FYI: 7th Cir Rejects FCRA Claim for Lack of Standing at Summary Judgment Stage

The U.S. Court of Appeals for the Seventh Circuit affirmed a trial court's dismissal, on separate grounds, of a borrower's FCRA claims because the borrower lacked standing.

 

In addition, the Seventh Circuit held that the borrower's affidavit made conclusory statements with documentary support, and was therefore insufficient to defeat the lender's motion for summary judgment. 

 

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

 

The plaintiff borrower was a real estate developer who relied on loans to operate his real estate development business. A dispute arose between the borrower and his lender regarding a $1.1 million dollar mortgage loan. 

 

The borrower and lender disputed the scope of certain insurance coverage, whether certain insurance coverage was sufficient to satisfy the terms of the loan, and whether timely payments for insurance premiums were made by the borrower. The lender asserted that the borrower did not comply with the terms of the loan and the lender was forced to obtain additional insurance coverage and assess the cost of the additional insurance coverage to the borrower. The borrower allegedly did not pay the increased insurance premiums and disputed that the additional insurance was required. 

 

The lender notified various credit reporting agencies of borrower's late payments. The borrower disputed these payments were late and filed a formal dispute with the credit reporting agencies.  The borrower alleged that based on the lender's notification of the credit reporting agencies, the borrower's credit score decreased. Because of the decrease in his credit score, this allegedly prevented borrower from obtaining a new loan, purchasing new property, refinancing his loans and resulted in borrower being forced to sell certain property and forego rental income.

 

The borrower sued the lender for various claims including alleging that the lender violated the FCRA by failing to investigate the dispute borrower filed with the credit reporting agencies, and for breach of contract relating to the lender's decision to obtain force-placed insurance coverage, breach of implied duty of good faith and fair dealing, and a breach of fiduciary duty for allegedly mishandling the loan's escrow account. The lender filed a counterclaim to obtain a judgment on the loan.

 

The trial court granted summary judgment for the lender and dismissed borrower's claims. The borrower appealed.

 

THE SUMMARY JUDGMENT AFFIDAVITS

 

The borrower argued that the trial court erred by properly considering the evidence in the borrower's affidavit filed in opposition to the lender motion for summary judgment. The Seventh Circuit noted that trial courts may find affidavits as insufficient or conclusory at the summary judgment stage without making specific findings about the litigant's credibility. Credibility determinations are normally reserved for in-person testimony.

 

Throughout his affidavit, the Court noted, the borrower made numerous allegations but failed to support these allegations with documentary evidence.  For example, the borrower averred in his affidavit that he provided proof of flood insurance to the lender and that he was current on his loan payments. However, the borrower did not support these averments with documentary evidence. As result, the Seventh Circuit agreed that the borrower's affidavit lacked the substance to rebut the lender's affidavit and cause a genuine issue of a material fact.

 

In support of its motion for summary judgment, the lender also filed an affidavit. The borrower argued that the lender's affidavit was faulty because the corporate representative who signed the affidavit did not have sufficient personal knowledge. However, because the borrower did not challenge the validity of the lender's affidavit at the trial court level, the Seventh Circuit ruled that he waived this argument. 

 

Even if the borrower did not waive this claim, the Appellate Court held that borrower's arguments were without merit because the lender submitted a properly authenticated business record under Fed. R. of Evidence 803(6) and 901(b)(1). Under these rules, the corporate representative only needs to personally know of the procedure utilized by the lender to create and maintain the documents relied upon in the affidavit. The Court of Appeals affirmed the propriety of the lender's affidavit and rejected all of the borrower's arguments about the invalidity of lender's affidavit.

 

THE FCRA CLAIM FAILED FOR LACK OF STANDING

 

The borrower also argued that the trial court erred when it dismissed his FCRA claim against the lender. The Seventh Circuit affirmed the trial court's decision to dismiss the borrower's FCRA claim but on separate grounds. The Court of Appeals sua sponte held that the borrower lacked standing to even bring the FCRA claim against the lender because the borrower's injury was not fairly traceable to the alleged violation.

