FYI: 9th Cir Holds "Sue or Be Sued" Clause in Fannie Mae's Charter Provides Federal Question Jurisdiction Over Claim By or Against Fannie Mae

The U.S. Court of Appeals for the Ninth Circuit recently held that Federal National Mortgage Association’s (“Fannie Mae”) federal corporate charter confers federal question jurisdiction over claims brought by or against Fannie Mae.

A copy of the opinion is available at:http://cdn.ca9.uscourts.gov/datastore/opinions/2014/10/02/10-56068.pdf

The plaintiffs brought two lawsuits in federal district court raising state and federal law claims against Fannie Mae following the initiation of foreclosure proceedings.  The district court dismissed both cases. 

Thereafter, plaintiffs filed a lawsuit in California state court, alleging state law claims.  Fannie Mae removed to federal court, arguing that the sue-and-be-sued clause in its federal corporate charter conferred federal question subject matter jurisdiction.  The plaintiffs filed a motion to remand, which the district court denied.  The district court later dismissed all of plaintiffs’ claims as barred by res judicata and collateral estoppel.

On appeal, the plaintiffs argued that the district court lacked subject matter jurisdiction.  The Ninth Circuit disagreed, and held that under the rule announced in American National Red Cross v. S.G., 505 U.S. 247 (1992), Fannie Mae’s federal charter confers federal question jurisdiction over claims brought by or against Fannie Mae. 

The sue-and-be-sued clause in Fannie Mae’s charter authorizes Fannie Mae “to sue and be sued, and to complain and to defend, in any court of competent jurisdiction, State or Federal.” 12 U.S.C. §1723a(a).

The Ninth Circuit, held that this language confers federal question jurisdiction over claims brought by or against Fannie Mae. 

In so ruling, the Ninth Circuit relied on Red Cross.  In Red Cross, the United States Supreme Court gave a clear rule for construing sue-and-be-sued clauses for federally chartered corporations.  The Court held that “a congressional charter’s ‘sue and be sued’ provision may be read to confer federal court jurisdiction if, but only if, it specifically mentions the federal courts.”  505 U.S. at 255.

The question in Red Cross was whether the American National Red Cross’s federal charter conferred federal question jurisdiction over suits brought by or against the Red Cross.  The sue-and-be-sued clause in the Red Cross’s charter authorized the Red Cross “to sue and be sued in courts of law and equity, State or Federal, within the jurisdiction of the United States.” Id. at 248.  The Court held that the clause conferred federal question jurisdiction.  Id. at 257.

As the Fannie Mae sue-and-be-sued clause contains a specific reference to federal court, it too confers federal question jurisdiction

Accordingly, the Ninth Circuit affirmed the District Court’s ruling in favor of Fannie Mae.

Eric Tsai
McGinnis Wutscher Beiramee LLP 
Emerald Plaza
402 West Broadway, Suite 400
San Diego, CA 92101
Direct: (619) 955-6989

Fax: (866) 581-9302

Mobile: (714) 600-6000

Email: etsai@mwbllp.com

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FYI: 9th Cir Allows Atty Fees for Violation of Automatic Stay to Establish and Remedy the Violation, Affirms Emotional Distress and Punitive Damages Awards

The U.S. Court of Appeals for the Ninth Circuit recently held that a debtor seeking damages for violation of the automatic stay is entitled to attorneys’ fees under 11 U.S.C. § 362(k), but may recover fees only up to the time the stay violation ended and the fees must be related to remedying the stay violation itself. 

The Court held that “[t]he bankruptcy laws do not permit a stay violator to undermine the remedies available under § 362(k) by forcing a bankruptcy petitioner to accept a conditional offer in lieu of pursuing fair compensation and attorneys’ fees.”

