Friday, November 12, 2021

FYI: 11th Cir Rejects Debtors' Challenge to Real Estate Collateral Sale Approved by Bankruptcy Court

The U.S. Court of Appeals for the Eleventh Circuit recently ruled that a Debtor's appeal of a sale order was statutorily mooted by Subsection 363(m) of the Bankruptcy Code.

 

In so ruling, the Eleventh Circuit held that: (1) while the Bankruptcy Code bars relief for an appeal pursuant to 11 U.S.C. § 363(m), it does not defeat jurisdiction; and (2) Subsection 363(m) applies to appeals from any sale authorized by the bankruptcy court, not just those properly authorized by the Bankruptcy Code.

 

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

 

The underlying proceedings arose out of two separate Chapter 11 bankruptcy proceedings. The first proceeding involved two natural person debtors ("Debtors") and the second proceeding involved the company owned by Debtors in the first proceedings ("Company Debtor"). Prior to declaring bankruptcy, Debtors and Company Debtors borrowed money from Lender, each serving as guarantor for the other's debt. The loans were secured by real property.

 

After declaring bankruptcy, Company Debtor was granted permission by the bankruptcy court to acquire a debtor-in-possession loan from Lender which would "roll-up" the debt and provide an additional amount of working capital. None of the parties thought this loan would affect the Lender's lien on real property collateral.

 

Approximately a month later, Debtors filed a motion seeking approval of the sale of the real property to Lender, pursuant to 11 U.S.C. § 363(b), which provides for the sale of a bankruptcy estate's assets outside the normal course of business. The sale was approved "via a credit bid of $3.5 million" under 11 U.S.C. § 363(k). In approving the sale, the bankruptcy court expressly found that Lender was "a good faith purchaser under Section 363(m) of the Bankruptcy Code."

 

After final approval of the sale, Debtors asserted that Lender's roll-up loan to Company Debtor had paid off their own debts to Lender and eliminated Lender's lien on their real property. Debtors filed a motion to amend the sale order and stay the sale.

 

The motion was rejected by the Bankruptcy Court as: (1) the only effect the roll-up loan had on Debtors loans was making Company Debtor a co-obligor rather than a guarantor; and (2) Debtors were foreclosed from arguing that Lender lacked a biddable interest in the property after final approval of the sale.

 

The bankruptcy court further ruled that equitable estoppel, judicial estoppel, and the law of the case barred Debtors from amending the sale on the ground that Lender lacked a biddable interest in the property. The bankruptcy court also held that the roll-up loan consolidated the Company Debtor's obligations, making it an obligor or co-obligor in all debt owed to Lender without eliminating Debtors' obligations to Lender.

 

Debtors appealed the sale order and the order denying their motion to amend, and petitioned the bankruptcy court to stay the sale pending appeal. The bankruptcy court agreed to grant the stay on condition that Debtors post a supersedeas bond which they failed to do.

 

Debtors ultimately gave the executed deed to the property to Lender and the deed was duly recorded. After the sale was consummated, Lender moved to dismiss the appeal as moot under 11 U.S.C. 363(m) and the motion was granted by the district court, which held that because Debtors did not obtain a stay or prevent the sale from being completed, the trial court lacked authority to grant effective relief under the Bankruptcy Code, which rendered the appeal moot.

 

Debtors then appealed the district court's decision.  The basis for the appeal was that Lender was not a good faith purchaser under the Bankruptcy code provision which governs sales of debtor assets.

 

Under Subsection 363(m) of the Bankruptcy Code, district and appellate courts are precluded from reversing or modifying a bankruptcy court's authorization of a sale of a bankruptcy estate's property to someone who "purchased … such property in good faith" under subsection 363(b) or (c) unless the sale was stayed pending appeal. 11 U.S.C. 363(m).

 

Although the Bankruptcy Code bars relief for an appeal pursuant to subsection 363(m) it does not defeat jurisdiction. However, as any opinion on the propriety of the transaction would be advisory-only, the appellate court considers such statutory appeals moot. See Chafin v. Chafin, 568 U.S. 165, 172 (2013).

 

The Eleventh Circuit here found that subsection 363(m) applied to Debtor's appeal, holding that section 363(m) applies to appeals from any sale authorized by the bankruptcy court, not just those properly authorized by the Bankruptcy Code.

