FYI: 9th Cir Upholds Dismissal of False Claims Act Allegations Involving Loans Sold to GSEs

The U.S. Court of Appeals for the Ninth Circuit recently affirmed the dismissal of a federal False Claims Act, 31 U.S.C. §§3729-3733 ("FCA"), lawsuit brought by private citizen plaintiffs against various mortgage lenders and servicers for supposedly making false certifications regarding loans sold to Fannie Mae and Freddie Mac.

In so ruling, the Court held that Fannie Mae and Freddie Mac were not federal instrumentalities for purposes of FCA, 31 U.S.C. § 3729(b)(2)(A)(i).

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

The plaintiff private citizens brought suit under the FCA against various mortgage lenders and servicers alleging that the lenders and servicers supposedly certified mortgage loans purchased by Fannie Mae and Freddie Mac were free of certain home association liens and charges when in fact they were not. 

The plaintiffs alleged that the government sponsored enterprises (GSEs) were federal instrumentalities either under case law or due to the Federal Housing Finance Association's ("FHFA") conservatorship.  As such, the plaintiffs claimed that the allegedly false certifications were made to an "officer, employee, or agent" of the United States in violation of FCA, 31 U.S.C. § 729(b)(2)(A)(i).

The district court dismissed the action, holding that the GSEs were not federal instrumentalities for purposes of FCA, 31 U.S.C. § 3729(b)(2)(A)(i), because the entities are private, albeit sponsored or charted by the federal government.  The plaintiffs appealed.

The Ninth Circuit noted that a "claim" giving rise to liability under the FCA, 31 U.S.C. § 3729(b)(2)(A)(i), requires that a demand or request for payment be "presented to an officer, employee, or agent of the United States."  However, the Court found that the language of 12 U.S.C § 1716b and 12 U.S.C. §1452 illustrates that certain government sponsored entities are indeed private, and not federal instrumentalities. 

The plaintiffs argued that Rust v. Johnson, 597 F.2d 174 (1979), held that one of the GSEs was a federal instrumentality for state/city tax purposes.  However, the Court disagreed and explained that an entity found to be a federal instrumentality for one purpose does not mean the same entity is a federal instrumentality for another purpose. See Kuntz v. Lamar Corp., 385 F.3d 1177, 1185 (9th Cir. 2004), Lewis v. United States, 680 F.2d 1239, 1242-43 (9th Cir. 1982).  Accordingly, the Court distinguished Rust because it did not address the GSEs' status under the FCA.

The Ninth Circuit also disagreed with plaintiffs' argument that the FHFA conservatorship over the GSEs transformed them into federal instrumentalities.  The Court reasoned that the conservatorship gave the FHFA "all the rights, titles, powers and privileges" of the GSEs, not the other way around.

Further, the Court noted that Lebron v. National Railroad Passenger Corp., 513 U.S. 374, did not bolster plaintiffs' argument regarding the effect of the FHFA's conservatorship.  The Court explained that, unlike in Lebron, the conservatorship here did not represent the federal government's retention of permanent authority over the GSEs.

The Court did not opine on whether the plaintiffs could otherwise state a claim under False Claims Act, 31 U.S.C. § 3729(b)(2)(A)(ii), because the plaintiffs did not raise the argument at district level nor on appeal.  However, the Court noted that a properly pled claim under § 3729(b)(2)(A)(ii) could give rise to liability.

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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FYI: Cal Sup Ct Holds Borrower in Non-Judicial Foreclosure May Challenge Allegedly Void Assignment of DOT

In a case limited to nonjudicial foreclosures, the Supreme Court of California recently held that a borrower may maintain an action for wrongful foreclosure based on an allegedly void assignment. 

More specifically, the Court held that, "because in a nonjudicial foreclosure only the original beneficiary of a deed of trust or its assignee or agent may direct the trustee to sell the property, an allegation that the assignment was void, and not merely voidable at the behest of the parties to the assignment, will support an action for wrongful foreclosure."

