Monday, August 29, 2016

FYI: ND Cal Holds Alleged "Invasion of Privacy" Sufficient for TCPA Standing

The U.S. District Court for the Northern District of California recently held that a mobile phone app designed to send messages to a phone user's contacts did not violate the federal Telephone Consumer Protection Act ("TCPA"), because the phone user selected the message recipients and had to take several affirmative steps for the app to send the unwanted messages.

In so ruling, the Court also held that the plaintiff had Article III standing because his TCPA claim did not simply allege a procedural violation, and instead alleged that he suffered concrete harm because the mobile app provider supposedly invaded his privacy

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

A phone user received an allegedly unwanted text message with a hyperlink.  The defendant company sent the message to advertise its mobile app.  The phone user alleged he had never been a user of the app nor downloaded the app onto any device.

The app allows users to communicate with and see the location of the contacts in their phone.  The app requires users to download it on their phone.  After downloading the app and creating an account, users are asked, "Want to see others on your map?"  Users who click the "Yes" button are asked permission for the company to access their contacts.  Users who allow permission are then brought to a screen to "Add Member[s]," with certain "Recommended" members selected through an algorithm. 

Each "Recommended" contact appears with a checkmark next to it.  An "Invite" button showing the number of selected invitations is at the bottom of this screen.  The app does not inform users how or when invitations will be sent.  The app states that it has full control over the content of the text message and when it will send the message, if the app sends it at all.

The phone user brought a class action complaint alleging violations of the TCPA and the California unfair competition law.  The mobile application company moved to dismiss both claims. 

As a preliminary matter, the District Court determined that the phone user sufficiently alleged that he suffered a concrete injury and consequently had standing to bring the case. 

As you may recall, Article III standing requires that a plaintiff "have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision." Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1547 (2016). The "injury in fact must be both concrete and particularized." Id. at 1548. The Supreme Court recently made clear that, "Article III standing requires a concrete injury even in the context of a statutory violation," and a plaintiff does not "automatically satisf[y] the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right." Id. at 1549. That is, a plaintiff cannot "allege a bare procedural violation, divorced from any concrete harm, and satisfy the injury-in-fact requirement of Article III." Id.

The Court reasoned that the phone user supposedly suffered a necessary concrete injury because he alleged an invasion of privacy.

The Court also rejected the defendant's efforts to distinguish two other court rulings allowing TCPA standing on grounds that the alleged conduct in the other cases was more pervasive than here.  The Court explained that "such distinctions go only to the extent of the injury, not whether there was a concrete injury at all."

The Court then turned to the merits of the TCPA claim.  The Court noted the established rule that a text message is a "call" under the TCPA.  The relevant TCPA section makes it unlawful to "to make any call… using any automatic telephone dialing system or an artificial or prerecorded voice… to any telephone number assigned to a … cellular telephone service."  47 U.S.C. § 227(b)(1)(A)(iii).  

The Court noted that the determination of liability depended on whether the mobile app company "made" the unwanted call or used an "automatic telephone dialing system" as intended by the TCPA.   In making this determination, the Court relied on the Federal Communications Commission's ("FCC") analysis in In the Matter of Rules & Regulations Implementing the Telephone Consumer Protection Act of 1991, 30 F.C.C. Rcd. 7961. 

The FCC explained who "makes" a call by distinguishing the practices of two mobile application companies.  According to the FCC, one company "made" a call under the TCPA by designing a mostly automated app that sent invitational texts of its own choosing to every contact in the app user's contact list with little or no input by the phone user. 

The other company did not "make" a call under the TCPA because it designed a user-action based app that required the phone user to: 1) tap a button that invites contacts to use the app; 2) determine whether to invite all contacts or individually select contacts; and 3) choose to send the invitational text message by tapping another button. 

Put differently, the FCC concluded that the phone user's affirmative steps stripped the user-action based app company from the status of "maker" of the call under the TCPA.  This held true even if the app still controlled the content of the text message.

The District Court here followed the FCC's analysis and determined that the defendant mobile application company did not "make" a call because its app required affirmative steps by phone users, namely granting the app access to their contacts, selecting the invitees, and tapping an additional invite button.   It was immaterial, for the purposes of who "makes" a call under the TCPA, whether an app informs the user how invitations will be sent. 

The Court stated that the goal of the TCPA is to prevent an invasion of privacy and the person who chooses to send an unwanted invitation is responsible for the invasion regardless of the form of the invitation.  The app's "recommended" invitee feature was not material to the result because the phone user must first take the affirmative step to share contacts with the app and then has the option to deselect "recommended" invitees.  For added measure, the Court noted, the phone user must press the "Invite" button after selecting invitees.

As to the California unfair competition law claim, the plaintiff phone user conceded that the California statutory claim required a violation of the TCPA.  Accordingly, the Court summarily dismissed the state claim. 

Accordingly, the District Court dismissed the phone user's entire complaint with prejudice.


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, August 22, 2016

FYI: Cal App Ct (2nd Dist) Rejects Claim That Post-Dated Checks Were Undisclosed "Deferred Downpayments"

The Court of Appeal of the State of California, Second District, recently held that the California Rees-Levering Motor Vehicle Sales and Finance Act, Calif. Civil Code, § 2981, et seq. ("Rees-Levering Act") does not require a post-dated check provided at the time of sale to be categorized as a "deferred down payment" on the sales contract.

