Case Law Newsletter

Noonan and Lieberman keeps you current on litigation news with its regular Case Law Update focusing on important and emerging trends in federal and state case law. Case Law Update is edited by attorney James V. Noonan.

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August 2010

A SERVICER’S WRITTEN OFFER TO DISCUSS FORECLOSURE ALTERNATIVES WITH A DELINQUENT BORROWER IS A “COMMUNICATION MADE IN CONNECTION WITH THE COLLECTION OF A DEBT” UNDER THE FDCPA

In Gburek v. Litton Loan Servicing LP, 08-3776, (7th Cir. July 27, 2010) the servicer sent a delinquent borrower a letter offering to discuss ways she could avoid losing her home a foreclosure and asking for current financial information. A few days later, she received a letter from a firm that facilitates communication between the servicer and distressed borrowers. The borrower sued the servicer under the FDCPA contending, in a class action complaint, that the letters were a deceptive means to obtain personal information and charging it with communicating with a third party about her mortgage without her consent. The district court granted the servicer’s motion to dismiss, concluding that the conduct did not fall within the scope of the FDCPA because the letters the borrower received did not contain a demand for payment. The issue on appeal was whether the communications to the borrower were made in connection with the collection of her debt. The Seventh Circuit found that they did. Recognizing there was no “bright-line rule” for determining whether a communication from a debt collector was made in connection with the collection of a debt the court looked to three opinions from its own circuit that it deemed instructive. The court distilled from its holdings in Bailey v. Security National Servicing Corp., 154 F.3d 384 (7th Cir.1998), Horkey v. J.V.D.B. & Associates, 333 F.3d 769 (7th Cir.2003), and )Ruth v. Triumph Partnerships_, 577 F.3d 790 (7th Cir.2009) that the absence of a demand for payment is just one of several factors that come into play in the commonsense inquiry of whether a communication is made in connection with the collection of a debt. The nature of the parties’ relationship is also relevant, and the court found it significant in Bailey (which held that the communication was not the collection of a debt) that there was a preexisting forbearance agreement in place. “As was implicit in all three cases, the purpose and context of the communications-viewed objectively-are important factors as well”. In the case before it the court determined that the context and content of the servicer’s letter was sufficient to bring the claim within the scope of the FDCPA because the borrower was in default, the letter offered to discuss “foreclosure alternatives”, and they asked for financial information in order to initiate that process. The court viewed the letter as the “opening communication in an attempt to collect [borrower’s] defaulted home loan-by settlement or otherwise”. Though it did not explicitly ask for payment, the letter was an offer to discuss repayment options, which qualify as a communication in connection with an attempt to collect a debt. Accordingly, it was a mistake to dismiss the complaint on the sole ground that none of the communications explicitly demanded payment.

VAGUELY WORDED COMPLAINT PLEADING A VIOLATION OF THE FAIR HOUSING ACT MEETS THE HIGHER STANDARD REQUIRED FOR FEDERAL PLEADINGS PRONOUNCED BY THE SUPREME COURT

The Seventh Circuit in Swanson v. Citibank, N.A., 10-1122 (7th Cir. July 30, 2010) has allowed a vaguely worded complaint alleging violations of the Fair Housing Act to proceed despite a strong dissent from Judge Posner. In this case the Plaintiff applied for a home-equity loan with the Bank having been previously denied a home-equity loan from another lender. A Bank representative told the Plaintiff that because she owned her home jointly with her husband he had to apply as well. The Plaintiff suspected that this was a ploy to discourage African-Americans from submitting loan applications. She therefore asked to speak to a manager who confirmed the Bank’s policy and that its loan criteria were more stringent than those of other banks but otherwise did not want to discourage her from applying for the loan. She applied for the loan and was ultimately turned down. Plaintiff cried discrimination and sued under the Fair Housing Act. The court explored the recent pronouncements by the Supreme Court in a trio of cases, Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 563, 127 S.Ct. 1955 (2007); Erickson v. Pardus, 551 U.S. 89, 127 S.Ct. 2197 (2007), and Ashcroft v. Iqbal, —- U.S. ——, 129 S.Ct. 1937 (2009) on what it takes to state a claim under Rule 8 of the Federal Rules of Civil Procedure. It read these cases as requiring the plaintiff to give enough details about the subject-matter of the case to present a story that holds together. In other words, the court will ask itself could these things have happened, not did they happen. In the case before it the Plaintiff’s complaint identifies the type of discrimination that she thinks occurs (racial), by whom (the Bank, through the manager, and the outside appraisers it used), and when (in connection with her effort in early 2009 to obtain a home-equity loan). This is all that she needed to put in the complaint to state a claim under FHA. Judge Posner dissented believing that the complaint lacked additional allegations to support the inference of discrimination such as the fact that the Plaintiff was competing with a white person for a loan. Also, other facts alleged in the complaint actually refuted the discrimination theory. The Bank was the second bank to turn down the loan request and the loan was approved subject to an appraisal which turned out not to support the loan request.

WHEN THE MORTGAGOR RESCINDED UNDER TILA BUT LACKED THE MEANS TO TENDER THE LOAN PROCEEDS THE COURT MODIFIED THE MORTGAGE WITH DIFFERENT LOAN TERMS TO ACCOMMODATE THE MORTGAGOR’S ABILITY TO REPAY

In Avelo Mortg., LLC v. Jeffery, A-0765-08T1 (N.J. Super. Ct. App. Div. July 15, 2010) the Borrowers defended a foreclosure action by arguing that the failure of the lender to comply with their notice of rescission entitles them to a dismissal of the foreclosure complaint because the security interest is rendered void pursuant to § 1635 of TILA. The judge agreed, dismissed the foreclosure complaint and voided the security interest. However, the judge ruled that the lender could proceed on the note, with all defenses available to the Borrowers. The appellate court reversed that ruling finding that this was an inappropriate remedy. The Borrowers imperfectly rescinded the mortgage because they did not return the balance they received to the lender nor directed the return of the proceeds to the prior lender who was paid off with the Plaintiff’s funds. Consequently, rescission was not the equitable remedy that the court should have applied. Extending the well recognized rule that courts have the equitable power to modify the statutory rescission process, the appellate court said the trial court instead should have considered judicially modifying the mortgage. “The mortgage and note should be modified or reformed with the equitable goal of restoring the parties to the status quo”.