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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February 2009

WHERE THE DEMAND FOR RESCISSION WAS MADE WITHIN THREE YEARS BUT SUIT FOR RESCISSION WAS NOT BROUGHT WITHIN THREE YEARS, THE COURT WAS WITHOUT JURISDICTION TO CONSIDER CLAIM

In Ramos v. Citimortgage, Inc., CIV. 08-02250 (E.D.Cal. Jan. 8, 2009), the consumer sent a letter to the assignee of the mortgage holder (assignee) demanding rescission of the loan which was made on September 25, 2005. The demand was based on the originator’s failure to supply the notice of the right to cancel required by TILA. The notice was sent to the assignee on August 11, 2005 and suit for rescission and money damages for not honoring the rescission was filed on September 24, 2005. The defendant moved to dismiss the complaint for failure to state a claim. As to damage claim for failure to rescind, brought under Section 1640, the court ruled that that claim was timely because it was brought within one year of the demand. As for the rescission claim, the court ruled that irrespective of the assignee’s timely receipt of the notice of rescission, the fact that the plaintiff did not file the complaint within three years from the date on which he consummated his loan, meant that the court was without jurisdiction to consider the claim, citing Miguel v. Country Funding Corp., 309 F.3d 1161, 1165 (9th Cir. 2002).

DISTRICT COURT’S SPLIT ON WHETHER THE CONSUMER’S INABILITY TO TENDER RESCISSION PROCEEDS WILL JUSTIFY DISMISSAL OF THE RESCISSION CLAIM AT THE PLEADING STAGE

In three recent California District Court decisions, the courts were asked to dismiss TILA rescission actions on the ground that the consumer could not demonstrate the ability to tender. In Alcaraz v. Wachovia Mortg., FSB, 08-cv-01640 (E.D.Cal. Jan. 21, 2009), the assignee of the lender argued that the Plaintiff was not entitled to injunctive relief or rescission in the absence of an allegation that she “is truly able and willing to do ‘equity’ by tendering the full indebtedness.” The assignee pointed to the allegation in the complaint that the plaintiff lacked sufficient income “to afford or pay the loan” and thus acknowledged her inability to tender the full debt. Although, the complaint failed to allege the consumer’s ability to tender, the court was “troubled” that the assignee attempted to rely on a factual issue to defeat the claim. It denied the motion but admonished the Plaintiff to take heed of F.R.Civ.P. 11(b)’s requirements if she later elects to amend her complaint.

In Cosio v. Simental, 08-6853 (C.D.Cal. Jan. 27, 2009), a Central District of California court similarly refused to dismiss a TILA claim as premature. The assignee asserted that the plaintiff’s had not alleged nor shown the ability to tender the benefit they received under the loan. The Court viewed the assignee as challenging the Plaintiffs’ ability to tender what benefit the Court determines appropriate. The court found that the assignee’s “fears appear well-founded. After all, by their own admission plaintiffs allege that they ‘do not have sufficient income to pay monthly mortgage payments due on these option ARM loans.’” Nevertheless, the Court could not conclude with certainty on the underdeveloped factual record that plaintiffs will be unable to tender payment if they ultimately prevail on their claim for rescission. Simply because plaintiffs presently did not have sufficient funds available to make certain payments does not necessarily mean that at the time of rescission Plaintiffs will be unable to tender. “Circumstances may very well change between now and the time of tender.”

The opposite conclusion was reached in Garza v. American Home Mortgage,Co., 08-1477 (E.D.Cal. Jan. 27, 2009). In that case, the District Court dismissed the complaint with leave to amend to allege, subject to F.R.Civ.P. 11(b) requirements, that plaintiff has the ability to tender and pay back what she has received. The court observed that “[r]escission is an empty remedy” without the consumer’s ability to pay back what she has received (less interest, finance charges, etc.). The court found that the complaint failed to address “head on” her ability to tender loan proceeds. It failed to hint that the plaintiff was able to fulfill her obligations under 15 U.S.C. §1635(b) and 12 C.F.R. §226.23(d). The complaint therefore lacked a necessary element of the TILA rescission claim.

