the California Courts of Appeal.

 

In 2019, in Obduskey v. McCarthy & Holthus LLP (2019) U.S. [139 S.Ct. 1029], the Supreme Court of the United States effectively overruled the defendants' cited opinions, holding that a loan secured by a deed of trust is a "'debt' ... primarily for personal, family, or household purposes." (Id. at pp. 1033, 1035-1040.) (see 15 U.S.C. § 1692a(5))

 

Meanwhile, in 2018, Davidson v. Seterus, Inc., 21 Cal.App.5th 283 (2018), held that a loan secured by a trust deed can be a "consumer debt" within the meaning of the Rosenthal Act. (Id. at pp. 298-300.) The Fourth Appellate District decided that this definitive construction of state law effectively overruled the contrary federal cases.

 

The Fourth Appellate District also remarked that the California Legislature recently amended the Rosenthal Act so as to state that: "[t]he term 'consumer debt' includes a mortgage debt." (Civ. Code, § 1788.2, subd. (f), Stats. 2019, ch. 545, § 2, p. 5004.)

 

The defendants also argued that the Rosenthal Act cause of action was time-barred. The limitations period under the Rosenthal Act is one year. (Civ. Code, § 1788.30, subd. (f).) The defendants asserted that the plaintiffs were aware of allegedly unlawful debt collection practices as early as 2016, when they filed the federal action.

 

The Fourth Appellate District was not persuaded and held that, at a minimum, the plaintiffs can recover any damages flowing from the most recent violations that occurred after the 2016 federal action was filed.

 

Additionally, the Fourth Appellate District concluded that the continuing violation doctrine applied. "Under the appropriate circumstances . . . , the continuing violation doctrine may apply to [Rosenthal Act] claims." (Joseph v. J.J. Mac Intyre Companies, L.L.C. (N.D. Cal. 2003) 281 F.Supp.2d 1156, 1161. "The key is whether the conduct complained of constitutes a continuing pattern and course of conduct as opposed to unrelated discrete acts." (Id. at p. 1161.) If it does, "[a]pplication of the continuing violation doctrine to these facts is not only logical by way of analogy, it is entirely consistent with . . . the Rosenthal Act's broad remedial purpose of protecting consumers." (Id. at p. 1162.) The Court thus held that the demurrer to this cause of action could not have been sustained on these grounds.

 

In demurring to the unfair competition cause of action, the defendants argued that the plaintiffs failed to allege any unlawful, unfair, or fraudulent conduct. They also argued that this cause of action was time-barred.

 

However, the Fourth Appellate District held that "[v]irtually any law — federal, state or local — can serve as a predicate for a [UCL] action." (Law Offices of Mathew Higbee v. Expungement Assistance Services (2013) 214 Cal.App.4th 544, 553.) Because the plaintiffs adequately alleged violations of the Rosenthal Act, the Court concluded that they also adequately alleged "unlawful" business practices and that it need not decide whether the plaintiffs adequately alleged any unfair or fraudulent conduct.

 

The limitations period for unfair competition is four years. (Bus. & Prof. Code § 17208.) As the Rosenthal Act cause of action was not time-barred, the Fourth Appellate District also held that the unfair competition cause of action was not time-barred. The Court thus concluded that the demurrer to this cause of action could not have been sustained on these grounds.

 

Finally, in demurring to the cause of action for cancellation of instruments, the defendants argued that the plaintiffs failed to allege any facts showing that the instruments were void or voidable — i.e., the allegations to this effect were unduly conclusory.

 

One of the elements of a cause of action for cancellation of an instrument is that the instrument is void or voidable. (Civ. Code, § 3412; Thompson v. Ioane (2017) 11 Cal.App.5th 1180, 1193-1194.) The Fourth Appellate District conceded that the plaintiffs' allegations that the March 2009 and November 2009 assignments were invalid were indeed conclusory. However, the Court also noted that the plaintiffs did specifically allege that the January 2013 substitution of trustee and the April 2014 assignment were invalid because they were executed by an agent without subscribing the name of the principal. They also specifically alleged that the January 2013 substitution of trustee was invalid because the beneficiaries had not signed and recorded a majority action affidavit.

 

The Fourth Appellate District held that these allegations were not conclusory. Because the defendants did not argue otherwise, the Court assumed that these instruments were void or voidable. The Court thus concluded that the demurrer to this cause of action could not have been sustained on this ground.

 

Accordingly, the Fourth Appellate District reversed the trial court's judgment with respect to the first (Rosenthal Act), third (unfair competition), and fifth (cancellation of instruments) causes of action. However, the judgment was affirmed with respect to the second (improper substitution of trustee), fourth (negligent misrepresentation), and sixth (intentional infliction of emotional distress) causes of action.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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   |   Tennessee   |   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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