Source: http://updates.mwbllp.com/2012_07_22_archive.html
Timestamp: 2018-04-24 15:01:13
Document Index: 388756217

Matched Legal Cases: ['§ 1692', '§580', '§580', '§580', '§ 57', '§ 57', '§ 57', '§ 57']

Financial Services Law Developments: 7/22/12 - 7/29/12
FYI: 5th Cir Rules in Favor of Debt Collector in Alleged FDCPA Overshadowing Case
The U.S. Court of Appeals for the Fifth Circuit recently held that a debt collector did not violate section 1692g(a) of the federal Fair Debt Collection Practices Act ("FDCPA") by sending a letter with language requesting the debtor "timely validate" the amount the debt collector claimed was due, and threatening to report the debtor's account to credit reporting agencies if the debtor did not do so.
http://www.ca5.uscourts.gov/opinions/pub/11/11-10291-CV0.wpd.pdf
A debtor sued a debt collector, alleging that a letter from the debt collector violated the FDCPA, because it supposedly contained language that contradicted and overshadowed the statutorily mandated debt validation or "1692g" notice. The letter stated: "failure to timely validate the referenced amount due will cause us to report your account to the credit reporting agencies" followed by blank space and the notice requirement of Section 1692g(a).
The collection agency moved for summary judgment, arguing that the statutory notice in its letter was not contradicted or overshadowed by the quoted passage in the letter. The district court granted the collection agency's motion for summary judgment and the debtor appealed. The Fifth Circuit affirmed.
As you may recall, Section 1692(g)(a) of the FDCPA requires debt collectors to provide written notice of the following information to consumers within five days of the initial communication regarding a debt: (1) the amount of the debt; (2) the name of the creditor to whom the debt is owed; (3) a statement that unless the consumer "disputes the validity of the debt" within 30 days, the debt collector will assume the debt is valid; (4) a statement that if the consumer notifies the collector that the consumer is disputing the debt in writing within the 30 day period, the debt collector will obtain verification of the debt from the creditor and mail a copy of the verification to the consumer; and (5) a statement that, upon the consumer's written request, the debt collector will give the consumer the name and address of the original creditor, if different from the current creditor. In addition, the notice must be set forth in a form, and within a context, that does not distort or alter its meaning through inconsistent or overshadowing statements.
The Fifth Circuit rejected the debtor's argument that the request to "timely validate" the debt equated to an immediate demand for payment. The Court reasoned that, generally for a demand for payment to contradict the requirements of § 1692g, the debt collector must make a demand in a concrete period shorter than the 30 day statutory contest period, or a demand for immediate payment without explaining the demand in the context of the 30 day contest period. The Court found that an unsophisticated debtor would not construe the language requesting the debtor "timely validate" the debt as a demand for payment of the debt.
The Fifth Circuit also held that the threat of reporting the debtor to credit reporting agencies falls in the category of letters that encourage debtors to pay their debts by informing them of the possible negative consequences of failing to pay. The Court found this language does not contradict or overshadow the required 1692g notice language.
In addition, the Court held the location of the notice was significant. The notice was on same page as the language contested by the debtor, was in bold typeface, which the contested language was not, was of the same size and font as the rest of the letter, and was located immediately above a payment slip for the debtor to fill out, tear off and send to the debt collector, which provided visual confirmation that payment was not the only option.
FYI: 8th Cir Upholds Dismissal of Loan Mod Misrepresentation and "Good Faith and Fair Dealing" Allegations Against MERS and Servicer
The U.S. Court of Appeals for the Eighth Circuit recently upheld the dismissal of a complaint against MERS and a loan servicer based on the servicer's supposed fraudulent and negligent misrepresentations, where the complaint failed to establish a causal link between the alleged misrepresentations and borrowers' claimed damages from the subsequent foreclosure.
The Court further ruled that the complaint failed to state claims based on supposed violations of: (1) the duty of good faith and fair dealing, under a Minnesota statute authorizing mortgagees to purchase foreclosed properties at foreclosure sales; and (2) an implied duty of good faith and fair dealing under the mortgage agreement.
Plaintiffs-borrowers ("Borrowers") were having trouble making the payments on their home mortgage loan, and submitted an application to the loan servicer ("Servicer") for a loan modification under the Home Affordable Mortgage Program ("HAMP"). Servicer subsequently informed Borrowers that they "potentially qualified for a modification," and would be placed on a trial loan modification plan.
