Monday, April 24, 2017

FYI: 9th Cir Rejects Debtor's Attempt to Avoid SBA Judgment By Disclaiming Inheritance

The U.S. Court of Appeals for the Ninth Circuit recently affirmed the district court's judgment in favor of the United States Small Business Administration ("SBA") in a Federal Debt Collection Procedures Act, 28 U.C.S. § 3001 et seq. ("FDCPA"), lawsuit the SBA filed against a loan guarantor to satisfy a default judgment assigned to it after the guarantor disclaimed an inheritance to avoid paying the judgment. 

The Federal Debt Collection Procedures Act, which governs the collection of money owed to the U.S. government, should not be confused with the federal Fair Debt Collection Practices Act, which is found at 15 U.S.C. § 1692 et seq. and governs how debt collectors may collect debts from consumers.

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

The SBA, a federal government agency, guaranteed 75% of a $175,000 small business loan between a private bank and a company, and the company's owner personally guaranteed the loan. The company defaulted on the loan, and the private bank sued the company and guarantor, obtaining a default a judgment against them. When neither the company nor the guarantor satisfied the default judgment, the bank assigned the default judgment to the SBA to honor is guaranty of the loan, which totaled over $300,000.

The guarantor later inherited a share of his deceased father's trust, which was valued at over $150,000. Instead of accepting the inheritance, he signed a disclaimer under California law that allowed him to renounce his share of the trust and legally pass it to his two children, thereby attempting to prevent his creditors from accessing his share of the trust.  The SBA filed a lawsuit under the FDCPA seeking to void the disclaimer under the FDCPA's prohibition of fraudulent transfers of property. 

The guarantor countered that California law permitted the disclaimer because it states that a disclaimer is not a voidable transfer, and that the default judgment obtained against the guarantor was not a "debt" as defined by the FDCPA.  The trial court disagreed, holding that the FDCPA pre-empted California law and that the default judgment was a debt within the meaning of the FDCPA. The guarantor appealed.

In affirming, the Ninth Circuit explained that the FDCPA's fraudulent transfer provision, 28 U.S.C. §3304(a), permits the federal government to void a fraudulent transfer by a debtor who owes a debt to the U.S. where the existence of the debt pre-dated the transfer, there was a transfer of assets, a lack of equivalent value in exchange of the transfer, and the debtor's insolvency at the time of the transfer. The parties' arguments focused on whether the guarantor's disclaimer qualified as a transfer of property and whether the default judgment constituted a debt within the meaning defined by the FDCPA. 

The guarantor argued that he had acted lawfully under the California Probate Code, which states that a disclaimer is not a voidable transfer. The Ninth Circuit held, however, that California law directly conflicted with the FDCPA, which defines "transfer" so as to include the guarantor's disclaimer because it involves "every mode…of disposing of or parting with an asset or an interest in an asset…". 28 U.S.C. §3301(6).  Thus, the Court held, the disclaimer was a transfer of property that could be voided under the FDCPA and the federal statute pre-empted state law, which the Ninth Circuit found was supported by U.S. Supreme Court precedent.

The guarantor's argument that the default judgment did not qualify as a debt under the FDCPA also failed.  The FDCPA defines "debt" as an amount owing to the U.S. government because of a direct loan or a loan insured or guaranteed by the U.S., includes a long list of various types of debts and financial obligations, and contains the catch-all phrase "other source of indebtedness."  28 U.S.C. §3002(3).  The Ninth Circuit found that the default judgment fit into the catch-all phrase and that limiting language attached to the catch-all phrase ("owing under the terms of a contract originally entered into by only persons other than the United States") did not prevent the default judgment from qualifying as "debt" under the statute. 

In reaching its ruling, the Ninth Circuit examined the statutory language and purpose of the FDCPA, the House report and legislative discussion on the statute, and case law interpreting limiting language in statutes. It reasoned that, looking beyond the label given to the debt and analyzing the source of the debt, especially the contract that the created the debt, led to the conclusion that the SBA was a party to the contract that created the debt and had statutory authority to pursue collection of it.

The Court rejected the guarantor's arguments that the default judgment had not been entered in favor of the U.S., but merely assigned to the SBA, that the financial obligation was merely a guaranty and not a loan, and that the SBA improperly sought to enforce the entire default judgment instead of only the portion related to the SBA loan. The Ninth Circuit found each of the arguments to be without merit or legal authority.

Accordingly, the Ninth Circuit affirmed the trial court's holding that the SBA was allowed to reach the guarantor's trust share because the FDCPA pre-empted California's disclaimer law and the default judgment was a debt within the statute.


