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




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Saturday, February 25, 2017

FYI: 9th Cir Rejects FDCPA Class Settlement Using Injunctive Relief and Improper Cy Pres to Account for Cap on Monetary Damages

The U.S. Court of Appeals for the Ninth Circuit recently held that a lower court abused its discretion in approving a class settlement for claims of violations of the federal Fair Debt Collection Practices Act (FDCPA) in which the named plaintiffs and class counsel would receive monetary compensation, but the remaining four million class members would receive only injunctive relief.

Rejecting the arguments of a consumer advocacy group that filed an amicus brief, the Ninth Circuit also held that only the consent of the named plaintiffs and defendant – and not also the absent class members -- was required for the magistrate judge to exercise jurisdiction.

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

The plaintiffs sued a debt collector under the FDCPA, alleging that the debt collector violated §§ 1692d(6) and 1692e(11) of the FDCPA by leaving voicemail messages in which the callers failed to disclose (1) that they worked for the debt collector, (2) that their employer was a debt collector, or (3) that the purpose of the call was to collect a debt. The plaintiffs brought the action on behalf of four million people who received a voicemail message from the debt collector which failed to disclose this information.

As you may recall, in an individual FDCPA action, a plaintiff may recover any actual damages suffered plus statutory damages up to $1,000, as well as attorney's fees and costs. § 1692k(a)(1), (a)(2)(A). In a class action, the named plaintiffs may recover actual damages plus statutory damages up to $1,000, but the damages award for the rest of the class is capped at $500,000 or 1% of the defendant's net worth, whichever is less. § 1692k(a)(2)(B).
  
The named plaintiff and debt collector consented to have all matters adjudicated by a magistrate judge in the trail court.  The parties eventually agreed to a settlement whereby the plaintiffs would seek certification of a nationwide, settlement-only class under Federal Rule of Civil Procedure 23(b)(2), which allows for class-wide injunctive or declaratory relief. 

The proposed class consisted of everyone who between 2008 and 2011 received a voicemail message from the debt collector that failed to identify the debt collector as the caller, disclose that the call was from a debt collector, or state that the purpose of the call was to collect a debt. Because the class would be certified under Rule 23(b)(2), the parties agreed that no notice of any kind would be sent to the four million class members and that no one would be permitted to opt out of the class.

The debt collector agreed to pay the three named plaintiffs $1,000 each, the maximum they could hope to recover under the FDCPA as none of them had suffered any actual damages. Because the debt collector's net worth was $3.5 million, under § 1692k(a)(B), the other four million class members could collectively recover no more than $35,000. Given the impossibility of distributing less than a penny to each member of the class, the debt collector agreed to make a cy pres award to a local charity and to pay class counsel a negotiated sum for attorney fees.

The four million unnamed class members received no monetary compensation under the settlement, but they were the beneficiaries of a stipulated injunction that required the debt collector to continue using a new voicemail message it had already voluntarily adopted. In return for that benefit, the unnamed class members forfeited the right to seek damages from the debt collector as part of a class action, but retained the right to pursue damages claims against the debt collector on an individual basis.

As required by the federal Class Action Fairness Act, the debt collector sent notice of the proposed settlement to the appropriate state and federal officials, none of whom objected to the settlement. See 28 U.S.C. § 1715(b).

The four million class members did not receive individual notice of the proposed settlement, but one class member filed an objection. She was the named plaintiff in a separate class action against the same debt collector pending in Florida, which alleged essentially the same FDCPA violations, except that she sought certification of a much smaller class limited to Florida residents who owed money to a particular creditor on whose behalf the debt collector was attempting to collect.

After the parties agreed to the settlement in this case, the debt collector asked the trial court in Florida to stay all further proceedings in the Florida class member's lawsuit on the ground that, if approved, the settlement in the case pending in the Ninth Circuit would bar the Florida case from proceeding as a class action. The trial court in Florida agreed to stay the class member's action pending final approval of the settlement in the case pending in the Ninth Circuit.

In her objection to the settlement, the Florida class member argued that the settlement in the case pending in the Ninth Circuit was unfair and unreasonable because class members would be barred from pursuing damages claims as part of a class action but would receive nothing of value in return.

