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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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November 2009

COURT RULES THAT A CONSTRUCTION OF THE NEW “PROTECTING TENANTS AT FORECLOSURE ACT” CAN BE CONSTITUTIONALLY SQUARED BY LIMITING IT TO ONLY THOSE TENANCIES IN DWELLINGS OR RESIDENTIAL REAL PROPERTY WHERE A FEDERALLY RELATED MORTGAGE WAS FORECLOSED.

In *Collado v. Boklari, * No. —- N.Y.S.2d —— 2009 (N.Y.Dist.Ct.) N.Y. Slip Op. 29447, the respondent sought to vacate a judgment of possession and eviction on the ground that a recent federal law, Title VII of 2009 Emergency Economic Stabilization, “Protecting Tenants at Foreclosure Act” of 2009, requires that a tenant be provided a 90 day notice before it can be dispossessed of property. The petitioner only used the 10 day notice mandated by New York law. 12 U.S.C. Sec. 5220(a) of the Act reads that the purchaser in foreclosure “(a) in the case of any foreclosure on a federally related mortgage loan or on any dwelling or residential real property * * * shall assume such interest subject to (1) the provision by such successor in interest of a notice subject to vacate to any bona fide tenant at least 90 days before the effective date of such notice * * *.” (Emphasis added). The respondent argued that the use of the word “or” in Sec. (a) spreads the 90 day Notice to Quit requirement beyond HUD, FHA or other federally related properties to “any dwelling and residential property”. The Court analyzed whether this expansion of federal authority to areas not involving federal expenditure is constitutionally permissible and concluded it wasn’t. The court first noted that the Constitution’s Article I, Section 8(1) “Taxation and Expenditure” power, under which Congress created and operates its assorted affordable housing departments, does not extend federal control to every area of human endeavor. The court decided the drafters use of the word “or” was thus an error. It evoked Supreme Court precedent which authorizes a court to ignore the plain meaning of the word “or”, “inserted into a hastily enacted amendment”, to make it consonant with the function sought to be served, citing Clark v. Uebersce Finanz-Korp., 68 S.Ct. 174 (1947); Markham v. Cable, 66 S. Ct. 193 (1945). “Thus, the simplest way to restore constitutionality to Sec. 5220(a) is to simply deem the insertions of the word “or” as a scrivener’s error and to ignore it”. According to the court, by removing the word the statute now reads that “n the case of any foreclosure on a federally related mortgage loan on any dwelling or residential real property * * * .” Under this construction, the statute limits its reach to only those tenancies arising from dwellings or residential real property in which a federally related mortgage was foreclosed.

SERVICER’S NOT LIABLE UNDER FCRA FOR REPORTING DELINQUENCIES CAUSED BY MORTGAGOR’S FAILURE TO NOTIFY SERVICER’S THAT HE MADE TAX AND INSURANCE PAYMENTS DIRECTLY.

The U.S. Court of Appeals for the Seventh Circuit held in Huckic v. Aurora Loan Services, 07-3826 (7th Cir. Nov. 20, 2009) that two mortgage servicers did not violate FCRA when they reported delinquencies to a credit reporting agency about a mortgagor who had defaulted on his escrow payment obligations but failed to notify the servicers that he paid the tax and insurance payments on his own. The mortgage agreement permitted the mortgagor to pay taxes and insurance premiums himself but he had to notify and provide receipts of those payments to the servicers. He paid the bills but did not notify the servicers. Without knowledge of those payments, the servicers paid the taxes and insurance premiums themselves and repeatedly notified him that his monthly payments would increase by the prorated amount of those payments. When the mortgagor failed to pay the increased amount, the servicers reported him as delinquent to a consumer reporting agency. The borrower filed suit, alleging that the servicers violated the FCRA by furnishing information to the reporting agency that they knew or had reason to know was inaccurate. The Seventh Circuit upheld the lower court’s ruling in favor of the servicers, stating that the mortgagor’s failure to pay the increased payments was a failure to comply with his contractual obligation to “promptly furnish receipts evidencing his [tax and insurance] payments,” and therefore that he was in default on his mortgage obligations. Therefore, the court ruled, the delinquency information provided to CRAs was accurate.
The Court also upheld the lower court’s ruling in favor of the servicers that they had failed to conduct a reasonable investigation of a consumer dispute. The current servicer had removed the negative information which had been reported so its obligations under FCRA had been met. The Court also rejected the argument that because the current servicer had “constructive knowledge” of a delinquency reported by the prior servicer, it had an obligation to inform the prior servicer of the dispute. FCRA does not require an information furnisher to investigate information reported by other entities, however, and that the mortgagor himself had not notified the prior servicer of the dispute.

HAMP DOES NOT PROVIDE A “PROTECTED PROPERTY INTEREST” REQUIRING CONSTITUTIONAL DUE PROCESS PROTECTIONS.