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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Thursday, April 20, 2017

FYI: 9th Cir Holds Mortgagee's "Sold Out Second" Claim Not Barred by California's 4-Yr Statute of Limitations

The U.S. Court of Appeals for the Ninth Circuit recently reversed a ruling that disallowed an unsecured creditor's claim filed in a California bankruptcy court based on the forum state's statute of limitations. 

In so ruling, the Ninth Circuit held that, although courts typically apply the forum state's statute of limitations if the contract is silent on the issue, exceptional circumstances warranted the application of a longer statute of limitations here, because the creditor had no option but to enforce its claim in the forum based on where the bankruptcy petition was filed.  

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

In 2007, the plaintiff borrowers ("Borrowers") purchased a condominium in California with two loans secured by liens against the property, of which a bank ("Bank") held the junior lien.

Borrowers' promissory note to Bank provided in relevant part that: 

"[T]he Bank is a national bank located in Ohio and Bank's decision to make this Loan … was made in Ohio.  Therefore, this Note shall be governed by and construed in accordance with … the laws of Ohio … without regard to conflict of law principles."

Borrowers defaulted, the senior lender foreclosed, and Bank was left holding an unsecured claim in the amount of $42,000. 

Borrowers filed bankruptcy, and Bank filed a proof of claim based on the 2007 note.  Borrowers objected to the claim on the grounds that the claim was barred by California's applicable four-year statute of limitations.  Cal. Code Civ. Proc. § 337.  Bank argued that its claim was timely because the promissory note's choice of Ohio law incorporated Ohio's six-year statute of limitations period.  Ohio Rev. Code § 1303.16.

The bankruptcy court held that the promissory note selected Ohio's six-year statute of limitations period, and overruled Borrowers' objection.  The Bankruptcy Appellate Panel ("BAP") reversed.  Bank appealed from the BAP's decision.

As you may recall, when a contract contains a choice of law provision, federal courts will enforce that choice.  See, e.g., Flores v. Am. Seafoods Co., 335 F.3d 904, 916-19 (9th Cir. 2003).  But where a choice of law provision does not expressly include the statute of limitations, the Ninth Circuit construes it as silent on the issue.  See, e.g., Des Brisay v. Goldfield Corp., 637 F.2d 680, 682 (9th Cir. 1981).  Here, the Ninth Circuit determined that the choice of law provision at issue was materially identical to the one in Des Brisay. 

In Des Brisay, the Ninth Circuit applied the well-established rule that a federal right of action for which no statute of limitations was provided was subject to the limitations period which the forum state applies to analogous claims.  See, e.g., Wilson v. Garcia, 471 U.S. 261, 266-67 (1985).  However, unlike Des Brisay, this was not a federal securities case premised on an implied right of action.  This case involved a common law action on a promissory note for which both Ohio and California have statutorily prescribed a statute of limitations. 

To resolve this conflict of laws, the Ninth Circuit turned to the Restatement (Second) of Conflict of Laws.  See, e.g., Liberty Tool, & Mfg. (In re Vortex Fishing Systems), 277 F.3d 1057, 1069 (9th Cir. 2001). 

As you may recall, the 1971 version of the Restate (Second) of Conflict of Laws § 142 provides that:  "(1) An action will not be maintained if it is barred by the statute of limitations of the forum, including a provision borrower the statute of limitations of another state."  The 1988 version of § 142 is similarly worded, except that it provides a limited carve out which states "unless exceptional circumstances of the case make such a result unreasonable … The forum will apply its own statute of limitations barring the claim."

Here, the Ninth Circuit held that § 142 compelled the application of the longer statute of limitations under Ohio law based on "exceptional circumstances." 

According to the Ninth Circuit, the unique structures of the Bankruptcy Code meant that, through no fault of Bank's, there was no forum for its claim other than the one in which Borrower's bankruptcy was filed.  This was not a case filed voluntarily by Bank in California, in which a dismissal on statute of limitations grounds would be without prejudice to bringing the same claim in Ohio.  Rather, the Court held, once Borrowers declared bankruptcy, Bank was obligated to bring all of its claims in the district where Borrowers filed. 

Thus, the Ninth Circuit concluded that disallowing Bank's claim under California's statute of limitations would be wholly unreasonable under the circumstances. 

Accordingly, the Ninth Circuit reversed the BAP's judgment and remanded the case to the bankruptcy court.