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

The plaintiff purchased a car from the defendant car dealer using three checks as down payment.  Two of the checks were dated the day after the contract was signed, and one check was dated about two weeks later.

The car dealer entered the three check down payment on the line of the sales contract describing it as a down payment as opposed to a deferred down payment. The car dealer informally agreed to briefly hold the checks as a favor to the plaintiff. 

After several months of owning the car, the plaintiff sought to rescind the contract based on violations of the Rees-Levering Act. The court ruled in favor of the car dealer and auto finance company and the plaintiff appealed.   

The plaintiff argued that the car dealer's failed to disclose a deferred down payment in supposed violation of the Rees-Levering Act, as some or all of the checks were agreed to be held until a later date.  See § 2983 (a)(6)(D) and (c).  In addition, the plaintiff argued if the court were to conclude that a held check is different from a deferred down payment, there would be a violation of the Rees-Levering Act because the agreement to hold the checks would supposedly violate the single document rule.  See Section 2981.9.

As you may recall, section 2981 of the Rees-Levering Act defines "down payment" as "a payment that the buyer pays or agrees to pay to the seller in the cash or property value or money's worth at or prior to delivery by the seller to the buyer of the motor vehicle described in the conditional sale contract."  See Section 2981. 

The term "down payments" also includes "the amount of any portion of the down payment the payment of which is deferred until not later than the due date of the second otherwise scheduled payment, if the amount of the deferred down payment is not subject to a finance charge. The term does not include any administrative finance charge charged, received or collected by the seller as provided in this chapter." (§ 2981, subd. (f).)

Section 2982(a)(6)(D) requires disclosure for deferred down payment, and 2982(c) requires that the deferred down payment schedule be disclosed as required under the federal Truth In Lending Act. 

Here, the plaintiff's monthly payments were set to begin after the date on the post-dated check.  None of the checks were deferred to a later due date than the second scheduled payment.  Therefore, the Appellate Court held, the held checks fell under the definition of down payment in section 2981(f).  The Court also noted that the plaintiff did not provide any evidence that holding the checks affected any aspects of the purchase transaction -- it did not increase the purchase price, the amount financed, the annual percentage rate, monthly payments, payment schedule or the final payment. 

The Court also noted that the plaintiff made her down payment at the time of the purchase and there was nothing left for her to do after that.  Unlike the car buyers in in two other "deferred down payment" cases in which violations of the Rees-Levering Act were found, the here plaintiff did not make her down payments in installments.  See Rojas v. Platinum Auto Group, 212 Cal. App. 4th 997 (2013) and Munoz v. Express Auto Sales, 222 Cal. App. 4th Supp.1 (2014).  

The plaintiff also relied on Highway Trailer of Cal. Inc. v. Frankel, 250 Cal. App. 2d 733 (1967), in which the court held that a post-dated check that was not accurately represented in a contract should not listed as cash down payment.  

Here, the Appellate Court noted that Highway Trailer of Cal. Inc. relied on an earlier version of the Rees-Levering Act under which deferred payments were not mentioned.  Accordingly, the Appellate Court refused to read Highway Trailer to suggest that a check, as a matter of law, cannot be listed on a contract as a down payment under the Rees-Levering Act. 

After reviewing statutory language, legislative history and case law, the Appellate Court here could not find that a post-dated check must be categorized as deferred down payment under the Rees-Levering Act. 

The plaintiff also argued that the car dealer violated the single document rule in the Rees-Levering Act section 2981.9.  This provision requires all agreements of the buyer and seller with respect to the terms of the payment be disclosed in the contract. 

The plaintiff argued that because the car dealer agreed that one check would be deposited until a later date, and that agreement was not stated in the contract, the contract violated the single document rule.  The Appellate Court disagreed, refusing to rule that an informal agreement to accommodate a customer by not immediately depositing a check constitutes a "term of payment" requiring disclosure under section 2981.9. 

Accordingly, the Appellate Court affirmed the trial court's ruling. 


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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Friday, August 19, 2016

FYI: 9th Cir Rejects FDCPA Claim for Failure to Disclose "Debt Collector" Status in Follow Up Communications

The U.S. Court of Appeals for the Ninth Circuit recently held that there is no federal Fair Debt Collection Practices Act ("FDCPA") violation if a subsequent communication is sufficient to disclose to the least sophisticated debtor that the communication was from a debt collector, even without expressly stating "this communication is from a debt collector."

In reaching the conclusion, the Court gave weight to the extensive communication between the debtor and debt collector, prior to the debt collector's employee leaving a voicemail in which the employee stated he was from the debt collector.

A link to the opinion is available at:  Link to Opinion

In order to qualify for a business credit card, a debtor filled out the application using his spouse's former business.  The debtor used the credit card for personal items and subsequently defaulted on the debt.  The creditor referred the debt to a debt collector. 

The debt collector first contacted the debtor on the telephone.  The debt collector required its employees to identify both the nature of the call and to identify the company as a debt collector.  The debtor did not allege that the debt collector employee failed to communicate this information during its initial contact with the debtor. 