Having been denied loan modifications, the Plaintiffs in Williams v. Timothy F. Geithner, et al. 00-1959 ADM/JJG (Nov. 9, 2009 D. Minn.)) sued their mortgage loan servicers, among others, contending that they had a constitutional right to have their mortgages modified under HAMP. Specifically, Plaintiffs contended that the servicer’s failure to provide written notification of an adverse decision and an opportunity for appeal deprives them of due process of law. The court disagreed. To prevail on a due process claim, the Plaintiffs were required to show a deprivation of a protected liberty or property interest. Plaintiffs argued that the “rules or understandings” underlying HAMP provide two benefits that constitute property interests: (1) the temporary suspension of foreclosure pending a determination on the homeowner’s loan modification application and, (2) the right to receive a loan modification. If these benefits are protected property interests, the protections of due process apply. For a number of reasons, the Court concluded that the regulations did not intend to create a property interest in loan modifications for mortgages in default. First, the statute did not create an absolute duty on the part of the Secretary to consent to loan modifications. Notably, the statute provides that loans may be modified “where appropriate”-a phrase that limits the Secretary’s obligation and evinces a Congressional intent to afford discretion in the decision whether to modify loans in certain circumstances. Next, Congress dictated that requests for loan modifications necessarily consider the net present value (NPV) to the taxpayer. Thus loan modifications are not an entitlement, but are linked to decisions that result in profits to taxpayers. Third, the regulations promulgated by Treasury for administering HAMP clearly demonstrate that the Secretary is allowed the exercise of some discretion, including calculation of the NPV, to the servicers. Finally, if the Secretary prescribed the exact criteria all servicers must use to determine whether a loan has positive NPV then servicers may choose to forego participating in the HAMP program so that they are not forced to modify loans that do not make financial sense. Thus, HAMP does not provide Plaintiffs with a “protected property interest,” the denial of which must comport with due process protections.

SECTION 1635(G) OF TILA DOES NOT REPLACE THE ONE YEAR STATUTE OF LIMITATIONS ON DAMAGE CLAIMS PERIOD WITH A THREE YEAR LIMITATIONS PERIOD.

In Douglas v. Wilmington Finance, Inc., No. 09 C 1370. (N.D.Ill., November 18, 2009) the mortgagor argued that despite not being brought within the time allowed under TILA her damage claim survived by virtue of 15 U.S.C. §1635(g). That provision reads “in any action in which it is determined that a creditor has violated this section, in addition to rescission the court may award relief under section 1640 of this title for violations of this subchapter not relating to the right to rescind.” From this language she asserts that the three year limitations period applies to all TILA violations. She relied on Washington v. Ameriquest Mortg. Co., 2006 WL 1980201 (N.D.Ill.2006), which “adopt[ed] the reasoning of a District of Massachusetts case”, _ McIntosh v. Irwin Union Bank & Trust Co._ , 215 F.R.D. 26, 30 (D.Mass.2003) that ruled just that way. The district court noted that the holding in McIntosh has been drawn into question by other cases in its own district. Those cases have held that for TILA damages claims the one year statute of limitations period is not replaced by the three year limitations period. It joined those decisions in concluding that the one-year statute of limitations in Section 1640(e) applies to TILA damages claims.

SUB-SECTION 108(B), NOT SUB-SECTION 108(A), OF THE BANKRUPTCY CODE OPERATES TO EXTEND THE TIME TO RESCIND UNDER TILA.

At issue in In re West, —- B.R. ——, No. 07-23398-JKF, (Adv. No. 08-2075, Bkrtcy.W.D. Pa., Nov. 19, 2009) was whether Section 108(a) or Section 108(b) of the Bankruptcy Code extends the time within which the debtor may rescind a mortgage under TILA. The debtors asserted that their rescission claim was not time barred because under Section 108(a) they had two years from the filing of the Bankruptcy to bring a claim for relief. It was their position that they gave notice of rescission within the allotted time as extended under § 108(a) when they commenced the adversary. The defendant contended that § 108(b) applied. That section provides that “if applicable nonbankruptcy law * * * fixes a period within which the debtor * * * may file any pleading, demand, notice * * * the trustee may only file, cure, or perform, as the case may be, before the later of (1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or (2) the 60 days after the order for relief.” The court agreed with the defendant. Pursuant to TILA, the right to rescind is effectuated by notifying the creditor of the consumer’s intention to do so. To exercise the right the consumer has to notify the creditor of the rescission by mail, telegram, or other means of written communication. The court read this to mean that the consumer must actually give notice to the creditor and the commencement of the adversary action is not notice. The court noted that other courts have determined that the filing of a complaint seeking rescission can qualify as notice to satisfy the terms of TILA but it is notice that is required by the statute and not the commencement of an action under § 108. As such, the applicable subsection is § 108(b) which provides an additional sixty days from the order for relief to serve notice where that extension is longer than the period provided by nonbankruptcy law.