After a fairness hearing, the trial court in the case pending in the Ninth Circuit certified the proposed class under Rule 23(b)(2); approved the settlement as fair, reasonable, and adequate under Rule 23(e)(2); and entered judgment accordingly.

Having objected to the settlement in the trial court in the case pending in the Ninth Circuit, the Florida class member then appealed.

Before reaching the merits, the Ninth Circuit first addressed the question of whether it had jurisdiction to decide the appeal. The Court's jurisdiction would be triggered only if the magistrate judge hearing the case by consent of the named plaintiffs and debt collector had the authority to enter final judgment under 28 U.S.C. § 636(c). The question was whether the statute required not just the consent of the named plaintiffs, but also the consent of the absent four million class members.

Section 636(c) authorizes magistrate judges, "upon the consent of the parties," to "conduct any or all proceedings in a jury or nonjury civil matter and order the entry of judgment in the case, when specially designated to exercise such jurisdiction by the district court or courts he serves." 28 U.S.C. § 636(c)(1). When a magistrate judge is authorized to enter final judgment, "an aggrieved party may appeal directly to the appropriate United States court of appeals from the judgment of the magistrate judge in the same manner as an appeal from any other judgment of a district court." § 636(c)(3).

The Ninth Circuit joined three other circuits that all concluded that § 636(c) only requires the consent of the named plaintiffs. See Day v. Persels & Associates, LLC, 729 F.3d 1309, 1316 (11th Cir. 2013); Dewey v. Volkswagen Aktiengesellschaft, 681 F.3d 170, 181 (3d Cir. 2012); Williams v. General Electric Capital Auto Lease, Inc., 159 F.3d 266, 269 (7th Cir. 1998).

The Ninth Circuit noted that the Supreme Court of the United States has observed that absent class members may be treated as parties "for some purposes and not for others." Devlin, 536 U.S. at 10, 122 S. Ct. 2005.  In addition, the Ninth Circuit concluded that in § 636(c)(2), which specifies the procedures for obtaining party consent under (c)(1), the phrase "the parties" is used multiple times in a way that cannot sensibly be read to include absent class members.

For example, the Court noted, section 636(c)(2)'s reference to the consent of "the parties" could encompass both the named plaintiffs and the absent class members, but in virtually all class actions, it would be impossible for the clerk of court to issue this notice to absent class members at the time the action is filed.  Accordingly, viewing § 636(c) as a whole, the Ninth Circuit concluded that that Congress did not intend absent class members to be treated as parties in this context.

Additionally, the Ninth Circuit explained that the named plaintiffs in a properly certified class action are charged with conducting the litigation on behalf of the class they represent, and by definition class actions involve too many plaintiffs to allow each to participate personally. See Fed. R. Civ. P. 23(a)(1). 

The Ninth Circuit concluded that Congress authorized magistrate judges to enter judgment in a class action so long as the named parties to the action have consented, and here the named plaintiffs and debt collector had done so. Thus, the class member's appeal from the judgment entered by the magistrate judge was properly before the Ninth Circuit "in the same manner as an appeal from any other judgment of a district court." 28 U.S.C. § 636(c)(3).

The only remaining issue was whether § 636(c) is constitutionally valid. The National Association of Consumer Advocates, appearing as a friend of the court, argued that the statute is unconstitutional as applied to class actions, because § 636(c) violates Article III of the Constitution by permitting magistrate judges to exercise jurisdiction over class actions without obtaining the consent of each absent class member.

The Ninth Circuit disagreed.  The Court explained that litigants in federal court have a personal right, conferred by Article III, to insist upon adjudication of their claims by a judge who enjoys the salary and tenure protections afforded by Article III—protections that magistrate judges lack. Commodity Futures Trading Commission v. Schor, 478 U.S. 833, 848, 106 S.Ct. 3245, 92 L.Ed.2d 675 (1986); see Pacemaker Diagnostic Clinic of America, Inc. v. Instromedix, Inc., 725 F.2d 537, 542 (9th Cir. 1984) (en banc).  However, the personal right to an Article III adjudicator may be waived, and a party's express or implied consent to adjudication by a magistrate judge constitutes a valid waiver of the right. Roell v. Withrow, 538 U.S. 580, 590, 123 S.Ct. 1696, 155 L.Ed.2d 775 (2003).