 

The Court held that Subsection 363(m) is a flat rule, but acknowledged the applicability of Subsection 363(m) is still conditioned on the presence of (1) the failure of the appellant to obtain a stay of the sale order, and (2) a sale transacted with "an entity that purchased or leased [the] property in good faith."

 

Thus, the Eleventh Circuit held that appellate courts could assess whether a buyer acted in good faith in determining whether Subsection 363(m) moots an appeal.  Here, the Appellate Court found no evidence that Lender engaged in fraudulent behavior. The Court further found that Lender's lien had value enough to support the bankruptcy court's fact-finding that Lender was a good faith purchaser.

 

Having established that Debtors appeal was covered by Subsection 363(m), the Eleventh Circuit went on to affirm the district court's ruling that the relief sought by Debtors was precluded, thereby mooting their appeal.

 

The Debtors finally argued, that rather than unwinding the sale, the Court could make Lender pay cash for the property. However, the Eleventh Circuit held that because this relief would change the sale price after the fact, it would affect the validity of the sale on appeal. Thus, the Court reasoned, if it ordered Lender to pay an amount other than that which it bid and which the bankruptcy court approved, the Court would be undoing the sale itself, which they do not have the power to do under 363(m).

 

Therefore, as the statute forbids appellate court from providing a remedy, the Eleventh Circuit held that the appeal was moot.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th 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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Monday, November 8, 2021

FYI: More on 11th Cir's FDCPA Letter Vendor Ruling : "Hunstein II - The Phantom Harm Still Stands"

Costumes, candy, and frightening movie sequels often mark the end of October. Just in time for Halloween, the U.S. Court of Appeals for the Eleventh Circuit released its own scary sequel with its substituted opinion in Hunstein v. Preferred Collection and Management Services, Inc.

 

A copy of the opinion in "Hunstein II" is available at:  Link to Opinion

 

You surely know the first chapter of this chilling tale. Hunstein's vendor-disclosure claim was vanquished in the District Court but was then shockingly revived on appeal. Preferred fought back with a petition for rehearing, which was supported by a volley of amicus briefs. Then a higher power in the form of the Supreme Court of the United States sent our phantom-harm fighters another weapon: its decision in TransUnion LLC v. Ramirez.

 

There appeared to be no way Hunstein's claim could survive the sequel. Spoiler alert: It lives, and it continues to haunt collectors in the dark forests and murky bayous of Alabama, Florida, and Georgia. Put another way, the Eleventh Circuit held for a second time that Hunstein has standing to maintain his case in federal court and that his complaint states a claim under 15 U.S.C. § 1692c(b).

 

Many anticipated that the Hunstein sequel would star an ensemble cast comprising all the judges of the Eleventh Circuit in an en banc review. Instead, the three-judge panel decided to vacate its prior opinion and substitute a new opinion after reviewing Preferred's petition, the amicus briefs, and the Supreme Court's decision in TransUnion.

Kind, Not Degree

 

Standing opinions, like horror films, are largely formulaic so by now you know the plot. The plaintiff in a federal lawsuit must allege (among other things) that he has suffered a concrete injury. He can do this by alleging a tangible harm, a risk of real harm, or an intangible injury that is nonetheless treated by courts as concrete. Hunstein's alleged statutory violation falls into this third category.

 

In many instances, the intangible harm associated with a statutory violation is a ghost that cannot be seen, heard, or felt. The federal courts simply do not acknowledge these creatures; and plaintiffs who burden the federal courts with stories of such specters are told to seek their relief elsewhere. But two types of phantom harms can be sufficiently concrete to exist in federal court: (1) harms that bear a close resemblance to a harm historically recognized as actionable, such as that associated with a common-law tort claim; and (2) intangible (but nonetheless real) harms that were previously inadequate at law, but which Congress has elevated to the status of legally cognizable injuries.

 

In its original decision, the Hunstein panel explained that the harm associated with the disclosure to a mail vendor of information related to Hunstein's debt and his son's medical condition was sufficiently analogous to the common-law tort of public disclosure of private facts. Hunstein II takes a deeper look at how closely a phantom harm must resemble the harm associated with a common-law cause of action and ultimately holds that those harms need only be similar in kind, not in degree.