A copy of the opinion is available at: http://cdn.ca9.uscourts.gov/datastore/opinions/2014/09/12/13-35291.pdf

The borrower (“Debtor”) obtained a $575 payday loan from a lender (“Creditor”) secured by a post-dated check.  Debtor filed chapter 7 bankruptcy without directly advising Creditor, and listed the Creditor’s unsecured claim in her petition.  After a number of supposedly harassing phone calls to Debtor’s place of employment, the Creditor allegedly used an electronic funds transfer to debit Debtor’s bank account for the amount due, overdrawing her account by $816.88, including bank charges.

Debtor filed a motion for sanctions in the bankruptcy court, alleging that Creditor willfully violated the automatic stay provision of the bankruptcy code, 11 U.S.C. § 362, and sought a return of the funds and overdraft fees, emotional distress and punitive damages, and attorney’s fees.

Prior to trial, the Creditor denied any liability and offered to repay the loan amount, bank fees, and three hours of attorneys’ fees, for a total of $1,445.  Debtor rejected the settlement offer.

The bankruptcy court found that the Creditor willfully violated the automatic stay, and awarded emotional distress damages of $12,000 as well as the $575 loan amount, $370 in bank fees, $12,000 in punitive damages, and $2,538.55 in attorneys’ fees, for a total of $27,483.55.  The bankruptcy court determined that Debtor was entitled to attorneys’ fees incurred up to the date of the Creditor’s settlement offer only, because the offer effectively terminated the stay violation.

Creditor appealed the bankruptcy court’s emotional distress, punitive damages, and fee awards.  After two rounds of appeals, the district court upheld the award for emotional distress and punitive damages, but denied Debtor’s attorneys’ fees incurred as a result of the appeal.  In so ruling, the district court held that those fees were not incurred in an effort to enforce the stay, but in pursuit of a damages award for a stay violation.

On subsequent appeal to the Ninth Circuit, the Court began by analyzing the award for emotional distress and punitive damages.

As you may recall, 11 U.S.C § 362(k) permits an award of emotional distress damages if the bankruptcy petitioner “(1) suffer[s] significant harm, (2) clearly establish[es] the significant harm, and (3) demonstrate[s] a causal connection between that significant harm and the violation of the automatic stay.”  In re Dawson, 390 F.3d 1139, 1149 (9th Cir. 2004).

In addition, Section 362(k)(1) provides for punitive damages upon “showing of reckless or callous disregard for the law or rights of others.”  In re Bloom, 875 F.2d 224, 228 (9th Cir. 1989). 

The Ninth Circuit held that the district court did not err in confirming the emotional distress award, because the record sufficiently established that the Debtor suffered emotional harm from the collection calls to her place of employment. 

Similarly, the Ninth Circuit held that the bankruptcy court applied the correct legal standard in awarding punitive damages, and supported its award with findings that Creditor failed to provide policies and procedures or employee training regarding debt collection following a bankruptcy filing.

Next, the Court turned to the issue of attorneys’ fees.  In Sternberg v. Johnston, the Ninth Circuit established a brightline rule that attorneys’ fees incurred in an attempt to collect damages are not recoverable once the stay violation ended.  Sternberg v. Johnston, 595 F.3d 937, 948 (9th Cir. 2010).  The issue before the Court is whether the Creditor’s settlement offer had terminated the stay violation. 

In a recent decision, the Ninth Circuit permitted recovery of attorneys’ fees incurred in defending an appeal from a bankruptcy court decision finding a violation of the automatic stay.  See In re Schwartz-Tallard, No. 12-60052, 2014 WL 4251571 (9th Cir. August 29, 2014).  The debtor in Schwartz-Tallard was entitled to fees because she was forced to defend the appeal to validate the bankruptcy court’s ruling that a violation of the stay had occurred, and to preserve her right to collect the pre-remedy damages awarded by the bankruptcy court.  Id. at *3. 

Similarly, here, the Ninth Circuit found that the bankruptcy court abused its discretion when it determined that the Creditor’s settlement offer marked the end of the stay violation.  Relying on In re Abrams, 127 B.R. 239 (B.A.P. 9th Cir. 1994), the Court explained that the Creditor had an affirmative obligation to return any property it had wrongfully seized from the bankruptcy estate.  Instead of returning that property with no strings attached, the Creditor denied that it violated the stay and issued a settlement offer with implied conditions.