Accordingly, the question before the Ninth Circuit was whether Article III categorically prohibits named plaintiffs from waiving, on behalf of the class members they represent, the right to proceed before an Article III judge. The Court noted that a categorical prohibition of that sort might be warranted if the interests of named plaintiffs and the absent class members frequently diverged with respect to exercise of the right at issue.

However, the Court held that the opposite is true of the right to have a case heard by an Article III judge, because to serve as class representatives, the named plaintiffs must have claims that are typical of the claims held by the class, and in conducting the litigation the named plaintiffs must fairly and adequately protect the interests of the class. Fed. R. Civ. P. 23(a)(3)–(4).

When those requirements are met, the interests of the named plaintiffs and absent class members will almost always be aligned when it comes to deciding whether to consent to a magistrate judge's jurisdiction. Barring unusual circumstances, the named plaintiffs will have as strong an interest as the absent class members in having their claims adjudicated by an independent and impartial decision maker. The Ninth Circuit concluded therefore that the named plaintiffs in a putative class action could be expected to protect the absent class members' interests in the exercise of the right conferred by Article III.

There are constitutional limits, of course, on the named plaintiffs' authority to waive the rights of their fellow class members, but the Court noted that those limits were imposed by the Due Process Clause, not by Article III.

Most fundamentally, as mandated by due process (and enforced through Federal Rule of Civil Procedure 23), the named plaintiffs' interests must in fact be aligned with those of the class, and the named plaintiffs must adequately represent the interests of the class throughout the litigation. Taylor v. Sturgell, 553 U.S. 880, 900–01, 128 S.Ct. 2161, 171 L.Ed.2d 155 (2008); Hansberry v. Lee, 311 U.S. 32, 41–43, 61 S.Ct. 115, 85 L.Ed. 22 (1940). In some instances, absent class members must also receive notice of the action and an opportunity to opt out. Taylor, 553 U.S. at 900, 128 S.Ct. 2161; Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 811–12, 105 S.Ct. 2965, 86 L.Ed.2d 628 (1985).

The absent class members in this case were not afforded notice and an opportunity to opt out, but the Court did not decide whether the Due Process Clause required those protections before the debtors could waive, on behalf of the class, the right to an Article III adjudicator, because any violation of the absent class members' due process rights would affect only the preclusive reach of the resulting class judgment in subsequent litigation. See, e.g., Hecht v. United Collection Bureau, Inc., 691 F.3d 218, 224–26 (2d Cir. 2012) (lack of notice); Crawford v. Honig, 37 F.3d 485, 488 (9th Cir. 1994) (inadequate representation).

The Ninth Circuit therefore concluded that the limits imposed by the Due Process Clause on the enforcement of class judgments do not curtail a magistrate judge's authority under § 636(c) to enter judgment that at the very least would bind the named plaintiffs who consented to the magistrate judge's jurisdiction. Thus, the Court noted, any due process violation that might have occurred here would not deprive the Court of jurisdiction to decide this appeal, given that its jurisdiction was keyed to the magistrate judge's authority to enter final judgment.

Moreover, the Court reasoned, due process issues involving the extent to which the judgment might bind absent class members in future litigation would arise only if the Court were to uphold the magistrate judge's order approving the settlement. Because the Court ultimately concluded that the magistrate judge abused her discretion in entering that order, the Ninth Circuit was not faced with such due process issues here.

Under Federal Rule of Civil Procedure 23(e)(2), a district court may approve a class action settlement only after finding that the settlement is "fair, reasonable, and adequate."

When, as here, a class settlement was negotiated prior to formal class certification, there is an increased risk that the named plaintiffs and class counsel will breach the fiduciary obligations they owe to the absent class members. As a result, "such agreements must withstand an even higher level of scrutiny for evidence of collusion or other conflicts of interest than is ordinarily required under Rule 23(e) before securing the court's approval as fair." In re Bluetooth Headset Products Liability Litigation, 654 F.3d 935, 946 (9th Cir. 2011).

The Ninth Circuit ultimately held that the trial court abused its discretion by approving the settlement in this case because in its view there was no evidence that the relief afforded by the settlement had any value to the absent class members, even though they had to relinquish their right to seek damages in any other class action.

