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.

Sign up for the list

The newsletter is sent out monthly.

Archive

July 2009

A guarantor has no claim for discrimination under ECOA.

The wife of the owner of a development company who was sued in Champion Bank v. Regional Development, LLC, 4:08 CV 1807 CDP (May 13, 2009 E.D.Mo.) said she was asked (forced?) by the company’s lender to guarantee a note issued for company in violation of the Equal Credit Opportunity Act (ECOA). ECOA makes it “unlawful for any creditor to discriminate against any applicant with respect to any aspect of a credit transaction” on the basis of the applicant’s marital status. 15 U.S.C. § 1691. In support of this argument, she pointed to regulations issued by the Federal Reserve Board that interpreted the term “Applicant” to include “guarantors, sureties, endorsers, and similar parties.” 12 C.F.R. § 202.2(e). The District Court refused to accept the FRB’s interpretation relying on a Seventh Circuit opinion, Moran Foods, Inc. v. Mid-Atlantic Market Devel. Co., 476 F.3d 436 (7th Cir. 2007). Moran held that the Federal Reserve’s interpretation that the term “applicant” includes guarantors is unreasonable and inconsistent with the unambiguous text of ECOA. A guarantor is not an applicant because a guarantor does not, by definition, apply for anything. Moreover, the Seventh Circuit said, a guarantor cannot be denied credit for which he or she did not apply, and “‘thus it is difficult to conceive how a guarantor can claim to have been discriminated against.’” Id. The District Court agreed and said that extending the protections of ECOA to someone in the spouse’s position would expand ECOA beyond its intended purpose and lead to circular and illogical results. She is not able to show discrimination by virtue of the fact that she chose to guarantee her husband’s business loan. She was never denied anything, and there is no logical remedy that would make her whole. “But the very thing she is protesting is that she has been made a guarantor in the first place. [She] cannot claim that she has rights under a statute while simultaneously asserting that she should not be a member of the class of people the statute is designed to protect”.

Assignee may have to answer for an originator’s RESPA violations.

In a question that has vexed litigants and the courts for years a district court in New Jersey, in a thinly-reasoned opinion, held that assignee is liable for the assignor’s RESPA violations. In Carmen v. Metrocities Mortg. Corp., Civ. No. 08-2729 (D.N.J., May 18, 2009), the court found that an assignee can be held to account under RESPA due solely to its assignee status. Despite citing an “inability to find any opinion in which a court decided the issue”, it did discuss the only reported case which has in fact addressed it to date. In In re Murray, 239 B.R. 728, 736 (Bankr.E.D.Pa. 1999), the court held that RESPA liability does not extend to assignees because “[t]he RESPA Regulations define a ‘lender’ as a secured creditor ‘named in the debt obligation and document creating the loan.’ (quoting 24 C.F.R. § 3500.2(b)) and ‘this definition would not include … a subsequent assignee.” In re Murray, 239 B.R. at 736. The New Jersey District court was not persuaded by this simple, but compelling, reasoning. Instead it distinguished Murray on the grounds that it did not address whether an assignee could be held liable for a RESPA violation pursuant to the FTC Holder Rule. The court did not explain how the holder rule applies in these circumstances, however. It also felt that because RESPA, unlike TILA, does not have a specific provision limiting assignee liability Congress surely intended to extend liability to assignees.

Seventh Circuit holds that the Rooker-Feldman doctrine does not bar claim for injury caused by fraudulent schemes despite the lender’s credit bid at the foreclosure sale.

The Court of Appeals for the Seventh Circuit reversed a district court’s finding that a lender’s loan fraud recovery action was barred by the Rooker-Feldman doctrine and claim preclusion due to prior credit bids entered in the foreclosures of the loans. In Freedom Mortgage Corp. v. Burnham Mortgage, Inc., No. 08-3007 (7th Cir., June 23, 2009) the lender sued several settlement service providers alleging that they fraudulently induced the extension of the mortgage loans at issue. However, the lender brought the action after it foreclosed the mortgage loans. In several of those foreclosures it bid the full amount of the judgment through credit bidding. The Court held that the _Rooker-Feldman_doctrine does not prevent (although it may limit) the pursuit of compen¬sation for injury caused by fraudulent schemes. As for claim preclusion, the Court noted that Illinois follows the “same transaction” approach to the rule. So the questions litigated in a mortgage foreclosure action – which is whether the borrower paid – differ from the claims litigated in a case relating to fraudulent appraisals, misrepresentations, and racketeering activity. Although the defendants received the benefit of the lender being limited in its recovery by the value of its credit bids, the Seventh Circuit held that this does not eliminate damages, and nothing in the rule that a credit bid establishes the collateral’s value blocks any of the remedies sought by the lender.

Technical Flaw in Notice to Rescind Did Not Support Longer Period for Rescission

In Melfi v. WMC Mortgage Corp., No. 09-1066, (1st Cir., June 11, 2009) the U.S. Court of Appeals for the First Circuit held that a technical violation of TILA and Regulation Z did not trigger the longer three-year rescission period becuase the documents gave reasonable notice to the borrower that he had three days to rescind the transaction. The borrower argued that, although his documents used the form suggested by the Federal Reserve Board, the notice of his right to rescind was deficient because the spaces for the date of the transaction and the actual deadline to rescind were left blank. The date of the transaction, however, was stamped in the upper right corner of the page, and the notice clearly stated that he had three business days to cancel the transaction. The district court applied the holding from Palmer v. Champion Mortgage, 465 F.3d 24 (1st Cir. 2006). In that case, the plaintiff received a notice of her right to cancel that followed the Federal Reserve Board’s model after the rescission deadline listed on the notice. Even so, the First Circuit held that the notice was “crystal clear” because it included an alternative deadline of three business days following the date that the notice was received. The Court further held that some of the cases finding a blank notice form to be grounds for rescission even though harmless were decided under an earlier version of TILA; noting that in 1995 Congress added a new subsection to TILA which provided that a borrower could not rescind “solely from the form of written notice used by the creditor . . . if the creditor provided the [borrower] the appropriate form of written notice published and adopted by the Board . . . .” Although this safe harbor provision may not apply directly, the Court held that the TILA amendments were aimed in general to guard against widespread rescissions for minor violations. “In any event, in the absence of some direction from Congress or the Board to impose a penalty, we see no policy basis for such a result”.