The Court clarified that:  "[w]e hold only that a borrower who has suffered a nonjudicial foreclosure does not lack standing to sue for wrongful foreclosure based on an allegedly void assignment merely because he or she was in default on the loan and was not a party to the challenged assignment. We do not hold or suggest that a borrower may attempt to preempt a threatened nonjudicial foreclosure by a suit questioning the foreclosing party's right to proceed."

The Court also declined to rule on whether the borrower could prove that the assignment was void instead of voidable, or otherwise satisfy the elements of a wrongful foreclosure claim.

A copy of the opinion is available at: http://www.courts.ca.gov/opinions/documents/S218973.PDF

In 2006, the plaintiff borrower executed a deed of trust on a residential property.  The lender filed for bankruptcy in 2007 and was liquidated in 2008. 

The servicer as attorney in fact for the lender executed an assignment of the deed of trust to an asset securitization trust.  The assignment was dated December 19, 2011, after the lender's dissolution, and it was recorded eleven days later.  The closing date of the asset securitization trust – i.e., the date by which the investment trust needed to receive the trust deed -- was January 27, 2007.

On February 28, 2012, a different entity was substituted as trustee on the deed of trust.  On August 20, 2012, the new trustee recorded this substitution as well as a notice of trustee's sale dated August 16, 2012.

On September 14, 2012, the plaintiff borrower's property was sold at public auction.  The sale was identified by the deed upon sale dated December 24, 2012.

The borrower filed suit for quiet title against various parties, alleging that the assignment from the lender to the investment trust was void because: (1) the lender's assets were transferred by the bankruptcy trustee in 2008, and the lender therefore had no authority to assign the deed of trust; and  (2) the investment trust did not receive the assignment until after its closing date of January 27, 2007.

The defendants demurred, and the trial sustained the demurrer, finding that the borrower could not state a claim for quiet title.

The Court of Appeal affirmed the trial court's judgment.  The appellate court held that the borrower's claim was fatally flawed because she failed to allege that she tendered payment on the debt.  The appellate court then considered whether the borrower could amend her complaint to plead wrongful disclosure.  After seeking and receiving briefing on the issue, the appellate court held that leave to amend was not warranted because, as an unrelated third party to the assignment, the borrower had no standing to enforce the terms of the securitization agreements allegedly violated.

The Supreme Court of California granted review and limited its analysis to whether a borrower has standing to pursue a claim for wrongful foreclosure by challenging the assignment of the deed of trust and arguing that defects on the assignment make it void.

The Supreme Court began its analysis by explaining that California designed its nonjudicial foreclosure system to provide mortgagees with an expedient remedy against the defaulted borrower, while also protecting the borrower from wrongful loss of the property and ensuring that properly conducted sales of the property are final and conclusive as to a bona fide purchaser.

The Court noted that a deed of trust typically has three parties: the borrower, the lender, and the trustee; and the trustee possesses the power of sale.  However, the trustee of a deed of trust is not a trustee in the sense that it has fiduciary obligations, but rather acts as an agent for the borrower and the lender. 

Under California law, the trustee initiates the nonjudicial foreclosure process.  Cal. Civ. Code, § 2924, subd. (a)(1).  But the trustee may only take these steps at the direction of the holder of the note and beneficiary interest under the deed of trust.  See Santens v. Los Angeles Finance Co., 91 Cal.App.2d 197, 202 (1949). 

Thus, while the Court agreed with the defendants that generally a borrower has no ability to raise an objection to an assignment of a note or deed of trust, if the borrower defaults on the loan, only the current beneficiary is authorized to instruct the trustee to initiate the nonjudicial foreclosure process. 

A lender or trustee under a deed of trust may be liable to the borrower for wrongful foreclosure if it conducts an illegal, fraudulent or willfully oppressive sale of the property.  This conduct includes foreclosure initiated by a trustee that has no authority to do so.  Ohlendorf v. American Home Mortgage Servicing, 279 F.R.D. 575, 582-583 (E.D. Cal. 2010). 