The Court concluded that the settlement's injunctive relief was worthless to most members of the class because it merely dictated the disclosures the debt collector must make in future voicemail messages for a period of two years. Although that relief could potentially have benefited class members who were likely to be contacted by the debt collector during the two-year window, the Court noted that the settlement class was not defined to include those who were likely to be contacted by the debt collector in the future.  Instead, the Court noted, the settlement class was defined to include those who had suffered a past wrong.

The named plaintiffs and debt collector bore the burden of demonstrating that class members would benefit from the settlement's injunctive relief, which required them to show that class members were likely to face future collection efforts by the debt collector. See In re Dry Max Pampers Litigation, 724 F.3d 713, 719 (6th Cir. 2013). The Ninth Circuit held that they fell short of carrying that burden, because they made no showing that members of the class continued to receive calls from agency as part of ongoing efforts to collect debts that were by then two to five years old, and did not show that class members were likely to become targets of the agency's future collection efforts.

In addition, the Court noted that even for class members who might become targets of collection efforts by the agency in the future, the settlement's injunctive relief was of no real value because the injunction did not obligate the debt collector to do anything it was not already doing, as the debt collector had already adopted and was already using the new voicemail message.

The Ninth Circuit was also troubled by the escape clause in the settlement that allowed the debt collector to seek dissolution of the injunction "at any time if there is a change in the law." Thus, the Court noted that if the litigation risk were reduced by a new court decision or legislative enactment — the only scenario in which the debt collector might be tempted to resume its prior conduct — the debt collector could seek to dissolve the injunction.

Moreover, the Ninth Circuit also held that the named plaintiffs and debt collector presented no evidence that the absent class members would derive any benefit from the settlement's cy pres award. The Ninth Circuit held that the cy pres award was likely improper under its precedents, which require that cy pres awards be tethered to the objectives of the underlying statutes or the interests of the class members. See Nachshin v. AOL, LLC, 663 F.3d 1034, 1039 (9th Cir. 2011).

Here, the award consisted of a $35,000 donation to a San Diego veterans' organization. The San Diego location of the chosen charity had no geographic nexus to the class, which included four million individuals scattered throughout the United States. Nor was there any evidence that the settlement class was disproportionately composed of veterans. And there was no showing that the work performed by the designated charity would protect consumers from unfair debt collection practices, the objective of the FDCPA.

Thus, even putting aside the relatively small size of the cy pres award, the Ninth Circuit could not say that this aspect of the settlement provided any material benefit to the class members.

Because the settlement in the Court's view gave the absent class members nothing of value, the Ninth Circuit concluded that the class members could not fairly or reasonably be required to give up anything in return. However, the settlement required absent class members to relinquish their right to pursue damages claims against the debt collector as part of a class action.

The parties disputed whether that right had any real value to the absent class members, given the FDCPA's cap on class action damages.

The debt collector asserted that, with total damages capped at $35,000, none of the absent class members had any hope of obtaining meaningful monetary relief as part of another class action because it would be impossible to define a class small enough to afford individual recoveries of more than a trivial amount.

The Florida class member asserted, however, that the proposed class in her pending Florida action might contain as few as several hundred members, each of whom could recover meaningful relief of roughly $100.

The Ninth Circuit did not resolve the parties' dispute on this point, because it was enough to conclude that the waiver of the right to seek damages in future class actions had some value, but very few class members would bother to file their own individual actions to recover minimal (or non-existent) actual damages and statutory damages capped at $1,000.

The fact that class members were required to give up anything at all in exchange for what the Ninth Circuit saw as worthless injunctive relief precluded the approval of the settlement as fair, reasonable, and adequate under Rule 23(e)(2).

The class member also challenged the reasonableness of the settlement on other grounds, such as the disparity between what the named plaintiffs would receive and what the rest of the class members would receive, and contended in addition that the class could not be certified under Rule 23(b)(2). In light of the Court's disposition, however, it did not address these remaining contentions.

In sum, the Ninth Circuit reversed the lower court's approval of the class settlement and remanded it for further proceedings.