In two telephone calls, the debtor and his wife each referred the debt collector employee to a debt settlement firm.  Over the next few weeks, the debt collector employee communicated exclusively with the debt settlement firm.  The debt collector made multiple attempts to reach the debtor's representative during this time. 

The case was later assigned to a different debt collector employee.  This newly-assigned employee had all remaining relevant contacts with the debtor.  

After failed attempts to reach the debt settlement firm, the debt collector employee emailed the debtor to thank him for a telephone inquiry to settle the debt.  The debtor wrote back and offered to settle the credit card debt for a percentage of the total due.  The debt collector employee wrote that he would provide the information to the creditor. 

The next day, the debt collector employee and the debtor again exchanged emails concerning more details as to settlement.

A few days later, the debtor emailed the debt collector employee about the status of the settlement offer.  The debt collector employee wrote back and explained that there was no update.

A week later, the debt collector employee called the debtor and left the following message: "Hello this is a call for [the debtor] from [the employee] at the [law firm].  Please call sir, it is important, my number is [law firm number].  Thank you."  In the voicemail message, the employee did not state that the company was a debt collector. 

After the voicemail, the debtor and the debt collector employee exchanged eleven additional emails in the span of eight days.  The debt collector employee informed the debtor that his offer had been declined and that the debt collector would move forward with legal action.  The parties still had not reached an agreement almost three months after the initial contact. 

The debt or filed suit alleging that the voicemail did not disclose the debt collector was as a debt collector, in supposed violation of the federal Fair Debt Collection Practices Act ("FDCPA").  The lower court held a bench trial and ruled in favor of the debtor.   The debt collector appealed the ruling.

On appeal, the Ninth Circuit noted that 15 U.S.C. § 1692(e)(11) requires a debt collector to disclose in the initial communication that the debt collector is attempting to collect a debt and any information obtained will be used for that purpose.  The provision also requires that the debt collector must "disclose in subsequent communications that the communication is from a debt collector," with the exception of formal pleadings made in a legal action.

The Court also clarified that any error in a debt collector's communications must be material in order to be actionable under § 1692e of the FDCPA.  The Court recited that mere technical errors that deceive no one do not give rise to liability under the FDCPA.

As you may recall, the "least sophisticated debtor" standard for FDCPA claims assumes a basic level of understanding, but does not include bizarre or idiosyncratic interpretations.  Accordingly, the Court examined whether the voicemail at issue would be sufficient to disclose to the least sophisticated debtor that the call was on behalf of a debt collector. 

The Court noted that prior to the relevant voicemail, the debtor and the debt collector employee had been involved in potential settlement discussions for about a two week period.  The debtor had made a telephone inquiry to the debt collector employee about settlement.  The debt collector employee and the debtor exchanged eight emails in this time period. 

Moreover, the Court gave weight to the fact that, at the time the debt collector employee left the voicemail, the debtor had a pending settlement offer for a percentage of the total due.  The debtor even asked the debt collector employee for a status report as to the settlement offer.   Most importantly for the Court, in the voicemail the debt collector employee identified himself by his first name and stated that he was from the debt collector.

The Ninth Circuit determined that the lengthy communication history and the fact that the debt collector employee identified himself by his first name and stated that he was from the debt collector was sufficient to disclose to the least sophisticated debtor that the communication at issue was from a "debt collector" under 15 U.S.C.§ 1692(e)(11).

The Court noted that any other interpretation of the voicemail at issue would be bizarre or idiosyncratic.  In this context, the Court found that the voicemail was not "false, deceptive, or misleading" under 15 U.S.C.§ 1692(e).

The Court held that § 1692(e)(11) does not require subsequent communications from a debt collector to use any specific language so long as it is sufficient to disclose that the communication is from a debt collector. 

Accordingly, the Ninth Circuit reversed the trial court's ruling. 


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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Wednesday, August 17, 2016

FYI: SD Cal Holds No Standing For TCPA Plaintiff Alleging 290 Nonconsensual Calls

The U.S. District Court for the Southern District of California recently held that a TCPA plaintiff alleging some 290 unwanted autodialed calls to her call phone did not demonstrate "concrete injury" sufficient to confer Article III standing under Spokeo v. Robins.

A copy of the opinion is attached.

The plaintiff failed to make payments her credit card, and started to receive collection calls. The defendant creditors allegedly called the plaintiff on her cellular telephone over 290 times using an automated telephone dialing system ("ATDS") over the course of six months between July and December 2014.  The plaintiff answered only three of these telephone calls.

The plaintiff alleged that "Defendant's unlawful conduct caused Plaintiff severe and substantial emotional distress, including physical and emotional harm, including but not limited to: anxiety, stress, headaches (requiring ibuprofen, over the counter health aids), back, neck and shoulder pain, sleeping issues (requiring over the counter health aids), anger, embarrassment, humiliation, depression, frustration, shame, lack of concentration, dizziness, weight loss, nervousness and tremors, family and marital problems that required counseling, amongst other injuries and negative emotions." She also testified in her deposition that, as a result of the collection calls, she suffered "nervousness, a lot of tension, problems with my husband, headaches, my neck, and they would go down to my back and I would lose my appetite. I lost weight."