After making the trial payments for three months, Borrowers were allegedly informed by an employee of Servicer to discontinue making payments pursuant to the trial plan, as the Borrowers had already demonstrated their ability to make payments pursuant to the modification. Borrowers were also allegedly told that they could shortly expect a notice that the loan modification had been approved. Supposedly in reliance on these statements, Borrowers stopped making their trial payments.
Several months later, Servicer sent Borrowers a letter denying their loan modification application. The letter also allegedly informed Borrowers that a foreclosure action would ensue if they failed to bring their loan current immediately. Borrowers later received another letter from Servicer allegedly informing them that, although they may not be eligible for a HAMP modification, the loan had been placed under review, that Borrowers should continue making their monthly trial payments in order to "continue to be eligible for HAMP consideration," and that Borrowers would be notified at the end of the review period as to the status of the modification. Before the end of the review period, however, Borrowers were served with notice of a foreclosure sale and informed that they needed to pay almost $32,000 to bring the loan up to date. The property was eventually sold at the foreclosure sale to the owner of the loan.
A month after the foreclosure sale, Borrowers filed suit in Minnesota state court against Servicer and Mortgage Electronic Registration Systems, Inc. ("MERS") (collectively, "Defendants"), seeking a "detailed accounting" of the steps taken in response to Borrowers' request for a loan modification. The complaint also sought damages for: violation of the duty of good faith and fair dealing required by Minnesota's "foreclosure-by-advertisement" statute, Minn. Stat. §580.11; breach of the implied duty of good faith and fair dealing arising from the original mortgage agreement; and, fraudulent and negligent misrepresentation. Borrowers further sought a preliminary injunction staying the foreclosure proceedings.
Removing the case to federal court, Defendants moved to dismiss or alternatively for summary judgment. The district court granted Defendants' motion to dismiss, ruling that there was no private right of action, because Borrowers' claims were based entirely on a request for a HAMP loan modification. The district court also ruled that Borrowers failed to plead their claims with sufficient particularity. The Eighth Circuit affirmed.
Addressing whether the complaint contained sufficient facts to state plausible claims, the Court of Appeals ruled, first, that Borrowers' request for an accounting was unwarranted, as they had an available remedy through normal discovery requests, but had failed to explain why discovery was not an adequate remedy in this case.
Next, rejecting Borrowers' assertion that Minn. Stat. §580.11 imposed a duty on Defendants to act fairly and in good faith "while foreclosing," the Eighth Circuit ruled that this provision merely authorized mortgagees to purchase foreclosed premises at the foreclosure sale, as long as the mortgagee's actions relating specifically to the sale are fair and done in good faith. See Minn. Stat. §580.11 (authorizing "[t]he mortgagee, the mortgagee's assignee, or the legal representative of either or both [to purchase the premises] fairly and in good faith"). See also Sprague Nat'l Bank v. Dotty, 415 N.W.2d 725, 726-27 (Minn. App. 1987)(ruling that Section 580.11 imposes a duty on mortgagees to act fairly and in good faith when purchasing property at a foreclosure sale).
Concluding that Section 580.11 did not pertain to conduct that had no material impact on the fairness of the sale, the Court ruled that Borrowers' failure to allege a connection between the fairness of the foreclosure sale itself, and Servicer's supposed failure to work with them to work out their delinquency or to provide them with requested information and documentation, warranted dismissal of the allegations under Section 580.11.
As to Borrowers' allegations that Defendants breached an implied duty of good faith and fair dealing, the Eighth Circuit pointed out that Borrowers did not need to assert an independent breach of an express contractual duty, as long as the claims were based on the underlying agreement and there was a "causal link" between the alleged breach of good faith and fair dealing and any claimed damages.
However, unable to locate the requisite causal link in the complaint, the Appellate Court dismissed Borrowers' claims that Defendants engaged in an "abuse of a power" and "unjustifiably hindered" performance under the mortgage agreement. In so doing, the Court observed that Borrowers never: (1) identified any particular term in the mortgage agreement that gave rise to the alleged abuse of power; (2) alleged that Defendants' actions somehow prevented Borrowers from performing their obligations under the mortgage agreement; or (3) alleged plausible facts indicating that Borrowers would have been able to pay the mortgage absent their reliance on Servicer's alleged instructions to discontinue payments.
In addition, observing that under Minnesota law any allegation of misrepresentation, whether fraudulent or negligent, is considered an allegation of fraud and must be pled with particularity, the Eighth Circuit ruled that Borrowers had failed to plead their misrepresentation claims with particularity in that they failed to plead "'the time, place, and contents' of the false representations, the identity of the individual who made the representations, and what was obtained thereby." See, e.g., BJC Health Sys. v. Columbia Cas. Co., 478 f.3d 908, 917 (8th Cir. 2007).
