FYI: 9th Cir Holds FCRA "Permissible Purpose" Plaintiff Had Standing, Establishes Elements for Such Claims

In a case of first impression in that circuit, the U.S. Court of Appeals for the Ninth Circuit recently reversed a trial court’s dismissal of a consumer’s Fair Credit Reporting Act (“FCRA”) claim for lack of standing and failure to state a claim, holding that the plaintiff had Article III standing.

In so ruling, the Ninth Circuit held that the consumer suffered a concrete injury in fact when a bank obtained her credit report for a purpose not authorized by the statute, and it was irrelevant whether the report was published or used by the party requesting it.

The Court further held that:  (1) in order to state a claim under this provision of FCRA, a plaintiff only needs to allege that the credit report was obtained for an unauthorized purpose;  (2) the defendant must then plead that it was obtained for an authorized purpose; and  (3) the plaintiff need not plead the actual purpose, but only facts creating a reasonable inference the report was obtained for an improper purpose.

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

A consumer reviewed her credit report from one of the “big three” credit reporting agencies and discovered that a bank with whom she allegedly had no prior or existing relationship had requested her credit report. The consumer filed suit alleging that the bank violated the FCRA by obtaining her credit report without her consent and not for any of the purposes authorized under the Act.

The trial court dismissed the complaint with prejudice for lack of standing and failure to state a claim, and the plaintiff appealed.

On appeal, the Ninth Circuit noted that the case presented two issues of first impression in that circuit: “(1) whether a consumer suffers a concrete Article III injury in fact when a third-party obtains her credit report for a purpose not authorized by the FCRA and (2) whether the consumer-plaintiff must plead the third-party’s actual unauthorized purpose in obtaining the report to survive a motion to dismiss.”

The Court answered “yes” to the first question and “no” to the second, holding that “a consumer suffers a concrete injury in fact when a third-party obtains her credit report for a purpose not authorized by the FCRA … [,] a consumer-plaintiff need allege only that her credit report was obtained for a purpose not authorized by the statute to survive a motion to dismiss[,] [and] the defendant has the burden of pleading it obtained the report for an authorized purpose.”

The Court noted that the FCRA prohibits a person from using or obtaining a consumer report for any purpose unless it is obtained for an authorized purpose and the user certifies the authorized purpose for which it is obtained or used.

As you may recall, FCRA provides that a “consumer reporting agency” can only furnish a consumer report for certain enumerated purposes “and no other.” See 15 U.S.C. § 1681(b)(a).

These permissible purposes include, among other things, that the consumer report was obtained in response to a court order, or pursuant to the consumer’s written instructions, or only “[t]o a person which it has reason to believe — (A) intends to use the information in connection with a credit transaction involving the consumer … and involving the extension of credit to, or review or collection of an account of, the consumer; (B) … for employment purposes; or (C) in connection with the underwriting of insurance involving the consumer; or (D) … in connection with a license or other benefit granted by a governmental instrumentality …; or (E) [to] a potential investor or servicer, or current insurer …; or [who] otherwise has a legitimate business need for the information—(i) in connection with a business transaction that is initiated by the consumer; or (ii) to review an account to determine whether the consumer continues to meet the terms of the account.”

On the issue of standing, the Court explained that Article III of the U.S. Constitution limits federal courts’ power “only to ‘Cases’ and ‘Controversies’ … [and] ‘[s]tanding to sue is a doctrine rooted in the traditional understanding of a case or controversy.’ … ‘[T]he irreducible constitutional minimum’ of standing consists of three elements. The 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.’”

According to the Ninth Circuit, the case at bar primarily involved the first “injury in fact” element, with the Court explaining that “[t]o establish injury in fact, a plaintiff must show that he or she suffered ‘an invasion of a legally protected interest’ that is ‘concrete and particularized’ and ‘actual or imminent, not conjectural or hypothetical.’ … ‘Concrete’ is not, however, necessarily synonymous with ‘tangible.’ Although tangible injuries are perhaps easier to recognize … intangible injuries can nevertheless be concrete.’”

