Tuesday, February 24, 2015

FYI: 9th Cir Holds Any "Private Attorney General" Interest of Putative Class Rep After Voluntary Settlement of Individual Claims Not Enough for Article III Standing

The U.S. Court of Appeals for the Ninth Circuit recently dismissed an appeal of a putative class action as moot, holding that when a putative class representative voluntarily settles his individual claims, any continuing “private attorney general” interest that the putative class representative may have retained does suffice to meet Article III standing requirements.


A consumer (“Consumer”) brought a class action against a vendor (“Vendor”) alleging several causes of action, including breach of contract, breach of the implied covenant of good faith and fair dealing, violations of the California Consumers Legal Remedies Act (“CLRA”) and violations of the California Unfair Competition Law (“UCL”). 

Generally, Consumer alleged that Vendor arbitrarily denied claims made by him and a putative class of similarly situated policy holders of Vendor warranty plans, or otherwise cheated him and the putative class out of benefits owed under their policies with Vendor.

Following several years of motion practice, the district court denied Consumer’s motion for class certification and later granted Vendor’s motion for partial summary judgment on Consumer’s claims under the CLRA and UCL. 

After the district court granted partial summary judgment in Vendor’s favor, the parties reached a settlement agreement and filed a joint motion and stipulation for dismissal with the district court.  In that motion and stipulation for dismissal, the parties agreed to dismiss with prejudice Consumer’s individual claims in exchange for the full amount of those claims.  The parties also agreed to dismiss without prejudice “any class action claims and representative claims” under the UCL, one of several sets of claims alleged in Consumer’s complaint. 

However, the joint motion and stipulation for dismissal expressly reserved Consumer’s right to appeal the Court’s order denying class certification, the order precluding the Plaintiff from pursuing injunctive relief under the UCL, and any other order in the case.

The Ninth Circuit noted that after the rulings in Vendor’s favor and before Consumer’s appeal, the parties settled all of Consumer’s individual claims.  As such, the Court noted, Consumer expressly released all of his claims against Vendor, and even though Consumer expressly retained his right to appeal the putative class claims, that fact made no difference.

The Ninth Circuit held that the test for whether an appeal is moot after the putative class representative voluntarily settles his individual claims is whether the class representative retains a personal stake in the case.  See Narouz v. Charter Commc’ns, LLC, 591 F.3d 1261, 1264 (9th Cir. 2010). 

Consumer argued that he had a personal stake in getting the class certified because he maintained an interest in the matter as a private attorney general.  However, the Ninth Circuit noted that its case law required the putative class representative to maintain a financial interest in class certification.  See, e.g., Narouz (holding that a financial interest existed where putative class representative could receive a $20,000 enhancement fee if the court were the court to approve the settlement); Evon v. Law Offices of Sidney Mickell, 688 F.3d 1015 (9th Cir. 2012) (holding that financial interest remained where putative class representative could recover attorney’s fees).

The Ninth Circuit held that, under the terms of his settlement agreement, Consumer settled attorney’s fees and costs as well as his damages, and Consumer could not get a penny more.  Thus, the Court held, Consumer had no financial interest in the class action. 

Next, the Ninth Circuit rejected Consumer’s arguments relying on Pitts v. Terrible Herbst, Inc., 653 F.3d 1081 (9th Cir. 2011) and U.S. Parole Comm’n v. Geraghty, 445 U.S. 388 (1980).  The Court concluded that both cases were inconsistent with its analysis because the putative class representative’s claims expired involuntarily. The Court noted that, when the putative class representative’s claims expired involuntarily, the theoretical interest akin to a private attorney general could potentially suffice to meet Article III requirements. 

However, when a putative class representative voluntarily settled his individual claims, the Ninth Circuit held that the “private attorney general” interest does not suffice.

Accordingly, the Ninth Circuit dismissed Consumer’s appeal as moot.



Eric Tsai
McGinnis Wutscher 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
 

Friday, February 20, 2015

FYI: 9th Cir Holds Undersecured, Non-Recourse Mortgage Loans Count Toward Statutory "Aggregate Debts" Limitation For Chpt 12 BK

The U.S. Court of Appeals for the Ninth Circuit recently affirmed the dismissal of a debtor’s Chapter 12 bankruptcy petition, where the debtor’s aggregate debts exceeded the statutory limitation for Chapter 12 eligibility. 

In so ruling, the Ninth Circuit determined that “aggregate debts” include the unsecured portions of the undersecured mortgage loans that remain enforceable against the debtor’s property, even though the loans are not enforceable against the debtor personally.


