Source: http://updates.mwbllp.com/2016_02_14_archive.html
Timestamp: 2019-04-19 22:41:37+00:00

Document:
The U.S. Court of Appeals for the Ninth Circuit recently held that, under California law, a two year delay in failing to investigate the facts entitling a party to rescind a foreclosure sale transaction barred that equitable remedy, even though there was a genuine issue of material fact as to whether the plaintiff foreclosure buyer could have discovered material defects before the foreclosure sale.
A mortgagee ("Lender") initiated a non-judicial foreclosure of residential real estate in California, and sold that property at a foreclosure sale to a third party ("Buyer"). At the time of sale, the residential property lacked a certificate of occupancy and a residential easement to provide electrical utilities to the newly constructed home. Buyer discovered the utility easement issue soon after purchasing the property. Two years later, Buyer brought an action seeking to rescind the transaction on the basis of the Lender's failure to disclose the defect.
The District Court granted summary judgment in favor of the Lender against the Buyer holding that the Buyer was not entitled to the equitable remedy of rescission. The U.S Court of Appeals for the Ninth Circuit affirmed the district court's decision to grant summary judgment in favor of Lender.
The Ninth Circuit noted that one issue was whether the Buyer could have discovered the defect prior to the foreclosure sale. Karoutas v. HomeFed Bank, 232 Cal. App. 3d 767, 771 (1991). Under that inquiry, the Court found that there was a genuine issue of material fact as to whether the Buyer could have discovered the defects because 1) their due diligence exceeded industry standards; and 2) it was reasonable not to seek an occupancy certificate because the residence appeared to be constructed before 2007 and the City did not require occupancy certificates until 2010.
However, the Court relied on the language of Cal. Civ. Code s. 1691 that a party seeking rescission must do so "promptly upon discovering the facts upon discovering the facts entitling him to rescind". Cal. Civ. Code § 1691. The Buyer paid $624,000 for a residential property and shortly thereafter discovered that it could not be supplied with electricity (absent the purchase of an additional easement). The Court referred to the cases Bancroft v. Woodward, 183 Cal. 99, 108 (1920) and Jolly v. Eli Lilly & Co., 44 Cal. 3d 1103, 1112 (1988) to find that a reasonable person would have been put on inquiry of the wrongdoing, and therefore the Buyer would have a duty to investigate the facts supporting their equitable right to rescind.
The Ninth Circuit reasoned that the Buyer could have discovered the electricity defect early on, and therefore, there was no genuine issue of material fact that the Buyer was put on inquiry notice of wrongdoing. The Buyer was deemed to know all facts that could be discovered from a reasonable investigation under Fox v. Ethicon Endo-Surgery, Inc., 35 Cal. 4th 797, 808-09 (2005).
The Court noted that, under Karoutas, as a foreclosing mortgagee, the Lender had the same duty to disclose defects regarding property as any other seller. The Lender presented evidence that the foreclosed borrower informed the Buyer of the defects at the time of sale. Thus, the Ninth Circuit held that, because the Buyer did not present any evidence that it would not have been able to discover facts supporting its right to rescind at the time it discovered the defects, there was no question of material fact on that issue.
Moreover, the Ninth Circuit noted, instead of pursuing its claims, the Buyer took actions inconsistent with unwinding the contract such as encumbering the property, building improvements, and attempting to sell. Therefore, the Court held that the Buyer affirmed the transaction and lost its equitable right to rescind.
Because there was no genuine issue of material fact as to whether the delay deprived the Buyer of the equitable right to rescind under California law, the Ninth Circuit held that the Lender was entitled to summary judgment on that issue.
The District Court of Appeal of the State of Florida, Fourth District, recently affirmed the dismissal of a mortgage foreclosure action because the mortgagee failed to present competent, substantial evidence that it had standing to foreclose, due to lack of conformity between the name of the plaintiff mortgagee and the names in the transactional documentation by which the plaintiff mortgagee claimed an interest in the note at issue.
A mortgagee filed a foreclosure action. The promissory note contained a special indorsement in favor of the mortgagee's predecessor in interest, as trustee. At trial, the mortgagee's witness testified that note was placed into a trust with the predecessor in interest as the first trustee and that the mortgagee became the successor trustee in April of 2006.
The court admitted into evidence an excerpt of a Pooling and Servicing Agreement ("PSA") that created the trust and showed the mortgagee's predecessor as the trustee. However, the mortgagee's witness admitted that the excerpt from the PSA did not show that the plaintiff mortgagee owned or had any other interest in the note.
Also admitted into evidence was a purchase and assumption agreement between two entities with names similar to the plaintiff mortgagee's, but not the same entity. Although the plaintiff mortgagee's witness believed the agreement reflected the plaintiff mortgagee's purchase of trust assets of the entity that served as the first trustee, including the subject loan, neither the plaintiff mortgagee nor the entity to which the note was indorsed were parties to the agreement.
