FYI: Cal App Ct (2nd Dist) Reverses Dismissal of HELOC Collection Action as Time-Barred

The Court of Appeal for the State of California, Second District, recently reversed a trial court's dismissal of a debt buyer's complaint to collect on a home equity line of credit (HELOC) as barred by the statute of limitations.

 

In so ruling, the Second District held that the statute of limitations for a breach of contract claim involving the borrower's HELOC agreement was not triggered by a missed monthly payment, as the HELOC agreement gave the lender the option to accelerate the debt on default and the debt buyer did not do so until within the applicable statute of limitations.

 

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

 

In 2006, a borrower took out two deeds of trust against his property located in the Los Angeles, CA, with two different lenders. The second deed of a trust was a HELOC memorialized in an Equity Reserve Agreement secured by a deed of trust against the property.

 

The HELOC agreement included terms stating the borrower was required to make monthly payments toward repaying the outstanding balance of the loan and that the lender could require the borrower to pay the entire outstanding balance in one payment if the borrower breached a material obligation. This included not meeting any of the repayment terms. The deed also contained a provision giving the lender the option to accelerate the debt and demand all or any part of the outstanding debt become immediately due and payable upon the occurrence, or "anytime thereafter" of a default by the borrower. The acceleration was not automatic, and the lender also reserved the right to delay exercising any or part of its rights, without losing those rights.

 

On April 1, 2011, the borrower did not pay his monthly HELOC payment. He did not make any payments after this date. In December 2012, the lender for the first deed of trust foreclosed on its deed of trust. The sale did not net any surplus funds to pay off the HELOC.

 

In October 2019, a debt buyer purchased the HELOC debt and issued a notice of acceleration to the borrower because he was in default for failing to make his monthly loan payment when due. No payments were made in response.

 

In April of 2020, the debt buyer sued the borrower for breach of contract, money lent, money had and received, and declaratory relief. The debt buyer did not seek recovery for any amounts that were already time barred by the statute of limitations.

 

The borrower demurred (moved to dismiss) on the grounds that the lawsuit was barred by the four-year statute of limitations for breach of contract because the limitations period began to run when the borrower first missed his payment in 2011 not when the debt buyer exercised the acceleration clause in 2019. The trial court sustained the borrower's demurrer without leave to amend and an appeal followed.

 

On appeal, the debt buyer argued that the trial court erred in sustaining the demurrer without leave to amend on statute of limitations grounds. To determine whether the debt buyer's claims were barred by the statute of limitations, the Appellate Court examined the various contractual duties in the HELOC agreement.

 

Specifically, the Second District looked at whether the borrower's contractual duty to make monthly payments and his duty to pay the full amount of his loan were divisible. The Court found that these duties are divisible. This turned on the lender being granted the right to choose whether to accelerate the maturity date when the borrow missed his first monthly payment or "anytime thereafter." 

 

By granting the lender that choice, and by explicitly reserving the lender's ability to delay exercising this right without losing it, the HELOC agreement necessarily contemplated that a breach of the borrower's duty to make monthly payments was divisible from his duty to pay the full amount of the loan. See Burrill v. Robert Marsh & Co., 138 Call. App. 101, at 107 (1934). Therefore, each breach of duty to make a monthly payment gives rise to its own breach of contract claim with its own limitations period.

 

The Second District rejected the borrower's assertion that the discretionary acceleration clause in the HELOC agreement should not be allowed to be included in a contract because it means the lender is not obligated to sue the first time a periodic payment is missed. The Court held the clause was not against the policy behind the statute of limitations encouraging lawsuits to be filed as early as possible.

 

The Court held it could not ignore the discretionary acceleration clause because it was a mutually agreed to term of the contract. See Boghos v. Certain Underwriters at Lloyd's of London, 36 Cal.4th 495, 503 (2005). In addition, the Second District cited a number of authorities demonstrating that the doctrine of waiver has been used to bar claims if a lender unduly delays exercising a discretionary acceleration clause. The Court then noted that no claim for undue delay was raised in this case.