As you may recall, “[o]nly a family farmer . . . with regular annual income may be a debtor under chapter 12.”  11 U.S.C. §109(f).  In addition, Section 101(18)(A) further limits eligibility to be a chapter 12 debtor by mandating that the debtor’s aggregate debts not exceed a statutory maximum and that those debts arise mostly out of the farming operation. 11 U.S.C. § 101(18)(A).

In 1997, the Debtor attempted to establish a vineyard on her ranch. In 2006, however, her efforts failed, and she defaulted on three loans.

In July 2010, the Debtor filed a voluntary petition under chapter 7 of the Bankruptcy Code. Thereafter she received a discharge, which released her from personal liability for the unsecured claims associated with the properties. See 11 U.S.C. § 727(b).  But the creditors retained the “right to enforce a valid lien, such as a mortgage or security interest, against the debtor's property after the bankruptcy.”

In March 2011, the Debtor filed a second voluntary petition, this time under chapter 12 of the Code, which contains special provisions for family farmers whose “aggregate debts” do not exceed a statutory dollar amount. See 11 U.S.C. §§ 101(18)(A), 109(f).

At the time of the second petition, the statutory limit was $3,792,650, and the appraised value of the Debtor's properties totaled about $1.6 million, but the amount of the liens encumbering the properties totaled about $4.1 million. Thus, on the schedules that she attached to her petition, the Debtor listed debts of $4.1 million; of that amount, $2.5 million was unsecured.

The bankruptcy court dismissed the Debtor's petition on the ground that she had “aggregate debts” of $4.1 million, exceeding the statutory limitation for chapter 12 eligibility.

The Debtor appealed to the Bankruptcy Appellate Panel.  The Debtor contended that the unsecured portion of her secured creditor's claims should not be included in her “aggregate debts” and, therefore, should not bar chapter 12 eligibility, because her personal liability for those claims had been discharged in her earlier chapter 7 case.  The Debtor argued that because the secured portions of her creditors’ claims were limited to the value of the secured collateral, the value of her “aggregate debts” fell well below the statutory limitation for chapter 12 eligibility.

The Bankruptcy Appellate Panel rejected the Debtor’s arguments and affirmed the bankruptcy court.  The Bankruptcy Appellate Panel concluded that “obligations enforceable against the debtor's property but for which the debtor has no personal liability are nonetheless ‘claims’ and ‘debts’ within the meaning of the Bankruptcy Code.” In re Davis, 2012 Bankr. LEXIS 3631, 2012 WL 3205431, *5.

As you may recall, the bankruptcy code defines a “debt” as “liability on a claim.”  11 U.S.C. § 101(12).  In turn, the bankruptcy code defines “claim” to mean: 

(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right of payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.

11 U.S.C. § 101(5).

On appeal, the Ninth Circuit noted that the Supreme Court had found that “the meanings of ‘debt’ and ‘claim’ [were intended by Congress to] be coextensive.” Pa. Dep't of Pub. Welfare v. Davenport, 495 U.S. 552, 558, 110 S. Ct. 2126, 109 L. Ed. 2d 588 (1990).

The Ninth Circuit also noted the Supreme Court’s decision in Johnson v. Home State Bank, 501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991), wherein the Supreme Court determined that a “claim” can be an enforceable obligation against either the debtor or the debtor's property.  In Johnson, the Supreme Court had considered the related question of whether a debtor must include a mortgage lien in a chapter 13 reorganization plan after the obligation secured by the mortgage had been discharged in an earlier chapter 7 proceeding. 

The Supreme Court reasoned that “[e]ven after the debtor's personal obligations have been extinguished, the mortgage holder still retains a ‘right to payment’ in the form of its right to the proceeds from the sale of the debtor's property. Alternatively, the creditor's surviving right to foreclose on the mortgage can be viewed as a ‘right to an equitable remedy’ for the debtor’s default on the underlying obligation. Either way, there can be no doubt that the surviving mortgage interest corresponds to an ‘enforceable obligation’ of the debtor.”

The Ninth Circuit determined that “claim” is broadly defined to include any right to payment or any right to an equitable remedy giving rise to a right of payment.  The Ninth Circuit found that a creditor’s claim remains a “debt” so long as it is enforceable against either the debtor or the debtor's property. 

Accordingly, the Ninth Circuit held that Debtor's “aggregate debts” include the unsecured portions of the undersecured mortgage loans that remain enforceable against the Debtor’s property, even though the loans are not enforceable against the Debtor personally.

