Source: http://updates.mwbllp.com/2013_12_29_archive.html
Timestamp: 2019-04-19 22:58:17+00:00

Document:
The U.S. Court of Appeals for the Seventh Circuit recently concluded, in an appeal of a denial of a motion to certify a class, that suing on a time-barred consumer debt violates the federal Fair Debt Collection Practices Act (FDCPA), and that a debt collector may violate the FDCPA by filing a collection lawsuit even if the consumer is never actually served with the lawsuit.
The Court also held that the district court should have ruled on the dispute between the parties as to the correct statute of limitations period prior to denying the plaintiff's motion to certify a class, as it was both a merits and procedural issue because it determined the composition of the class. The Court also included troubling dicta about attacks on the adequacy of class representatives.
In so ruling, the Seventh Circuit reversed the district court's denial of plaintiff's motion for class certification, and remanded the matter to the district court for further proceedings.
A copy of the Court's opinion is attached.
The case involves a consumer who was sued by a debt collector for a debt arising from the consumer's purchase of natural gas for household use. The consumer responded by bringing a purported class action against the debt collector, alleging the debt collector had initiated its collection action after the statute of limitations in violation of the federal Fair Debt Collection Practices Act. The plaintiff's complaint also contained supplemental claims under Illinois and other states' laws, making similar allegations. The plaintiff sought to have the purported class certified.
According to the data compiled for use in addressing the issue of certification, the class the plaintiff wanted certified had 793 members, of whom 343 resided in Illinois. There was virtually no information about the other potential members. Of the 343 Illinois residents, 290 were sued between four and five years after the claims against them had accrued and 45, including the plaintiff, were sued more than five years after accrual. No information was known about the remaining 8 Illinois putative class members. Of the 45 claimants sued by the debt collector after more than five years, 23 were served and 22 were not.
One of the primary issues was whether Illinois' four-year statute of limitations for suits on sale contracts, 810 ILCS 5/2-725(1), or the five-year statute of limitations for suits on unwritten contracts under 735 ILCS 5/13-205 applied. Although the parties did not raise the issue, the statute of limitations on written contracts is ten years, 735 ILCS 5/13-206, and the natural gas contracts on which the debts were based were written. Both the four and ten year statute of limitations have an exception to contracts governed by section 2-725 of the UCC, which is four years. The district court, however, never addressed the statute of limitations issue in denying class certification.
Instead, district court focused on the plaintiff's status and the lack of a sufficient number of claimants to justify a class action. Because the plaintiff had been sued after five years, the district court concluded that she was not an adequate representative of the entire class because, according to the district court, the plaintiff had little to no incentive to argue for a four year statute of limitations on behalf of the other claimants. The district court then isolated the 45 claimants who, like plaintiff, had been sued after five years.
The district court held that because 22 of those claimants were never served, the class was only composed of 23 claimants, a number too small to justify class certification.
On appeal, the Seventh Circuit found several flaws with the district court's analysis of whether class certification was appropriate for purposes of pursuing claims against the debt collector based on the debt collector's untimely suits against consumers. The Seventh Circuit, citing to a 1987 opinion from a federal court in Alabama, recognized the dangers associated with allowing stale claims to collect debts from consumers.
The Seventh Circuit held that suing on time-barred consumer debts violates the FDCPA, citing to Huertas v. Galaxy Asset Mgmt., 641 F.3d 28, 32–33 (3d Cir. 2011), Harvey v. Great Seneca Financial Corp., 453 F.3d 324, 332–33 (6th Cir. 2006), and Herkert v. MRC Receivables Corp., 655 F. Supp. 2d 870, 875–76 (N.D. Ill. 2009).
According to the Seventh Circuit, as with any defendant sued on a stale claim, the passage of time not only dulls the consumers' memory of the circumstances and validity of the debt, but heightens the probability that she will no longer have personal records detailing the status of the debt. Indeed, according to the Seventh Circuit, the unfairness of such conduct is particularly clear in the consumer context where courts have imposed a heightened standard of care – that sufficient to protect the least sophisticated consumer. The Seventh Circuit further noted that, because few unsophisticated consumers would be aware that a statute of limitations could be used to defend against lawsuits based on stale debts, such consumers would unwittingly acquiesce to such lawsuits. And, the Court continued, even if the consumer realizes that she can use time as a defense, she will more than likely still give in rather than fight the lawsuit because she must still expend energy and resources and subject herself to the embarrassment of going into court to present the defense, and this -- the Court noted -- is particularly true in light of the costs of attorneys today.
Next, the Seventh Circuit concluded that the district court erred by determining that the plaintiff was not an adequate representative of the claimants based on her status of being sued after five years.
The Seventh Circuit stated: "To question her adequacy is to be unrealistic about the role of the class represented in a class action suit. The role is nominal. The class representative receives modest compensation for what usually are minimal services in the class action suit. For class action attorneys are the real principals and the class representatives/clients their agents."
The Seventh Circuit went on to state that the district court judge, if not willing to appoint a second class representative for those claimants sued between four and five years after the debt accrued, should have ruled on whether the statute of limitations was four or five years. The debt collector argued that it would have been wrong for the district court to address the statute of limitations issue because it was a merits issue and not one of class action procedure, but the Seventh Circuit disagreed and determined that the statute of limitations was both a merits and procedural issue because it determined the composition of the class.
Having determined that the four year statute of limitation exception under the UCC applied to the purchase of natural gas for household use, the Seventh Circuit finally addressed the district court's exclusion from the class those consumers who the debt collector sued but never served the complaint.