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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Thursday, April 13, 2017

FYI: CD Cal Cites Lack of Clear Regulatory Guidance in Dismissing ADA Claims Relating to Website Accommodations for Visually-Impaired

The U.S. District Court for the Central District of California recently dismissed a claim brought under the federal Americans with Disabilities Act ("ADA") brought by a visually-impaired plaintiff who alleged that the defendant pizza company's website did not permit users to complete their purchases using a screen-reading software program.  The plaintiff also alleged that the company's mobile app did not allow him to access the menu on his iPhone using a particular software. 

In dismissing the action without prejudice, the Court concluded that there were no regulations clarifying what web accessibility accommodations are required under the ADA.  Thus, the Court held, it was uncertain whether the company's web accessibility accommodations complied with the ADA.  In so ruling, the Court expressly called on Congress, the Attorney General, and the Department of Justice to issue regulations setting minimum web accessibility standards.

A copy of the opinion is attached.

The plaintiff brought the lawsuit against a retail pizza company, alleging the company's website and mobile app were not accessible to and independently usable by plaintiff and other blind or visually-impaired people using "screen readers." 

In particular, the plaintiff alleged the company's website did not allow users to complete their purchase using the screen-reading software program Job Access With Speech ("JAWS").  The plaintiff also alleged the company's mobile app did not permit him to access the menus and applications on his iPhone using the "VoiceOver" software program.  The plaintiff alleged that the website and mobile app failed to comply with version 2.0 of W3C's Web Content Accessibility Guidelines ("WCAG 2.0") under the ADA. 

The plaintiff brought claims under the ADA and California's Unruh Civil Rights Act ("UCRA"). 

The Court noted that the company's website and mobile app included accessibility banners that directed users who access the website using screen readers to call a specific toll free number if they need any assistance.  The Court also noted that the toll free phone number is staffed by a live representative who can assist blind or visually-impaired individuals.  The banners also indicated customers can call their local store directly to make purchases or ask questions.

The company moved for summary judgment on all of plaintiff's claims, asserting that dismissal was warranted for several reasons. 

First, according to the company, websites and mobile apps do not constitute "places of public accommodation" under the ADA.  Next, the company asserted the lawsuit violates fundamental principles of due process because the ADA, its implementing regulations, and the Department of Justice's ("DOJ") website all failed to indicate whether complying with WCAG 2.0 constitutes compliance with the ADA. 

The company's third argument was that the plaintiff could not establish violations of any applicable accessibility standards.  Fourth, according to the company, the UCRA claims fail because plaintiff could not establish the company intentionally discriminated against him.  The company's fifth argument was that plaintiff's UCRA's claims fail because the company did not have notice of the barriers plaintiff claims exist.  The company's final argument asserted the matter should be stayed because the DOJ had not issued any accessibility regulations addressing the websites and mobile apps of private businesses. 

The Court first address the company's argument that websites and mobile apps do not constitute "places of public accommodation" under the ADA.  In analyzing the background of the ADA and legal precedent interpreting it, the Court rejected the argument that websites and mobile apps do not need to comply with the ADA. 

Although the company raised several other arguments, the remainder of the Court's opinion addressed the company's argument that the lawsuit violates fundamental principles of due process because the ADA, its implementing regulations, and the DOJ's website all failed to indicate whether complying with WCAG 2.0 constitutes compliance with the ADA. 

The Court quickly established that the ADA regulations specifically reference "screen reader software" and "other effective methods of making visually delivered materials available to individuals who are blind or have low vision" as forms of accommodations under the ADA. 

According to the company, however, other than the acknowledgement that accommodations for web access exist, there was no concrete guidance addressing the accessibility standards a website must meet, or any standards established that companies operating websites must meet.  More specifically, the company argued that there were no regulations, guidelines or rules establishing that it had to comply with the WCAG 2.0. 

Responding to the company's argument, the Court observed that "the DOJ has consistently stated its view that the ADA's accessibility requirements apply to websites belonging to private companies."  The Court determined that the true inquiry was whether the DOJ had issued any guidance regarding the specific type of access at issue in this case.

The Court noted that the DOJ had issued a Notice of Proposed Rulemaking ("NOPR") in 2010 intended to address requirements for public accommodations via the internet and websites accessible to individuals with disabilities.  Within the NOPR, the DOJ acknowledged the creation of WCAG, but stated that "a clear requirement that provides the disability community consistent access to Web sites and covered entities clear guidance on what is required under the ADA does not exist."  Since the 2010 NOPR, the DOJ has not issued any final rule regarding web access.