“’In determining whether an intangible harm constitutes injury in fact, both history and the judgment of Congress play important roles … [and] it is instructive to consider whether an alleged intangible harm has a close relationship to a harm that has traditionally been regarded as providing a basis for a lawsuit in English or American courts.’ … ‘The … injury required by Art. III may exist solely by virtue of ‘statutes creating legal rights, the invasion of which creates standing.’”

The Ninth Circuit further recited that “a bare procedural violation may not establish a concrete harm sufficient for Article III standing[,]” but “an alleged procedural violation [of a statute] can by itself manifest concrete injury where Congress conferred the procedural right to protect a plaintiff’s concrete interests and where the procedural violation presents ‘a risk of real harm’ to that concrete interest.’”

The Court also explained that it has “recognized a distinction between violations of a procedural right …and a substantive right … [and a] violation of a substantive right invariably ‘offends the interests that the statute protects.’”

Based on the foregoing prior rulings, the Court concluded that the plaintiff had standing to sue under FCRA section 1681b(f)(1) because “[f]irst, obtaining a credit report for a purpose not authorized under the FCRA violates a substantive provision of the FCRA.

This is because, the Ninth Circuit held, this section of FCRA, “which prohibits obtaining a credit report for a purpose not otherwise authorized—protects the consumer’s substantive privacy interest. The section does not merely ‘describe a procedure’ that one must follow. Rather, [it] is the central provision protecting the consumer’s privacy interest: every violation invades the consumer’s privacy right that Congress sought to protect in passing the FCRA.”

Accordingly, the Court held, “the Plaintiff ‘need not allege any further harm to have standing.’”

Second, the Court noted that it had “previously found the invasion of the interest at issue — the right to privacy in one’s consumer credit report — confers standing.”

“Third, historical practice also supports a finding of standing … [because] [t]he harm attending a violation of §1681b(f)(1) of the FCRA is closely related to—if not the same as—a harm that has traditionally been regarded as providing a basis for a lawsuit: intrusion upon seclusion (one form of the tort of invasion of privacy).”

The Ninth Circuit concluded that the plaintiff had “standing to vindicate her right to privacy under the FCRA when a third-party obtains her credit report without a purpose authorized by the statute, regardless whether the credit report is published or otherwise used by that third-party.”

The Court then turned to the second issue of first impression: “[m]ust “the consumer-plaintiff plead the third-party’s actual unauthorized purpose in obtaining the credit report to survive a motion to dismiss? The Court answered “no,” finding that “[t]he trial court erred in holding that … [plaintiff] has the burden of pleading the actual purpose behind [defendant’s] procurement of her credit report. A plaintiff need allege only facts giving rise to a reasonable inference that the defendant obtained his or her credit in violation of  §1681b(f)(1) to meet their burden of pleading.”

As with any affirmative defense, the defendant bears “the burden of pleading it had an authorized purpose to acquire [plaintiff’s] credit report[,] … first, because “the FCRA generally prohibits obtaining a credit report, … but then provides a numerous and diverse list of exceptions[.] … As such, the authorized purposes … are matters of exception that the defendant must plead as a defense.”

“Second, placing the burden on the plaintiff would be unfair, as it would require the plaintiff to plead a negative fact that would generally be peculiarly within the knowledge of the defendant.”

Finally, the Ninth Circuit concluded that the complaint contained “sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face’”.

Here, the Court noted that the plaintiff alleged “that she did not have a credit relationship with [defendant]” and made  “factual assertions which negative each permissible purpose for which [defendant] could have obtained her credit report and for which [plaintiff] could possibly have personal knowledge.”

Accordingly, the trial court’s order of dismissal was reversed and the case remanded.