 

As you may recall, a plaintiff must show an injury beyond just a statutory violation. See Spokeo, Inc. v. Robins, 578 U.S. 330, 341–42 (2016). At the  summary judgment stage of litigation, a plaintiff can meet this standard by establishing specific facts that show "a concrete and particularized injury that is both fairly traceable to the challenged conduct and likely redressable by a judicial decision. Spuhler v. State Collection Serv., Inc., 983 F.3d 282, 284 (7th Cir. 2020) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992)).

 

Once a party pleads an injury, they are still required to prove causation that shows "that the defendant's actual action has caused the substantial risk of harm." Remijas v. Neiman Marcus Group, LLC, 794 F.3d 688, 696 (7th Cir. 2015) (quoting Clapper v. Amnesty Int'l USA, 568 U.S. 398, 414 n.5 (2013)).

 

The borrower's alleged damages occurred when the lender received two notices of borrower's dispute from the credit reporting agencies in January of 2012. The borrower alleged due to the lender's failure to investigate this dispute and properly respond, the borrower's credit score dropped and he was injured.

 

However, the Seventh Circuit noted that the alleged injury was related to a decrease in his credit score in 2011.  Therefore, this injury could not be fairly traced to a failure of the lender to reasonably investigate credit reporting disputes in January of 2012. Therefore, the Seventh Circuit affirmed the dismissal of the borrower's FCRA claim for lack of standing.

 

THE COMMON LAW CLAIMS ALSO FAILED

 

The borrower also argued that the trial court erred by dismissing his breach of contract and breach of fiduciary duty claims. In support of his argument, the borrower asserted that he did not receive certain contractually required notices from the lender, and was forced to sell valuable possessions for less than market value as a result.

 

The Seventh Circuit also this argument because the language of the mortgage deemed service of the notices by the lender to be effective upon mailing. Additionally, the Court of Appeals held that the evidence proffered by the borrower was too speculative to meet the required elements of a breach of contract claim, and Florida law prohibits standalone claims for breach of the implied duty of good faith and fair dealing without alleging a breach of an express contract term  Ins. Concepts & Design, Inc. v. Healthplan Servs., Inc., 785 So. 2d 1232, 1234 (Fla. Ct. App. 2001)

 

Last, the borrower argued that the lender's counterclaim for a judgment on the loan should not have been granted. The Court of Appeals held this argument was without merit because borrower only generally stated that he remained in compliance with the terms of the loan while separately admitting that the lender returned his partial payments for two years.

 

The Court of Appeals affirmed the trial court's ruling on all grounds but vacated the judgment as to the FCRA claim and remanded with instructions for the trial court to dismiss the FCRA claim on the separate ground that the borrower lacked standing because the injury was not fairly traceable to the alleged violation. 

 

 

 

 

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: 7th Cir Affirms Dismissal of Putative Class Action Alleging Excessive NSF Fees

The U.S. Court of Appeals for the Seventh Circuit recently affirmed a trial court's ruling that a credit union's fee practices did not breach its contract with a customer.

 

In so ruling, the Seventh Circuit held that the credit union did not make any promises not to use the "available balance" method to assess nonsufficient fund (NSF) fees or not to charge multiple fees when a transaction is presented to it multiple times. 

 

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

 

The customer sued the credit union under the federal Electronic Fund Transfers Act, 15 U.S.C. § 1693–1693r, and state law on behalf of herself and other similarly situated customers, essentially alleging that the credit union charged fees in violation of its contract.

 

The credit union charged an NSF fee when it rejected an attempted debit because an account lacked sufficient funds to cover the transaction. The customer argued that the contract required the credit union to assess NSF fees using the "ledger-balance method" and only allowed one NSF fee per transaction, while the credit union claimed that the contract permitted it to use the "available-balance method" and charge multiple NSF fees if presented with the same insufficient funds transaction more than once.

 

The trial court agreed with the credit union and granted the credit union's motion to dismiss with prejudice. The customer timely appealed.

 

On appeal, the customer argued that the plain language of the contract promised that the credit union would not charge NSF fees unless a customer's account had an insufficient ledger balance at the time of the transaction.

