Monday, January 16, 2017

FYI: 9th Cir Rejects "Administrative Feasibility" or "Ascertainability" Class Cert Requirement

The U.S. Court of Appeals for the Ninth Circuit recently held that class action plaintiffs are not required to demonstrate that there is an administratively feasible way to determine who is in a class in order for the class to be certified.

In so ruling, the Ninth Circuit noted that the Sixth, Seventh, and Eighth Circuits have similarly ruled. See Sandusky Wellness Ctr., LLC, v. Medtox Sci., Inc., 821 F.3d 992, 995–96 (8th Cir. 2016); Rikos v. Procter & Gamble Co., 799 F.3d 497, 525 (6th Cir. 2015); Mullins v. Direct Digital, LLC, 795 F.3d 654, 658 (7th Cir. 2015), cert. denied, ––– U.S. ––––, 136 S.Ct. 1161, 194 L.Ed.2d 175 (2016). 

Although the Court focused on the Third Circuit's contrary ruling, the First, Second, Fourth, and Eleventh Circuits have also held to the contrary.  See, e.g., In re Nexium Antitrust Litig., 777 F.3d 9 (1st Cir. 2015); Brecher v. Republic of Argentina, 806 F.3d 22 (2d Cir. 2015), EQT Prod. Co. v. Adair, 764 F.3d 347 (4th Cir. 2014); Byrd v. Aaron's Inc., 784 F.3d 154 (3d Cir. 2015); Carrera v. Bayer Corp., 727 F. 3d 300 (3d Cir. 2013); Karhu v. Vital Pharmaceuticals, Inc., Case No. 14-11648 (11th Cir 2015)(unreported).

The Ninth Circuit held that a separate "administrative feasibility" or "ascertainability" prerequisite to class certification was not compatible with the language of Rule 23.  In addition, the Court opined that Rule 23's enumerated criteria already address the policy concerns that had motivated some courts to adopt a separate administrative feasibility or ascertainability requirement, and Rule 23 did so without undermining the balance of interests inherent in certifying a class. 

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

Consumers who purchased cooking oil products labeled "100% Natural" filed putative class actions asserting state-law claims against the manufacturer in eleven states. The cases were consolidated in this action.

The consumers moved to certify eleven classes defined to include all persons who resided in the States of California, Colorado, Florida, Illinois, Indiana, Nebraska, New York, Ohio, Oregon, South Dakota, or Texas who had purchased the manufacturer's products within the applicable statute of limitations periods established by the laws of their state of residence (the "Class Period") through the final disposition of this and any and all related actions.

The manufacturer opposed class certification on the grounds that there would be no administratively feasible way to identify members of the proposed classes because consumers would not be able to reliably identify themselves as class members.  Thus, the manufacturer argued that the class was not eligible for certification.

Although the trial court acknowledged that the Third Circuit and some district courts had refused certification in similar circumstances, it declined to join in their reasoning. Instead, the trial court held that, at the certification stage, it was sufficient that the class was defined by an objective criterion -- here, whether class members purchased manufacturer's oil during the class period.

The trial court ultimately granted the consumers' motion for class certification in part, and certified eleven statewide classes to pursue certain claims for damages under Federal Rule of Civil Procedure 23(b)(3).  The manufacturer then appealed to the Ninth Circuit pursuant to Rule 23(f).

As you may recall, Federal Rule of Civil Procedure 23 governs class action procedure in federal court.  Parties seeking class certification must satisfy each of the four requirements of Rule 23(a) — numerosity, commonality, typicality, and adequacy — and at least one of the requirements of Rule 23(b). See Ellis v. Costco Wholesale Corp., 657 F.3d 970, 979–80 (9th Cir. 2011).

Rule 23(a), which is titled "prerequisites," provides that one or more members of a class may sue or be sued as representative parties on behalf of all members only if: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.  Rule 23(a) does not mention "administrative feasibility."

The manufacturer argued that the Court should reverse the class certification because the district court did not require the consumers to proffer a reliable way to identify members of the certified classes here, which included consumers in eleven states who purchased the cooking oils labeled "100% Natural" during the relevant period.

The manufacturer argued that, in addition to satisfying these enumerated criteria, class proponents must also demonstrate that there is an administratively feasible way to determine who is in the class. The manufacturer claimed that the consumers did not propose any way to identify class members and could not prove that an administratively feasible method existed because consumers do not generally save grocery receipts and are unlikely to remember details about individual purchases of a low-cost product like cooking oil.

The Ninth Circuit rejected the manufacturer's argument, holding that Rule 23(a)'s omission of "administrative feasibility" was meaningful. Relying on Silvers v. Sony Pictures Entm't, Inc., 402 F.3d 881, 885 (9th Cir. 2005), the Court concluded that because the drafters specifically enumerated "prerequisites," Rule 23(a) constituted an exhaustive list.

The Court of Appeals also took guidance from language used in other provisions of the Rule, noting, for example, in contrast to Rule 23(a), that Rule 23(b)(3) provides, "The matters pertinent to these findings include," followed by four listed considerations. FED. R. CIV. P. 23(b)(3).