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: Cal App Ct (1st Dist) Refuses to Enforce Predispute Jury Waiver Despite Forum Selection Clause

The Court of Appeal of the State of California, First Appellate District, recently held that a forum selection clause in favor of a New York forum was unenforceable where the clause included a predispute jury trial waiver, which is unenforceable under California law but which would have been enforceable under New York law. 

Accordingly, the Appellate Court reversed the order of dismissal entered by the trial court. 

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

The plaintiff storeowner ("Plaintiff") filed a lawsuit against the defendant company ("Defendant") alleging that the Defendant supposedly defrauded the Plaintiff regarding a lease agreement for credit card processing equipment.

The complaint alleged causes of action for fraud, rescission, injunctive relief, and violation of the California Business and Professions Code section 17200.  The complaint also attached a lease agreement, which provided that New York law would apply to all disputes between the parties, and that all disputes "shall be instituted and prosecuted exclusively in the federal or state court located in the State and County of New York."  Further, the agreement provided that "YOU AND WE WAIVE, INSOFAR AS PERMITTED BY LAW, TRIAL BY JURY IN ANY DISPUTE."

The Defendant moved to dismiss the complaint based on the forum selection clause of the lease agreement.  The trial court granted the dismissal, and the matter was appealed. 

  

On appeal, the Appellate Court first observed that "California favors contractual forum selection clauses so long as they are entered into freely and voluntarily, and their enforcement would not be unreasonable," but "California courts will refuse to defer to the selected forum if to do so would substantially diminish the rights of California residents in a way that violates our state's public policy."

The Appellate Court also noted that a party opposing enforcement of a forum selection clause ordinarily bears the burden of proving why it should not be enforced, but the burden is "reversed when the claims at issue are based on unwaivable rights created by California statutes [in which case] the party seeking to enforce the forum selection clause bears the burden to show litigating the claims in the contractually designated forum" will not diminish the substantive rights afforded under California law.

The Plaintiff argued that the forum selection clause impacted his substantive rights under California law because it includes a predispute waiver of the right to a jury trial and such right is unwaivable, even voluntarily, under California law.  Thus, the Plaintiff argued that the trial court erred in failing to place the burden on the Defendant to prove litigating in New York would not result in a diminution of his substantive rights under California law.

The Defendant argued that the Plaintiff's lawsuit did not involve claims based on unwaivable rights under a statutory scheme and therefore the burden should not shift to the Defendant.

In siding with the Plaintiff, the Appellate Court held that "enforcing the forum selection claim here would be contrary to California's fundamental public policy protecting the jury trial right and prohibiting courts from enforcing predispute jury trial waivers."

Although the Plaintiff's claims were not based on a statutory scheme which includes an antiwaiver provision, the "complaint includes a demand for a jury trial, which [the Plaintiff] correctly argues is unwaivable in predispute contracts under California law."  The right to a jury trial "is inviolate under the California Constitution, and which may only be waived by the methods enumerated by the Legislature." 

However, "[w]hile California law holds predispute jury trial waivers are unenforceable, it is undisputed that under New York law there is no similar prohibition." 

The Appellate Court next considered whether the right to jury trial was a substantive or procedural right, which it noted "is an open question."

After analyzing the issue, the Appellate Court determined that "even if the rule is considered procedural, it is intimately bound up with the state's substantive decision making" and "serves substantive state policies" of preserving the right to jury trial, which is "an interest the California Constitution zealously guards."

Thus, the Appellate Court held that "because enforcement of the forum selection clause here has the potential to contravene a fundamental California policy of zealously guarding the inviolate right to a jury trial, which is unwaivable by predispute agreements, [the Defendant] bears the burden of showing that litigation in New York" will not diminish the Plaintiff's substantive rights under California law.

The Defendant argued that the only issue to be decided was the enforcement of the forum selection clause, and that the issue of whether to enforce the jury trial waiver should be decided by a New York court. 