As you may recall, "the 'irreducible constitutional minimum' of standing consists of three elements. The plaintiff must have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision."  Spokeo v. Robins, 136 S. Ct. 1540, 1547 (2016) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992)).

The Court recited that "Congress cannot erase Article III's standing requirements by statutorily granting the right to sue to a plaintiff who would not otherwise have standing.'" Spokeo, 136 S.Ct. at 1547-48.  "To establish injury in fact, a plaintiff must show that he or she suffered 'an invasion of a legally protected interest' that is 'concrete and particularized' and 'actual or imminent, not conjectural or hypothetical.'" Id. at 1548 (quoting Lujan, 504 U.S. at 560).

Again citing Spokeo, the Court noted that a plaintiff does not "automatically satisf[y] the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right. Article III standing requires a concrete injury even in the context of a statutory violation." Id. at 1549.  A "bare procedural violation, divorced from any concrete harm," does not satisfy the injury-in-fact requirement of Article III. Id.

The Court also noted that "a plaintiff must demonstrate standing for each claim he seeks to press." DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 352 (2006). In other words, "standing is not dispensed in gross." Id. (quoting Lewis v. Casey, 518 U.S. 343, 358 n.6 (1996)).

The Court observed that, because the TCPA provides for a separate statutory $500 damage award for each call that violates its provisions, the plaintiff must establish standing for each violation -- i.e., the plaintiff must have suffered an injury in fact caused by each individual nonconsensual autodialed call to her cell phone.

In other words, "[t]he determination of standing to bring a TCPA claim based on a call made using an ATDS does not change whether it is the only call alleged to have violated the TCPA or 1 of 290 calls that allegedly violated the TCPA," and "the Court must determine whether [p]laintiff has evidence of an injury in fact specific to each individual call, and not in the aggregate based on the total quantity of calls."

The Court explained that "[i]nstead of basing a violation based on the quantity of calls, or creating a private right of action for someone who has received an excessive number of calls over time from the same offender, the TCPA treats every single call as a separate, independent violation, regardless of who made the call, the time of the call, the reason for the call, or whether the recipient was even aware the call was made or aware that it was made with an ATDS."

However, the Court noted, "Congress's finding that the proliferation of unwanted calls from telemarketers causes harm does not mean that the receipt of one telephone call that was dialed using an ATDS results in concrete harm. In other words, regardless of Congress's reasons for enacting the TCPA, one singular call, viewed in isolation and without consideration of the purpose of the call, does not cause any injury that is traceable to the conduct for which the TCPA created a private right of action, namely the use of an ATDS to call a cell phone."

Stated differently, the Court held the fact that Congress created a TCPA private right of action for each nonconsensual call made using an ATDS does not mean "that an individual who receives one call to her cell phone using an ATDS suffers a concrete harm" sufficient to confer Constitutional standing. 

"Under Spokeo, if the defendant's actions would not have caused a concrete, or de facto, injury in the absence of a statute, the existence of the statute does not automatically give a Plaintiff standing. See Spokeo, 136 S.Ct. at 1547-48 ("Congress cannot erase Article III's standing requirements by statutorily granting the right to sue to a plaintiff who would not otherwise have standing.") (quoting Raines v. Byrd, 521 U.S. 811, 820 n.3 (1997)." 

In the Court's words, "the mere dialing of a cellular telephone number using an ATDS, even if the call is not heard or answered by the recipient, does not cause an injury to the recipient. That the TCPA allows private suits for such calls does not somehow elevate this non-injury into a concrete injury sufficient to create Article III standing."

Turning to the matter at hand, the Court noted that the plaintiff alleged that the defendants supposedly violated the TCPA over 290 times -- i.e., each time they allegedly called her cell phone using an ATDS after the plaintiff claims she revoked her consent to call her cell phone.

The Court divided the alleged calls into three categories: (1) calls of which the plaintiff was not aware either because her phone did not ring or she did not hear it ring; (2) calls that the plaintiff heard ring on her phone but that she did not answer; and (3) calls that the plaintiff answered and spoke with a representative of the defendants.  After examining the evidence, the Court held that the plaintiff here failed to "demonstrate that any one of [the d]efendants' over 290 alleged violations of the TCPA, considered in isolation, actually caused her a concrete harm."

The Court explained that, "[a]lthough a defendant violates the TCPA by dialing a cell phone with an ATDS, it is possible that the recipient's phone was not turned on or did not ring, that the recipient did not hear the phone ring, or the recipient for whatever reason was unaware that the call occurred. … A plaintiff cannot have suffered an injury in fact as a result of a phone call she did know was made. Moreover, even for the calls Plaintiff heard ring or actually answered, Plaintiff does not offer any evidence of a concrete injury caused by the use of an ATDS, as opposed to a manually dialed call."

Although the plaintiff asserted "lost time, aggravation, and distress," the Court held that the plaintiff failed "to connect any of these claimed injuries in fact with any (or each) specific TCPA violation."

The Court held that a nonconsensual call to a cell phone made using an ATDS "is merely a procedural violation," which when "divorced from any concrete harm," does not satisfy the injury-in-fact requirement of Article III.

