Source: http://updates.mwbllp.com/2020_06_21_archive.html
Timestamp: 2020-07-11 17:59:33
Document Index: 301253655

Matched Legal Cases: ['§ 1692', '§ 1692', '§ 1692', '§1692', 'art 1022', '§1692']

Financial Services Law Developments: 6/21/20 - 6/28/20
FYI: Fed Cir Holds Lender's Claims Against Ginnie Mae Barred by Res Judicata
The U.S. Court of Appeals for the Federal Circuit recently dismissed a lawsuit brought by a mortgage lender against the Government National Mortgage Association ("Ginnie Mae") alleging that Ginnie Mae violated several guaranty agreements.
In so ruling, the Court held that the lender's breach of contract claims were barred by the doctrine of res judicata, due to a Consent Agreement and related judgment between the lender and the U.S. Securities and Exchange Commission ("SEC").
The plaintiff originated and serviced residential mortgages and issued mortgage-backed securities in Ginnie Mae's mortgage-backed securities (MBS) program. As part of the MBS program, the plaintiff lender and Ginnie Mae entered into many Guaranty Agreements.
Ginnie Mae's "Issuer Guide" was incorporated into the Guaranty Agreements. The Issuer Guide and Guaranty Agreements required, inter alia, that plaintiff establish a custodial account for principal and interest payments and also required that delinquency rates be kept below certain threshold levels.
In 2015, Ginnie Mae "undertook a compliance review" of plaintiff's portfolio and subsequently "served [plaintiff] with a Notice of Violation, stating that, during the compliance review, Ginnie Mae had 'observed numerous instances where borrower payments were not moved to Ginnie Mae custodial accounts within [forty eight] hours of receipt' and had found that [plaintiff] has 'submitted false reports to Ginnie Mae'" stating that mortgages were delinquent 90 days or more when plaintiff repurchased them pursuant to the Guaranty Agreements "when, in fact, the 'loans were not properly delinquent,' both in breach of the Guaranty Agreements."
The plaintiff lender responded to the Notice of Violation and promised to comply with Ginnie Mae's requirements, but also noted that it was under investigation by the SEC for the same conduct.
Based on further investigation, Ginnie Mae terminated the plaintiff from the MBS program and extinguished "any redemption, equitable, legal or other right, title and interest of [plaintiff] in the mortgages pooled under each and every Guaranty Agreement."
In 2016, the SEC filed a civil enforcement action against the plaintiff and its corporate officers, alleging that they misled investors by representing to Ginnie Mae and investors "that certain mortgage loans in [plaintiff's] securities were delinquent when, in fact, such loans were current … [and] that [plaintiff] had violated the Guaranty Agreements by 'improperly exercise[ing]' its repurchase option on loans."
The plaintiff lender allegedly did this by delaying the transfer of borrower payments that cured defaults into the custodial account, "falsely pushing the borrower's account into delinquency and eligibility for repurchase." The plaintiff "then applied the delayed payments to bring the loan current and 'back into [its] inventory,' to be re-purchased at par, re-pooled, and re-sold as an MBS 'at market rates, which reflected a premium over par.'"
The SEC alleged that the plaintiff lender "accrued '$7.5 million in illicit profits as a result of the practice,' all while [it] was certifying to Ginnie Mae that [it] was in compliance with the Guaranty Agreements."
The SEC and the plaintiff lender entered into a Consent Agreement that, without admitting liability, provided for the entry of a final judgment against the plaintiff that required plaintiff to "pay $7.5 million in disgorgement, approximately $500,000 in prejudgment interest, and $3.75 million in civil penalties." The Agreement "provided that it did not 'affect [plaintiff's] right to take legal or factual positions in litigation or other legal proceedings in which the [SEC] is not a party." The trial court approved the Consent Agreement "as its final judgment."
The plaintiff lender "tried to bring … breach of contract claims against Ginnie Mae" in the trial court but the court "dismissed these claims under Rule 12(b)(1) of the Federal Rules of Civil Procedure, for lack of subject matter jurisdiction over contract claims against the United States."