Citing its decision in Murray v. HSBC Bank USA, the Appellate Court explained that "'[w]hen specially indorsed, an instrument becomes payable to the identified person and may be negotiated only by the indorsement of that person.' … Where a bank is seeking to enforce a note which is specially indorsed to another, the bank is a nonholder in possession. … A nonholder in possession may prove its right to enforce the note through: (1) evidence of an effective transfer; (2) proof of purchase of the debt; or (3) evidence of a valid assignment." In addition, "[a] nonholder in possession must account for its possession of the instrument by proving the transaction (or series of transactions) through which it acquired the note."
The Appellate Court held that at trial, although the plaintiff mortgagee tried to prove its right to enforce the note by showing the purchase of the debt in the purchase and assumption agreement, "[t]he plaintiff's proof of purchase, however is an agreement between two entities that have no relationship to either the plaintiff or the indorsee. … The Agreement does not connect the indorsee of the note … to the plaintiff…."
Because there was no evidence of record "connecting" the indorsee to the plaintiff mortgagee, the Appellate Court concluded that "[t]he plaintiff thus failed to prove the series of transactions through which it acquired the note from the original lender" and "[f]or this reason, the [plaintiff] did not establish its standing as nonholder in possession with the rights of a holder, and the defendant's motion for involuntary dismissal was property granted."
The U.S. Court of Appeals for the Seventh Circuit recently upheld the dismissal of allegations that two letters sent to the consumer's counsel violated the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. ("FDCPA"), reiterating that its "competent attorney" standard applies regardless of whether a statement to the consumer's counsel is false, misleading or deceptive.
In a prior action, the consumer ("Debtor") sued a debt collector ("Collector") for alleged violations of the FDCPA. The case settled with the Collector settling and releasing two of Debtor's debts. After settlement, Collector sent two letters to Debtor "care of" and addressed to the Debtor's attorney who represented Debtor in the first suit, demanding payment of the two debts released in the settlement.
Debtor filed a subsequent action alleging that the new letters violated FDCPA. Debtor's attorney reviewed the two letters sent by the Collector, but never provided them to the Debtor. Debtor claimed that the letters violated: 1) § 1692c of the FDCPA prohibiting contact with a consumer once a debt collector knows the consumer is represented by counsel, and 2) continuing to demand payment after the consumer has refused to pay. Debtor also alleged the letters made false and misleading statements that the Debtor still owed debts that were previously settled.
The district court dismissed the Debtor's allegations under Fed. R. Civ. P. 12(b)(6) for failure to state a claim. Debtor appealed and the Seventh Circuit affirmed.
The Debtor argued that by sending the two letters to the Debtor's attorney, the Collector violated § 1692c(a)(2) by continuing communication with a represented consumer. However, the Seventh Circuit disagreed, citing its ruling in Tinsley v. Integrity Financial Partners, Inc., 634 F.3d 416 (7th Cir. 2011), that "§ 1692c as a whole permits debt collectors to communicate freely with consumers' lawyers."
Because the Debtor was represented by an attorney, and because the new letters were sent to the attorney, the Seventh Circuit declined to find that the Debtor's name on the envelopes was a communication with the consumer when the debt collector knows the consumer is represented by counsel under § 1692c(a)(2) when the letters were sent in "care of" to the address of the Debtor's attorney.
The Debtor also argued that the two letters were an attempt to continue collection efforts after notification to cease in violation of § 1692c(c). However, the Seventh Circuit resisted Debtor's invitation to distinguish this matter from Tinsley due to the fact that these two debts had been settled.
The Seventh Circuit based its determination on its ruling in Randolph v. IMBS, Inc. 368 F.3d 726 (7th Cir. 2004), that "[c]ourts do not impute to debt collectors other information that may be in creditors' files - for example, that debt has been paid or was bogus to start with." From Randolph, the Court reasoned that "it cannot limit a debt collector's ability to communicate with a debtor's counsel to only those incidents where a debt is owed."
In addition, the Seventh Circuit rejected the Debtor's argument that the letters amounted to "false, misleading, or deceptive misrepresentations" in connection with the collection of a debt in violation of 15 U.S.C. §1692e.
The Court noted that it "has consistently held that with regard to 'false, deceptive, or misleading representations' in violation of § 1692e of the FDCPA, the standard is: (1) whether the debt collector's communication would deceive or mislead an unsophisticated, but reasonable, consumer if the consumer is not represented by counsel or (2) whether a competent attorney would be deceived, even if he is not a specialist in consumer debt law."
Thus, the issue here was "whether a competent attorney, even if he is not a specialist in consumer debt law, would be deceived by two letters requesting payment for debts resolved in a settlement." The Seventh Circuit held that "[o]n the facts before us, we believe a competent attorney would be able to determine whether his client continued to owe a debt after it was settled in full and would therefore not be deceived by the two letters."
The Seventh Circuit declined to address the Debtor's arguments that the two letters violated § 1692e(5) because they contained threats of action the Collector was not legally able to take, noting that these arguments were not raised at the district level and were therefore waived on appeal.

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