 

A public disclosure of private facts occurs when one gives publicity to the private matter of another. Courts have traditionally held that a plaintiff can recover only when the private matter was publicized, which means it must have been made known to the public or to a large group of people. Hunstein's allegation that Preferred disclosed his information to the employees of a mail vendor, a relatively small group, appears to fall well short of the publicity required for a public-disclosure-of-private-facts claim. However, the majority in Hunstein II said that the difference is a matter of degree not of kind, and thus held that Hunstein's alleged harm bore a sufficiently close relationship to a harm traditionally recognized by American courts.

 

Perhaps in that same spirit, the costume judges at a Halloween party two weeks ago decided that someone in a Where's Waldo outfit qualified for the Freddy Krueger look-alike contest.[1] The would-be Waldo sported a sweater with horizontal red stripes, so his appearance was similar in kind to Freddy's even if the degree to which he resembled an undead, homicidal, knife-fingered slasher left much to be desired.[2]

 

The Impact of TransUnion v. Ramirez

 

How did Hunstein's phantom claim survive TransUnion, which was hurled like a thunderbolt from a judicial Olympus after the petition for rehearing was briefed? As you might recall, the Supreme Court in TransUnion held that class members whose credit reports contained misleading information related to a terrorist list had standing only if their reports were published to third parties. According to the Hunstein II majority, TransUnion does not foreclose Hunstein's standing but rather confirms that the Eleventh Circuit struck the right balance by drawing a line between kind and degree.

 

However, the Eleventh Circuit still had to confront TransUnion's footnote 6, which seemed eerily aimed at the spectral harm associated with a vendor disclosure. In that footnote, the Supreme Court addressed whether TransUnion "published" class members' information to its own employees and to the vendors that printed notices and mailed them to the members of the class. The Supreme Court noted that "[m]any American courts did not traditionally recognize intra-company disclosures as actionable publications for purposes of the tort of defamation…[n]or have they necessarily recognized disclosures to printing vendors as actionable publications."

 

The Supreme Court also suggested that a plaintiff who alleges damages based on internal publication to employees or publication to third-party vendors would have to show that the defendant "brought an idea to the perception of another" and that "the document was actually read and not merely processed."

 

Hunstein II brushes TransUnion's footnote 6 aside as mere dicta, noting that the plaintiffs in TransUnion forfeited that argument by raising it for the first time on appeal. The Hunstein II majority also observed that TransUnion went to trial, whereas it was reviewing a motion to dismiss. As a result, the Eleventh Circuit had "no 'evidence' by which to evaluate whether anyone at [the mail vendor] 'actually read and not merely processed' Hunstein's sensitive information." Instead, the court had to accept as true Hunstein's allegation that the defendant debt collector did disclose his son's medical information to the mail vendor's employees. The court used this allegation, along with the defendant's concession that its transmittal of information to the mail vendor was a "communication" under the FDCPA, to distinguish Hunstein's standing from that of certain class members in TransUnion.

 

So perhaps Hunstein will have to prove on remand that at least one sentient being employed by the mail vendor read the information related to his debt. Or perhaps not. The Hunstein II majority also suggests that requiring Hunstein to show that mail-vendor employees actually read his information would "transform Spokeo's 'close relationship' test into a 'perfect match' test…[and] would do the very thing that the Court [in TransUnion] said it was not doing, namely, 'requir[ing] an exact duplicate' of a common-law claim."

 

Recall that in TransUnion the Supreme Court analogized the plaintiffs' Fair Credit Reporting Act claim to the common-law tort of defamation, even though a statement generally must be false to be defamatory and the statements at issue in TransUnion were merely misleading. After all, the credit reports at issue in that case did not say that the class members were terrorists, only that their names potentially matched names on a list of suspected terrorists. Similarly, if the credit reports of Mike Myers, the Canadian comedian, and Fred Krueger, a hypothetical sleep therapist in Peoria, indicated their names were on a list of suspected demons it would not technically be defamation, but it would be close enough to support an FCRA claim.

 

Returning to Hunstein II, the publication of private information to a handful of people (or to a corporate entity) is not publicity to the degree usually required for a public-disclosure-of-private-facts claim, but the majority held that it sufficiently resembles the type of harm associated with that tort to confer standing (at least in this case).[3]

 

The Vendor-Disclosure Allegation States a Claim

 

As for the merits of Hunstein's claim, the panel again held that he stated a claim under § 1692c(b), even while acknowledging once more that its decision "runs the risk of upsetting the status quo in the debt-collection industry" and that preventing collectors from using vendors "may not purchase much in the way of 'real' consumer privacy."