Relying on Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296, 78 L.Ed.2d 17 (1983), the Ninth Circuit reasoned that if the Rules Advisory Committee had intended to create a non-exhaustive list in Rule 23(a), it would have used similar language. The Court noted that where Congress includes particular language in one section of a statute but omits it in another section of the same act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion. See Russello v. United States, 464 U.S. 16, 23, 104 S. Ct. 296, 78 L.Ed.2d 17 (1983).

Moreover, Ninth Circuit noted that Rule 23(b)(3) requires a court certifying a class under that section to consider the likely difficulties in managing a class action, and held that imposing a separate administrative feasibility requirement would render that manageability criterion largely superfluous, a result that contravenes the familiar precept that a rule should be interpreted to give effect to every clause.

The Ninth Circuit also relied on the Supreme Court precedent of Amchem Products, Inc. v. Windsor, 521 U.S. 591, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997). In Amchem, the Supreme Court considered whether a settlement-only class could be certified without satisfying the requirements of Rule 23.  In holding that it could not, the Supreme Court underscored that the Federal Rules of Civil Procedure result from "an extensive deliberative process involving a Rules Advisory Committee, public commenters, the Judicial Conference, the Supreme Court, and Congress." Id. at 620, 117 S.Ct. 2231.

Noting that in Amchem, the Supreme Court warned that the "text of a rule thus proposed and reviewed limits judicial inventiveness" and admonished that "courts are not free to amend a rule outside the process Congress ordered," the Ninth Circuit concluded that the lesson of Amchem Products was plain: "Federal courts ... lack authority to substitute for Rule 23's certification criteria a standard never adopted." Id. at 622, 117 S.Ct. 2231.

In sum, the Ninth Circuit concluded that the language of Rule 23 does not impose a freestanding administrative feasibility prerequisite to class certification, and, mindful of the Supreme Court's guidance, the Court of Appeals declined to interpose an additional hurdle into the class certification process delineated in the enacted Rule. 

The Ninth Circuit recognized that the Third Circuit requires putative class representatives to demonstrate "administrative feasibility" as a prerequisite to class certification. See Byrd v. Aaron's Inc., 784 F.3d 154, 162–63 (3d Cir. 2015); Carrera v. Bayer Corp., 727 F.3d 300, 306–08 (3d Cir. 2013). The Court noted that the rationale that the Third Circuit has given for imposing an administrative feasibility requirement is the need to mitigate the administrative burdens of trying a Rule 23(b)(3) class action.

Courts adjudicating such actions must provide notice that a class has been certified and an opportunity for absent class members to withdraw from the class. See Wal–Mart Stores, Inc. v. Dukes, 564 U.S. 338, 362, 131 S.Ct. 2541, 180 L.Ed.2d 374 (2011); accord FED. R. CIV. P. 23(c)(2)(B). The Third Circuit largely justifies its administrative feasibility prerequisite as necessary to ensure that compliance with this procedural requirement does not compromise the efficiencies Rule 23(b)(3) was designed to achieve.  See Shelton v. Bledsoe, 775 F.3d 554, 562 (3d Cir. 2015); Carrera, 727 F.3d at 307.

However, the Ninth Circuit noted that Rule 23(b)(3) already contains a specific, enumerated mechanism to achieve that goal: the manageability criterion of the superiority requirement. Rule 23(b)(3) requires that a class action be "superior to other available methods for fairly and efficiently adjudicating the controversy," and it specifically mandates that courts consider "the likely difficulties in managing a class action." FED. R. CIV. P. 23(b)(3)(D).

The Court also observed that the Seventh Circuit had rejected the Third Circuit's justifications in Mullins v. Direct Digital, LLC, 795 F.3d 654 (7th Cir. 2015), and the Sixth Circuit followed suit in Rikos v. Procter & Gamble Co., 799 F.3d 497, 525 (6th Cir. 2015). Accordingly, the Ninth Circuit concluded that Rule 23's enumerated criteria already addressed the interests that motivated the Third Circuit and, therefore, an independent administrative feasibility requirement was unnecessary.

Moreover, relying on the Seventh Circuit case of Mullins, which observed that requiring class proponents to satisfy an administrative feasibility prerequisite "conflicts with the well-settled presumption that courts should not refuse to certify a class merely on the basis of manageability concerns," the Ninth Circuit concluded that this presumption makes ample sense given the variety of procedural tools courts can use to manage the administrative burdens of class litigation. See Mullins, 795 F.3d at 663.

The Court further noted that Rule 23(c) already enables district courts to divide classes into subclasses or certify a class as to only particular issues. FED. R. CIV. P. 23(c)(4), (5).  The Ninth Circuit also reasoned that adopting a freestanding administrative feasibility requirement instead of assessing manageability as one component of the superiority inquiry would have practical consequences inconsistent with the policies embodied in Rule 23, noting that Rule 23(b)(3) calls for a comparative assessment of the costs and benefits of class adjudication, including the availability of "other methods" for resolving the controversy, FED. R. CIV. P. 23(b)(3).