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, February 23, 2017

FYI: 9th Cir Holds TCPA Revocation of Consent Must Be Clearly Expressed

The U.S. Court of Appeals for the Ninth Circuit recently held that under Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 194 L. Ed. 2d 635 (2016), a consumer alleged a concrete injury sufficient to confer Article III standing to pursue a Telephone Consumer Protection Act (TCPA) for alleged nonconsensual text messages.

In so ruling, the Court held that a consumer may revoke his or her consent, but must clearly express that he or she does not want to receive the messages or calls. The Court concluded that, in this case, the consumer gave prior express consent to receive the text messages at issue and did not effectively revoke his consent, thereby dooming his TCPA claims.

The Ninth Circuit also held that the consumer did not establish economic standing for his claims asserting violations of California Business and Professional Code §§ 17538.41 and 17200.

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

The plaintiff filed suit under the TCPA, alleging a gym sent him unsolicited text messages. The parties disputed the scope of the consumer's consent to being contacted after he gave his cell phone number while signing up for a gym membership, and whether he revoked his consent when he canceled the membership.

As you may recall, the TCPA generally prohibits making nonemergency, unsolicited calls advertising "property, goods, or services" using automatic dialing systems and prerecorded messages. 47 U.S.C. § 227(a)(5); 47 U.S.C. § 227 (b)(1)(A)(iii).

The Federal Communications Commission (FCC), the agency implementing the TCPA, has interpreted the TCPA to "encompass both voice calls and text calls to wireless numbers including, for example, short message service (SMS) calls," which are generally referred to as text messages. In re Rules & Regulations Implementing the TCPA, 18 F.C.C. Rcd. 14014, 14115 (July 3, 2003).

A call or text is not unsolicited, however, where the recipient gave the sender "prior express consent" the calls or texts. 47 U.S.C. § 227(b)(1)(A).

The plaintiff visited a gym franchise to obtain information about a gym membership. During the visit, the consumer submitted a desk courtesy card to the gym, with his wrote his personal and contact information to determine whether he was pre-qualified to become a member.

The plaintiff then signed a gym membership agreement and provided his cell phone number. Within three days of opening his gym membership, the consumer canceled his membership. The consumer subsequently moved to California, but kept his pre-existing cell phone number from his prior residence location.

A management company that operated and managed the gym changed the gym name to a new brand and trademark. After the brand change, the management company's marketing partner announced the gym's brand change via text messages to current and former gym members and invited members to return. The plaintiff received two text messages from the marketer.

The plaintiff then filed a putative class action lawsuit, asserting three causes of action: (1) violation of the TCPA; (2) violation of California Business and Professions Code § 17538.41; and (3) violation of California Business and Professions Code § 17200.

The trial court granted the consumer's motion for class certification, but subsequently granted the companies' motion for summary judgment on all of the claims. The consumer then appealed to the Ninth Circuit.

Before turning to the merits of the consumer's TCPA claim, the Ninth Circuit first addressed whether the consumer had standing under Article III of the Constitution.

As you may recall, under the recent Supreme Court of the United States ruling in Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 194 L. Ed. 2d 635 (2016), to satisfy Article III standing, a 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." Id. (applying the traditional standing test from Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61, 112 S. Ct. 2130, 119 L. Ed. 2d 351 (1992)).

A plaintiff establishes injury in fact, if 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).

In Spokeo, the Supreme Court reiterated that "Article III standing requires a concrete injury even in the context of a statutory violation," and that a plaintiff does not "automatically satisfy 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.

The companies argued that the consumer did not establish a concrete injury-in-fact necessary to pursue his TCPA claim in light of Spokeo.

The Ninth Circuit disagreed. The Court concluded that, unlike in Spokeo, where a violation of a procedural requirement minimizing reporting inaccuracy might not cause actual harm or present any material risk of harm, the telemarketing text messages at issue here, absent consent, presented the precise harm and infringed the same privacy interests Congress sought to protect in enacting the TCPA.

The Court held that unsolicited telemarketing phone calls or text messages, by their nature, invade the privacy and disturb the solitude of their recipients. A plaintiff alleging a violation under the TCPA "need not allege any additional harm beyond the one Congress has identified." Spokeo, supra, at 1549.

The Ninth Circuit therefore held that the TCPA plaintiff alleged a concrete injury in fact sufficient to confer Article III standing.