The Seventh Circuit concluded that the district court should not have excluded those claimants. The Seventh Circuit stated: "The debt collector may also use the pending legal action to pressure a debtor to pay back the debt informally, without serving the complaint – precisely the type of unfair practice prohibited by the FDCPA. But even if no debtors were ever harmed by being sued but not served, the district judge would have been wrong to exclude from the class the debtors who were not served. Proof of injury is not required when the only damages sought are statutory."
Accordingly, the Seventh Circuit reversed the district court's denial of class certification and remanded the matter to the district court to determine the proper scope of the class. The Seventh Circuit instructed the district court that the scope need not be limited to Illinois residents or to claims under the FDCPA, and that the district court, if necessary, could create subclasses to address different state law allegations.
The U.S. Court of Appeals for the Seventh Circuit recently held that, under the Illinois mortgage recording statute in effect prior to a June 2013 corrective amendment occasioned by this litigation, the absence of a maturity date and/or an interest rate in a mortgage instrument did not allow a bankruptcy trustee to avoid a mortgage through the trustee's "strong-arm" powers under 11 U.S.C. § 544(a)(3). A copy of the Court's opinion is attached.
The Seventh Circuit addressed appeals from two separate bankruptcy cases. In both matters, the recorded mortgages did not state the maturity date of the secured debt or the applicable interest rate. Each mortgage did however incorporate by reference their respective promissory notes, which included these terms.
The bankruptcy trustee in each matter filed adversary actions under 11 U.S.C. § 544(a)(3) seeking to avoid the mortgages because they did not state the maturity dates or interest rates for the secured dates. In one of the matters, the bankruptcy court granted summary judgment in favor of the trustee, but this ruling was reversed by the district court judge. In the other action, the bankruptcy court granted summary judgment in favor of the mortgage lender. The bankruptcy trustees appealed in both actions.
As you may recall, 11 U.S.C. § 544(a)(3) provides a trustee with so-called "strong-arm" powers which provide the trustee the "rights and powers of … a bona fide purchaser of real property" to void any obligation of the debtor or avoid the transfer of property. Importantly, the strong arm power makes any actual notice of the trustee irrelevant.
As the Seventh Circuit noted, the determination of whether a party is a bona fide purchaser and what constitutes constructive notice is governed by state law. Accordingly, in rejecting the trustees' appeals, the Court's analysis was based upon Illinois law.
In Illinois, a bona fide purchaser is one who acquires an "interest in [the] property for valuable consideration without actual or constructive notice of another's adverse interest in the property." U.S. Bank N.A. v. Villasenor, 979 N.E.2d 451 (Ill. App. 2012). Under the strong-arm statute the trustee cannot be charged with actual notice; however, constructive notice is effective against a trustee.
Constructive notice, in Illinois, is defined as knowledge that the law imputes to a purchaser, whether or not the purchaser had actual knowledge at the time of the conveyance. U.S. Bank., 979 N.E.2d at 465. There are two kinds of constructive notice: record notice and inquiry notice. Record notice imputes to a purchaser knowledge that could be gained from an examination of the grantor-grantee index in the office of the Recorder of Deeds, as well as the probate, circuit, and county court records for the county in which the land is situated.
The trustees argued that each respective mortgage was legally insufficient to give constructive notice to a bona fide purchaser, because the instruments did not provide all the required information under the Illinois mortgage recording statute, 765 ILCS 5/11 (2012).
As may recall, 765 ILCS 5/11 (2012), in relevant part provides a form for which mortgages recorded in Illinois to follow. However, the statute also provides that "Mortgages of lands may be substantially in the following form." Id.
The Court noted that the mortgages at issue substantially followed the suggested form, and specifically provided that the underlying debts were secured by separate but contemporaneously signed promissory note. However, the mortgages did not set forth the maturity dates or the interest rates of the underlying loans, information which was provided for in the Illinois statutory form.
Applying the Illinois rules of statutory interpretation and attempting to predict how the Illinois Supreme Court would resolve the issue, the Seventh Circuit determined that the form in the Illinois mortgage recording statute was permissive and not mandatory. Thus, the trustee's section strong-arm powers could not avoid the mortgages at issue.
In so holding, the Seventh Circuit noted that statutes operative language was clearly permissive. Accordingly, the Court determined that strict compliance with the suggested form is not required to ensure a valid mortgage enforceable against subsequent lenders and purchasers.
The Seventh Circuit then examined the Illinois common law to determine which elements were required in a mortgage for it to be effective as to subsequent bona fide purchasers. In doing so, the Court first noted that the trustees failed to cite and indeed the Court did not find any Illinois cases holding that a recorded mortgage must state the maturity date and/or the interest rate to ensure their validity, enforceability, and priority. According to the Illinois Supreme Court, as noted by the Seventh Circuit, the "essential things" in a mortgage "are the existence of a debt and the intention to secure its payment." Caraway v. Sly, 78 N.E. 588, 589 (Ill. 1906).
The Court further noted that under Illinois law the amount of the debt is an indispensable element of a mortgage, and must be included in a recording for it to be effective against a third party. However, the Seventh Circuit was not persuaded by the trustees' arguments that the interest rate and maturity date were similarly indispensable elements, and determined that providing these terms was not necessary to give constructive record notice of the mortgage to subsequent lenders and purchasers.
Accordingly, the Seventh Circuit held that the trustees had constructive notice of the mortgages in both of the cases on appeal, and the trustees could not rely upon their strong-arm powers to avoid the mortgages.
Notably, the amended version of 765 ILCS 5/11 which went into effect on June 1, 2013, explicitly provides that the provisions in the suggested form "are, and have always been, permissive and not mandatory" and the specifically the "failure to state the interest rate or the maturity date, or both, shall not affect the validity or priority of the mortgage." See 765 ILCS 5/11(b) (2013).

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