The Appellate Court disagreed, ruling that "enforcing the forum selection clause in favor of New York will put the issue of enforceability of the jury trial waiver contained in the same agreement before the New York court," and "[b]ecause New York permits predispute jury trial waivers, and California does not, enforcing the forum selection clause has the potential to operate as a waiver of a right the Legislature and our high court have declared unwaivable."

The Appellate Court therefore held that "the trial court erred in enforcing the forum selection clause in favor of a New York forum where the clause includes a predispute jury trial waiver, which . . . is unenforceable under California law."

Accordingly, the Appellate Court reversed the order of dismissal entered by the trial court, and remanded the matter for entry of a new order denying the motion to dismiss.

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: Cal App Ct (2nd Dist) Upholds Over 60% Reduction on Consumer Plaintiff's Attorney Fee Award

The Court of Appeals of California, Second District, recently upheld a trial court's ruling reducing the amount of a plaintiff's attorney's fee award in a consumer litigation action to less than 40% of the amount sought by the plaintiff's counsel.

A copy of the opinion is available at:  Link to Opinion.  The opinion was later revised slightly and certified for publication:  Link to Opinion

A car buyer sued the manufacturer of a used car she purchased under California's Song-Beverly Consumer Warranty Act, Civ. Code, § 1790 et seq., for alleged defects that the manufacturer refused to repurchase. The parties settled the litigation, with the manufacturer agreeing to pay the purchaser plaintiff $85,000 plus reasonable attorney fees and expenses.

The plaintiff purchaser moved for a fee award using the lodestar method that consisted of a $127,792.50 base amount with a 1.5 multiplier, for a total of $191,688.75. However, the trial court awarded only $73,864 in fees.

This appeal followed.

Just as with many consumer statutes that allow the successful consumer to recover attorney's fees, in an action under California's Song-Beverly Consumer Warranty Act, the prevailing buyer has the burden of "showing that the fees incurred were `allowable,' were `reasonably necessary to the conduct of the litigation,' and were `reasonable in amount'."

The Appellate Court noted the extensive case law establishing that:

- The "trial judge is the best judge of the value of professional services rendered in his [or her] court, and while his [or her] judgment is of course subject to review, it will not be disturbed unless the appellate court is convinced that it is clearly wrong."

- In addition, "the lodestar method vests the trial court with the discretion to decide which of the hours expended by the attorneys were `reasonably spent' on the litigation, and to determine the hourly rates that should be used in the lodestar calculus."

- While the trial court has broad discretion to increase or reduce the proposed lodestar amount based on the various factors identified in case law, including the complexity of the case and the results achieved, the court's analysis must begin with the `actual time expended, determined by the court to have been reasonably incurred.'"  

- "A trial court may not rubber stamp a request for attorney fees, but must determine the number of hours reasonably expended."

- In evaluating whether the attorney fee request is reasonable, the trial court should consider "`whether the case was overstaffed, how much time the attorneys spent on particular claims, and whether the hours were reasonably expended.'"

- "Reasonable compensation does not include compensation for `padding' in the form of inefficient or duplicative efforts." 

- "A reduced award might be fully justified by a general observation that an attorney overlitigated a case or submitted a padded bill or that the opposing party has stated valid objections.'"

- "In making its calculation [of a reasonable hourly rate], the court may rely on its own knowledge and familiarity with the legal market, as well as the experience, skill, and reputation of the attorney requesting fees, the difficulty or complexity of the litigation to which that skill was applied, and affidavits from other attorneys regarding prevailing fees in the community and rate determinations in other cases."

The Appellate Court also noted that "it is inappropriate and an abuse of a trial court's discretion to tie an attorney fee award to the amount of the prevailing buyer/plaintiff's damages or recovery in a Song-Beverly Act action.'"  A "'rule of proportionality' would make it difficult for individuals with meritorious consumer rights claims to obtain redress from the courts when they cannot expect a large damages award."

Pointing to various statements by the trial judge at the hearing on attorney's fees, the plaintiff argued that the trial court engaged in a prohibited proportionality analysis in setting the attorney fee award.