The company relied on the fact that no final rule regarding web access had been issued to assert that plaintiff's allegations that the company failed to comply with certain accessibility standards would violate the company's due process rights.  In support of its argument, the company relied on the Ninth Circuit's ruling in United States v. AMC Entertainment, where that Court concluded that a specific provision within an ADA regulation was too vague to put the defendant on notice of whether it was required to retroactively incorporate a comparable viewing angle requirement in movie theaters. After criticizing the government for having "ample opportunity" to clarify the provision at issue but failing to do so, the Ninth Circuit concluded: "We decline to require AMC to have determined the precise meaning of the regulation when the government did not do so." 

The Court here found the ruling from AMC was analogous to the facts of this case.  "Here, too, Plaintiff seeks to impose on all regulated persons and entities a requirement that they 'compl[y] with the WCAG 2.0 Guidelines' without specifying a particular level of success and without the DOJ offering meaningful guidance on this topic.  This request flies in the face of due process." 

The Court rejected the plaintiff's argument that because the DOJ has issued several "Statements of Interest" and entered into several consent decrees and settlements requiring compliance with WCAG 2.0, so too must the company. 

In addition, the Court observed that the ADA requires "reasonable accommodations," and does not require entities to provide the best available accommodation.  The Court then determined that the plaintiff failed to articulate why the company providing a telephone hotline for the visually-impaired, or its use of a technical standard other than WCAG 2.0, would not qualify as a reasonable accommodation. 

The Court granted the company's motion and dismissed each of plaintiff's claims without prejudice pursuant to the primary jurisdiction doctrine, which allows the Court to stay proceedings or dismiss a complaint without prejudice pending the resolution of an issue within the special competence of an administrative agency. 

The Court then expressed the significance of establishing regulations and guidelines addressing the constantly-present issue of web accessibility.  "The Court concludes by calling on Congress, the Attorney General and the Department of Justice to take action to set minimum web accessibility standards for the benefit of the disabled community, those subject to Title III [of the ADA], and the judiciary." 


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, April 10, 2017

FYI: 9th Cir Holds FDCPA §1692f(6) Applies to Non-Judicial Foreclosures

The U.S. Court of Appeals for the Ninth Circuit recently reversed the dismissal of an FDPCA claim arising out of a non-judicial foreclosure.  The Ninth Circuit ruled that section 1692f(6) of the FDCPA applies to non-judicial foreclosure activity. 

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

Two borrowers refinanced a loan secured by their home and executed a note and deed of trust.  The lender assigned the note to a purchaser of the subject loan (the "loan owner").  Later, the lender assigned the deed of trust to the loan owner and caused a notice of default to be recorded.  The borrowers subsequently filed a Chapter 7 bankruptcy petition, and eventually received a discharge from the bankruptcy court.

A substitute foreclosure trustee recorded another notice of default.  The borrowers, the servicer of the subject loan, and the loan owner mediated the borrowers' default with a Nevada foreclosure mediator.  At the mediation, the servicer and the loan owner allegedly could not produce the original loan documents.  The mediation office stated that it would not issue a Certificate of Foreclosure, based upon the mediator's recommendation.

The loan's servicer allegedly sent the borrowers a letter stating:  "You are in default under the terms and conditions of the mortgage loan for failure to pay the required installments when due.  [The servicer] intends to enforce the provision of the Note and related security instrument[] … If you do not pay the full amount of the default, [the servicer] may accelerate the entire sum of both principal and interest due and payable, and invoke any remedies provided for in the Note and security instrument, including but not limited to the foreclosure sale of the property."

Thereafter, counsel for the borrowers allegedly demanded repeatedly that the servicer cease all foreclosure efforts, and that either the servicer or the loan owner prove that it had possession of the note.

The borrowers filed suit against the servicer and the loan owner alleging purported violations of the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. ("FDCPA"), intentional infliction of emotional distress, and purported violation of the Nevada Deceptive Trade Practices Act ("DTPA").  Specifically, the borrowers alleged violations of sections 1692c(a)(2), 1692d, 1692e, and 1692(f)(6) of the FDCPA.

The defendants moved to dismiss the borrowers' complaint.  The trial court granted the motion to dismiss and held that the borrowers could not state a claim for relief under the FDCPA because the defendants' alleged conduct was all related to non-judicial foreclosure activities, and therefore not debt collection.

On appeal, the Ninth Circuit first noted its recent ruling in Ho v. ReconTrust Co. where it held that enforcing a security interest does not involve collecting a debt, which "for the purposes of the FDCPA, debt is synonymous with money."  Ho v. ReconTrust Co., 840 F.3d 618, 621 (9th Cir. 2016).  Instead, the "object of a non[-]judicial foreclosure is to retake and resell the security, not to collect money ... Thus, actions taken to facilitate a non-judicial foreclosure … are not attempts to collect 'debt' as that term is defined by the FDCPA."  Id.