In addition, following the reasoning of the Seventh Circuit's Mullins, the Ninth Circuit held that a standalone administrative feasibility requirement would invite courts to consider the administrative burdens of class litigation "in a vacuum." See Mullins, 795 F.3d at 663. The Court reasoned that the difference in approach would often be outcome determinative for cases like this one, in which administrative feasibility would be difficult to demonstrate but in which there might be no realistic alternative to class treatment. See id. at 663–64.

The Ninth Circuit therefore concluded that class actions involving inexpensive consumer goods would likely fail at the outset if administrative feasibility were a freestanding prerequisite to certification.

Again citing to the Supreme Court case, Amchem, the Court reasoned that the authors of Rule 23 opted not to make the potential administrative burdens of a class action dispositive and instead directed courts to balance the benefits of class adjudication against its costs. The Ninth Circuit held that it lacked authority to substitute its judgment for the authors of Rule 23. See Amchem Prods., 521 U.S. at 620, 117 S.Ct. 2231.

The Ninth Circuit noted that Third Circuit justified its administrative feasibility requirement as necessary to protect absent class members and to shield bona fide claimants from fraudulent claims. With respect to absent class members, the Third Circuit had expressed concern about whether courts would be able to ensure individual notice without a method for reliably identifying class members. See Byrd, 784 F.3d at 165; Carrera, 727 F.3d at 307.

The Ninth Circuit, however, believed that concern was unfounded, because neither Rule 23 nor the Due Process Clause requires actual notice to each individual class member.

As you may recall, Rule 23 requires only the "best notice that is practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort." FED. R. CIV. P. 23(c)(2)(B). "Rule 23 rule does not insist on actual notice to all class members in all cases and recognizes it might be impossible to identify some class members for purposes of actual notice." See Mullins, 795 F.3d at 665.

Similarly, the Ninth Circuit held, the Due Process Clause does not require actual, individual notice in all cases. See Silber v. Mabon, 18 F.3d 1449, 1453–54 (9th Cir. 1994). Courts have routinely held that notice by publication in a periodical, on a website, or even at an appropriate physical location is sufficient to satisfy due process. See, e.g., Hughes v. Kore of Ind. Enter., Inc., 731 F.3d 672, 676–77 (7th Cir. 2013).

Moreover, the Court observed that the Third Circuit's lack-of-notice concern presumes that some harm will inure to absent class members who do not receive actual notice. 

Although in theory, inadequate notice might deny an absent class member the opportunity to opt out and pursue individual litigation, the Ninth Circuit held that in reality, that risk was virtually nonexistent in low-value consumer class actions.  Such cases typically involve low-cost products and, as a result, recoveries were too small to incentivize individual litigation. The Court explained that an administrative feasibility requirement like that imposed by the Third Circuit would likely bar such actions because consumers generally do not keep receipts or other records of low-cost purchases.

The Ninth Circuit further explained that, practically speaking, a separate administrative feasibility requirement would only protect a purely theoretical interest of absent class members at the expense of any possible recovery for all class members in those cases that depend most on the class action mechanism.

The Court concluded that justifying an administrative feasibility requirement as a means of ensuring perfect recovery at the expense of any recovery would undermine the very purpose of Rule 23(b)(3), which was the "vindication of 'the rights of groups of people who individually would be without effective strength to bring their opponents into court at all.' " Amchem Prods., 521 U.S. at 617, 117 S.Ct. 2231.

The Ninth Circuit noted that the Third Circuit had expressed concern that without an administrative feasibility requirement, individuals would submit illegitimate claims and thereby dilute the recovery of legitimate claimants. See Carrera, 727 F.3d at 310.

The Ninth Circuit agreed that the fraud concern of the Third Circuit might be valid in theory, but, relying again on Mullins, it concluded that, in practice, the risk of dilution based on fraudulent or mistaken claims was low. See Mullins, 795 F.3d at 667. The Court pointed to class actions involving low-cost consumer goods, noting that consumers were unlikely to risk perjury charges and spend the time and effort to submit a false claim for a de minimis monetary recovery.

Further, the Court noted that consistently low participation rates in consumer class actions made it very unlikely that non-deserving claimants would diminish the recovery of participating, bona fide class members. 

Finally, observing that the Third Circuit has characterized its administrative feasibility requirement as necessary to protect the due process rights of defendants to raise individual challenges and defenses to claims, the Ninth Circuit, relying on Mazza v. Am. Honda Motor Co., Inc., 666 F.3d 581, 595 (9th Cir. 2012) and Marcus v. BMW of N. Am., LLC, 687 F.3d 583, 594 (3d Cir. 2012), pointed out that at the class certification stage, class representatives bear the burden of demonstrating compliance with Rule 23.
  
The Court reminded the manufacturer that it would have the opportunity to challenge the claims of absent class members if and when they filed claims for damages. The Court explained that at the claims administration stage, other litigants have relied on claim administrators, various auditing processes, sampling for fraud detection, and follow-up notices to explain the claims process, and other techniques tailored by the parties and the court to validate claims. See Mullins, supra, 795 F.3d at 667. The Court explained that Rule 23 specifically contemplates the need for such individualized claim determinations after a finding of liability.