Accordingly, the Court held that calls of which the plaintiff was not aware -- "either because her ringer or phone were turned off, or because she did not have her phone with her when the calls occurred" -- did not result in any plausible injuries in fact that could be traceable to the alleged TCPA violation.  "For Plaintiff to have suffered 'lost time, aggravation, and distress,' she must, at the very least, have been aware of the call when it occurred."  Thus, the Court held that the plaintiff did not have standing to sue for any calls of which she was not aware.

As to calls of which the plaintiff was aware but did not answer -- for example, the plaintiff asserted "that she called the number that appeared on her phone and when someone answered on behalf of Defendants, she hung up" -- the Court held that the plaintiff "must demonstrate that she suffered an injury in fact solely as a result of the telephone ringing for that particular call." 

Here, the Court held that "[n]o reasonable juror could find that one unanswered telephone call could cause lost time, aggravation, distress, or any injury sufficient to establish standing. When someone owns a cell phone and leaves the ringer on, they necessarily expect the phone to ring occasionally. Viewing each call in isolation, whether the phone rings as a result of a call from a family member, a call from an employer, a manually dialed call from a creditor, or an ATDS dialed call from a creditor, any 'lost time, aggravation, and distress,' are the same. Thus, Defendants' TCPA violation (namely, use of an ATDS to call Plaintiff) could not have caused Plaintiff a concrete injury with respect to any (and each) of the calls that she did not answer."

The Court noted that only two of the 290 calls were actually answered.  Here, the Court held that "Plaintiff does not offer any evidence demonstrating that Defendants' use of an ATDS to dial her number caused her greater lost time, aggravation, and distress than she would have suffered had the calls she answered been dialed manually, which would not have violated the TCPA. Therefore, Plaintiff did not suffer an injury in fact traceable to Defendants' violation of the TCPA, and lacks standing to make a claim for any violation attributable to the calls she actually answered."

The Court held that "the specific facts of this case reveal that any harm suffered by Plaintiff is unconnected to the alleged TCPA violations. Defendants here were creditors of Plaintiff and were attempting to collect a debt. They were calling Plaintiff's cell phone because that was the only telephone number she provided them. Although these calls seeking to collect debts may have been stressful, aggravating, and occupied Plaintiff's time, that injury is completely unrelated to Defendants' use of an ATDS to dial her number."

Importantly, the Court also held that the plaintiff "would have been no better off had Defendants dialed her telephone number manually."

"A plaintiff who would have been no better off had the defendant refrained from the unlawful acts of which the plaintiff is complaining does not have standing under Article III of the Constitution to challenge those acts in a suit in federal court." McNamara v. City of Chicago, 138 F.3d 1219, 1221 (7th Cir. 1998).

In addition, the fact that "the use of an ATDS may have allowed Defendants to call a greater number of debtors more efficiently did not cause any harm to Plaintiff." See Silha v. ACT, Inc., 807 F.3d 169, 174-75 (7th Cir. 2015) ("[A] plaintiff's claim of injury in fact cannot be based solely on a defendant's gain; it must be based on a plaintiff's loss."). In other words, the Court held, "Plaintiff's alleged concrete harm was divorced from the alleged violation of the TCPA." See Spokeo, 136 S.Ct. at 1549 (holding that "a bare procedural violation, divorced from any concrete harm, [does not] satisfy the injury-in-fact requirement of Article III").

Accordingly, the Court held that the plaintiff did not and cannot satisfy the injury-in-fact requirement of Article III, and dismissed the TCPA allegations.


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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Friday, July 22, 2016

FYI: Cal App Ct (6th Dist) Holds Servicer May Owe Borrower Duty of Care as to Loan Mod Efforts, Loan Owner May Be Liable for Servicer's Misconduct

The Court of Appeal of the State of California, Sixth Appellate District, recently held that a loan owner may be liable for misrepresentations made by the loan servicer.

The Court also held that a loan servicer may owe a duty of care to a borrower through application of the "Biakanja" factors, even though its involvement in the loan does not exceed its conventional role.

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

In May 2005, the borrowers obtained an adjustable rate mortgage. In early 2008, the borrowers asked their servicer refinance or modify the loan. They were told that neither were possible because another was in the process of acquiring the right to service the loan.

The borrowers eventually contacted the new servicer about refinancing the loan. They alleged they contacted the new servicer on a weekly basis until they finally received a loan modification application in mid-2009. The employees of the new servicer allegedly told the borrowers they would be granted a modification if they complied with all of the servicer's requirements.

Months later, the borrowers' modification application was denied because the borrowers did not provide the appropriate documents. The borrowers again applied for a loan modification.  The servicer allegedly told the borrowers they had provided the proper documentation, but then denied the application for failure to provide documentation.

In mid-2010, the borrowers again contacted the servicer and were supposedly told they were ineligible for loan modification because they were not at least three months' delinquent in their payments. The servicer's employees allegedly led the borrowers to belief they would be granted a loan modification if they became at least three months' delinquent in their mortgage payments.

The borrowers, who were current on the loan, allegedly purposefully became three months' delinquent in their payments. The borrowers were then allowed to reduce their payments.  The borrowers eventually attempted to resume making their regular higher monthly payments but the servicer allegedly refused to accept those payments. At the end of 2011, the servicer refused to accept any payment from the borrowers.