The Ninth Circuit followed Ho and affirmed the trial court's dismissal of the borrowers' claims for purported violation of sections 1692c(a)(2), 1692d, and 1692e of the FDCPA because defendants had not attempted to collect a money debt.

However, the Ninth Circuit also found that section 1692a(6) of the FDCPA provides a more expansive definition of "debt collector" for the purposes of section 1692f(6).  In particular, section 1692a(6) states that "[f]or the purpose of section 1692f(6)" a debt collector also includes a security interest enforcer.

The Ninth Circuit then stated that "Ho held that while the FDCPA regulates security interest enforcement activity, it does so only through Section 1692f(6)."

As you may recall, section 1692f(6) prohibits:  "[t]aking or threatening to take any nonjudicial action to effect dispossession or disablement of property if – (A) there is no present right to possession of the property claimed as collateral through an enforceable security interest; (B) there is no present intention to take possession of the property; or (C) the property is exempt by law from such dispossession or disablement."

The Ninth Circuit reversed the trial court's dismissal of the borrowers' claim for purported violation of section 1692(f)(6) of the FDPCA against the servicer.  The Ninth Circuit found that the borrowers had alleged that the servicer threatened to take nonjudicial action to dispossess the borrowers of their home without a legal ability to do so.  The Ninth Circuit then held that section 1692f(6) prohibits such conduct.

However, the Ninth Circuit affirmed the trial court's dismissal of the borrowers' purported claims for intentional infliction of emotional distress.  The Ninth Circuit found that the borrowers failed to allege conduct which was "outside all possible bounds of decency" and "regarded as utterly intolerable in a civilized community," which is required to state a claim for intentional infliction of emotional distress.

Finally, the Ninth Circuit affirmed the trial court's dismissal of the borrowers' purported DTPA claim and held that the real estate loans do not fall within the DTPA, which governs transactions relating to "goods and services" because a real estate loan is neither a good nor a service.  See Nev. Rev. Stat. §§ 598.0915-598.0925, 598.0934.       


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, March 31, 2017

FYI: Cal App Ct (2nd Dist) Holds Res Judicata Did Not Bar TILA Action Based on Prior Contract Action

The Court of Appeals of California, Second District, recently held the dismissal of a borrower's breach of contract claim in a prior lawsuit did not bar a claim in subsequent lawsuit for violation of the federal Truth in Lending Act, 15 U.S.C. § 1601, et seq. ("TILA"), even if the breach of contract and TILA claims were based on the same set of underlying facts, because the right to full disclosures under TILA was a distinct primary right from the common law rights in contract.

However, although the Appellate Court determined that the dismissal based on the doctrines of res judicata and issues preclusion was reversible error, the dismissal was affirmed because the borrower's claims, including the TILA cause of action, were barred by the statute of limitations or otherwise failed to state a valid cause of action.  

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

In the first lawsuit, the borrower's complaint asserted causes of action for breach of contract, temporary restraining order and preliminary injunction, violation of the California's unfair competition law in Bus. & Prof. Code § 17200, et seq. ("UCL"), specific performance, and equitable rescission.  The borrower alleged that the lender failed to disclose fees when she refinanced the loan, and it added additional sums for "escrow option insurance" when her loan was subsequently modified.  The borrower claimed that these undisclosed sums made the loan unaffordable.

The trial court sustained the defendants' demurrer based on several deficiencies in the complaint.  The borrower filed an amended complaint that was virtually identical to the original complaint which, once again, did not attach any of the alleged agreements or describe their terms in any greater detail.  The court sustained the defendants' demurrer to the amended complaint without leave to amend.  The Appellate Court affirmed.  The California Supreme Court denied the borrower's request for review.

The borrower then filed a new complaint, this time omitting the alleged breach of contract claim, and instead asserting causes of action for violation of TILA, the UCL, fraudulent omission/concealment, and injunctive relief.  The general allegations in the complaint were identical to those in the prior lawsuit. 

The borrower alleged that the lender violated TILA by failing to make required disclosures with respect to the "escrow option insurance," which was supposedly surreptitiously added to her monthly loan payment obligation.  She also alleged that the lender's violation of TILA was an unlawful business practice in violation of the UCL, and the lender's alleged failure to disclose the "escrow option insurance" in the loan modification agreement constituted fraudulent concealment.  According to the borrower, had she known the true facts, she would have considered other financing options, and thus requested injunctive relief preventing the sale of the property.

The lender demurred, contending that the borrower's new complaint was barred as a matter of law by the doctrines of claim preclusion and issue preclusion. 