The manufacturer did not explain why such procedures are insufficient to safeguard its due process rights.

Given the existing opportunities to challenge the consumers' case, the Ninth Circuit could see no reason why requiring an administratively feasible way to identify all class members at the certification stage would be necessary to protect the manufacturer's due process rights. See Mullins, 795 F.3d at 670. Although it noted that the manufacturer might prefer to terminate the litigation at class certification rather than later challenging each individual class member's claim to recovery, the Court concluded that there is no due process right to "a cost-effective procedure for challenging every individual claim to class membership." Id. at 669.

Even if the concern were that claimants in cases like this would eventually offer only a self-serving affidavit as proof of class membership, the Court did not see any reason why that issue should be resolved at the class certification stage to protect a defendant's due process rights. The Court explained that if an oil consumer pursued an individual lawsuit instead of a class action, an affidavit describing her purchases would create a genuine issue if the manufacturer disputed the affidavit, and would prevent summary judgment against the consumer. See Mullins, 795 F.3d at 669; accord FED. R. CIV. P. 56(c)(1)(A). Given that a consumer's affidavit could force a liability determination at trial without offending the Due Process Clause, the Ninth Circuit saw no reason to refuse class certification simply because that same consumer presented her affidavit in a claims administration process after a liability determination had already been made.

Moreover, the Court explained that identification of class members would not affect a defendant's liability in every case. For example, in this case, the consumers proposed to determine the manufacturer's aggregate liability by (1) calculating the price premium attributable to the allegedly false statement that appeared on every unit sold during the class period, and (2) multiplying that premium by the total number of units sold during the class period.  This would affect the amount paid to each class member, but not the total amount paid by the defendant.

The Ninth Circuit agreed with the Seventh Circuit that, in cases in which aggregate liability can be calculated in such a manner, "the identity of particular class members does not implicate the defendant's due process interest at all" because "the addition or subtraction of individual class members affects neither the defendant's liability nor the total amount of damages it owes to the class." See Mullins, 795 F.3d at 670; see also Six (6) Mexican Workers, 904 F.2d at 1307.

For these reasons, the Ninth Circuit held that protecting a defendant's due process rights did not necessitate an independent administrative feasibility requirement.

In conclusion, the Ninth Circuit affirmed the trial court's ruling declining to condition class certification on the consumers' proffer of an administratively feasible way to identify putative class members.


Eric Tsai
Maurice Wutscher LLP
 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

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Wednesday, November 16, 2016

FYI: Cal App Ct Holds Consumer Properly Rejected Pre-Suit Offer With General Release and Confidentiality Clauses

The California Court of Appeal, Fourth Appellate District, recently held that a successful consumer plaintiff was entitled to $185,000 in attorney fees and costs, even though she rejected a settlement offer containing an appropriate remedy before she filed suit.

In so ruling, the Court held that rejecting the pre-litigation settlement offer was not unreasonable, as the offer required the consumer to agree to a broad release of claims and a confidentiality clause, and especially as the confidentiality provision in particular was unlawful as to the consumer's Song-Beverly Consumer Warranty Act, Cal. Civ. Code § 1790, et seq. ("Song-Beverly Act") claims.

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

A car buyer filed a complaint against a car dealer and manufacturer for violations of the Song-Beverly Act and other statutes, alleging the used vehicle she purchased had numerous defects that the dealer and manufacturer were unable to repair. After the parties settled the lawsuit as to all issues except attorney fees, the trial court awarded the buyer over $185,000 in attorney fees and costs.

The dealer and manufacturer appealed, contending that the buyer was not entitled to attorney fees or costs because she could have avoided litigation by settling the matter earlier. The dealer had made a prelitigation offer in response to a notice required by the Consumers Legal Remedies Act, Cal. Civ. Code, § 1750 et seq., for the buyer's claim under that statute. The dealer and manufacturer argued that they had offered the buyer an appropriate remedy before she filed her complaint, but that she unreasonably refused to agree to a general release and a confidentiality clause.

As you may recall, the Song-Beverly Act generally provides that a prevailing buyer may recover reasonable attorney fees.  See Cal. Civ. Code § 1794.

Relying on McKenzie v. Ford Motor Co. (2015) 238 Cal. App. 4th 695, the Court of Appeal noted that under the Song-Beverly Act, the dealer's requirement of a confidentiality provision was unlawful, and the dealer's and manufacturer's appeals were premised on their mistaken belief the buyer should have accepted the settlement offer with the conditions notwithstanding statutory and case law.

The Court therefore held that the buyer's rejection of the dealer's pre-litigation settlement offer was reasonable and the failure to resolve the case earlier was not attributable solely to her obstinacy or a desire to generate fees.

