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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April 2009

FORECLOSING IN THE NAME OF WRONG PARTY NOT A VIOLATION OF FDCPA, PROVIDED THE OWNER OF THE MORTGAGE AND NOTE ACTUALLY OWNED THEM AT THE TIME THE FORECLOSURE COMMENCED.

Among other debt collection claims the district court in Whittiker et al., v. Deutsche Bank Nat. Trust Co., 1:08 CV 300. —- F.Supp.2d ——, (N.D.Ohio, March 17, 2009) was asked to assess whether the plaintiff stated a claim under the Fair Debt Collection Practices Act because the defendant in state court foreclosure proceedings misrepresented who owned the mortgage and notes and thus allegedly concealed the fact that it lacked capacity to bring the actions. In two of the foreclosures, the debt was assigned to the defendant and recorded prior to the final adjudication; in the other one the loan was assigned and recorded prior to or at the same time the foreclosure was filed. The court observed that the simple inability to prove present debt ownership at the time a collection action is filed does not constitute a FDCPA violation. However, a cause of action exists where the plaintiff in the underlying collection action asserted it was the owner of the debt “all the while knowing that they did not have means of proving the debt,” that FDCPA complaint will survive a motion to dismiss for failure to state a claim. The court distinguished the allegations in this case because the plaintiffs did not claim that defendant filed the underlying foreclosure actions with the knowledge that it did not have the means to prove ownership of the debts. In fact, the defendant, as trustee, was the holder of the loans of each of the plaintiffs at the time the state foreclosure actions were filed. The fact that it may have filed the foreclosure actions before assignment of the debt was completed is not deceptive or misleading to the least sophisticated debtor as to the defendant’s ability to prove ownership of the debts, the existence or amount of the debts, the plaintiffs’ obligations to pay the debts, or the ability of defendant to legally prevail in the foreclosure actions. The filing of a foreclosure action by a plaintiff in the process of obtaining an assignment not yet fully documented is not a deceptive, misleading, or abusive tactic and does not violate the FDCPA.

CONSUMER NEED ONLY SEND WRITTEN NOTICE OF RESCISSION, NOT ACTUALLY SUE TO RESCIND, WITHIN THREE YEARS TO PRESERVE A CLAIM UNDER TILA.

The Chapter 7 trustee in In re Hunter, 400 B.R. 651 (Bkrtcy. N.D.Ill., March 10, 2009) filed an adversary complaint against the originator of two consumer residential mortgage loans obtained by debtor prepetition and assignee of one of the loans, seeking damages and rescission of both loans on the basis of defendants’ alleged Truth in Lending Act (TILA) violations. The borrower sent notice to rescind both loans two weeks shy of the third anniversary of the transaction. She filed bankruptcy a month or so later and the trustee brought his TILA rescission suit nearly six months after the loan closed. Defendants moved to dismiss the rescission claims on the basis that they were time-barred. The court denied the motion finding that the rescission request was timely and that neither TILA nor the Supreme Court in _Beach v. Ocwen Fed. Bank,_523 U.S. 410 (1998) required that suit be brought within three years. Because Regulation Z provides that “to exercise the right to rescind, the consumer shall notify the creditor of the rescission by mail, telegram or other means of written communication”. 12 C.F.R. § 226.23(a)(2). The court determined that the written notice sufficed to trigger and preserve the right to rescind. It also found that TILA does not require the consumer to file a lawsuit to exercise the right to rescind. Both the statute and the regulation require only notification to the creditor. If the consumer timely exercises the right to rescind and the creditor fails to respond, the consumer should have a year to file suit. Id. According to the court, the Defendants’ interpretation would unfairly “reward creditors for failing to take the steps upon receipt of notice set forth in 15 U.S.C. 1635(b).”

PLAINTIFF’S CLAIM AGAINST SERVICER FOR “OUTRAGEOUS CONDUCT” NOT PREEMPTED AND SUFFICIENTLY PLEAD A CLAIM UNDER FCRA.