The borrowers continued to attempt to obtain a loan modification but were continually denied. The servicer's employees allegedly told the borrowers multiple times that the proper paperwork was not submitted, even though the servicer allegedly had independently confirmed receipt of the documents. In 2012, the borrowers again attempted to modify the loan but the servicer denied them because their home was underwater.

In August of 2011, the trustee on the deed of trust was substituted.  Another servicer began to service of the loan on December 1, 2012. In August 2012, a notice of default was recorded against the property. The notice was recorded on November 28, 2012..

The borrowers were plaintiffs in a mass joinder action against multiple servicers in 2011, Maxam et al v. Bank of America (Super. Ct. Orange County, 2011). The complaint alleged multiple causes of action based upon borrowing loans and loan modification.

The Maxam defendants moved to dismiss the allegations, and the trial court sustained the demurrer with 60 days' leave to amend. The borrowers failed to file an amended complaint. The trial court entered a judgment of dismissal with prejudice against the plaintiffs. Four months later, the borrowers moved to set aside the judgment due to its preclusive effect on their legitimate and meritorious claims.

The borrowers filed the current action against the servicers on March 19, 2013. The servicers filed motions to dismiss on the ground that the borrowers' claims were barred by res judicata.  The trial court sustained the demurrers. The borrowers appealed.

The Appellate Court first looked to if the borrowers' claims were precluded on the grounds of res judicata, based on the Maxam judgment.

As you may recall, claim preclusion bars re-litigation of a claim altogether where a second suit involves the same cause of action between the same parties after a final judgment on the merits by a court of competent jurisdiction.

Here, the Court of Appeal found that there were additional servicers in the instant suit that were not parties in the Maxam action. Thus, the Appellate Court held that the same parties' element was not satisfied as to those servicers and claim preclusion did not apply as to those parties.

The Court of Appeal then addressed the final factor.  The Court recited that, under California law, a former judgment entered after a general demurrer is sustained with leave to amend is a judgment on the merits. However, the former judgment will not bar a subsequent action alleging new or additional facts that cure the defects in the original pleading.

The Appellate Court held that the current action alleges facts about the origination and attempted modification of borrowers' loan that were not alleged in Maxam. The Court found the issue of whether the final judgment on the merits was satisfied was insufficiently developed, and thus it concluded that the borrowers were entitled to amend their complaint.
The Court of Appeal then looked at the borrowers' intentional and negligent misrepresentation claims.

As you may recall, the elements of a cause of action for intentional misrepresentation are (1) a misrepresentation, (2) with knowledge of its falsity, (3) with the intent to induce another's reliance on the misrepresentation, (4) actual and justifiable reliance, and (5) resulting damage.

The elements of a claim for negligent misrepresentation are nearly identical. Only the second element is different, requiring the absence of reasonable grounds for believing the misrepresentation to be true instead of knowledge of its falsity. Each element must be plead with specificity. However, this requirement is relaxed when the allegations indicate the defendant must necessarily possess full information concerning the facts of the controversy.

Here, the Court of Appeal looked to whether borrowers stated a claim for intentional or negligent misrepresentation based on any alleged misrepresentation by the servicers.

The Court noted that the borrowers alleged that one of the servicers had not received financial documents submitted in support of their loan modification application, and that the borrowers identified the employee in their complaint.  The Appellate Court held this was sufficient to apprise the defendant servicer of the specific grounds of the charge.

In addition, the Court of Appeal held it could reasonably infer from the allegations that the borrowers were alleging that they believed the representation, and that they relied upon information exclusively within the servicer's knowledge. The Court held that the borrowers also sufficiently pled the remaining factors for negligent and intentional misrepresentation. Accordingly, the trial court's order granting motion for judgment on the pleadings as to the intentional and negligent misrepresentation claims against the servicer were reversed.

However, the Court of Appeal found that the borrowers failed to state a claim for negligent and intentional misrepresentation against the subsequent servicer.

The borrowers alleged that the subsequent servicer was liable for the prior servicer's misrepresentations because the subsequent servicer benefited from the prior servicer's fraudulent conduct, and under agency and successor-in-liability theories. The Court noted that the subsequent servicer did not address any deficiencies with these arguments, but it nevertheless found the borrowers' allegations against the subsequent servicer to be insufficient. The Court of Appeal granted the borrowers another opportunity to amend their claims for intentional and negligent misrepresentation against the subsequent servicer.

Importantly, the Court of Appeal found that the borrowers stated misrepresentation claims against the owner of the loan based on agency.

As you may recall, an agent is anyone who undertakes to transact some business, or manage some affair, for another, by authority of and on account of the latter, and to render an account of such transactions. The chief characteristic of the agency is that of representation, the authority to act for and in the place of the principal for the purpose of bringing him or her into legal relations with third parties. The significant test of an agency relationship is the principal's right to control the activities of the agent. A principal is liable to third parties for the frauds or other wrongful acts committed by its agent in and as a part of the transaction of the business of the agency.