However, the Appellate Court noted that "the trial court's final written order in the instant case did not suggest in any respect that the court reduced the attorney fee award based on the size of the settlement award."

Instead, the Appellate Court noted that the trial court's order indicated a fee reduction was warranted because it was unreasonable to have 6 different lawyers from 2 different law firms for the plaintiff, "staffing a case that did not present complex or unique issues, did not involve discovery motions, and did not go to trial." In addition, the trial court found the attorneys' hourly rates of $500 per hour to over $600 per hour to be unreasonably high.

The plaintiff also argued that "the trial court arbitrarily cut 83.5 hours of reasonably incurred fees billed by six attorneys who worked on the case, citing concerns about inefficiencies and duplication," but without referencing "any specific examples of inefficiencies or redundancies as a result of the number of attorneys staffing the case."

The Appellate Court noted that "[a]n across-the-board reduction in hours claimed based on the percentage of total time entries that were flawed, without respect to the number of hours that were actually included in the flawed entries, is not a legitimate basis for determining a reasonable attorney fee award."

Nevertheless, the Appellate Court noted that the trial court "made clear that its approach was designed to reduce the total award to the reasonable amount that would have been billed had there been an appropriate number of attorneys on the case. The court could properly have made an across-the-board reduction of 30 percent to accomplish the same purpose."

Therefore, the Appellate Court rejected the plaintiff's argument here as well, holding that "[p]lainly, it is appropriate for a trial court to reduce a fee award based on its reasonable determination that a routine, non-complex case was overstaffed to a degree that significant inefficiencies and inflated fees resulted." 

The plaintiff also argued the trial court improperly reduced the hourly rates of $500 to $650 per hour for her attorneys to $300 per hour, even though she "submitted ample evidence, which Defendant failed to rebut, that her counsel's rates were reasonable and commensurate with other consumer attorneys' rates."

However, the Appellate Court again disagreed, noting that "even if Plaintiff established that her attorneys' rates were generally commensurate with other consumer law attorneys with the same level of experience and skill, Plaintiff ignores that there are a number of factors that the trial court may have taken into consideration in determining that reductions in the attorneys' hourly rates were warranted. The court reasonably could have reduced the rates based on its finding that the matter was not complex; that it did not go to trial; that the name partners were doing work that could have been done by lower-billing attorneys; and that all the attorneys were doing work that could have been done by paralegals."

In sum, the Appellate Court held that the plaintiff failed to meet "her burden to show an abuse of discretion in the trial court's reduction of the attorneys' hourly rates."

Therefore, the Appellate Court affirmed that trial court's order awarding fees and costs, and also allowed the defendant manufacturer to recover its costs on appeal.

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: Cal App Ct (2nd Dist) Rejects Claim That Loan Assignment During Default Was Void

The Court of Appeal for the Second District of California recently affirmed the dismissal of a borrower's claims for wrongful foreclosure alleging that the assignment of his mortgage to the foreclosing entity was invalid.

In so ruling, the Second District rejected the borrower's argument that a mortgage cannot be assigned to another entity while the loan is in default as illogical and incorrect, in part because this reasoning would allow borrowers to prevent lenders from assigning debt by refusing to make payments.

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

A borrower took out a mortgage loan secured by a deed of trust to his home (the "Loan").  After the initial lender was closed and placed into receivership by the federal government, the FDIC as receiver transferred the Loan to a new entity ("Assignor"), who in turn assigned the Loan to yet another entity ("Assignee") and recorded the assignment. 

Thereafter, a substitution of trustee was recorded declaring that Assignee was substituted for a new trustee ("Trustee") on the Loan.  The Assignee and Trustee foreclosed the Borrower's home in April 2017.