The borrower alleged such conduct in her complaint.  This, the only question for the Court to decide was whether the borrower "may challenge the authority of one who claims [the authority to foreclose] by assignment." The Court answered that question in the affirmative.

The California Supreme Court held that a borrower has standing to bring a claim for wrongful foreclosure if it can show that the assignment is void instead of merely voidable. 

When an assignment is voidable, the parties to the assignment have the power to ratify or avoid the transaction.  In that situation, a borrower challenging the foreclosure could be asserting an interest belonging to the parties to the assignment instead of herself.

However, the Court found that when the borrower alleges that the assignment is void, the concern for asserting the interests of other parties is misplaced.  The borrower is not asserting the rights of one of the contracting parties but rather asserting her own right not to have her home illegally foreclosed upon. 

The California Supreme Court noted that underpinning the distinction between void and voidable transactions is the fact that, for void transactions, the parties cannot ratify or validate the transaction even if they so desire.  Thus, standing is not lacking in those cases because the borrower has an independent interest and is not attempting to settle the rights of third persons who are not parties.

The Court recognized the defendants' argument that a defaulted borrower suffers no prejudice from foreclosure because the actual holder of the beneficial interest on the deed of trust could have also foreclosed on the property.  But the Court declined to delve substantively into the claim for wrongful foreclosure, asserting that it was "concerned only with prejudice in the sense of an injury sufficiently concrete and personal to provide standing, not with prejudice as a possible element of the wrongful foreclosure tort."

Moreover, the Court disagreed with the defendants' contention that the borrower has no cognizable interest in the identity of the party enforcing her debt.  The Court noted that although the borrower may not be able to object to an assignment, she is obligated to pay the debt only to the party "that has actually been assigned the debt."  Contractually, it is not a "procedural nicety" to insist that the foreclosing party have the actual authority to foreclose.

According to the California Supreme Court, the logic of defendants' argument implied that anyone could foreclose upon a defaulted borrower's property.  But, the Court noted, banks are not private attorneys general or bounty hunters, and are only permitted to foreclose upon those properties for which they are entitled to foreclose as beneficiaries of the deed of trust.

In embracing its limited decision that a borrower has standing to sue for wrongful foreclosure based upon a void assignment of the deed of trust, the Court pointed out that various other states around the nation had ruled similarly on the issue.  The Court further asserted that federal courts ruling differently in applying California law did not alter its conclusion.

Accordingly, the Court reversed the Court of Appeal and remanded the case back to the trial court for it to reconsider whether the borrower could amend its complaint to plead wrongful foreclosure.  In doing so, the Court expressed no opinion as to whether the borrower's complaint alleged facts showing that the assignment of the deed of trust was void instead of voidable, or whether the borrower could satisfy the elements for the claim of wrongful foreclosure.  

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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FYI: 9th Cir Rejects Foreclosure Buyer's Effort to Rescind Foreclosure Sale

The U.S. Court of Appeals for the Ninth Circuit recently held that, under California law, a two year delay in failing to investigate the facts entitling a party to rescind a foreclosure sale transaction barred that equitable remedy, even though there was a genuine issue of material fact as to whether the plaintiff foreclosure buyer could have discovered material defects before the foreclosure sale.

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

A mortgagee ("Lender") initiated a non-judicial foreclosure of residential real estate in California, and sold that property at a foreclosure sale to a third party ("Buyer").  At the time of sale, the residential property lacked a certificate of occupancy and a residential easement to provide electrical utilities to the newly constructed home.  Buyer discovered the utility easement issue soon after purchasing the property. Two years later, Buyer brought an action seeking to rescind the transaction on the basis of the Lender's failure to disclose the defect.

The District Court granted summary judgment in favor of the Lender against the Buyer holding that the Buyer was not entitled to the equitable remedy of rescission. The U.S Court of Appeals for the Ninth Circuit affirmed the district court's decision to grant summary judgment in favor of Lender.