In so ruling, the Ninth Circuit also relied upon its decision in Quintana v. Commissioner, 107 B.R. 234, 235-36 (B.A.P. 9th Cir. 1989), aff’d, Quintana II, 915 F.2d 513.  In Quintana, the debtors had borrowed $1 million, which was secured by real property valued at $600,000. The debtors defaulted on the loan, so the creditor brought an action in Idaho state court for a decree of foreclosure and an order of sale. Id., 235. In that action, the creditor waived its right to seek a post-sale deficiency judgment. Id., 236.

On appeal, the Ninth Circuit determined that the creditor's decision to waive its right to seek a deficiency judgment did not limit the value of the debtors’ “aggregate debts” to the value of the secured collateral. 

The Ninth Circuit in Quintana observed that “[a]lthough, as a practical matter, [the creditor] will only be able to collect the value of the property, it has the right to payment of the entire obligation if under some circumstance, the property is sold for more than its present value.” Id., 239.

Accordingly, the Ninth Circuit affirmed the dismissal of the Debtor’s Chapter 12 bankruptcy petition.



Eric Tsai
McGinnis Wutscher 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
 

Thursday, February 12, 2015

FYI: Cal App Ct Rejects Challenges to Notice of Default, Based on Timing of Substitution of Trustee and Lack of Affidavit of Mailing

The California Court of Appeal, First District, recently affirmed a trial court’s dismissal of allegations that a notice of default was void.  The Appellate Court rejected the borrowers’ argument that a notice of default is void when executed by a successor trustee prior to that successor trustee having been substituted in as trustee under the deed of trust. 

The Appellate Court also rejected the borrowers’ contention that the recorded substitution of trustee was void because it did not include an affidavit of mailing showing it was mailed to the trustee of record or other persons, if any, who may have requested notice of default and notice of sale, explaining that parties to a deed of trust may agree to a form of substitution of trustee other than that provided in Calif. Civil Code section 2934a. 

A copy of the opinion is available at: http://www.courts.ca.gov/opinions/documents/A139055.PDF

As you may recall, in order to initiate the foreclosure process in California, “[t]he trustee, mortgagee, or beneficiary, or any of their authorized agents” must first record a notice of default. See Calif. Civ. Code § 2924(a)(1).  The notice of default must identify the deed of trust “by stating the name or names of the trustor or trustors” and provide a “statement that a breach of the obligation for which the mortgage or transfer in trust is security has occurred” and a “statement setting forth the nature of each breach actually known to the beneficiary and of his or her election to sell or cause to be sold the property to satisfy [the] obligation . . . that is in default.” Calif. Civil Code § 2924(a)(1)(A)-(C).)

In 2005, the borrowers obtained a loan for $396,200 to purchase a home.  The borrowers executed and recorded a deed of trust in favor of the lender as the beneficiary.  The loan and deed of trust were subsequently assigned to another entity (“Bank”).

On September 7, 2010, the successor trustee executed and recorded a notice of default against the property.  However, the Bank did not execute a substitution of trustee appointing the successor trustee as the trustee under the deed of trust until September 24, 2010.  And, the substitution of trustee was not recorded until December 9, 2010, the same day that the successor trustee recorded a notice of sale.

On June 6, 2011, the property was sold to the Bank for an amount far less than what was then owed by the borrowers on the loan.

The borrowers filed a complaint to set aside the foreclosure sale.  The borrowers attempted to assert claims for wrongful foreclosure, intentional and negligent fraud, breach of the implied covenant of good faith and fair dealing, intentional infliction of emotional distress, negligence, unfair business practices, cancellation of deed upon sale, quiet title, declaratory relief, wrongful eviction, willful lockout, and injunctive relief. 

The borrowers argued that the foreclosure sale was void because the successor trustee had not been substituted in as trustee at the time it recorded the notice of default and therefore it lacked the authority to initiate the foreclosure proceedings. 

However, the borrowers did not allege that they had tendered, or were ready, willing, and able to tender, the amount owed on the loan at any time between the time the notice of default was recorded in early September and the foreclosure and sale that took place nine months later on June 6, 2011.

The trial court sustained the Bank’s demurrers to the complaint, reasoning that the borrowers failed to state a claim for wrongful foreclosure based on the timing of the successor trustee’s substitution as trustee “because a notice of default can be recorded before a notice of substitution of trustee.”  The trial court further held that where “the alleged wrongful foreclosure is the result of a defect in the required notice, the transaction is voidable, not void” and that in any further amendment to the complaint the borrowers would have to “allege sufficient facts of tender.”