 

The Hunstein II majority believed the wording of the statute compelled its decision. Like an evil incantation, Congress's words breathed life into these shadowy harms and conjured them into existence. The remedy, therefore, is to ask Congress to remove its spell. However, there is reason to believe the battle in the Eleventh Circuit has not yet concluded.

Don't Skip the Dissent, or the Footnotes

 

While the Supreme Court's decision in TransUnion did not slay the mail-vendor-disclosure claim in the way some anticipated, it did convert one of the panel's three judges. That judge wrote a blistering dissent explaining his revised conclusion that Hunstein lacked Article III standing and failed to state a claim. The dissent also highlighted several strong arguments that defendants can use to fight similar claims in other circuits.

 

Also, it's easy to skip the footnotes when reading a decision that runs 65 pages in total, but you should take time to read them.[4] Those long footnotes are where the majority responds to points raised in the dissent.

 

Will there be a Hunstein III?

 

Like the final moments in many franchise films, the dissent provides a glimpse of what we might see unfold in a potential Hunstein III. Preferred can re-petition the court to grant en banc review of the panel's substituted opinion, and the entire Eleventh Circuit might be more inclined to review Hunstein II given that at least one judge now believes the majority's decision conflicts with the Supreme Court's holding in TransUnion.

 

Have we just seen the second part of a Hunstein trilogy? Maybe, but Hunstein III is (at most) a project in early development. Stay tuned.

 

 

[1] This analogy isn't perfect, but it's probably no worse than some of the analogies we will see as courts struggle to apply the kind/degree distinction. 

 

[2] Our surprise contestant was later disqualified when the judges were unable to locate him for the final evaluation, which I suppose is a win in its own way for someone dressed like Waldo.

 

[3] The majority said that the judgment of Congress also supported a finding of standing, but it did not add much to what it said on this point in Hunstein I.

 

[4] This was a test. You passed.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th 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   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

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Sunday, November 7, 2021

FYI: Ill App Ct (1st Dist) Holds HUD "Face to Face" Compliance May Not Have Been Excused by Letter from Borrower's Counsel

The Appellate Court of Illinois, First District, recently vacated a judgment of foreclosure entered against a homeowner borrower, concluding that the mortgagee failed to conduct a face-to-face meeting with her prior to initiating foreclosure proceedings, as required for mortgage loans insured by the Department of Housing and Urban Development (HUD).

 

In so ruling, the Appellate Court held that the trial court erred in entering summary judgment in the mortgagee's favor because a genuine issue of material fact existed as to whether a letter from the borrower's former counsel was a "stop communications" letter that exempted the mortgagee from the face-to-face meeting requirement.

 

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

 

In July 2016, a mortgagee ("Mortgagee") filed a foreclosure action against husband and wife homeowners alleging a default under their mortgage loan.  The wife ("Borrower") was the only signer on the loan's promissory note, and individually entered into a second loan modification agreement with the mortgagee individually in October 2014.

 

The Borrower and her husband moved to dismiss the foreclosure complaint on the basis that the mortgagee failed to conduct a face-to-face meeting with them prior to filing the foreclosure complaint, as required for mortgages insured by the Department of Housing and Urban Development (HUD).  In response, the Mortgagee argued that it was exempt from this requirement because it received a cease-and-desist letter from the Borrower's attorney in February 2014 requesting that it stop all communications with the Borrower regarding the collection of the debt, which it acknowledged in a responsive letter to the Borrower's counsel.

 

The trial court struck the motion to dismiss and granted leave to file an answer to the foreclosure complaint, wherein the Borrower and her husband again alleged that the Mortgagee failed to conduct the required face-to-face meeting prior to initiating foreclosure as an affirmative defense.

 

The Mortgagee moved for summary judgment and judgment of foreclosure, arguing it was not required to conduct a face-to-face meeting with the Borrower because she requested that it cease communications with her, triggering the exceptions to the face-to-face meeting under 24 C.F.R. § 203.604(c)(3) (2018). ("[a] face-to-face meeting is not required if the mortgagor has clearly indicated that he will not cooperate in an interview.").