The lender argued that the borrower was asserting the same primary right in both actions (claim preclusion), and the issues alleged had been actually litigated and decided against the borrower on the merits (issue preclusion).  The lender also argued that the TILA and fraud causes of action were untimely; the borrower lacked standing to assert a UCL claim because she failed to allege she had lost money or property as a result of the lender's actions; and the claim for injunction was improper because injunctive relief is a remedy and not a cause of action. 

In her opposition, the borrower emphasized that she had not pleaded either violation of TILA or fraud in her prior lawsuit. 

The trial court sustained the defendants' demurrer without leave to amend.  In so ruling, it found that "[t]he 'primary right' of Plaintiff in both actions—the right to be free from increased loan payments that were not agreed to—is the same, which means the present proceeding is on the same 'cause of action' as the prior proceeding."  The trial court also ruled the claims were barred by collateral estoppel because her claims "all involve the same underlying issue—the validity of the increased loan payments that Plaintiff allegedly did not agree to," and that issue had been litigated and decided.  Moreover, the trial court held that the TILA and fraud claims were time barred; the borrower lacked standing to bring a UCL claim; and the cause of action for injunctive relief was not a valid cause of action.  The borrower appealed.

First, the Appellate Court had to determine if the borrower's TILA cause of action was subject to claim preclusion or issue preclusion.

As you may recall, the doctrine of res judicata has two aspects — claim preclusion and issue preclusion.  DKN Holdings LLC v. Faerber (2015) 61 Cal.4th 813, 824; Boeken v. Philip Morris USA, Inc. (2010) 48 Cal.4th 788, 797.

Claim preclusion prevents relitigation of the same cause of action in a second suit between the same parties or parties in privity with them.  Claim preclusion arises if a second suit involves (1) the same cause of action (2) between the same parties [or those in privity with them] (3) after a final judgment on the merits in the first case.  DKN Holdings, 61 Cal.4th at 824.  The bar applies if the cause of action could have been brought, whether or not it was actually asserted or decided in the first lawsuit.  Busick v. Workermen's Comp. Appeals Bd. (1972) 7 Cal.3d 967, 974.

Issue preclusion prohibits the relitigation of issues argued and decided in a previous case even if the second suit raises a different cause of action.  The doctrine applies "(1) after final adjudication (2) of an identical issue (3) actually litigated and necessarily decided in the first suit and (4) asserted against one who was a party in the first suit or one in privity with that party."  DKN Holdings, 61 Cal.4th at 825.  The doctrine differs from claim preclusion in that it operates as a conclusive determination of issues; it does not bar a cause of action.  Id.

The Appellate Court held that the trial court erred in its ruling because different primary rights may be violated by the same wrongful conduct.  As support, the Appellate Court relied on Agarwal v. Johnson (1979) 25 Cal.3d 932, 954-955, which held that an employer's racially discriminatory conduct may violate distinct primary rights under federal civil rights law and state tort law regarding defamation and intentional infliction of emotional distress.

In this case, although the borrower's contract and TILA claims were largely based on the same set of underlying facts, the Appellate Court determined that the two actions do not involve the same primary rights 

The Appellate Court held that the primary right at issue in the borrower's TILA cause of action was the right to full disclosure of the material terms of the loan and the subsequent loan modification.  This was, according to the Appellate Court, a federal statutory right distinct from the common law right to have enforced only those contractual terms which the borrower had agreed to (the claim presented by her initial lawsuit).  Thus, the Appellate Court concluded that the doctrine of claim preclusion did not bar the TILA cause of action.

Notably, the opinion was silent on whether the borrower could have, or should have, raised the TILA cause of action in the first lawsuit.  In fact, in the new complaint, the borrower alleged that she discovered the material omissions by May 2012 – well before she filed the original lawsuit in July 2013. 

Turning next to issue preclusion, the Appellate Court held that the prior ruling on the merits of the borrower's contract claim did not preclude the TILA cause of action.  This is because the adequacy of the disclosures at closing and in the loan modification agreement were neither actually litigated nor determined in the prior lawsuit.  Instead, the trial court sustained the demurrer because the borrower failed to allege sufficient facts to state a valid cause of action.  Thus, the Appellate Court concluded that the trial court erred by applying the doctrine of issue preclusion to dismiss the TILA claim.

However, the Appellate Court agreed with the trial court that the TILA cause of action was untimely under the statute of limitations. 

As you may recall, most TILA actions must be filed "within one year from the date of the occurrence of the violation."  15 U.S.C. § 1640(e).  A violation of TILA based on specific disclosures, however, may be brought within three-years.  Id.; 15 U.S.C. § 1639.  The violations here allegedly occurred in 2007 and 2010.  The borrower's current lawsuit was not filed until August of 2015.  Under either the one year or three-year statute of limitations, the borrower's claim was untimely.  Therefore, the Appellate Court concluded the untimely TILA cause of action was properly dismissed. 