As you may recall, the “traditional method” to challenge a nonjudicial foreclosure sale in California “is a suit in equity . . . to have the sale set aside and to have the title restored.”  Lona v. Citibank, N.A., 202 Cal.App.4th 89, 103 (2011).  Generally, the party contesting the foreclosure must prove:  “(1) the trustee . . . caused an illegal, fraudulent, or willfully oppressive sale of real property pursuant to a power of sale in a . . . deed of trust; (2) the party attacking the sale suffered prejudice or harm; and (3) the trustor . . . tenders the amount of the secured indebtedness or was excused from tendering.”  West v. JPMorgan Chase Bank, N.A., 214 Cal.App.4th 780, 800 (2013).

However, trustors attacking a void deed are “not required to meet any of the burdens imposed when, as a matter of equity, a party wishes to set aside a voidable deed.”  Dimock v. Emerald Properties, 81 Cal.App.4th 868, 878 (2000).  More specifically, the “distinction between a ‘void’ or ‘voidable’ nonjudicial foreclosure sale is simply whether the borrower, who is in default, must allege and prove a prerequisite tender of the amount due under the deed of trust and otherwise to show prejudice resulting from the defect, omission, or failure, before the sale will be set aside.  In deciding whether to require a showing of tender and prejudice, courts appear to focus on the nature and severity of the defect, omission or failure and its practical effect on the foreclosure process.”

The Appellate Court affirmed the trial court’s order of dismissal, and rejected the borrowers’ argument that the sale was void because the successor trustee did not yet hold the title of “trustee” as claimed on the notice of default, and was only formally named as trustee several weeks later, when the Bank executed a substitution of trustee naming the successor trustee as the trustee.

The Appellate Court first noted that a substitution of attorney may occur after a notice of default is recorded, but before a notice of sale is recorded.  See Calif. Civil Code § 2934a(c).  The Court found that the Bank complied with this procedure as authorized by the Legislature.  Accordingly, the Appellate Court determined that the ensuing trustee’s sale not either voidable or void.

The Appellate Court also determined that the successor trustee had the authority to execute the notice of default as the Banks’s agent.  The Court noted that Section 2924 authorizes a notice of default to be recorded by “the trustee, mortgagee, or beneficiary, or any of their authorized agents.”  The Court noted that nothing in the borrowers’ pleadings or judicially noticed documents suggests that the successor trustee was not authorized to act for the Bank, the beneficiary under the deed of trust.  See Calif. Civil Code § 2924(a)(1).

The Court held that the successor trustee’s substitution as trustee, which was executed within weeks of the successor trustee’s issuing the notice of default, “unmistakably evidences” an intent by the Bank to ratify the successor trustee’s authority to initiate the foreclosure proceedings.

Therefore, in order to avoid the effect of this ratification, the borrowers, as third parties, would be required to prove they were prejudiced by the successor trustee’s unauthorized actions. See Calif. Civil Code § 2313; Archdale v. American Internat. Specialty Lines Ins. Co., 154 Cal.App.4th 449, 480 (2007).  The Appellate Court noted that the borrowers had not alleged they suffered any prejudice.

The Appellate Court also rejected the borrowers’ argument that the recorded substitution of trustee, which is a single-page document, did not include an affidavit of mailing showing it was mailed to the trustee of record or other persons, if any, who may have requested notice of default and notice of sale under section 2924b. 

According to the borrowers, this failure to include an affidavit of mailing supposedly constituted a clear violation of section 2934a, subdivision (c), which supposedly invalidates the substitution of trustee.

In rejecting this argument, the Appellate Court explained that parties to a deed of trust may agree to a form of substitution of trustee other than that provided in Calif. Civil Code section 2934a.  See Jones v. First American Title Ins. Co., 107 Cal.App.4th 381, 390 (2003).  The Court then noted that the deed of trust entered into by the parties gave the Bank the option of substituting a successor trustee without the need to confirm that substitution with an affidavit:   “Lender, at its option, may from time to time appoint a successor trustee to any Trustee appointed hereunder by an instrument executed and acknowledged by Lender and recorded in the office of the Recorder of the county in which the Property is located.”

Finally, the Appellate Court held that the foreclosure sale was, at worst, voidable, not void.  The Court noted that the primary purpose of a notice of default is to provide notice of the amount in arrears and an opportunity to cure the default.  Therefore, in order for a defect in the notice of default to be material, it must cause prejudice.  Knapp v. Doherty, 23 Cal.App.4th 76, 99 (2004).

Accordingly, the Appellate Court affirmed the order of dismissal because the borrowers had not alleged that they were misled or prejudiced by the notice of default or that the information stated in the notice of default was erroneous.



Eric Tsai
McGinnis Wutscher 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