The dealer and manufacturer additionally contended that the fee award should have been reduced because there was insufficient evidence to show that her attorney's hours and hourly rate were reasonable given the litigation's lack of risk and complexity, and because the buyer ignored repeated offers of restitution, filed an unnecessary lawsuit, and engaged in unnecessary litigation activity. They further argued that the buyer's counsel should not be compensated at a higher rate than the $300 per hour that the dealer paid its counsel.

The Court of Appeal disagreed, noting that until the case actually settled, the buyer had to conduct discovery and prepare to prove liability on her varied claims with their varied elements. She also had to be prepared to counter the affirmative defenses asserted by the dealer and manufacturer.

Because the trial court, which considered the evidence and observed the buyer's counsel's lawyering skills firsthand, determined that he charged an appropriate hourly rate, the Court of Appeal concluded that the trial court did not abuse its discretion in basing its fee award on a rate of $575 per hour.

Accordingly, the Court of Appeal affirmed the trial court's award of the buyer's attorney fees and awarded her costs on appeal.


Eric Tsai
Maurice Wutscher LLP
 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Saturday, November 12, 2016

FYI: 9th Cir Holds Debtor's Acknowledgement of Debt Does Not Excuse Untimely Proof of Claim

The U.S. Court of Appeals for the Ninth recently held that if a creditor wishes to participate in the distribution of a debtor's assets under Chapter 13, it must timely file a proof of claim, and the debtor's acknowledgment of the debt owed to the creditor does not relieve the creditor of this affirmative duty.

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

The debtor filed a Chapter 13 bankruptcy petition.  The bankruptcy court issued a notice with a deadline for creditors to file a proof of claim.  The creditor was sent a copy of the notice with the deadline, as well as all versions of the debtors' Chapter 13 plan which was amended several times. 

Four months after the deadline to file proof of claims passed, the creditor filed one secured and two unsecured claims with the bankruptcy court.  After a hearing on the late filed claims, the bankruptcy court disallowed the claims because the proof of claims were not timely filed.

The creditor appealed, and the Ninth Circuit Bankruptcy Appellate Panel ("BAP") affirmed the decision.  This appeal followed.

As you may recall, in a bankruptcy proceeding, a debtor must file a schedule of assets and liabilities and a statement of financial affairs. Fed. R. Bankr. P. 1007(b)(1). In order to participate in and receive distributions through a Chapter 13 bankruptcy, a creditor must file a valid "proof of claim" and go through the allowance process set forth in 11 U.S.C. § 502. In re Blendheim, 803 F.3d at 484–85.  A secured creditor that does not wish to participate in a Chapter 13 plan, or that fails to file a timely proof of claim, does not forfeit its lien.  Id.

A bankruptcy court may disallow a claim for many reasons, including if the proof of claim was untimely. 11 U.S.C. § 502(b)(9); In re Blendheim, 803 F.3d at 485. Here, the creditor admitted it filed its proof of claims late. 

However, the creditor argued that the court should allow it take part in the plan because its debt was listed on the bankruptcy schedules.  The Ninth Circuit BAP disagreed.

The Federal Rules of Bankruptcy Procedure provide that, in a Chapter 13 plan, "[a]n unsecured creditor or an equity security holder must file a proof of claim or interest for the claim or interest to be allowed." Fed. R. Bankr. P. 3002(a). The Ninth Circuit previously made clear that the language in the statute should be given its "plain meaning" and enforced accordingly. Gardenhire v. IRS (In re Gardenhire), 209 F.3d 1145, 1148 (9th Cir. 2000).

The Ninth Circuit noted that the debtor's schedules are used by bankruptcy courts to determine whether debtors are eligible for relief, and by creditors to determine if they want to participate in the plan. See Guastella v. Hampton (In re Guastella), 341 B.R. 908, 918 (B.A.P. 9th Cir. 2006); Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 785 (9th Cir. 2001). A creditor may chose not to pursue a claim after evaluating all of a Chapter 13 debtor's debts and the proposed repayment plan. Perry v. Certificate Holders of Thrift Sav., 320 F.2d 584, 589 (9th Cir. 1963).

The Court also noted that "[t]he proof of claim plays the important role of 'alert[ing] the court, trustee, and other creditors, as well as the debtor, to claims against the estate,' and the creditor's intention to enforce the claims."  See In re Daystar of Cal., Inc., 122 B.R. 406, 408 (Bankr. C.D. Cal. 1990); see also Adair v. Sherman, 230 F.3d 890, 896 (7th Cir. 2000); Perry, 320 F.2d at 589.

The Ninth Circuit agreed with other courts that disallowed late filed claims even where the debt is listed on the debtor's bankruptcy schedules.  See, e.g., Bowden v. Structured Invs.
Co. (In re Bowden), 315 B.R. 903, 907 (Bankr. W.D. Wash. 2004); In re Greenig, 152 F.3d 631, 632–34 (7th Cir. 1998).

The creditor argued that by listing the debt on her schedule, the doctrine of judicial admissions applies, and the debtor is required to pay all debts listed. 

Judicial admissions are formal admissions in court pleadings which have the effect of withdrawing a fact from issue and dispensing wholly with the need for proof of the fact.  Judicial admissions are conclusively binding on the party who made them.

