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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January 2010

TILA requires there be a proximate cause between the violation and the consumer’s injury to sustain a claim of actual damages.

A recent Third Circuit decision held that a consumer must establish that there is a proximate cause between the violation and the consumer’s injury to sustain a claim of actual damages for a TILA violation. In Vallies v. Sky Bank, No. 08-4160 (3rd Cir., Dec. 31, 2009) the court observed that actual damages are treated differently from statutory damages under TILA. TILA states that statutory damages of not less than $400 or greater than $4,000 are recoverable in a transaction secured by real property if the creditor fails to comply with any requirement of TILA. 15 U.S.C. § 1640(a)(2). For actual damages TILA provides that where the creditor fails to comply with any requirement of the Act it is liable in an amount equal to the sum of “(1) any actual damage sustained by such person as a result of the failure.” 15 U.S.C. § 1640(a)(1). Coupled with the phrase “sustained by such person as a result of the failure” in §1640(a)(1) the court concluded that TILA “links the loss to the failure to disclose.” The plain meaning of § 1640(a), therefore, requires causation to recover actual damages. “In the context of TILA disclosure violations, a creditor’s failure to properly disclose must cause actual damages; that is, without detrimental reliance on faulty disclosures (or no disclosure), there is no loss (or actual damage)”. The court was not impressed by the argument that a detrimental reliance standard will make actual damages for TILA disclosure violations difficult to prove and may create obstacles for class certification because of the individualized fact-specific nature of the reliance inquiry. Given that the requirements of proving actual damages are dictated by TILA’s remedial structure the court felt it was compelled to rule this way. “By providing for statutory and actual damages, the statute achieves its dual purpose of deterrence and compensation. The compensatory remedy of actual damages is permitted only in cases where the violation caused harm-where harm was “sustained by [the consumer] as a result of” the violation”.

FDIC is not liable for TILA damages as it is not a voluntary assignee and is not liable for TILA rescission because it is no longer the holder of the mortgage.

In King v. Long Beach Mortg. Co. No. 06-11931-WGY (D. Mass., Dec.09, 2009) a debtor filed an action under TILA seeking damages and rescission against the FDIC, which was appointed the receiver of a failed lender, and against the lender’s successor, which purchased debtor’s mortgage from the FDIC. The District Court held that TILA barred the claims for monetary damages, rescission and attorney fees against the FDIC. The damages and attorney fees claim was easily disposed of because TILA expressly provides that a “civil action” against a creditor may only be brought against a “voluntary assignee” of that creditor. 15 U.S.C. § 1641(e)(1). The FDIC is not a “voluntary assignee” because it was statutorily obligated to accept appointment as the Receiver. The TILA rescission claim failed as well but for a different reason. The court agreed that any consumer with the right to rescind “may rescind the transaction as against any assignee of the obligation,” 15 U.S.C. § 1641© and that “[a]ny assignee” includes governmental agencies, such as the FDIC, that step into the shoes of a failed bank. But rescission against the FDIC was impossible because rescission is the unmaking of a transaction between parties to that transaction and another bank has replaced the FDIC as the party to the loan transaction. Applying the dictionary definition of “assignee”, the FDIC was an “assignee” when it first became receiver and acquired the assets of the failed lender but it is no longer an “assignee” because the rights in the mortgage were transferred to a new lender. Furthermore, the term “any”, which precedes the word “assignee,” in Section 1641© is not intended to refer to past or previous assignees. “It would be absurd to interpret the use of ‘any’ as having the effect of making the rescission remedy available against every single person that had previously held rights to a loan transaction but has since transferred the rights to someone else. Rather, the term ‘any’ is used simply to emphasize that the rescission remedy applies to any assignee, regardless of their knowledge or involvement in the original TILA violation, or their status as holder in due course”. Since it no longer holds any rights in the mortgage, the FDIC no longer fits the description of “assignee” or “any assignee” and the debtor cannot rescind against it.

Service of process during the FDCPA’s validation period must be preceded by notice to the consumer clarifying that the lawsuit does not alter the information contained in the validation notice.

The FDCPA provides that after receiving a validation notice required under 12 U.S.C. § 1692g(a), the consumer has thirty days to dispute the debt or request the name of the original creditor. If the consumer does so,” the debt collector must “cease collection of the debt, or any disputed portion thereof” until the debt collector provides the relevant information. § 1692g(b). The validation period, however, “is not a ‘grace period’; in the absence of a dispute notice, the debt collector may demand immediate payment and to continue collection activity. Relying on this provision, the debt collector in Ellis v. Solomon and Solomon, P.C., No. 09-1247-cv (2nd Cir., January 13, 2010) served the debtor with summons during the validation period rather than waiting until the validation period expired. The debtor sued the debt collector under the FDCPA contending it violated the FDCPA by personally serving her with a summons and complaint during the FDCPA thirty-day validation period, without explaining that the commencement of the lawsuit did not affect the rights set forth in the validation notice. The district court held for the debtor finding that the debt collector violated §1692g(b) which proscribes collections activities that “overshadow or … [are] inconsistent with” the validation notice. The Second Circuit agreed. It held that service of process during the validation period must, at a minimum, be preceded or accompanied by notice to the consumer clarifying that the lawsuit does not in any way alter the information contained in the validation notice. The court acknowledged that while the 2006 amendments to the FDCPA stated that the institution of a lawsuit does not constitute an initial communication, “there is still the real potential for confusion when a consumer is served with a lawsuit during the validation period. As explained by the District Court, ‘[w]ithout some explanation to the consumer of the relationship between [the] suit and [the] provisions in the notice, it may well appear to the least sophisticated consumer that being taken to court trumps any other out-of-court rights she had.’”