The borrower filed a wrongful foreclosure action against the Assignee and Trustee alleging that they had no rightful claim to foreclose on his home on the basis that: (i) the initial lender sold his mortgage to entities that were not named defendants to the foreclosure, and; (ii) that the Loan was not legally transferred, conveyed or assigned to Assignee because the borrower defaulted on the Loan nearly eight years prior to the time of assignment. 

The trial court sustained the Assignee and Trustee's demurrer to the borrower's complaint and the instant appeal followed.

On appeal, the appellate court reviewed the Borrower's chief argument that a financial institution may not validly assign a mortgage loan to another entity while the loan is in default, and that such an assignment is "void." 

Under California law, it is not enough for a homeowner merely to allege a mortgage assignment was voidable. See, e.g., Yhudai v. IMPAC Funding Corp. (2016) 1 Cal.App.5th 1252, 1256.  Rather, the homeowner must allege facts supporting a legally viable theory as to why the challenged assignment is void as a matter of law. See, e.g., Kalnoki v. First American Trustee Servicing Solutions, LLC (2017) 8 Cal.App.5th 23, 44; cf. Yvanova v. New Century Mortgage Corp. (2016) 62 Cal.4th 919, 929–930 [distinguishing between void and 4 voidable contracts].

Here, the Appellate Court noted that complaint asserted without any logical basis or supporting legal authority that a borrower, by refusing to pay, can prevent a lender from assigning the debt. 

Examining the Borrower's argument that the assignment was void, the Second District was unpersuaded by this "strange suggestion," concluding that the Borrower's argument was legally incorrect because he did not explain how the assignments were void as a matter of law.  See, e.g., Mendoza, supra, 6 Cal.App.5th at pp. 811– 820.). 

The other five claims raised in the borrower's complaint failed for not being within the jurisdiction of the appellate court (federal claims dismissed upon removal as invalid and remanded to state court), forfeited as not raised in the opening brief (claims for violation of Civil Code section 2934 or for cancellation of written instruments), or for want of an underlying claim (claim for unfair competition).

Because the Borrower failed to provide a logical basis for his argument suggesting that the assignment of his mortgage loan while in default was void, nor any supporting legal authority, the Second District concluded that the trial court's judgment sustaining the demurrer without leave to amend was proper, and affirmed the judgment.

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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The U.S. Court of Appeals for the Ninth Circuit recently affirmed a trial court's summary judgment ruling in favor of the financial services defendants in an action to rescind the mortgage under the federal Truth in Lending Act, 15 U.S.C. § 1601, et seq. (TILA).

In so ruling, the Ninth Circuit held that the plaintiff consumer did not have a right of rescission under TILA because he previously quitclaimed his interest in the property to his ex-wife, and his new loan to acquire the property from his ex-wife was a "residential mortgage transaction".

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

The plaintiff and his now ex-wife obtained title to the subject property in 1990.  In 2003, Plaintiff quitclaimed the property to his wife, and she then encumbered the property with a series of deeds of trust listing her as the sole owner.

The couple divorced in 2007.  The divorce judgment awarded the property to Plaintiff, and ordered him to among other things "immediately refinance the mortgage owning on said property in order to remove Wife's name from said financial obligation."  The judgment also ordered Plaintiff to pay his ex-wife $100,000.

The lender extended a loan to Plaintiff, who executed a deed of trust securing the note on the property.  Plaintiff used the proceeds from the loan to pay off his ex-wife's outstanding loan balance and to satisfy the money judgment. 

Plaintiff filed suit against the lender and its successors (Defendants) seeking rescission of the loan and other relief.  The trial court dismissed his claim for rescission as time-barred, and granted summary judgment against him on his claims for declaratory and injunctive relief and damages. 

The Ninth Circuit vacated the trial court's judgment and remanded, holding that Plaintiff's letter to the loan servicer gave proper, timely notice of rescission within three years of the loan transaction under TILA.

On remand, the trial court again granted summary judgment in favor of Defendants, holding that Plaintiff had no statutory right under TILA to rescind the mortgage because his loan was a residential mortgage transaction.