Put in another way, the Court explained that the Debtor had to proceed with the litigation in order to establish a violation of the automatic stay.  The fees the Debtor incurred after the settlement offer were incurred to put an end to the violation of the automatic stay.  In the Court’s own words, “[p]ermitting the violator to short-circuit the remedies available under § 362(k)(1) by making a conditional offer to return the property wrongfully seized in violation of the automatic stay would undermine the remedial scheme of § 362(k).”

Relying on In re Campion, 294 B.R. 313, 315, 318 (B.A.P. 9th Cir. 2003), where the Ninth Circuit declined to find that an automatic stay violation is remedied by a Rule 68 offer of judgment, the Court determined that the district court had erred in finding the Creditor’s settlement offer was an actual “tender.”  The Creditor did not return the property it had wrongfully seized at the time of its offer.  Thus, the Ninth Circuit concluded that the stay violation actually terminated on the date when the bankruptcy court found a violation of the automatic stay, and the Debtor was entitled to her fees up to that date.

Lastly, the Ninth Circuit upheld the bankruptcy refusal to issue a sanctions award because the record supported its finding that the Creditor’s approach to the bankruptcy litigation was not in bad faith.

Accordingly, the Ninth Circuit affirmed the order on emotional distress, punitive damages, and sanctions.  The Court reversed the order affirming the award of attorneys’ fees, and remanded for a recalculation of the fees.

Eric Tsai
McGinnis Wutscher Beiramee LLP 
Emerald Plaza
402 West Broadway, Suite 400
San Diego, CA 92101
Direct: (619) 955-6989

Fax: (866) 581-9302

Mobile: (714) 600-6000

Email: etsai@mwbllp.com

Admitted to practice law in California, Nevada and Oregon

          McGinnis Wutscher Beiramee LLP

CALIFORNIA   |   FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                 www.mwbllp.com

FYI: Cal App Ct Reverses Dismissal of Borrower's Breach of Contract and Fraud Claims Relating to HAMP Mod, Including Those Against Servicer's Employees

The California Court of Appeal, Fourth District, recently reversed the dismissal of borrowers’ allegations that a loan servicer breached a contract to modify the borrowers’ loan, as the borrowers were making plan payments under a HAMP trial period plan agreement when the servicer foreclosed. 

In so ruling, the Fourth District held that the borrowers stated claims for breach of contract and fraud, including against the servicer’s employees who made the alleged misrepresentations.

A copy of the opinion is available at: http://www.courts.ca.gov/opinions/documents/G050049.PDF.

In 2009, the borrowers (Borrowers) applied to have their loan modified in 2009.  In November 2011, the servicer (Servicer) allegedly informed Borrowers that they had been approved for a trial period plan under a Fannie Mae modification program.

According to Borrowers’ complaint, they were told that all they had to do was make three monthly payments of $957.43, starting on December 1, 2011.  Supposedly, if they made the payments, then they would move to the next step – verification of financial hardship. If they passed that test, they alleged their loan would be permanently modified.

Borrowers allegedly made the first two payments for December 2011 and January 2012.  A representative of Servicer allegedly told them in December that Servicer had received the December and January payments and that foreclosure proceedings had been suspended.  However, toward the end of January 2012, the subject property was sold at a trustee’s sale.

Borrowers filed suit in pro persona (pro se).  After a series of demurrers and amended complaints, the trial court dismissed the action.  The trial court reasoned that the trial period plan agreement was not a binding loan modification agreement, and Borrowers had no right to any guaranteed loan modification.

The Fourth District reversed the dismissal of Borrowers’ claim for breach of contract.  The Fourth District held, “[I]f the borrower complied with all terms of the TPP Agreement – including making all required payments and providing all required documentation – and if the borrower’s representations remained true and correct, the servicer had to offer a permanent modification.”  citing West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 788.