The Ninth Circuit held that it has recognized the judicial admissions doctrine, but that it has never held that a bankruptcy schedule qualifies as a formal admission under the doctrine.  The Court did not reach that issue here either.  

Instead, the Court held that listing a debt on the bankruptcy schedules, even if it is a judicial admission, does not remove the requirement that a proof of claim be filed.  The Ninth Circuit explained "Congress chose to require Chapter 13 creditors to file proofs of claims that demonstrate their intent to enforce their claims; a judicial admission by a debtor does not fulfill this strict requirement or its purpose."

The creditor tried to argue that listing the debt on the schedules was an informal proof of claim.  "Creditors, failing to file a timely formal proof of claim, often assert that an informal proof of claim can function to establish the creditor's claims."  See Cty. of Napa v. Franciscan Vineyards, Inc. (In re Franciscan Vineyards, Inc.), 597 F.2d 181, 183 (9th Cir. 1979).

"To qualify as an informal proof of claim: (1) the document must state an explicit demand showing the nature and amount of the claim against the estate, and (2) the document must evidence an intent to hold the debtor liable." Sambo's Restaurants, Inc. v. Wheeler (In re Sambo's Rests., Inc.), 754 F.2d 811, 815 (9th Cir. 1985).

In the Ninth Circuit, establishing an informal proof of claim requires among other things an affirmative action by the creditor within the required time frame. In re Bowden, 315 B.R. at 907 (rejecting argument that debtor's schedules alone suffice to establish an informal proof of claim). Here, the creditor took no affirmative action and relied solely on the bankruptcy schedules.  The Court stated that the schedules do not demand or demonstrate the intent to hold the debtor liable. 

The creditor further argued that the debtor's bankruptcy schedules constitute a debtor's proof of claim. However, the Court again did not agree. First, the bankruptcy schedules were not filed within the time period allowed for filing proofs of claim, and did not otherwise meet the requirements of Rule 3004. Second, the schedules do not qualify as a debtor's proof of claim. "Rule 3004 requires that debtors make an additional showing of their desire to include an unasserted claim in their Chapter 13 plan after receiving notice of which creditors intend to enforce their claims." No such additional showing was made by the debtor.

Finally, the creditor argued it would be inequitable if its claims are not allowed.  The Ninth Circuit stated that even though it might not be fair, it noted that it previously "has repeatedly held that the deadline to file a proof of claim in a Chapter 13 proceeding is rigid, and the bankruptcy court lacks equitable power to extend this deadline after the fact." In re Gardenhire, 209 F.3d at 1148.  Further explaining, the Court noted that it would be difficult for creditors to get a fresh start if creditors are able to continuously add claims after the deadlines expire. In re Goodwin, 58 B.R. at 77).

Accordingly, the Court held that in order to participate in distributions of a debtor's assets under her Chapter 13 plan, the creditor was required to file a proof of claim by the prescribed deadline, and the bankruptcy court properly rejected them.



Eric Tsai
Maurice Wutscher LLP
 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Monday, October 31, 2016

FYI: 9th Cir Holds Foreclosure Trustee Not FDCPA "Debt Collector"

The U.S. Court of Appeals for the Ninth Circuit recently held that the trustee of a California deed of trust securing a real estate loan was not a "debt collector" under the federal Fair Debt Collection Practices Act (FDCPA), because the trustee was not attempting to collect money from the borrower. 

In so ruling, the Court held that "actions taken to facilitate a non-judicial foreclosure, such as sending the notice of default and notice of sale, are not attempts to collect "debt" as that term is defined by the FDCPA."

The Court also vacated the dismissal of the borrower's federal Truth In Lending Act claim, confirming its prior ruling in Merritt v. Countrywide Fin. Corp., 759 F.3d 1023 (9th Cir. 2014), that a mortgagor need not allege the ability to repay in order to state a TILA rescission claim.

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

A borrower sought damages under the FDCPA, alleging that the foreclosure trustee initiated a California non-judicial foreclosure and sent her a notice of default and a notice of sale that misrepresented the amount of debt she owed.  The borrower also sought to rescind her mortgage transaction under TILA.

The trial court granted the servicer's motion to dismiss the borrower's FDCPA claims, and dismissed her TILA claim.

The borrower appealed, arguing that the foreclosure trustee was a "debt collector" under the FDCPA because the notice of default and the notice of sale constituted attempts to collect debt and threatened foreclosure unless she brought her account current.

The Ninth Circuit disagreed, holding that the California foreclosure trustee would only be liable if it had attempted to collect money from the borrower.

As you may recall, the FDCPA imposes liability on "debt collectors."  Under the FDCPA, the word "debt" is defined as an "obligation . . . of a consumer to pay money."  15 U.S.C. § 1692a(5).  The FDCPA's definition of "debt collector" includes entities that regularly collect or attempt to collect debts owed or due or asserted to be owed or due to another.