Here, the Court noted that the alleged business of the agency was the servicing and modification of the borrowers' loan. The Court found that the borrowers alleged the misrepresentations were made in the course of servicing their loan, and as such the representations were alleged to have been made within the scope of the alleged agency relationship. Accordingly, the Court of Appeal found that the borrowers stated claims for negligent and intentional misrepresentation against the owner of the loan.

However, the Court of Appeal held that the borrowers failed to state a negligent or intentional misrepresentation claim against two servicers and the owner of the loan under a civil conspiracy theory. The borrowers alleged the defendants conspired to deceive and defraud the borrowers into participating in the loan modification process.

The Court recited that conspiracy is not an independent cause of action, but rather a doctrine imposing liability for a tort upon those involved in its commission. Thus, liability for a conspiracy must be activated by the commission of an actual tort.  To allege a conspiracy, a plaintiff must plead: (1) formation and operation of the conspiracy and (2) damage resulting to plaintiff (3) from a wrongful act done in furtherance of the common design.

The Court of Appeal found the borrowers' allegations too conclusory as there were no factual allegations about the nature of the agreement or the timing of the alleged conspiracy. Accordingly, the Court of Appeal found the trial court did not err in dismissing the civil conspiracy cause of action without leave to amend.

The Appellate Court then looked to the borrowers' causes of action based on breach of contract.

As you may recall, a cause of action for damages for breach of contract is comprised of the following elements: (1) the contract, (2) plaintiff's performance or excuse for nonperformance, (3) defendant's breach, and (4) the resulting damages to plaintiff.

The borrowers alleged one of the servicers breached an oral agreement promising a loan modification.  The Court of Appeal found the terms of the alleged agreement to be not sufficiently definite to render the agreement enforceable.

The Court recited that the terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy. Where a contract is so uncertain and indefinite that the intention of the parties in material particulars cannot be ascertained, the contract is void and unenforceable. Typically, a contract involving a loan must include the identity of the lender and borrower, the amount of the loan, and the terms for repayment in order to be sufficiently definite. Agreements to agree are not enforceable contracts.

The Court of Appeal looked to the Home Affordable Modification Program and the U.S. Court of Appeals for the Seventh Circuit's ruling in Wigod v. Wells Fargo. The HAMP loan modification process consisted of two stages. After determining a borrower was eligible, the servicer implemented a Trial Period Plan (TPP) under the new loan repayment terms it formulated using the method prescribed by HAMP program directives. The trial period under the TPP lasted three or more months. After the trial period, if the borrower complied with all terms of the TPP Agreement—including making all required payments and providing all required documentation—and if the borrower's representations remained true and correct, the servicer had to offer a permanent modification.

In Wigod, the Seventh Circuit reasoned that the TPP was enforceable despite open terms because the HAMP guidelines provided an existing standard by which the ultimate terms of the permanent modification were to be set.

In the instant case, the Appellate Court found that the borrowers did not allege or argue on appeal that HAMP applied thus there was no standard to determine the essential terms of the loan modification they were allegedly promised. Thus, the Court held that the borrowers did not allege the existence of an enforceable contract.

The defendants also argued that the alleged oral contract fell within the statute of frauds and thus is not enforceable as it was not in writing.  The Court noted that full performance takes a contract out of the statute of frauds. Here, the Court of Appeal found the borrower alleged full performance of their obligations under the contract and therefore the statute of frauds did not bar enforcement of the alleged oral contract.

The Court of Appeal held that the borrowers should be given another opportunity to amend their complaint to include the specific pleading deficiencies.

The borrowers also alleged that the servicer twice promised them a loan modification and they relied on those promises by (1) applying for the promised loan modifications, (2) becoming delinquent in their monthly mortgage payments, (3) making the lower monthly payments, (4) providing the servicer with personal financial information, (5) spending time and resources applying for loan modifications, and (6) foregoing other remedies to cure the default.

As you may recall, the elements of a promissory estoppel claim are (1) a promise clear and unambiguous in its terms; (2) reliance by the party to whom the promise is made;?(3) [the] reliance must be both reasonable and foreseeable; and (4) the party asserting the estoppel must be injured by his reliance.

The Court of Appeal found that the borrowers adequately alleged detrimental reliance to sustain a promissory estoppel cause of action by alleging they repeatedly contacted the servicer, prepared documents at the servicers request, and by foregoing other means of avoiding foreclosure. 

However, the Court found that the absence of essential loan modification terms rendered the alleged promise insufficiently clear and unambiguous to support promissory estoppel. In addition, the Court found that no borrower could reasonably rely on a promise to make a unilateral loan modification offer because the offered modification might not lower their monthly payments sufficiently to allow them to avoid default.

Nevertheless, the Court of Appeal held that the borrowers should be given another opportunity to amend their promissory estoppel claim.

The borrowers also alleged the servicer breached its duty to act reasonably with respect to their loan modification application by (1) allegedly failing to accurately account for the documents the borrowers supposedly submitted, (2) allegedly failing to give them a fair loan modification evaluation, and (3) allegedly accepting trial payments from the borrowers but by not accurately accounting for this or by not granting them or denying a modification in a reasonable time period.

As you may recall, to state a cause of action for negligence, a plaintiff must allege (1) the defendant owed the plaintiff a duty of care, (2) the defendant breached that duty, and (3) the breach proximately caused the plaintiff's damages or injuries.