As you may recall, TILA defines a residential mortgage as "a transaction in which a mortgage is created or retained against the consumer's dwelling to finance the acquisition or initial construction of such dwelling."  15 U.S.C. § 1602(x).

The trial court concluded that, although Plaintiff had "a partial interest in the property from 1990 to 1997 and was the sole owner from 1997 to 2003, his interest in the property was fully extinguished in 2003 when he conveyed the entirety of his interest to his wife via quitclaim deed."

The trial court further found that pursuant to his obligations under the divorce judgment, Plaintiff entered into the loan in question specifically to acquire ownership interest in the property, and thus "[the loan] was a residential mortgage transaction as to which TILA provide[d] no statutory right of rescission."

This appeal followed. 

Plaintiff argued that the issue of whether his loan was a residential mortgage transaction was not properly before the trial court on remand because Defendants waived the issue by failing to raise it until after the prior appeal, and because defendants' argument was barred by law of the case and the Ninth Circuit's mandate in the prior appeal.

The Ninth Circuit disagreed, holding that "a defendant need not raise every possible argument in a motion for summary judgment and may make a different argument on remand if a grant of summary judgment in its favor is reversed on appeal."

In the prior appeal, the Ninth Circuit never ruled on the issue whether Plaintiff had a right of rescission.  Instead, it merely held that Plaintiff's letter to the servicer provided sufficient notice that he was exercising his right to rescind, and the trial court therefore erred in dismissing his claims for rescission on the ground of improper notice. 

Thus, the Ninth Circuit held that "neither law of the case nor the mandate on appeal barred the district court from addressing defendants' 'residential mortgage transaction' argument."

Plaintiff also argued that the trial court misinterpreted the statute by including in the definition of a residential mortgage transaction an initial acquisition and a reacquisition of the property.

Plaintiff cited the Official Staff Interpretations to Regulation Z, which provides that the term residential mortgage transaction "does not include a transaction involving a consumer's principal dwelling if the consumer had previously purchased and acquired some interest to the dwelling, even though the consumer had not acquired full legal title."  12 C.F.R. Pt. 226, Supp. I, Subpt. A § 226.2(a)(24)-5(i) ().

The Ninth Circuit observed that the "refinance" ordered by the divorce judgment allowed Plaintiff to pay off his ex-wife's outstanding mortgage and then made it possible for Plaintiff to acquire the property in his own right.  The loan was not a refinance where the borrower changed from the ex-wife to Plaintiff, and Plaintiff did not acquire title until the day after he signed the loan. 

Thus, the Ninth Circuit held, the trial court correctly concluded that the Official Staff Interpretations to Regulation Z refers to a situation where the borrower increases an existing ownership interest using loan proceeds, rather than the situation where the borrower reacquires a property after he had given up all ownership interest.

Next, Plaintiff argued that the 2003 quitclaim deed did not establish his subsequent lack of ownership interest in the property because upon the filing of the dissolution of marriage, the property took on communal attributes and he acquired a "species of co-ownership." 

The Ninth Circuit held, without deciding the issue, that assuming Plaintiff gained an interest in the property by operation of Oregon law, he still "acquired" his interest for purposes of TILA's "residential mortgage transaction" provision.  As the Ninth Circuit explained, the plain language of the statute requires a transaction in which a mortgage is created "to finance the acquisition or initial construction of such dwelling."

Plaintiff also argued that the language used in the loan documents showed that he already owned an interest in the property before he took out the loan.

However, the Ninth Circuit stated that the lender's characterization of the transaction was not determinative, and even if Plaintiff believed the purpose of the loan was to comply with the divorce judgment, the fact remained that he had no interest in the property when he took out the mortgage.

Accordingly, the Ninth Circuit affirmed the trial court's grant of summary judgment in favor of the Defendants.

Eric Tsai

Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654

Fax: (866) 581-9302

Mobile: (714) 600-6000

Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon

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