 

In conclusion, the Appellate Court held that the statute of limitations for a claim of breach of contract involving a HELOC agreement does not start to run when the borrower misses the first monthly payment if the contract contains divisible contractual duties and gives the lender discretion to accelerate the fixed maturity date of the loan any time after the breach. Accordingly, the Appellate Court reversed the trial court's dismissal.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
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Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

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FYI: 7th Cir Upholds Dismissal of Putative Data Leak Class Action for Lack of Standing

The U.S. Court of Appeals for the Seventh Circuit recently affirmed a trial court's dismissal of a purported data leak class action alleging unauthorized disclosure of driver's license numbers.

 

In so ruling, the Court held that the plaintiffs did not demonstrate a concrete injury traceable to the disclosure of their driver's license numbers, and therefore lacked Article III standing.

 

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

 

An auto insurance company created an "instant quote" feature on their websites. Anyone who supplied basic identifying information could receive a quote for auto insurance. Each site would auto-fill some information, including the number of the applicant's driver's license. Anyone could enter a stranger's name and home address, which caused the form to disclose the number of the stranger's driver's license.

 

The insurer discontinued the autofill feature after observing unusual activity suggesting misuse, and notified people whose information had been disclosed improperly. Three consumers who received the insurer's notice filed a purported class action under the federal Driver's Privacy Protection Act the ("DPPA"), 18 U.S.C. 2721–25.

 

The trial court held that the consumers lacked standing, having failed to show a concrete injury traceable to the disclosure.

 

On appeal, the consumers contended that the disclosure injured them by causing worry and anxiety, which led to other steps, such as paying for credit monitoring. However, the Seventh Circuit held that worry and anxiety are not the kind of concrete injury essential for Article III standing. See Wadsworth v. Kross, Lieberman & Stone, Inc., 12 F.4th 665, 668–69 (7th Cir. 2021). Additionally, the Court noted that the expense of credit-monitoring did not stem from the asserted wrong because a driver's license number cannot be used to obtain credit in someone else's name. See Amnesty International USA, 568 U.S. 398, 416 (2013).

 

The consumers also alleged that bogus unemployment insurance claims were filed in New York in the names of two of them, but the Seventh Circuit observed that that the complaint was silent on what harm came from the purported insurance claims or how knowledge of a driver's license number could facilitate this kind of fraud. A suit fails for lack of standing unless the complaint plausibly alleges concrete injury caused by the asserted wrong. See, e.g., Department of Education v. Brown, 143 S. Ct. 2343 (2023). Here, the Court held that the complaint did not do so.

 

In response, the consumers maintained that a violation of the DPPA is enough by itself to establish standing because Congress provided for an award of "liquidated damages" when actual damages cannot be shown. 18 U.S.C. §2724(b)(1). However, the Seventh Circuit held that this line of argument is incompatible with TransUnion LLC v. Ramirez, 141 S. Ct. 2190 (2021), and Spokeo, Inc. 6 No. 22-1892 v. Robins, 578 U.S. 330 (2016).

 

Specifically, Spokeo and TransUnion rejected the proposition that Congress can create standing just by requiring payment in the absence of an injury. Nevertheless, the Court pointed out that these decisions did mandate that courts should respect a legislative determination that concrete harms need remedies. The DPPA here does not identify any particular compensable harm, so the Court noted that TransUnion and Spokeo say that, in this situation, courts should inquire whether what the plaintiff asserts as an injury has a historical or common-law analog.

 

The Seventh Circuit could not identify any states that make disclosure of a driver's license number tortious, and remarked that the consumers could not either. The Court reasoned that this is because a driver's license number is not potentially embarrassing or an intrusion on seclusion; it is a neutral fact derived from a public records system, a fact legitimately known to many private actors and freely revealed to banks, insurers, hotels, and others.

 

Accordingly, the Seventh Circuit concluded that the consumers did not plausibly allege that the insurer's disclosure of their driver's license numbers caused them any injury, and the disclosure of a number in common use by both public and private actors does not correspond to any tort. Thus, the Court affirmed the trial court's dismissal of the consumers' claims for lack of standing.

 

 

 

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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