At issue in Llewellyn v. Shearson Financial Network, Inc., 08-cv-00179 (D. Colo., March 31, 2009) were the legality of efforts by a loan servicer to collect on a loan the plaintiff believed to have been repaid (but was in fact still outstanding due to an intermediary’s absconding of the funds). The plaintiff plead that he contacted the servicer to inform them that the loan had been paid in full but the servicer nevertheless provided negative credit information regarding plaintiff to various credit reporting agencies. Plaintiff sued under the Fair Credit Reporting Act (FCRA) claiming that the servicer’s conduct was outrageous. The servicer argued that the outrageous conduct claim was preempted by the FCRA and that the conduct alleged was not sufficiently outrageous. The court disagreed finding that the conduct alleged adequately stated a claim for outrageous conduct under Colorado law. It rejected the servicer’s preemption defense on the basis that the statutory authority for preemption, 15 U.S.C. § 1681h(e) is limited to actions in the “nature of defamation, invasion of privacy, or negligence with respect to the reporting of [credit] information … except as to false information furnished with malice or willful intent to injure such consumer.” An outrageous conduct claim is not a claim for “defamation, invasion of privacy, or negligence,” nor is it necessarily “in the nature of” such a claim. “Outrageous conduct claims occupy a well-established niche in the common law, discrete from the claims specifically described in the statute”. Also a claim for outrageous conduct is cognizable within the express exception of § 1681h(e) permitting claims based on “false information furnished with malice or willful intent to injure.” The court also rejected the contention that 15 U.S.C. § 1681t(b)(1)(F), which provides that “[n]o requirement or prohibition may be imposed under the laws of any State with respect to any subject matter [ ] relating to the responsibilities of persons who furnish information to consumer reporting agencies” preempts a state-law outrageous conduct claim. Noting that a recent unpublished case, Pinson v. Equifax Credit Information Servs., —-Fed.Appx. ——, 2009 WL595991 (10th Cir. March 10, 2009) affirmed a district court’s dismissal of state tort claims of libel, false-light, and invasion of privacy by explaining that the “state-law claims were preempted by 15 U.S .C. § 1681t(b)(1)(F), the Llewellyn court refused to follow that case because it had no precedential effect. The court instead followed the reasoning explained in cases such as Gorman v. Wolpoff & Abramson, LLP, 552 F.3d 1008, 1026-27 (9th Cir. 2009) and Saint Torrance v. Firstar, 529 F.Supp.2d 836, 841 (S.D.Ohio 2007) which said that treating § 1681t as broadly preempting every common-law tort claim arising out of credit reporting disputes gives the statute a broader reach than is necessary or appropriate.

MORTGAGEE’S FAILURE TO ABIDE BY HUD REGULATIONS ON REHABILITATION LOAN DOES NOT GIVE RISE TO A PRIVATE CAUSE OF ACTION.

In Hayes v. M&T Mortgage Corp., 1-07-1063 (Ill.App.Ct.,March 25, 2009) the plaintiff filed an action against the mortgagee seeking damages for the mortgagee’s failure to abide by applicable HUD regulations relating to rehabilitation loans and cited the breach of those regulations as the basis for dismissal of the mortgagee’s foreclosure complaint. The court entered judgment for the mortgagee on all claims. On appeal the appellate court rejected the plaintiff’s contention that her mortgage agreement’s references to HUD regulations made those regulations a part of the loan agreement. To be construed as incorporating an entire second document, the mortgage contract must display an intention to completely adopt that document, not merely require compliance with specified portions. The provisions cited reflect only an acknowledgment that the lender’s foreclosure rights under the mortgage are subordinate to applicable HUD regulation; they do not demonstrate intent to make each loan regulation enforceable under the parties’ agreement. The court also noted that authority from other jurisdictions supported the view that that the HUD regulations do not support either direct or implied private causes of action for their violation. Wells Fargo Home Mortgage, Inc. v. Neal, 398 Md. 705, 715, 922 A.2d 538, 543-44 (2007). The court adopted the holding in Wells Fargo and concluded that because the HUD regulations were not specifically incorporated into the contract between the parties, their alleged breach by the lender did not create a cause of action. It did observe that the lender’s breach of those regulations was a defense to the foreclosure but because the plaintiff did not raise breach as an affirmative defense the trial court properly denied the plaintiff’s motion to dismiss the foreclosure complaint.