Distinguishing rulings from the Fourth and Sixth Circuits, and agreeing with the California Courts of Appeal, the Ninth Circuit held that a California foreclosure trustee was not a "debt collector" subject to the FDCPA because the foreclosure trustee was not attempting to collect money from the borrower.

Specifically, the Court noted that the Fourth Circuit's ruling in Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373, 378–79 (4th Cir. 2006), "was more concerned with avoiding what it viewed as a 'loophole in the [FDCPA]" than with following the [FDCPA]'s text," which the Ninth Circuit found improper. 

The Court also noted that the Sixth Circuit's ruling in Glazer v. Chase Home Fin. LLC, 704 F.3d 453, 461 (6th Cir. 2013), "rests entirely on the premise that 'the ultimate purpose of foreclosure is the payment of money," but "the FDCPA defines debt as an 'obligation of a consumer to pay money."  The Ninth Circuit emphasized that "[f]ollowing a trustee's sale, the trustee collects money from the home's purchaser, not from the original borrower. Because the money collected from a trustee's sale is not money owed by a consumer, it isn't 'debt'" as defined by the FDCPA."

The Ninth Circuit held that the object of a non-judicial foreclosure in California is to retake and resell the security on the loan, and thus actions taken to facilitate a non-judicial foreclosure, such as sending the notice of default and notice of sale, are not attempts to collect "debt" under the FDCPA.

Accordingly, the Ninth Circuit concluded that the foreclosure notices at issue were an enforcement of a security interest, rather than debt collection under the FDCPA. 

The Ninth Circuit found it significant that California expressly exempts trustees of deeds of trust from liability under the California Rosenthal Act, Cal. Civ. Code. § 2924(b), the state analogue of the FDCPA, observing that holding California foreclosure trustees liable under the FDCPA would subject them to obligations that would frustrate their ability to comply with the California statutes governing non-judicial foreclosure.

The Ninth Circuit agreed with the foreclosure trustee, and, citing Sheriff v. Gillie, 136 S. Ct. 1594, 194 L. Ed. 2d 625 (2016), in which the U.S. Supreme Court instructed that the FDCPA should not be interpreted to interfere with state law unless Congress clearly intended to displace that law, the Ninth Circuit affirmed the district court's dismissal of the FDCPA claim, declining to create a conflict with state foreclosure law in its interpretation of the term "debt collector."

Turning to the borrower's TILA claims, which the trial court had dismissed without prejudice, the Court noted that it recently held in Merritt v. Countrywide Fin. Corp., 759 F.3d 1023, 1032-33 (9th Cir. 2014), that a mortgagor need not allege the ability to repay the loan in order to state a rescission claim under TILA. However, this was the basis of the trial court's dismissal of the TILA claim.

Accordingly the Ninth Circuit vacated the dismissal of the borrower's TILA claim and remanded it to the trial court for reconsideration.  The Court also affirmed the dismissal of the borrower's FDCPA claims, vacated the dismissal of her TILA claims, and remanded the TILA claims for reconsideration.



Eric Tsai
Maurice Wutscher LLP
 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon





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Tuesday, October 25, 2016

FYI: 9th Cir Holds Car Dealer Failed to Provide "Completed Inspection Report" as to "Certified" Used Car

The U.S. Court of Appeals for the Ninth Circuit recently held that a car dealership inspection certificate violated California statutory law that required that a vehicle seller provide a "completed inspection report" prior to the sale of any "certified" used car.

In so ruling, the Court held that the term "inspection report" was a term of art in the auto industry and in other state statutes, and that the California Legislature must have been aware of its usage.

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

An individual purchased a vehicle from a car dealership.   The individual alleged that he was drawn to the car dealership after hearing advertisements regarding the benefits of purchasing a "certified" vehicle that had passed the car dealership's rigorous "125-point" certification inspection.  The individual alleged that he would have paid less, or possibly not even purchased the car, had it not been a "certified" vehicle. 

According to the individual, it is the car dealership's policy to simply provide purchasers of used vehicles with a pre-printed car dealership "Quality Inspected Certificate" ("Certificate") listing the vehicle components that were inspected.  The individual received two versions of the Certificate: a one-sided Certificate provided to him prior to sale, and a two-sided Certificate, which was placed in the glove compartment before he took possession of the vehicle. 

In addition to the two Certificates that the car dealership provides to purchasers of used vehicles, the car dealership also uses a third document known as a "CQI/VQI Checklist."  This checklist contains 236 points of inspection and is filled out by a technician during the inspection process.

The CQI/VQI Checklist, unlike the Certificates, indicates the condition of each individual component inspected. Rather than provide the CQI/VQI Checklist to consumers, the car dealership destroys the document after the inspection results are entered into its electronic system, and no copy of the checklist is retained.

Shortly after purchasing the vehicle, the individual experienced some difficulty with the car. The individual filed suit in state court alleging violation of California consumer protection laws -- (1) the Consumer Legal Remedies Act ("CLRA"); (2) the Song-Beverly Consumer Warranty Act ("Song-Beverly"); (3) common law fraud and deceit; and (4) the Unfair Competition Law ("UCL"). 