 

Section 8(a) of the contract provided that when the credit union determined a customer had an "insufficient account balance" to cover a transaction, "[her] account may be subject to a charge." The customer argued that an ordinary English speaker would understand "account balance" to mean what the banking industry calls the ledger balance.

 

However, the Seventh Circuit determined that it must look beyond Section 8(a) and construe the contract as a whole. Sanders v. Ill. Union Ins. Co., 157 N.E.3d 463, 467–68 (Ill. 2019).  Section 7(a) advised that the credit union "permit[s] withdrawals only if [an] account has sufficient available funds to cover the full amount of the withdrawal" and that "[c]hecks or other transfer or payment orders which are drawn against insufficient funds may be subject to a service charge as set forth in the Fee Schedule."

 

The Seventh Circuit concluded that a reasonable person would read Section 7(a) before Section 8(a) and understand that Section 8(a)'s reference to an "insufficient account balance" referred back to Section 7(a)'s "insufficient available funds." Therefore, the Court held that the contract unambiguously allowed the credit union to use the "available-balance method" to charge NSF fees.

 

The customer next argued on appeal that the contract promised to assess an NSF fee only one time per transaction by the customer. The Fee Schedule in the contract provided for a $25 "Nonsufficient Fund Item (each)," and therefore the customer's theory turned on the definition of "item."  The customer read Section 7(a) and the Fee Schedule to mean that the credit union could only charge a $25 NSF charge for each payment order that a member draws against insufficient funds, even if the same payment order were submitted multiple times with insufficient funds to cover it.

 

However, the Seventh Circuit agreed with the trial court that the contract did not forbid the credit union from charging multiple fees when it was presented with the same transaction more than once.

 

Section 8(a) stated: "We do not have to notify you if your account does not have funds to cover checks, ACH debits, debit card transactions, fees or other posted items. Whether the item is paid or returned, your account may be subject to a charge as set forth in the Fee Schedule." The Seventh Circuit interpreted the list ending with "other posted items" to mean that the previous terms were also "items," including ACH debits. See Corbett v. County of Lake, 104 N.E.3d 389, 397 (Ill. 2017). The Court reasoned that defining "item" by reference to the debit rather than the transaction or purchase rendered the customer's reading untenable.

 

Thus, the Seventh Circuit held that, taken together, Section 8(a) and the Fee Schedule permitted the credit union to charge an NSF fee each time a payee attempted to make an ACH debit from an account with insufficient funds.

 

Accordingly, the Seventh Circuit affirmed the trial court's dismissal with prejudice of the customer's breach of contract claim.

 

 

 

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 (1st Dist) Holds Late Fee Was "Unlawful Penalty" Under Calif Law, Vacates Arb Award in Lender's Favor

The California Court of Appeals for the First Appellate District recently reversed a trial court's decision to affirm an arbitration award that upheld the validity of a late payment fee assessed to borrowers in the event of a borrower's default.

 

In so ruling, the Court of Appeals held that:

 

1 – Arbitration awards regarding liquidated damages provisions that allegedly violate California's prohibition on unlawful penalties under California Civil Code § 1671 involve "well-defined and dominant" public policy, and are therefore subject to de novo review;

 

2 – "Liquidated damages in the form of a penalty assessed during the lifetime of a partially matured note against the entire outstanding loan amount are unlawful penalties";

 

3- The late fee at issue here was an unlawful penalty under § 1671.

 

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

 

Two borrowers took out a $5.6 million business loan with 8.5% interest assessed per annum ("Loan"). The Loan was secured by a first lien deed of trust on commercial real property. The terms of the Loan provided that, "based on even one missed monthly payment at any time during the life of the Loan", the borrower would be charged "a one-time 10% fee of the overdue monthly payment" and "a default interest charge of 9.99% per annum assessed against the total amount of unpaid principal balance of the Loan."

 

The borrowers defaulted when they missed one monthly payment. The default triggered the late fee provisions in the loan.