The Fourth District reasoned that by taking “TARP money, lenders had to follow Treasury Department guidelines for restructuring loans.  [The lenders do] not have discretion to set their own criteria for handing out loan modifications.”

The Fourth District also reversed the trial court’s dismissal of Borrowers’ claims for promissory fraud, fraudulent misrepresentation, and promissory estoppel.

As you may recall, a cause of action for promissory fraud requires the plaintiff to allege that the promissor did not intend to perform at the time the promise was made, that the promise was intended to deceive and induce reliance, that it did induce reliance, and that this reliance resulted in damages. Lazar v. Superior Court (1996) 12 Cal.4th 631, 637; Building Permit Consultants, Inc. v. Mazur (2004) 122 Cal.App.4th 1400, 1414-1415.

In support of their claim for promissory fraud, Borrowers alleged that Servicer never intended to modify their loan – notwithstanding the representations made in the TPP agreement and those supposedly made by the parade of Servicer representatives who communicated with them – but rather allegedly intended to foreclose all along.

The Fourth District found that these allegations were sufficient to state a claim for promissory fraud.

Borrowers brought their claim for fraudulent misrepresentation against Servicer, Servicer’s CEO, a member of Servicer’s board of directors, and several of Servicer’s employees.

The Fourth District reversed the dismissal with respect to Servicer and its employees who allegedly made the supposed misrepresentations. 

The Appellate Court held that Borrowers had sufficiently pled fraudulent misrepresentation by alleging that representatives of Servicer had supposedly assured them that the payments submitted per the TPP agreement had been received and credited and that the foreclosure proceedings had supposedly been suspended.

With respect to Servicer’s employees who allegedly made the supposed misrepresentations, the Fourth District reasoned that “[i]f a tortious act has been committed by an agent acting under authority of his principal, the fact that the principal thus becomes liable does not, of course, exonerate the agent from liability … The fact that the tortious act arises during the performance of a duty created by contract does not negate the agent’s liability.” citing Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003) 107 Cal.App.4th 54, 68.

The Fourth District did, however, affirm the dismissal of Servicer’s CEO and the member of its board of directors.  The Fourth District found that Borrowers had alleged no facts showing that either of these defendants had personal knowledge of or involvement in any promises or misrepresentations supposedly made to Borrowers.

The Appellate Court also affirmed the dismissal of Borrowers’ claim for an accounting.  A cause of action for accounting requires a showing of a relationship between the plaintiff and the defendant, such a fiduciary relationship, that requires an accounting or a showing that the accounts are so complicated they cannot be determined through an ordinary action at law. (citing Brea v. McGlashan (1934) 3 Cal.App.2d 454, 460.)

Borrowers alleged that Servicer supposedly misapplied the loan payments they made from March 2010 through November 2011 and that there were “surplus” funds left over from the trustee’s sale.

The Appellate Court first determined that the issue of surplus funds had been resolved in another case.  With respect to the supposedly misapplied loan payments, the Fourth District found that “it appears this issue can be folded into the fraud and breach of contract causes of action.”

Generally, “[a]n action for accounting is not available where the plaintiff alleges the right to recover a sum certain or a sum that can be made certain by calculation.” (citing Teselle v. McLoughlin (2009) 173 Cal.App.4th 156, 179.)

Accordingly, the Fourth District affirmed the dismissal of Borrowers’ claim for accounting.

Eric Tsai
McGinnis Wutscher Beiramee LLP 
Emerald Plaza
402 West Broadway, Suite 400
San Diego, CA 92101
Direct: (619) 955-6989

Fax: (866) 581-9302

Mobile: (714) 600-6000

Email: etsai@mwbllp.com

Admitted to practice law in California, Nevada and Oregon

          McGinnis Wutscher Beiramee LLP

CALIFORNIA   |   FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                 www.mwbllp.com