TENNESSEE SUPREME COURT REVERSES APPELLATE COURT’S HOLDING THAT THE FAILURE TO ADVISE INSURER OF FORECLOSURE CONSTITUTED “INCREASE IN HAZARD” ALLOWING INSURER TO DISALLOW COVERAGE

As we reported in the January 2008 newsletter, a Tennessee Appellate court held that a mortgagee’s failure to advise the hazard insurer of the commencement of foreclosure proceedings constituted an “increase in hazard” allowing the insurer to disclaim coverage. That decision has been mercifully overturned. In U.S. Bank, N.A. v. Tennessee Farmers Mutual Ins. Co., W2006-02536, you may recall, the bank initiated foreclosure proceedings but did not notify the insurance company. Before the foreclosure process was complete, the house was destroyed by a fire. The bank made a claim for the loss which the insurer denied and cancelled coverage. The insurance company asserted that the foreclosure proceedings constituted an increase in hazard of which the bank was required to notify the insurance company. On January 29, 2009, the Tennessee Supreme court reversed the appellate court and held that the initiation of foreclosure proceedings did not constitute an “increase in hazard”. The court also found that the mortgagee did not have a duty under Tennessee insurance law to notify the insurer of the commencement of foreclosure proceedings. Foreclosure was not an “increase of hazard.”

FDCPA DOES NOT PROHIBIT A DEBT COLLECTOR FROM COMMUNICATING WITH AN ATTORNEY FOR ANOTHER CREDITOR OF THE DEBTOR

In Acosta v. Campbell, No. 07-10373 (11th Cir. Jan. 28, 2009), the plaintiff claimed that the defendants violated the FDCPA, specifically, 15 U.S.C. §1692c(b), by sending an allegedly confidential payoff letter to the attorneys for another one of her creditors, a defendant in her foreclosure action. Under a plain reading of the FDCPA, he argued, the only third parties with whom a debt collector may communicate are its own attorney or the consumer’s attorney and that “[t]he statute does not create a blanket exception for all attorneys of all creditors to communicate about a consumer’s disputed debt.” The district court agreed with the Magistrate who found that because it was a confidential payoff letter provided to the attorney for another creditor and because “[a]ttorneys for creditors are excluded from application of the FDCPA,” the plaintiff failed to state a claim. In affirming the District Court, the Eleventh Circuit in an unpublished opinion relied on Vega v. McKay, 351 F.3d 1334 (11th Cir. 2003) which holds that a foreclosure complaint which included the FDPCA notice was not an initial communication under the FDPCA; consequently, a communication made by a party in a foreclosure action or its counsel regarding the foreclosure action was not a “communication” either. A communication between attorneys for creditors in the same action does not implicate a consumer’s privacy interests as the second mortgage holder would necessarily know about the plaintiff’s default through the foreclosure proceedings.

OVERCHARGING FOR SETTLEMENT SERVICES GIVES PLAINTIFF STANDING TO BRING A RESPA CLAIM

There was a single question presented to the court Carter v. Welles-Bowen Realty, Inc., 07-3965 (6th Cir. Ohio, Jan. 23, 2009) and that was whether a plaintiff must allege a concrete injury, such as an overcharge, to have standing to bring a RESPA violation. The plaintiffs in *Carter *alleged that the defendants violated RESPA because the defendant title agency is allegedly a sham entity. It does not perform any settlement work but still receives unearned revenues while the real settlement work is actually performed by Chicago Title. The district court dismissed the complaint finding that the plaintiff’s lacked standing to sue under §8 of RESPA because they “do not allege any overcharge or other concrete injury.” The Sixth Circuit reversed. The Court started by reviewing the statute which it found prohibits “in no uncertain terms” the payment of “any fee, kickback, or thing of value” from business referrals. Where a violation of these blanket prohibitions occurs, RESPA provides that defendants are liable to the “person or persons charged” for an amount equal to three times the amount of any charge paid for such settlement service. Parsing the plain meaning of the term “any” showed that charges are neither restricted to a particular type of charge (such as an overcharge) nor limited to a specific part. Thus, a defendant is liable for the charges assessed the home buyer for settlement services as a whole, and not just for overcharges. This conclusion, it found, was supported by the legislative history (where, for example, Congress amended RESPA’s damages provision, replacing the “thing of value” language with the phrase “any charge paid for such settlement services”); agency regulations (where HUD opined that whether an overcharge occurs “is irrelevant in determining whether the act is prohibited” by RESPA. 24 C.F.R. §3500.14(g)(2)); and RESPA’s statutory purpose (to-wit; that “RESPA allows individuals to police the marketplace in order to ensure impartiality of referrals and competition between settlement service providers, thereby creating a market-wide deterrent against unnecessarily high settlement costs”).