Next, the trial court had determined that the borrower lacked standing because she could not show any loss of money or property as a result of the allegedly unlawful business practices.  The Appellate Court disagreed. 

In a previous decision, the Appellate Court had held that "the existence of an enforceable obligation, without more, ordinarily constitutes actual injury or injury in fact."  Sarun v. Dignity Health (2014) 232 Cal.App.4th 1159, 1167.  Here, the borrower had alleged that she paid money to the bank in excess of what she should have owed.  According to the Appellate Court, these allegations were sufficient to allege injury in fact to confer standing to assert a UCL cause of action. 

However, an action to enforce the UCL must be commenced within four years after the cause of action accrued.  Bus. & Prof. Code § 17208.  Because both the refinancing and the loan modification occurred more than four years before the new lawsuit was filed in August 2015, the Appellate Court concluded that the borrower's UCL claim was time-barred.

Relatedly, the borrower's fraudulent concealment claim, like her TILA and UCL claims, was based on the alleged nondisclosure of material terms of the loan refinancing and loan modification.  A cause of action for fraud is governed by a three-year statute of limitations.  Code of Civ. P. 338(d).  Because the borrower alleged that she discovered the alleged fraud when her loan was supposedly forensically examined in May 2011, the cause of action filed in August of 2015 was barred by the three-year statute of limitation. 

Finally, the Appellate Court ruled that the borrower's request for injunctive relief was properly dismissed because she failed to allege any valid cause of action.

Accordingly, the Appellate Court affirmed the order dismissing the action.  


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, March 21, 2017

FYI: 9th Cir Holds Servicer May Have Violated UDAP by Soliciting Trial Mod Payments After Determining Borrower Ineligible

The U.S. Court of Appeals for the Ninth Circuit recently reversed an award of summary judgment in favor of a mortgage loan servicer, holding that the evidence could support a verdict that the servicer engaged in an unfair business practice by accepting trial modification plan payments when it had previously determined the borrower was not eligible for a loan modification. 

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

A borrower defaulted on her mortgage loan, and later applied for a loan modification.  The mortgage loan servicer sent her a letter offering her a “Trial Plan Agreement.”  The letter specifically stated, “If you comply with all the terms of this Agreement, we’ll consider a permanent workout solution for your loan once the Trial Plan has been completed.”  The Agreement required the borrower to remit three equal payments of $3,280.05.  The borrower signed the Agreement and timely sent the payments.

Later, the servicer informed the borrower that she did not qualify “at this time” for a modification under either the federal Making Home Affordable Program (“HAMP”) or under the servicer’s in-house modification program because her “income [was] insufficient for the amount of credit [she] requested.”  The letter also stated that “we may be able to offer other alternatives to help avoid the negative impact” of foreclosure.

The servicer did not provide additional reasons for its denial.  However, the servicer had also denied the borrower for a modification because:  1) the unpaid principal balance on the loan was higher than the amount allowed under the HAMP Guidelines and 2) the loan failed to satisfy the servicer’s net present value (“NPV”) test.  The servicer’s NPV test compared the NPV expected from a modification to the NPV of the unmodified loan.  If the cash flow from a viable modification exceeds that of a non-modified loan, HAMP requires a servicer to offer a modification to a borrower.  If the NPV test generates a negative result, modification is optional.

The borrower then submitted a second application for a loan modification.

In response to the second application, the servicer sent a letter stating that it “want[ed] to help [the borrower] stay in [her] home” and confirmed receipt and review of the borrower’s “verification of income documentation.”  The servicer also provided three payment coupons in the amount of $2,988.49 with payment deadlines notated and stated: “After successful completion of the Trial Period Plan, [we] will send you a Modification Agreement for your signature which will modify the Loan as necessary to reflect this new payment amount.”

Later, the servicer sent the borrower another letter informing the borrower that she was not eligible for a federal HAMP modification “because the current unpaid principal balance on [her] loan [was] higher than the program limit.”  This letter also stated that the servicer was “happy” to tell the borrower that she “‘may be eligible for other modification programs’ and that [the servicer] may be able to offer ‘other alternatives’ to stave off the negative impact a possible foreclosure may have on [her] credit rating, the risk of a deficiency judgment … and the possible adverse tax effects of a foreclosure.”

The borrower made all payments called for by the first letter and continued making such payments for a total of seven months.