The Ninth Circuit noted that one issue was whether the Buyer could have discovered the defect prior to the foreclosure sale.  Karoutas v. HomeFed Bank, 232 Cal. App. 3d 767, 771 (1991).  Under that inquiry, the Court found that there was a genuine issue of material fact as to whether the Buyer could have discovered the defects because 1) their due diligence exceeded industry standards; and 2) it was reasonable not to seek an occupancy certificate because the residence appeared to be constructed before 2007 and the City did not require occupancy certificates until 2010. 

However, the Court relied on the language of Cal. Civ. Code s. 1691 that a party seeking rescission must do so "promptly upon discovering the facts upon discovering the facts entitling him to rescind". Cal. Civ. Code § 1691.  The Buyer paid $624,000 for a residential property and shortly thereafter discovered that it could not be supplied with electricity (absent the purchase of an additional easement). The Court referred to the cases Bancroft v. Woodward, 183 Cal. 99, 108 (1920) and Jolly v. Eli Lilly & Co., 44 Cal. 3d 1103, 1112 (1988) to find that a reasonable person would have been put on inquiry of the wrongdoing, and therefore the Buyer would have a duty to investigate the facts supporting their equitable right to rescind.

The Ninth Circuit reasoned that the Buyer could have discovered the electricity defect early on, and therefore, there was no genuine issue of material fact that the Buyer was put on inquiry notice of wrongdoing. The Buyer was deemed to know all facts that could be discovered from a reasonable investigation under Fox v. Ethicon Endo-Surgery, Inc., 35 Cal. 4th 797, 808-09 (2005).

The Court noted that, under Karoutas, as a foreclosing mortgagee, the Lender had the same duty to disclose defects regarding property as any other seller. The Lender presented evidence that the foreclosed borrower informed the Buyer of the defects at the time of sale.  Thus, the Ninth Circuit held that, because the Buyer did not present any evidence that it would not have been able to discover facts supporting its right to rescind at the time it discovered the defects, there was no question of material fact on that issue.

Moreover, the Ninth Circuit noted, instead of pursuing its claims, the Buyer took actions inconsistent with unwinding the contract such as encumbering the property, building improvements, and attempting to sell. Therefore, the Court held that the Buyer affirmed the transaction and lost its equitable right to rescind.  

Because there was no genuine issue of material fact as to whether the delay deprived the Buyer of the equitable right to rescind under California law, the Ninth Circuit held that the Lender was entitled to summary judgment on that issue.

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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FYI: 9th Cir Rules in Favor of Defendant in Putative TCPA Class Action Involving Third Party Consent

In an unreported ruling, the U.S. Court of Appeals for the Ninth Circuit recently affirmed summary judgment for the defendant in a putative class action for alleged violation of the federal Telephone Consumer Protection Act, 47 U.S.C. § 227 ("TCPA"). 

The Court held that the named plaintiff expressly consented to the text message in question when she provided her cell phone number to a third party contracting with the defendant while using the third party's services.

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

The named plaintiff booked flights online for herself and her family on an airline website.  A section of the website entitled "Contact Information" provided spaces to enter various phone numbers, noting that at least one was required.  The plaintiff entered her cell phone number. 

The defendant contracts with airlines to provide traveler notification services to passengers.  Three weeks after the named plaintiff made her reservation with the airline, and about a month before her scheduled departure, the defendant sent a text message to the consumer's cell phone.  The text message invited the named plaintiff to reply "yes" to receive flight notification services.  The named plaintiff did not respond and the defendant sent her no more messages.

The named plaintiff brought this action, alleging that the defendant violated the TCPA by sending her the unsolicited text message.  She sought to represent a class of people who received similar text messages from the defendant. 

As you may recall, the TCPA restricts calls and text messages made using an automatic dialing system or an artificial or prerecorded voice absent "prior express consent" from the called party.  47 U.S.C. § 227(b)(1)(A).