Prior consent is a complete defense to the consumer's TCPA claims. The plaintiff contended that he never gave "prior express consent" to receive the text messages, and even if he had, he revoked that consent by canceling his gym membership.

The Ninth Circuit disagreed.

For purposes of the TCPA, the Ninth Circuit held that the scope of a consumer's consent depends on the transactional context in which it is given.

In this case, the Ninth Circuit held that as a matter of law the consumer gave prior express consent to receive the companies' text messages, because he gave his cell phone number for the purpose of a gym membership contract with a gym. The Court noted that the scope of his consent included the text messages' invitation to return and reactivate his gym membership. The text messages at issue here, the Court added, were part of a campaign to get former and inactive gym members to return, and thus related to the reason the consumer gave his number in the first place, to apply for a gym membership.

The Ninth Circuit held that the fact that the gym changed its name and brand affiliation did not affect that the gym was owned and operated by the same entities.

The plaintiff also argued that even if he gave prior express consent, by submitting his phone number in the gym membership application, he revoked his consent when he canceled the gym membership.

Again the Ninth Circuit disagreed. Relying on sister circuit and lower court decisions, the Court held that although consumers may revoke their prior express consent, the consumer's gym cancelation was not effective in doing so here. See Osorio v. State Farm Bank, F.S.B., 746 F.3d 1242, 1255-56 (11th Cir. 2014); Gager v. Dell Fin. Servs., LLC, 727 F.3d 265, 272-73 (3d Cir. 2013).

The Ninth Circuit noted that courts have given three main reasons for concluding that consumers may revoke their consent under the TCPA.

First, such a holding is consistent with the common law principle that consent is revocable. See Gager, 727 F.3d at 270. Second, allowing consumers to revoke their prior consent is consistent with the purpose of the TCPA, which is intended to protect consumers from unwanted automated telephone calls and messages aligns with the purpose of the TCPA. Id. at 271; Osorio, 746 F.3d at 1255. Third, the FCC has implied that consumers may revoke their consent. See SoundBite Communications, Inc., 27 F.C.C. Rcd. 15391, 15398 ¶ 13.

Here, the Ninth Circuit concluded that revocation of consent must be clearly made and must express a desire not to be called or texted.

The Court noted that, when the plaintiff canceled his gym membership, he did not clearly express his desire not to receive further text messages.  Accordingly, the Ninth Circuit held that he did not revoke his consent, and affirmed the trial court's grant of summary judgment for the companies on their affirmative defense that the consumer consented to receive the text messages at issue here.

The Ninth Circuit then addressed the consumer's California statutory claims.

The plaintiff alleged that the companies violated California Business and Professions Code § 17538.41, which provides that entities which conduct business California may not transmit, or cause to be transmitted, a text message advertisement to mobile telephones. Cal. Bus. & Prof. Code § 17538.41.

The plaintiff also alleged that the companies violated California Business and Professions Code § 17200, which provides remedies for "any unlawful, unfair or fraudulent business act or practice."

The Ninth Circuit rejected these allegations, holding that under California law, the consumer did not have standing to bring either of these statutory claims.

Both relevant sections of the consumer's California claims may only be prosecuted by a person who has suffered injury in fact and has lost money or property as a result of the unfair competition. See Cal. Bus. & Prof. Code § 17535; Cal. Bus. & Prof. Code § 17204. This economic injury requirement is "more restrictive than federal injury in fact" because it encompasses fewer kinds of injuries. See Kwikset Corp. v. Superior Court, 51 Cal. 4th 310, 246 P.3d 877, 885, 886 (Cal. 2011).

Here, the Ninth Circuit held, the plaintiff could not prove that the text messages caused him to suffer an economic injury that was concrete and particularized and actual or imminent. See Kwikset, supra, 246 P.3d at 886.

Although the plaintiff argued that he was charged for the text messages sent by the companies, the Court noted that he had an unlimited text messaging plan in which regardless of how many text messages the consumer received, he still paid the same monthly fee.

The plaintiff nevertheless contended that he was still charged for the texts because every text message he received ultimately affected his cellular telephone provider's bundled pricing, but the Court disagreed, because that this argument was hypothetical and conjectural.