 

The borrowers filed a demand for arbitration challenging the validity of the late payment fee. The borrowers alleged the loan violated California Business and Professions Code § 10240 and California Civil Code § 1671 because the late fee was an unlawful penalty.

 

The arbitrator ruled against the borrowers and for the lender and upheld the validity of the late fee. The borrowers filed a petition to vacate the arbitration award with the trial court and argued that the arbitrator exceeded its authority by denying claims in violation of nonwaivable statutory rights and/or contravention of explicit legislative expressions of public policy under the Real Estate Loan Law which prohibits lenders from charging over 10% of the installment due and section 1671 which generally provides that contractual liquidated damages that constitute penalties are unenforceable.

 

The trial court disagreed with the borrowers and held that the borrowers did not meet their burden of proof to show that the default interest provision in the loan was invalid as a penalty. The trial court also concluded that the arbitrator did not exceed its powers by denying borrowers claims. The borrowers appealed. 

 

ARBITRATION AWARDS INVOLVING § 1671 REVIEWABLE DE NOVO

 

In California, an arbitrator's decision "is generally reviewable for errors of fact or law, whether or not such error appears on the face of the award and causes substantial injustice to the parties." See Moncharsh v. Heily & Blase (1992) 3 Cal. 4th 1, 6.  However, California Code of Civil Procedure § 1286.2 provides an exception to this rule when "[t]he arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted."  In California, arbitrators are considered to exceed their power when they either 1) issue awards the violate a party's unwaivable statutory right or 2) issue an award that contravenes an explicit legislative expression of public policy.

 

The Appellate Court held that California Civil Code § 1671 involves a "well-defined and dominant" public policy.  Therefore, arbitration awards involving alleged violations of California's prohibition on unlawful penalties under California Civil Code § 1671 are subject to de novo review.

 

Because the borrowers raised an issue on appeal that properly invoked the public policy considerations under section 1671, and argued that an arbitrator exceeded its powers by enforcing a contract in violation of public policy, the Court of Appeals conducted a de novo review.

 

LATE FEE VIOLATED § 1671

 

The Appellate Court noted, in California, a liquidated damages provision is generally "presumed valid if it is in a non-consumer contract but presumed invalid if it is in a consumer contract."  The loan at issue here was a business loan, as it was "neither for the purchase of property for personal use nor does it involve a primary dwelling."

 

Under § 1671, for business loans, "a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made." In California, lawful liquidated damages provisions must bear a "reasonable relationship" to the "actual damages that the parties anticipate would flow from breach; conversely, if the liquidated damages clause fails to so conform, it will be construed as an unenforceable 'penalty.'"

 

In Garrett v. Coast & Southern Fed. Sav. & Loan Assn, the California Supreme Court held that a charge for the late payment of a loan installment assessed against the unpaid balance of the loan must be deemed punitive in character.

 

Here, the lender argued that Garrett was not applicable because it was legislatively overruled when section 1671 was revised. The Court of Appeals disagreed, holding that "[w]hile the current version of section 1671 declares all liquidated damages clauses presumptively invalid as to consumer contracts (as opposed to all contracts), Garrett remains good law for the proposition that a late fee assessed against the entire unpaid balance of a loan constitutes an unlawful penalty."

 

Explaining its ruling, the Court of Appeals discussed a California Supreme Court opinion rendered after the legislative amendment which upheld Garrett and held the late payment fees at issue there were disproportionate to the anticipated damages and as a result should be considered a penalty. Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal. 4th 970, 977.

 

The lender further argued that the late fees represent the parties' attempt to adequately calculate the lender's damages in the event of a default and that the actual damages are not relevant because the parties agreed to the reasonableness of the liquidated damages in the loan.

 

The Court of Appeals again disagreed because there was not sufficient evidence in the record to support lender's arguments. The Court held that the that testimony proffered by a representative of the lender, without supporting documentation regarding the reasonableness of the late fees, was not sufficient or persuasive to support their arguments.

 

Therefore, the Court of Appeals held that the 10% late fee provision here amounted to an unlawful penalty under California law, and reversed the trial court's order affirming the arbitration award.

 

 

 

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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