The individual's central theory was that the car dealership violated state law by failing to provide him with a "completed inspection report" prior to the sale of the "certified" vehicle.

The car dealership removed to federal court asserting diversity jurisdiction. A week after removal, the car dealership filed a motion to dismiss, as well as a motion to strike the individual's punitive damages claim.
The following month, while the motion to dismiss the first amended complaint was pending, the district judge issued an order to show cause regarding subject matter jurisdiction, noting that he had "serious doubts" as to whether the case met the amount-in-controversy requirement.

After the parties responded to the order to show cause, the district judge found that the car dealership had shown by a preponderance of the evidence that the amount in controversy was over $75,000 and thus the action was properly removable.

The district court then granted the car dealership's motion to dismiss on all claims except for the CLRA and UCL claims. Following discovery, the car dealership filed a motion for summary judgment on the CLRA and UCL claims. The district court granted the motion, holding that there was no material legal difference between the one-sided form and the two-sided form, and that both forms were legally sufficient. 

The individual appealed the district court's dismissal and summary judgment orders.  In this opinion, the Ninth Circuit only considered the appeal of the summary judgment.

The Court of Appeals for the Ninth Circuit first addressed the potential lack of subject matter jurisdiction. As you may recall, to establish original jurisdiction based on diversity of parties, the amount in controversy must exceed the sum or value of $75,000, exclusive of interest and costs.  The Ninth Circuit explained that the amount in controversy is the amount at stake in the underlying litigation and includes damages, the cost of complying with an injunction, as well as attorney's fees awarded under fee shifting status.  The Court of Appeals held that the amount in controversy in this matter exceeded the minimal required when the potential cost of complying with injunctive relief was considered along with the individual's claims for compensatory and punitive damages.  

Next, the Court of Appeals considered the individual's claims under the California CLRA and UCL claims.

Section 11713.18 of the California Vehicle Code prohibits a car dealer from either advertising for sale or selling a used vehicle as "certified" under nine circumstances, including if:  "[p]rior to sale, the dealer fails to provide the buyer with a completed inspection report indicating all the components inspected."  Cal. Veh. Code §11713.18(a)(6).  The statute further provides that a violation of any of these provisions is actionable under the CLRA, the UCL, false advertising statutes, or any other applicable state or federal law. Cal. Veh. Code § 11713.18(b).

Applying the state law, the Ninth Circuit held that the car dealership's Certificates did not satisfy the requirements of § 11713.18.  The Court found support for its ruling in the plain meaning of the statutory language, as the statute requires a completed "inspection report."

The Court explained that, while the term is not defined in the statute, an "inspection report" is a term of art in the automobile industry.  Specifically, the Ninth Circuit noted, the term "inspection report" is understood to mean a report that lists the components inspected, with a space corresponding to each component in which the inspector designates whether or not that component is functional.

The Ninth Circuit also noted that a "completed inspection report" is one in which those spaces have been appropriately marked so as to indicate the result of the inspection.  The Court further noted that these terms are common in California state statutes, regulations, and everyday usage in the auto industry, and other states also use such a term of art for a document that requires an area for marking the components for defects.

The Court held it had to assume that the California legislature was aware of the meaning of "inspection report" and intended the meaning to control.  In disregarding this meaning, the Court would have improperly make the word "completed" superfluous. 

The Ninth Circuit also found support for its ruling in the purpose, history, and public policy of the statute.  The Court noted that section 11713.18(a)(6) was part of California's "Car Buyer's Bill of Rights," which, according to the author of the bill, aimed to "strengthen the protections afforded [to] California car buyers by improving laws regarding the sales, marketing, and financing of new and used vehicles."  Assembly Judiciary Comm., 2005Ð2006 Session, Analysis of AB-68 5 (March 1, 2005).

Prior to the enactment of this bill, the California legislature noted that there was no legal standard for use of the term "certified," despite the growing trend for dealers to use this term.  According to the Court, the legislature enacted this statute to protect consumers and assure that they received a fair bargain and for there to be transparency in the sale of "certified" vehicles.

The Ninth Circuit emphasized that the car dealership's certificates did not provide the status of the individual components inspected under its inspections.  Instead, the Court noted, the Certificates merely guaranteed that the vehicle's overall condition satisfied its certification program and listed the components under the program.  The Court found dispositive the fact that the consumer did not know neither the condition of the individual components nor which, or how many, components must pass the test before a vehicle is "certified." In other words, the Court explained, the individual did not know what it meant to pass the inspection.

The Ninth Circuit rejected the car dealership's argument based on the drafting history of the legislation.  In drafting the bill, the California legislature deleted the phrase "and certifies that all of the inspected components meet the express written standards of the vehicle certification program."  The Court explained that this deletion spared dealers from another substantive obligation, while leaving the requirement to provide a "completed inspection report" intact.

Accordingly, the Ninth Circuit reversed the district court's grant of summary judgment in favor of the car dealership and sua sponte granted summary judgment in favor of the individual.  



Eric Tsai
Maurice Wutscher LLP
 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon





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