As a general rule in California, a financial institution owes no duty of care to a borrower where the institution's involvement is simply to lend money.

However, this general rule has exceptions. In Biakanja v. Irving, 49 Cal.2d 647 (1958), the Supreme Court of California held that whether the defendant in a specific case will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, including: (1) the extent to which the transaction or conduct was intended to affect the plaintiff, (2) the foreseeability of harm to the plaintiff, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of the connection between the defendant's conduct and the injury suffered, (5) the moral blame attached to the defendant's conduct, and (6) the policy of preventing future harm.

The Court of Appeal looked to the Biakanja factors to determine if the servicer had a duty to the borrowers.

As to the first factor -- the extent to which the transaction was intended to affect the plaintiff – the Appellate Court found that the alleged conduct was intended to affect the borrowers as it was directed toward determining whether or not the borrowers could keep their home and at what cost. The Court concluded the first factor weighed slightly in favor of finding a duty of care.

As to the second factor -- the foreseeability of harm to the plaintiff -- the Appellate Court noted that the alleged mishandling of the borrowers' documents and the alleged failure to grant or deny a modification in a timely fashion in the Court's view kept the borrowers in a lending limbo where they paid less than they owed on the servicers instruction, and fell further into arrears. The Court concluded the second factor weighed in favor of finding a duty of care.

As to the third factor -- the degree of certainty that the plaintiff suffered injury – the Appellate Court noted that the borrowers alleged they were injured due to damage to their credit, foregone remedies, and increased arrears, interest, penalties, and fees due to the servicer's alleged conduct. The Court concluded the third factor weighed in favor of finding a duty of care.

As to the fourth factor -- the closeness of the connection between the defendant's conduct and the injury suffered – the Appellate Court noted that the borrowers were current on their loan payments until the servicer allegedly advised them to become delinquent to obtain a loan modification, which in the Court's view suggested a close connection between the servicer's conduct and the default-related remedies. The Court concluded the fourth factor weighed in favor of finding a duty of care.

As to the fifth factor -- the moral blame attached to the defendant's conduct – the Appellate Court held that the servicer's blameworthiness was impossible for the Court of assess at this stage thus it considered the factor neutral.

As to the sixth and last factor -- the policy of preventing future harm -- the Court of Appeal found the policy of preventing future harm to cut both ways. The Court looked to Alvarez v. BAC Home Loans Servicing, L.P., 228 Cal.App.4th 941 (2014) for guidance. In Alvarez, the appellate court concluded that the sixth Biakanja factor weighed in favor of finding a duty because recent statutory enactments demonstrate the existence of a public policy of preventing future harm to loan borrowers. Here, the Court of Appeal could not say whether or not the imposition of a duty would prevent future harm to borrowers.

In sum, in the Appellate Court's view, four of the six factors weighed in favor of finding a duty, and therefore the Court of Appeal concluded that the servicer owed the borrowers a duty of care with respect to the loan modification process.

The Court of Appeal also found the borrowers properly alleged a breach of duty and damages, thus concluding the borrowers stated a claim for negligence against the third servicer.

However, the Court of Appeal found the borrowers' secondary liability allegations against the subsequent servicer and the loan owner were insufficient. The Court found the borrowers should be permitted to amend their negligence claims against these parties.

The borrowers also alleged wrongful foreclosure.  As you may recall, in California, the basic elements of a tort cause of action for wrongful foreclosure track the elements of an equitable cause of action to set aside a foreclosure sale. These are: (1) the trustee or mortgagee caused an illegal, fraudulent, or willfully oppressive sale of real property pursuant to a power of sale in a mortgage or deed of trust; (2) the party attacking the sale (usually but not always the trustor or mortgagor) was prejudiced or harmed; and (3) in cases where the trustor or mortgagor challenges the sale, the trustor or mortgagor tendered the amount of the secured indebtedness or was excused from tendering.

Here, the borrowers alleged the assignment of the deed of trust to the trustee was invalid because the securitized trust closed prior to the assignment.  The borrowers conceded during oral argument that, as pled, their wrongful foreclosure claim was insufficient and they would be unable to amend it to create a viable cause of action. The Court of Appeal therefore held that the trial court did not abuse its discretion in dismissing the claim for wrongful foreclosure.

The borrowers also sued under California's Unfair Competition Law (UCL).  The UCL prohibits, and provides civil remedies for, unfair competition, which it defines as any unlawful, unfair or fraudulent business act or practice. A plaintiff may pursue a UCL action in order to obtain either (1) injunctive relief, the primary form of relief available under the UCL, or (2) restitution as may be necessary to restore to any person in interest any money or property, real or personal, which may have been acquired by means of such unfair competition.

The Appellate Court held that to the extent the borrowers' UCL claim was predicated on an alleged violation based on transfer of property, the allegations fail because  the borrowers' failed to state a claim for wrongful foreclosure. Otherwise, the Court of Appeal held that the trial court erred by denying the borrowers leave to amend their UCL claim.

In sum, the Court of Appeal reversed the judgment of the trial court with specific remand instructions for each respondent and claim.


Eric Tsai
Maurice Wutscher LLP
 
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Email: etsai@MauriceWutscher.com

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