The Court pointed out that, by providing only conclusory allegations that they suffered damages in reliance on Servicer's alleged misrepresentations, Borrowers failed to specify how Defendants' various misrepresentations caused either the foreclosure proceedings or Borrowers' inability to pay the mortgage delinquency, especially in light of the communications from Servicer alerting them to the need to bring the loan current immediately to avoid foreclosure. The Court thus ruled that Borrowers failed to state plausible claims for fraudulent or negligent misrepresentation. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007)(requiring a complaint to contain sufficient factual matter to state a claim that is plausible on its face).
Among its other rulings, the Eighth Circuit also dismissed Borrowers' claim for preliminary injunctive relief.
FYI: 10th Cir Holds Mere Demand for TILA Rescission Not Sufficient to Stop 3-Yr Deadline from Running, MERS Can Assign DOT and Related Right to Foreclose
The U.S. Court of Appeals for the Tenth Circuit recently held that Utah law does not prevent MERS from assigning a deed of trust and the related right to foreclose, and that the sending a letter to a lender, without more, is insufficient for a borrower to timely assert a right of rescission under the Truth in Lending Act ("TILA") within the three-year deadline.
http://www.ca10.uscourts.gov/opinions/11/11-4176.pdf.
The Plaintiffs ("Borrowers") entered into a home loan agreement with the lender ("Lender") in February of 2007 by executing a note secured by a deed of trust. Mortgage Electronic Registration Systems, Inc. ("MERS") was named as the beneficiary of the deed of trust with the power to foreclose and sell the property. Subsequently, two separate assignments were made to materially identical assignees, and the assignments of the deed of trust were recorded. In August of 2009, the Borrowers sent notice of rescission to the Lender, MERS, and the assignees claiming that the Lender failed to provide required disclosures under TILA. The Borrowers stopped paying the mortgage and an amended notice of default was recorded in June of 2010.
In September of 2010, the Borrowers filed an action seeking to quiet title and a TILA claim seeking rescission and monetary damages. The district court dismissed the Borrowers' quiet title count because the Borrowers failed to allege they held clear title to the property, had not alleged that they were not in default on the note, and had admitted to conveying their interest in the property for purpose of securing the loan.
The district court also rejected the Borrowers' claim that MERS lacked standing to authorize the assignment of the deed of trust and resulting foreclosure, because the Borrowers had agreed that MERS was the beneficiary, and its successors and assigns had foreclosure authority.
The district court dismissed the TILA claim on two grounds: (1) the transaction at issue was a "residential mortgage transaction", thus exempt from TILA; and (2) the Borrowers had failed to allege that they had tendered or had the ability to tender the amounts owed under the note.
On appeal, the Borrowers argued that the district court misinterpreted Utah Code Ann. § 57-1-35, which provides: "The transfer of any debt secured by a trust deed shall operate as a transfer of the security therefor." The Borrowers claimed that under the statute, once the promissory note was transferred, the benefit of the deed of trust was transferred to the holder of the note, and only the holder of the note or its agent could transfer the beneficial interest in the deed of trust. Thus, the Borrowers argued that the defendants were not beneficiaries of the deed of trust because they were not holders of the note.
In rejecting the Borrowers argument, the Tenth Circuit noted that Utah Code Ann. § 57-1-35 simply describes the long-applied principle that when a debt is transferred, the underlying security continues to secure the debt. Further, the Court agreed with a prior Utah state court case holding that § 57-1-35 does not prevent the original parties to the note and deed of trust from contracting at the outset to have a party, other than the beneficial owner of the debt, act on behalf of that owner to enforce the rights granted in the note and deed of trust. Finally, the Court noted that the deed of trust explicitly gave MERS the right to foreclose on behalf of 'Lender and Lender's successors and assigns' which is permissible under § 57-1-35.
The Tenth Circuit also upheld the dismissal of the Borrowers' TILA claim, but did so on the grounds that the Borrowers had failed to give notice of their intent to rescind within three years of the consummation of the transaction, as required under TILA. The Court held that written notice sent to the Lender, without more, is insufficient to be a timely exercise of the right to rescind under TILA. Thus, the Court upheld the district court's dismissal, because the Borrowers had failed to file the court action within TILA's three year statute of limitations.