The Ninth Circuit therefore held that because the consumer failed to demonstrate that any price increase was caused by the companies' conduct, he did not show and could not demonstrate any economic injury.  Accordingly, the Ninth Circuit held that the consumer lacked standing to bring his claim under California Business and Professions Code §17538.41 and § 17200.

In sum, the Ninth Circuit affirmed the trial court's grant of summary judgment in favor of the companies on all claims.


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

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Friday, February 10, 2017

FYI: Cal App Ct Rejects Borrower's HBOR "Dual Tracking" and SPOC Allegations

The Court of Appeals of California, Second Appellate District, recently held that a borrower failed to state a cause of action for alleged violations of the "dual tracking" and "single point of contact" provisions of California's Homeowners Bill of Rights (HBOR, Calif. Civ. Code, '§§ 2923.6, 2923.7) because:

(1) the borrower did not allege acceptance of a loan modification agreement within 14 days after receiving it; and
(2) the borrower's allegations demonstrated that the servicer assigned a customer service representative to process the loan modification application.

The Court also dismissed the borrower's allegations of lack of standing to foreclose, illegal substitution of trustee, and fraud as meritless and held that the doctrine of res judicata applied to the borrower's new theory of wrongful foreclosure which was premised on the same primary right as past litigation that had resulted in final judgments allowing foreclosure proceedings to go forward.

Of note, the Court prefaced its ruling by stating:

"'The purpose of the law of contracts is to protect the reasonable expectations of the parties.' (Ben-Zvi v. Edmar Co. (1995) 40 Cal.App.4th 468, 475.) This principle applies to the law of 'mortgages.'  A person who borrows money from a bank to purchase or refinance a home has a reasonable expectation that the bank will fund the loan. The bank has a reasonable expectation that monthly mortgage payments will be made. Here, appellant's reasonable expectations were met. The bank's were not. Nonpayment of the mortgage for approximately eight years while the borrower remains in possession is an egregious abuse. Respondent argued, and the trial court agreed, that appellant is 'gaming the system.' The game is over."

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

This lawsuit was the fifth in a series of state and federal lawsuits brought by a borrower since 2009 challenging a servicer's efforts to foreclose upon his real property. The lawsuits concerned similar allegations of claimed wrongful foreclosure procedures and the bank's standing to foreclose.

In 1992, the borrower acquired residential property. He subsequently obtained a $500,000 loan from a lender, and executed an adjustable interest rate promissory note in favor of the lender. A deed of trust was recorded to secure the loan.

Sixteen years later, the Federal Deposit Insurance Corporation, as receiver for the lender, and a bank entered into a Purchase and Assumption Agreement whereby the bank purchased all right, title, and interest in the assets of the lender. The agreement also stated that the bank specifically purchased all mortgage servicing rights and obligations of the lender.

A year later, in 2009, the borrower defaulted on the loan, and the bank's foreclosure trustee recorded a notice of default and a notice of trustee's sale.

Before the foreclosure sale, the borrower filed a complaint against the foreclosure trustee and the bank, alleging that the notice of default was not properly recorded, that it was not filed in compliance with Cal. Civil Code section 2923.5, and that the notice of sale was not properly recorded. The trial court dismissed the action without leave to amend.  The borrower appealed and the Court of Appeal, affirmed the trial court's judgment of dismissal.

In 2011, the foreclosure trustee recorded a second notice of trustee's sale. The borrower filed a second action against the foreclosure trustee, alleging that the notice of default was defective and that the bank violated section 2923.52 by giving premature notice of sale. The trial court dismissed this action. The borrower appealed, and the Court of Appeal affirmed the trial court's judgment of dismissal.

In 2012, the foreclosure trustee recorded another notice of trustee's sale. In response, the borrower filed a third lawsuit against the bank, this time in federal court. In part, he repeated allegations made in his previous state court cases regarding the misspelling of his first name. The borrower also challenged bank's right to nonjudicial foreclosure.

The trial court granted the bank's motion to dismiss the action without leave to amend.  The borrower appealed, and the U.S. Court of Appeals for the Ninth Circuit affirmed the dismissal without leave to amend. See Gillies v. JPMorgan Chase Bank N.A. (Gillies III) (9th Cir. 2016) 644 Fed.Appx. 716.

