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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June 2010

CLAIM THAT VIOLATIONS WERE APPARENT ON THE FACE OF THE DISCLOSURES MEANS THAT VIOLATIONS WERE ALSO APPARENT FOR EQUITABLE TOLLING PURPOSES

In an attempt to invoke the equitable tolling doctrine on a TILA damage claim against an assignee the plaintiff in Conder v. Home Sav. of Am., CV 077051AGCT (C.D. Cal. June 14, 2010) alleged that the disclosures provided to him before his loan closed violated TILA by failing to adequately explain the nature of his loan. But he also alleged that the “violations … are objectively and reasonably apparent on the face of the documents provided to Plaintiff and Class Members, because the disclosures provided can be determined to be incomplete and inaccurate by a comparison among the [Truth in Lending Disclosure Statement], the other disclosure statements, and the Note.” The court found that the allegation that the violations were “objectively and reasonably apparent on the face” of the documents defeated plaintiff’s equitable tolling argument. The reason being that a reasonable plaintiff would have known of the existence of a possible claim within the limitations period if the violations were “objectively and reasonably apparent on the face” of the documents received at the loan closing. The court was not convinced by the plaintiff’s argument that by alleging that the violations were “objectively and reasonably apparent on the face” of the loan documents he “was alleging that the TILA violations were apparent to professionals,” not “to a lay person like [Plaintiff].” But ignorance of TILA or lack of sufficient expertise to understand loan terms is not sufficient to apply the equitable tolling doctrine.

MORTGAGOR HAS NO RIGHT OR STANDING TO ENFORCE THE HAMP REGULATIONS AGAINST A SERVICER WHO REFUSED TO MODIFY A LOAN

The Home Affordable Modification Program (“HAMP”) has lately been cited by disgruntled mortgagors who did not receive a loan modification to their liking. The latest of these cases has gone the way of almost all the rest: mortgagors are not third party beneficiaries under the program so they have no enforceable rights. In Hoffman v. Bank of Am., N.A., C 10-2171 SI (N.D. Cal. June 30, 2010) the Plaintiff sued for breach of the HAMP servicer’s agreement as a third party beneficiary to the contract and claimed he had a private right of action to enforce the HAMP regulations that Defendant allegedly violated. The court followed the nearly dozen other courts which have determined that a borrower is not a third party beneficiary of the HAMP servicer’s agreement. Plaintiff is at most an incidental and not an intended beneficiary to the HAMP servicer’s agreement. It would be unreasonable, the court observed, for a qualified borrower seeking a loan modification to rely on the HAMP servicer’s agreement as granting him an enforceable right since the agreement does not actually require that the servicer modify all eligible loans, nor does any of the other language of the contract demonstrate that the borrowers are intended beneficiaries. The Plaintiff’s attempt to distinguish his case from the other cases was misguided. In addition to claiming a breach of contract for the denial of the loan modification, the Plaintiff also claimed that Defendants had breached the HAMP servicer’s agreement by other means that were not alleged in the other cases. For example, Plaintiff alleged that Defendants did not follow through on written and implied promises of the servicer’s agreement. More specifically, Plaintiff contended that Defendants erroneously instituted foreclosure proceedings while a loan modification application was being processed. The court was not impressed. Not only were the facts in those cases identical to the facts of Plaintiff’s case but the distinction Plaintiff attempts to raise was of no consequence. The only contradictory district court case cited by the Plaintiff, Reyes v. Saxon Mortg. Servs., No. 09cv1366 DMS (WMC) (S.D.Cal. November 5, 2009) was deemed unhelpful as there was no analysis to support the decision and, more importantly, the judge who decided Reyes rejected the third party beneficiary argument in a subsequent case based on detailed analysis of the contract at issue.

CLAIM FOR COLLECTING A DISCHARGED DEBT CANNOT BE PURSUED OUTSIDE THE BANKRUPTCY COURT

In Townsend v. M & T Mortg. Corp., 3:09CV1866 (M.D. Pa. June 23, 2010) the Plaintiffs sued in District Court for the Defendant’s attempt to collect a debt that had been previously discharged in Bankruptcy. The Plaintiffs asserted that recovery was available under §§ 524(a)(2) and 105(a) of the U.S. Bankruptcy Code and the FDCPA. The Defendants moved to dismiss the suit on the grounds that the Plaintiff had no private right of action for violations of the discharge injunction contained in §524(a)(2) and that §105(a) did not create substantive rights that would otherwise be unavailable under the Bankruptcy Code. The court agreed. It rejected the notion that although §524(a)(2) contains no explicit private right of action, the court has the power through §105(a) to issue an order of contempt against the Defendants for violating the discharge injunction. The legislative history of §524 did not indicate that Congress intended to create a private right of action under §524 and the court followed other courts in not implying one. Nor does §105(a) allow a district court to exercise jurisdiction to find Defendants in contempt for violating the discharge injunction is equally unavailing. Following Third Circuit precedent, the court concluded that the power contained in §105(a) to issue orders and injunctions to enforce the Bankruptcy Code “is a power tool, but … it operates only within the context of Bankruptcy proceedings.” Plaintiffs must therefore go before the Bankruptcy court to obtain that relief. As such, no private cause of action exists pursuant to §§ 524(a)(2) and 105(a) and plaintiff cannot bring a claim in this court based on a violation of the discharge injunction. Regarding the FDCPA claims, the court found they were preempted by the Bankruptcy Act. Because the claims are based on alleged violations of the Bankruptcy Code the remedies under the Bankruptcy Code are the sole remedies for their alleged actions. Following the reasoning from the Ninth Circuit, the court concluded that to permit a simultaneous claim under the FDCPA would allow through the back door what a plaintiff cannot accomplish through the front door—a private right of action. Since the Third Circuit has adopted the reasoning of the Ninth Circuit that no private right of action exists under §524, the conclusion that §524 precludes FDCPA claims follows logically.

Mortgage Loan Servicer is a Real Party in Interest

The right of a mortgage loan servicer to sue has been the subject of much litigation and not only in the mortgage foreclosure area. In a recent Seventh Circuit opinion, CWCapital Asset Mgmt., LLC v. Chicago Properties, LLC, 09-3506 (7th Cir. June 29, 2010) a mortgage servicer sued the mortgagor and landlord, its owners who guaranteed the loan for commercial mortgage placed in securitization trust, and the former tenant. The servicer claimed that it was contractually entitled to rent owed for time remaining on a lease after tenant abandoned the premises, including money that the tenant paid the mortgagor in settlement of underlying suit for unpaid rent. The District Court ruled “seemingly as an after-thought” that the servicer was not a real party in interest and dismissed the suit under Fed. R. Civ. P. 17(a). The Seventh Circuit reversed. The opinion explained the servicer’s place in the mortgage securitization procedure. After mortgage loans close, they are placed in a securitization trust and the trust holds the legal title to the mortgages. The “trustee or in this case the trustee’s delegate (the plaintiff)” is responsible for servicing those mortgages. The servicer is the trust’s collection agent to whom all power and authority to service and administer is delegated under the pooling and servicing agreement. Under the terms of the pooling and servicing agreement, the servicer “has the whip hand; he is the lawyer and the client”; while the trustee’s duty was merely to provide support when needed. It likened the servicer to an assignee for collection who must render to the assignor the money collected by the assignee’s suit on his behalf (minus the assignee’s fee) but can sue in his own name without violating Rule 17(a). Though a servicer may not be an assignee, it also has a personal stake in the outcome of the lawsuit because it receives a percentage of the proceeds of a defaulted loan that it services.