Posted by Ralph T. Wutscher at 1:20 PM
The Illinois Appellate Court, Third District, recently held that the Illinois Credit Agreements Act did not prohibit a challenge to a commercial security agreement, where the lender raised the security agreement as an affirmative defense in an action for conversion of personal property, and the borrowers argued that the agreement as drafted contained a mutual mistake of fact as to extent of the lender's security interest.
http://www.state.il.us/court/Opinions/AppellateCourt/2012/3rdDistrict/3110008.pdf.
Plaintiffs-borrowers ("Borrowers") took out a $30,000 loan (the "Loan") from a bank ("Bank"), executing a commercial security agreement ("CSA") that gave Bank a security interest in certain assets to secure payment on "Secured Debts." Pursuant to the CSA, Borrowers granted Bank a security interest in Borrowers' personal property, including inventory, equipment, farm products and supplies. At the time the Loan was made, Bank had already made 18 separate real estate mortgage loans to Borrowers. Borrowers repaid the Loan in full the following month.
The CSA contained two boxes that could be checked to indicate whether "Secured Debts" referred to all the debts Borrowers owed to the bank or only to "Specific Debts" listed in the CSA. The box for "All Debts" was checked.
Bank later instituted foreclosure proceedings on the real estate mortgage loans against Borrowers, and also took possession of Borrowers' farm equipment, supposedly in accordance with the CSA. Borrowers initially filed a complaint for declaratory and injunctive relief, seeking return of the personal property, and claiming that the farm equipment had allegedly been taken unlawfully.
Borrowers ultimately filed a second amended complaint for conversion of the farm equipment, seeking the fair market value of the property. The second amended complaint contained no mention of the CSA. As its sole affirmative defense, Bank contended that the CSA secured "all present and future debts owed by [Borrowers]," including Borrowers' various real estate loans. Moving for summary judgment, Bank argued that it had properly seized and sold the farm equipment pursuant to the CSA.
In response, Borrowers asserted that the CSA mistakenly indicated that the parties had intended to secure all debts to Bank, rather than just the Loan that had been paid off. Bank then moved to strike and bar the testimony relating to errors in the written CSA, arguing that Borrowers were improperly attempting to modify the CSA in violation of the parol evidence rule and the Illinois Credit Agreements Act, 815 ILCS 160/1, et seq. ("ICAA").
The trial court granted Bank's motion to strike and bar the Borrower's testimony, and granted the Bank's the motion for summary judgment. Borrowers appealed. The Appellate Court reversed and remanded, ruling in part that Borrowers could challenge the validity of the CSA because it was raised as an affirmative defense to the Borrower's conversion action.
As you may recall, the ICAA provides: "[a] debtor may not maintain an action on or in any way related to a credit agreement unless the credit agreement is in writing, expresses an agreement or commitment to lend money or extend credit or delay or forebear repayment of money, sets forth the relevant terms and conditions, and is signed by the creditor and the debtor." 815 ILCS 160/2.
As to the question whether Borrowers had sufficiently raised a claim of mutual mistake of fact, the Appellate Court disagreed with Bank's argument that, because Borrowers did not actually plead reformation of the CSA, Borrowers were not permitted to raise the validity of the CSA as a challenge to the Bank's affirmative defense based on the CSA.
In so ruling, the Appellate Court noted that Borrowers were not looking to reform the CSA, but instead were challenging the preclusive effect of the CSA as an affirmative defense. In addition, the Court ruled that Borrowers had alleged all five elements necessary for a cause of action for conversion, had raised the validity of the CSA at the appropriate point in the proceedings, and had properly alleged that the CSA did not accurately reflect the parties' intent.
The Appellate Court further ruled that, even if Borrowers were required to specifically plead a count of reformation, Borrowers had presented sufficient facts from which mutual mistake could be established. Accordingly, the Court ruled that no further pleadings were required to present the issue to the trial court.
Turning to the issue as to whether the ICAA precluded a challenge to the validity of the CSA, the Appellate Court noted that Illinois courts have consistently ruled that the ICAA precluded actions by a debtor against a creditor "so long as the action is in anyway related to a credit agreement." See Bank One, Springfield v. Roscetti, 309 Ill. App. 3d 1048, 1055 (1999).
Importantly, the Appellate Court pointed out, however, that the Borrowers had not raised an action against Bank under the CSA or any alleged oral modification of the CSA, but had instead only alleged that the CSA was not accurate once Bank had asserted it as an affirmative defense to the Borrowers' conversion action.
Ruling that there was "no clear and unambiguous prohibition" in the ICAA against a debtor's challenge to the validity of a credit agreement when first raised by a creditor as an affirmative defense against a debtor, the Appellate Court concluded that summary judgment in favor of Bank was improper. The Court thus reversed and remanded.