In 2015, a new foreclosure trustee recorded a notice of trustee's sale setting a foreclosure sale of the property. The borrower responded by filing yet another complaint alleging violations of the California Homeowners Bill of Rights (HBOR), lack of standing to foreclose, unlawful substitution of trustee, fraud, injunctive relief, and damages. He also obtained a temporary restraining order and filed an application for a preliminary injunction.

Once again, the bank demurred, asserting that the borrower's allegations did not state facts sufficient to constitute a cause of action. The trial court sustained the demurrer without leave to amend, vacated the temporary restraining order, denied the borrower's request for a preliminary injunction, and dismissed the borrower's action. The borrower appealed again,

For his first cause of action, the borrower alleged that the bank violated the "dual-tracking" prohibition of HBOR, Cal. Civil Code ' 2923.6 (c), by proceeding with the foreclosure while his loan modification application was pending. He also alleged that the bank did not assign "a single point of contact," as required by ' 2923.7 (a).

As you may recall, Cal. Civ. Code § 2923.6(c)(2) permits a "mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent" to record a notice of default or notice of sale or conduct a trustee's sale if a borrower does not accept a first lien loan modification offer within 14 days of the offer.

Cal. Civ. Code § 2923.7(a) requires that "[u]pon request from a borrower who requests a foreclosure prevention alternative, the mortgage servicer shall promptly establish a single point of contact and provide to the borrower one or more direct means of communication with the single point of contact."

The Court of Appeal rejected the borrower's arguments, noting that the allegations of his complaint belied his contention that the bank violated HBOR, because he did not allege that he accepted the loan modification during the four month period after he received the modification agreement and before the servicer recorded the notice of sale. 

In addition, the Appellate Court held that the borrower's allegations demonstrated that the bank assigned a customer service representative to whom the borrower submitted his loan modification application.

For his second cause of action, the borrower alleged that the bank lacked standing to foreclose because he alleged that the note and deed of trust were sold to a third party before the bank assumed the assets of the lender.

The Court of Appeal, taking judicial notice of the agreement between the bank and the Federal Deposit Insurance Corporation, disagreed. It dismissed the borrower allegations as speculation with no reasonable basis.

For his third cause of action, the borrower alleged that the bank was not the beneficiary of his trust deed and could not substitute the servicer as trustee to foreclose his property.

Again, the Court of Appeal disagreed, holding that it was beyond dispute that the bank succeeded to the lender's interest as beneficiary, and affirming the trial court's conclusion that that the borrower did not state a cause of action regarding the substitution of trustee.

In his fourth cause of action, the borrower alleged that the bank committed fraud on each occasion that it noticed a trustee's sale by misstating his name although he admitted that the misspelling was a clerical error.

The Appellate Court concluded that the allegation of fraud did not state a cause of action, observing no reasonable person would be confused by this minor typographical error. It noted that the notices contained the street address of the property and correctly spelled the borrower's surname.

Thus, the Appellate Court held that the trial court properly denied the borrower's motion for a preliminary injunction.

The Court also rejected the borrower's arguments concerning his new theory of wrongful foreclosure, noting that it was the same primary right that the borrower had always claimed and was precluded by the principle of res judicata. See Weikel v. TCW Realty Fund II Holding Co. (1997) 55 Cal.App.4th 1234, 1245.

By now, the borrower had lost three superior court cases, a federal case in the United States District Court, an appeal in the Ninth Circuit Court of Appeals. He also lost an emergency petition for relief in the Ninth Circuit as well as in the United States Bankruptcy Court.

The Court of Appeal admonished the borrower, who was an attorney, for not complying with lawful court orders, and continuing to tax the legal system in an attempt to retain possession of his house.

The Court observed that no litigant has an entitlement to file a lawsuit seeking relief from an alleged wrong and then not follow the court's ruling denying relief. By submitting to the court to resolve a dispute, a litigant who is willing to abide by an order granting relief must be willing to abide by an order denying relief. The sanctity and integrity of a final judgment must be honored or there is no such thing as a final judgment. See People v. Barragan (2004) 32 Cal.4th 236, 255.

The Court of Appeal therefore affirmed the trial court's dismissal of the complaint.


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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