Two years later, the plaintiff "filed its Complaint in the Court of Federal Claims, alleging that Ginnie Mae had 'breached all of [the] Guaranty Agreements' when it wrongfully terminated [plaintiff] from its MBS program."
The Government moved to dismiss the complaint, and the Court of Federal Claims dismissed the complaint, concluding that the "[G]overnment has shown that [plaintiff's] breach of contract claims … are precluded under the doctrine of res judicata, because [the] action is essentially a collateral attack on the [Final] Judgment entered by the [District Court] in the SEC Civil Enforcement Action.'"
The Court of Appeals for the Federal Circuit explained that "'[t]he doctrine of res judicata involves the related concepts of claim preclusion and issue preclusion.' … Claim preclusion 'foreclose[s] any litigation of matters that … should have been advanced in an earlier suit.'… 'A final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action.'" "Generally, claim preclusion applies where: '(1) the parties are identical or in privity; (2) the first suit proceeded to a final judgment on the merits; and (3) the second claim is based on the same set of transactional facts as the first.'"
The plaintiff lender argued "that the Court of Federal Claims erred in dismissing its Complaint because 'the elements of claim preclusion have not been met.'" Specifically, the plaintiff lender argued that "the SEC and Ginnie Mae are not in privity," and that its complaint did not "arise from the same set of transactional facts for the purposes of defendant preclusion because [plaintiff's] 'claims are not a collateral attack on the [Final] Judgment.'"
The Court of Appeals rejected this argument, explaining that "[f]irst, the SEC and Ginnie Mae are in privity for the purposes of precluding [plaintiff's] breach of contract claims. 'There is privity between officers of the same government,' for the purposes of claim preclusion, if 'in the earlier litigation the representative of the United States had authority to represent its interests in a final adjudication of the issue in controversy.'"
The Court noted that, as it was "uncontested that the SEC and Ginnie Mae are both officers and representatives of the United States", the "SEC has the authority to represent the United States in civil enforcement actions," the SEC "has the authority to represent the United States in settlements resolving those civil enforcement actions", and therefore that the SEC "'represent[ed] the United States' on the 'issue in controversy'— whether [plaintiff] breached the Guaranty Agreements, precipitating Ginnie Mae's extinguishment and termination of [plaintiff's] rights[,]" the Court of Appeals concluded that "the Court of Federal Claims properly concluded that the SEC and Ginnie Mae are in privity for the purposes of claim preclusion."
Second, the Court of Appeals determined that the plaintiff lender's claims "constitute a collateral attack on the Final Judgment." This is because "[a] claim is a 'collateral attack' on a final judgment where 'successful prosecution of the second action would nullify the initial judgment or would impair rights established in the initial action.'"
The Court noted that the plaintiff lender's complaint sought "to dispute the facts laid out in the SEC District Court Complaint and, thereby, 'impair rights established' by, if not 'nullify,' the Consent Agreement and Final Judgment." The Court also noted that a "defendant that could have been interposed cannot later be used to attach the judgment of the first action.'" Accordingly, the Court of Appeals held that the plaintiff lender's complaint "was a collateral attack on the Final Judgment."
The Court of Appeals rejected the plaintiff's remaining arguments as unpersuasive, and affirmed the judgment of the U.S. Court of Federal Claims.
FYI: 7th Cir Holds FDCPA Claims Failed Due to No Evidence of "Confusing or Misleading to Significant Fraction of Population"
The U.S. Court of Appeals for the Seventh Circuit recently affirmed entry of summary judgment in favor of a debt collector that its collection letter language was "false, misleading or deceptive," in violation of section 1692e of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. ("FDCPA").