The borrower was served with a foreclosure notice listing a foreclosure sale date.  Prior to the sale date, the servicer sent the borrower another letter encouraging her to continue to seek a modification.  The servicer told the borrower that she might “qualify for monetary incentives that will be used to pay down the principal balance of your loan if you make your modified payments on time.”

Several months later, the servicer sent the borrower a letter denying her application, stating:  “We are unable to offer you a modification through the Home Affordable Modification Program (HAMP) or any [of the servicer’s] modification programs … because you did not provide us with the documents we requested.”

The borrower then filed an action for breach of contract, breach of the implied covenant of good faith and fair dealing, violation of California’s Unfair Competition Law (“UCL”), and violation of the federal Truth in Lending Act (“TILA”). 

The servicer moved to dismiss the borrower’s complaint.  The trial dismissed the borrower’s TILA claim but denied the servicer’s motion with respect to the borrower’s remaining claims.  The trial court reasoned, “If what [the borrower] alleges is true – that [the servicer’s] left hand sought payments from Plaintiff pursuant to a plan designed to give her an opportunity to modify her loan while, notwithstanding [the borrower’s] payment in accordance with that plan, [the servicer’s] right hand continued all along with foreclosure proceedings and both hands should have known from the start that [the borrower’s] loan would not be eligible for modification in any event – the Court can conceive of such allegations stating a [UCL] claim.”

Later, the servicer brought a motion for summary judgment.  The trial court granted the servicer’s motion on the ground that the borrower had failed to provide the servicer with the “requested documentation to support her loan modification request.”  The trial court also rejected the borrower’s breach of contract claims because the borrower had only “conclusorily” asserted that the “modification back-and-forth ripened into a contract with [the servicer]” and remarked that the borrower had not included a breach of contract claim in her first amended complaint.

The borrower appealed.  On appeal, the Ninth Circuit reversed the trial court’s order granting summary judgment on the borrower’s breach of contract claim. 

The Ninth Circuit held that the trial court “erred in failing to acknowledge [the borrower’s] claim for breach of contract in her pro se complaint.”  The Ninth Circuit noted that the borrower “explicitly styled her complaint on its first page as one for “BREACH OF CONTRACT AND BREACH OF IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALINGS.”  The Ninth Circuit also found that “[o]nce [the borrower] made her three payments, [the servicer] was obligated by the explicit language of its offer to send her an Agreement for her signature ‘which will modify the loan as necessary to reflect this new payment amount.’  [The Servicer] did not call it either a HAMP agreement or [an in-house] agreement, just an ‘Agreement.’  What program the Agreement was part of is irrelevant.”

The Ninth Circuit also reversed the District Court’s order granting summary judgment on the borrower’s UCL claim.  The Ninth Circuit noted that the borrower was indeed ineligible for a HAMP modification, but that “instead of determining eligibility before asking for money – a logical protocol called for by HAMP as of January 28, 2010 – [the servicer] asked [the borrower] for more payments.” 

The Ninth Circuit held that “[t]he facts in this record would amply support a verdict on this claim in [the borrower’s] favor on the ground that she was the victim of an unconscionable process.”  The Ninth Circuit reasoned that “[w]ith its March 1, 2010 letter, [the servicer] deceptively enticed and invited [the borrower] into a process with the demonstrably false promise that a loan modification was within her reach if she were to make three monthly payments of $2,988.49 each.  The next day – and for the first time – [the servicer] eliminated a HAMP modification from its menu, but neither advised [the borrower] what [its in-house modification guidelines] required nor suspended additional payments until it could determine her [in-house modification] eligibility.”

Finally, the Ninth Circuit reversed the trial court’s dismissal of the borrower’s TILA claim.  The Ninth Circuit cited the Supreme Court of the United States’ ruling in Jesinoski v. Countrywide Home Loans, Inc., 135 S. Ct. 790 (2015) which held that TILA’s right to cancel may be exercised by a written notice from the borrower to the lender within three years after the consummation of the transaction, without need to also file a lawsuit within the three-year period. 


The Ninth Circuit observed that the Supreme Court decided Jesinoski after the trial court had dismissed the borrower’s TILA claim.  As a result, the Ninth Circuit remanded the action to the trial court “with instructions to permit [the borrower] to amend her complaint to allege a right to rescind pursuant to Jesinoski.”


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




ALABAMA   |   CALIFORNIA   |   FLORIDA   |   ILLINOIS   |   INDIANA   |   MARYLAND   |   MASSACHUSETTS   |   NEW JERSEY   |   NEW YORK   |   OHIO   |   PENNSYLVANIA   |   TEXAS   |   WASHINGTON, D.C.