 

The Borrower and her husband filed a response in opposition to the Mortgagee's motion, as well as their own cross-motion for summary judgment, arguing that the Mortgagee was still required to arrange a face-to-face meeting prior to initiating foreclosure proceedings because the February 2014 letter sent by the Borrower's former counsel was not a "stop communications" letter, but a limited power of attorney letter and third-party authorization, only requesting communications from the Mortgagee to be made directly to counsel.  In support of their claims, the Borrower and her husband noted that even after receipt of the February 2014 letter, the Mortgagee negotiated a modification agreement that was entered an executed by the Borrower in October 2014.

 

After hearing arguments on the parties' respective motions for summary judgment, the trial court entered summary judgment in the Mortgagees' favor, concluding that the February 2014 letter sent by the Borrower's former counsel did, in fact, constitute a request to halt communications, which relieved the Mortgagee of its duty to conduct a face-to-face meeting because it was never withdrawn.  The property was subsequently sold at a judicial foreclosure sale which was later confirmed by court order.  The Borrower appealed.

 

The lone issue on appeal was whether the trial court erred in granting summary judgment in the Mortgagee's favor, and more specifically, whether receipt of the purported "stop communications" letter in February 2014 exempted the Mortgagee from the requirements of arranging a face-to-face meeting prior to initiating foreclosure. 

 

As you may recall, federal regulations for HUD-insured loans require that the mortgagee make a reasonable effort to conduct a face-to-face meeting with the borrower prior to initiating foreclosure proceedings, which "shall consist at a minimum of one letter sent to the mortgagor certified by the Postal Service as having been dispatched [and]… [shall] also include at least one trip to see the mortgagor at the mortgaged property, unless the mortgaged property is more than 200 miles from the mortgagee, its servicer, or a branch office of either, or it is known that the mortgagor is not residing in the mortgaged property." 24 C.F.R. § 203.604(b)-(d) (2018).

 

The Appellate Court noted that the February 2014 letter from the Borrower's counsel authorized her attorney to interact with the Mortgagee on all matters pertaining to the mortgage loan, but notably, did not include the words "cease-and-desist."  The Borrower's counsel argued before the Appellate Court that the letter demonstrated the Borrower's willingness to work with the Mortgagee by authorizing her former counsel to speak with it given the potential foreclosure, and did not relieve it of its obligation to make a reasonable effort for a face-to-face meeting with the Borrower, but rather instructed that any such meeting be coordinated through counsel. 

 

The Borrower's counsel further noted at oral argument that the Mortgagee's position that the letter required all communications to stop was undermined by its efforts to work with the Borrower to modify the loan in October 2014. 

 

In response, the Mortgagee took the position that the February 2014 letter still allowed it to have loss mitigation discussions with the Borrower's former counsel but was prevented from arranging a face-to-face meeting through counsel because the federal regulations at issue require the lender to contact the homeowner directly, and not through an authorized agent.

 

With no established Illinois law on this issue, the Appellate Court turned to cases from Florida appellate courts for guidance.  In Derouin v. Universal American Mortgage Co., 254 So. 3d 595 (Fla. Dist. Ct. App. 2018), a Florida appellate court held that a borrower's telephonic instruction to its bank to contact her attorney for future communications was not the same as indicating to the mortgagee that the borrowers were not open to a face-to-face meeting, and did not exempt the bank from the face-to-face meeting requirement. Derouin, 254 So. 3d at 602.  However, in Bank of America, N.A. v. Jones, 294 So.3d 341 (Fla. Dist. Ct. App. 2020), another Florida appellate court concluded that the borrowers' cease-and-desist letter sent before the foreclosure proceedings could " 'be interpreted as indicia of an unwillingness to commit to' " a face-to-face meeting. Jones, 294 So. 3d at 343.

 

Considering argument on both sides, the Appellate Court here found that an issue of material fact existed as to the meaning and interpretation of the February 2014 letter in which the Mortgagee relied upon in eschewing its obligation to conduct a face-to-face meeting with the Borrower prior to initiating foreclosure proceedings on the HUD-insured loan.

 

Accordingly, the Appellate Court concluded that the trial court erred in granting summary judgment in the Mortgagee's favor, and vacated the trial court's judgment and remanded the case for further proceedings.

 

 

 

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

 

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