In so ruling, the Seventh Circuit concluded that, although the language at issue in the collections letter was neither "plainly and clearly not misleading" nor "plainly false, deceptive or misleading" on its face, but could be construed so by the unsophisticated consumer, but summary judgment in the debt collector's favor was appropriate as a result of the debtor's failure to present evidence that the language in question would be confusing or misleading to a significant fraction of the population, as required.
A third-party debt collector ("Debt Collector") mailed three dunning letters to the debtor ("Debtor") dated March 8, 2016 (which the Debtor claims to have never received), and two nearly identical letters dated April 21, 2016 and June 6, 2016, attempting to collect on delinquent call phone bills.
The April 21, 2016 letter that formed the basis of this lawsuit (the "Collections Letter") identified the cell phone provider as the creditor and offered three payment options to satisfy the outstanding debt. The Collections Letter further included language informing the Debtor that "This letter serves as notification that your delinquent account may be reported to the national credit bureaus," followed by the statement that "[p]ayment of the offered settlement amount will stop collection activity on this matter."
The Debtor filed suit against the Debt Collector alleging that the Collections Letter violated section 1692e of the FDCPA, which prohibits debt collectors from using "any false, deceptive, or misleading representation or means in connection with the collection of any debt."
The Debt Collector's motion to dismiss was denied on the grounds that determination of whether a communication is confusing or misleading under § 1692e is ordinarily a question of fact. After class certification and cross‐motions for summary judgment were filed, summary judgment was entered in the Debt Collector's favor based upon the Debtor's failure to adduce necessary evidence that the language in question would be confusing or misleading to a significant fraction of the population.
The Debtor appealed the summary judgment rulings and the Debt Collector cross-appealed, claiming that the trial court erred in denying its motion to dismiss the complaint for failure to state a claim.
The Seventh Circuit first addressed the Debt Collector's cross-appeal of the trial court's order denying its motion to dismiss, initially collecting cases upholding the proposition that complaints alleging misleading communications under section 1692e are rarely subject to dismissal for failure to state a claim in the Seventh Circuit because whether a communication is false, deceptive or misleading under the FDCPA is a question of fact. See Evory v. RJM Acquisitions Funding, L.L.C., 505 F.3d 769, 776 (7th Cir. 2007) ("[W]e treat issues of deception as ones of fact rather than of law."); Zemeckis v. Glob. Credit & Collection Corp., 679 F.3d 632, 636 (7th Cir. 2012) ("As a general matter, we view the confusing nature of a dunning letter as a question of fact that, if well‐pleaded, avoids dismissal on a Rule 12(b)(6) motion.") (internal citation omitted); McMillan v. Collection Prof'ls Inc., 455 F.3d 754, 760 (7th Cir. 2006) (noting that inquiries under § 1692e "are necessarily fact bound" and that in "most instances" application of Rule 12(b)(6) "will require that the plaintiff be given an opportunity to demonstrate that his allegations are supported by a factual basis responsive to the statutory standard").
However, dismissal of a claim under §1692e is appropriate when it is clear from the face of the communication that no reasonable person, however unsophisticated, would be deceived by the allegedly false or misleading statement. See Heredia, 942 F.3d at 814; Taylor v. Cavalry Inv., L.L.C., 365 F.3d 572, 574–75 (7th Cir. 2004) ("If it is apparent from a reading of the letter that not even 'a significant fraction of the population' would be misled by it… the court should reject it without requiring evidence beyond the letter itself.").
Here, the Seventh Circuit rejected the Debt Collector's argument that the Collection Letter's disputed language was not misleading because it tracks safe harbor model language found in Regulation V, which governs the Fair Credit Reporting Act (12 C.F.R. Part 1022, App. B, Model Notices of Furnishing Negative Information, Model Notice B‐1), holding that use of the model language does not eliminate the factual question of whether the Debtor stated a claim under the FDCPA.