The Federal Communications Commission ("FCC"), having authority to prescribe regulations to implement specific parts of the TCPA, determined that "persons who knowingly release their phone numbers have in effect given their invitation or permission to be called at the number which they have given, absent instructions to the contrary."  In re Rules & Regulations Implementing the Tel. Consumer Prot. Act of 1991, Report and Order, 7 FCC Rcd. 8752, 8769 (Oct. 16, 1992) ("1992 Order").  The Ninth Circuit noted that the defendant's assertion that the named plaintiff consented to receive the text message is an affirmative defense to liability under the TCPA.

The district court relied upon the 1992 FCC Order, stating that "[i]f a call is otherwise subject to the prohibitions [against using an autodialer, and other rules targeting telemarketing], persons who knowingly release their phone numbers have in effect given their invitation or permission to be called at the number which they have given, absent instructions to the contrary." 1992 FCC Order ¶ 31. 

The district court reasoned that the FCC appeared to have intended its 1992 Order to provide a definition of "prior express consent" in Paragraph 31, which states, in its entirety:

31. We emphasize that under the prohibitions set forth in [47 U.S.C.] § 227(b)(1) and in [47 C.F.R.]§§ 64.1200(a)-(d) of our rules, only calls placed by automatic telephone dialing systems or using an artificial or prerecorded voice are prohibited. If a call is otherwise subject to the prohibitions of § 64.1200, persons who knowingly release their phone numbers have in effect given their invitation or permission to be called at the number which they have given, absent instructions to the contrary. Hence, telemarketers will not violate our rules by calling a number which was provided as one at which the called party wishes to be reached. However, if a caller's number is "captured" by a Caller ID or an ANI device without notice to the residential telephone subscriber, the caller cannot be considered to have given an invitation or permission to receive autodialer or prerecorded voice message calls. Therefore, calls may be placed to "captured" numbers only if such calls fall under the existing exemptions to the restrictions on autodialer and prerecorded message calls.

2008 FCC Order ¶ 31 (footnote citing H.R. Rep. No. 102-317 omitted).

The district court noted that, although "Paragraph 31 of the 1992 FCC Order is not a model of clarity," the statement that "telemarketers will not violate our rules by calling a number which was provided as one at which the called party wishes to be reached" begs the question of whether merely providing a cellphone number demonstrates that the number is "one at which the called party wishes to be reached" by an automated telephone dialing system, instead of a number at which the called party wishes to be reached by a human being.

Nevertheless, the district court held that Paragraph 7 of the 1992 FCC Order showed that the FCC intended to provide a definition of the term "prior express consent," and that definition governed the district court's analysis of whether the plaintiff could prevail on her claim that the defendant's text message to her cell phone violated the TCPA.  The district court held that under the FCC's definition, the plaintiff "knowingly release[d]" her cellphone number to the airline when she booked her tickets, and by doing so gave permission to be called at that number by an automated dialing machine. See 1992 FCC Order ¶ 7, 31.

The named plaintiff appealed.  The Ninth Circuit's ruling affirming the lower court's judgment in favor of the defendant was twofold: 

First, the Ninth Circuit held that the named plaintiff's argument that providing her phone number did not constitute "prior express consent" "may not be challenged in the context of this appeal" because her lawsuit was not brought pursuant to the Hobbs Act. 

The Ninth Circuit noted that the Hobbs Act provides the court of appeals with exclusive jurisdiction to determine the validity of all final orders of the FCC.  A party may invoke this appellate jurisdiction "only by filing a petition for review of the FCC's final order in a court of appeals naming the United States as a party." US W. Commc'ns v. MFS Intelenet, Inc., 193 F.3d 1112, 1120 (9th Cir. 1999).  Because the named plaintiff did not bring suit pursuant to the Hobbs Act, the Court held that the validity of the FCC's interpretation of "prior express consent" must be presumed valid. 

Second, the Ninth Circuit held that when the named plaintiff released her phone number to the airline while making a flight reservation, she expressly consented to the text message in question.  The Court noted that she did not provided the airline any "instructions to the contrary" indicating that she did not "wish[] to be reached" at that number.  See 1992 Order, 7 FCC Rcd. at 8769.

Accordingly, the Ninth Circuit affirmed the district court's order granting of summary judgment in favor of the defendant. 

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

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