The Court further agreed that the Debtor's interpretation of the Collection Letter's statements following the settlement offers that delinquent account "may be reported" to credit bureaus, but "[p]ayment of the offered settlement amount will stop collection activity on this matter," stated a cause of action under section 1692e, and that the Debtor did not argue that she believed payment of the settlement offer could prevent any collection activity, as the Debt Collector suggests. Accordingly, the order denying the Debt Collector's Rule 12(b)(6) motion to dismiss was affirmed.
Turning to the Debtor's argument that summary judgment in the Debt Collector's favor was improper, the Seventh Circuit was tasked with determining whether the Collection Letter was deceptive from the objective standpoint of an "unsophisticated debtor" — one who is "uninformed, naive," and "trusting," but does possess "rudimentary knowledge about the financial world," and "is wise enough to read collection notices with added care." Boucher v. Fin. System of Green Bay, Inc., 880 F.3d 362, 366 (7th Cir. 2018) (quoting Williams v. OSI Educ. Servs., Inc., 505 F.3d 675, 678 (7th Cir. 2007) (citations and internal quotations omitted)).
Applying this standard, the Seventh Circuit has categorized §1692e cases into three groups to determine whether the disputed language "could well confuse a substantial number of recipients" (Pantoja v. Portfolio Recovery Assoc., LLC, 852 F.3d 679, 686 (7th Cir. 2017)):
(1) cases where the challenged language is obviously not misleading and no extrinsic evidence is required to demonstrate that a reasonable unsophisticated consumer would not be misled. (*Id. at 686–87.);
(2) cases where the debt collection language is not deceptive or misleading on its face, but could be construed so as to be confusing or misleading to the unsophisticated consumer, requiring plaintiffs to produce extrinsic evidence, such as consumer surveys, tending to show that unsophisticated consumers are in fact confused or misled by the challenged language. (Id.), and;
(3) cases involving language that is plainly false, deceptive, or misleading, and therefore requires no additional evidence for the plaintiff to succeed on her claim. (Id.).
The Debtor took the position that no additional evidence was required beyond her own opinion that a reasonable but unsophisticated consumer would deem the Collection Letter as a "threat to engage in credit reporting" unless payment was made by the date listed with the first settlement offer. However, the Court disagreed with the Debtor's claim that the phrase "may be reported to the national credit bureaus" conveyed a future possibility that her debt could be reported when, in fact, it already had been reported at the time the letter was generated (or shortly thereafter). The Seventh Circuit reasoned that "may" could refer to future events, as the Debt Collector argued and by definition, but by definition, could also be intended to notify the Debtor that the Debt Collector is capable of reporting the outstanding debt.
Thus, the Collections Letter did not fall into the first category as so "plainly and clearly not misleading," nor the third category involving plainly false, deceptive or misleading language, but the second category for which the Debtor bears the burden of producing evidence of confusion (beyond her own) using an objective measure such as "a carefully designed and conducted consumer survey." Sims v. GC Servs. L.P., 445 F.3d 959, 963 (7th Cir. 2006).
The Debtor's reliance on cases from other circuits to support her contention that no further evidence was required when a communication has two possible readings — one of which is misleading — were inapplicable, as each of the cited circuits used the "least sophisticated consumer" standard expressly rejected by the Seventh Circuit to assess whether a communication is confusing under the FDCPA. See Pettit v. Retrieval Master Creditor Bureau, Inc., 211 F.3d 1057, 1060 (7th Cir. 2000) ("[W]e have rejected the 'least sophisticated debtor' standard used by some other circuits because we don't believe that the unsophisticated debtor standard should be tied to 'the very last rung on the sophistication ladder.'").
Without adequate proof that a significant — or any (beyond herself) — fraction would read the Collections Letter as misleading, the Seventh Circuit agreed with the trial court's findings that the Debtor failed to create a genuine issue as to whether a significant fraction of the population would reach such a conclusion. Lox v. CDA, Ltd., 689 F.3d 818, 821 (7th Cir. 2012) (internal quotation omitted); Pettit, 211 F.3d at 1062.
Accordingly, entry of summary judgment in the Debt Collector's favor and against the Debtor was affirmed.