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

September 2008

RESPA and TILA claim based on scheme by lender to direct inflated appraisals tossed because neither statute regulates the quality of the services provided.

The U.S. District Court for the Southern District of New York in Cedeno v. IndyMac Bancorp, Inc., 06 Civ. 6438 (S.D.N.Y., August 26, 2008) was asked to decide if a lenders failure to disclose to the plaintiff class that it selected appraisers and appraisal companies who performed faulty and defective appraisal services which inflated the value of residential properties in order to allow the lender to complete more real estate transactions and obtain greater profits violated RESPA and TILA. The plaintiff argued that under RESPA’s “anti-kickback” provision, 12 U.S.C. § 2607(a), a person is prohibited from giving or accepting “any fee, kickback, or thing of value” as part of a real estate settlement service involving a federally related mortgage loan. The court held that, even assuming that the lender received a “thing of value” in the form of inflated appraisals, and that it promised and provided business in return, the plaintiff could not state a claim under RESPA. Under RESPA’s “safe harbor” provision the payment for goods or facilities actually furnished or services actually performed is not prohibited. See 12 U.S.C. § 2607©(2). There was no dispute that the appraiser received a fee for the appraisal so the safe harbor applied. The court rejected the plaintiffs’ attempt to avoid the “safe harbor” provision by arguing that the appraisal was “faulty and inaccurate”. The court said that RESPA does not apply because it is not a “price control” statute. The TILA claim was similarly disposed of on the grounds that TILA does not regulate the quality of the service but only requires that the cost of the service be set out.

Debtor’s pre-petition escrow obligations under the mortgage documents were “claims” for purposes of the Bankruptcy Code’s automatic stay.

The servicer in Campbell v. Countrywide Home Loans, Inc. 07-20499, —- F.3d ——, (5th Cir. (Tex.), August 26, 2008 ) took the position that a debtor’s pre-petition escrow obligations under the mortgage documents were not “claims” for purposes of the Bankruptcy Code’s automatic stay. It therefore reasoned that it could increase the amount of the pre-petition escrow payments without having the stay lifted. It relied on RESPA’s rules allowing a servicer to recalculate monthly escrow payments to ensure that there would be a sufficient balance in the debtor’s escrow account to satisfy the escrow expenses as they became due. The servicer posited that a “claim” for the unpaid escrow payments would only accrue when it paid an escrow expense, and there were insufficient funds in the escrow account to cover the expenses. The Fifth District affirmed the Bankruptcy court which held that the pre-petition escrow payments are “claims” for purposes of the automatic stay. The stay does not determine a creditor’s claim but merely suspends an action to collect the claim outside the procedural mechanisms of the Bankruptcy Code. Therefore, staying efforts to collect pre-petition escrow amounts does not bar a servicer from asserting its contractual rights in the bankruptcy court. However, the Circuit court reversed the finding that the servicer violated the stay by including these amounts in its Proof of Claim. The court found “no precedents in which a court has held that asserting a right to payment in a Proof of Claim constitutes a violation of the automatic stay. In fact, a number of courts * * * have found that an automatic stay has no effect on actions that are expressly allowed under the Bankruptcy Code.”

Debt collector’s legal mistake not fatal because it was a “bona fide error” under the FDCPA.

In Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 538 F.3d 469 (6th Cir., August 18, 2008) the Debtor brought an action against a debt collection law firm alleging violations of the FDCPA arising from the law firm’s use of a deceptive foreclosure notification. The debtor claimed that Defendants violated the FDCPA by representing that her debt would be presumed valid unless she disputed the debt “in writing”. The FDCPA does not require that the dispute be in writing. See, Camacho v. Bridgeport Financial, Inc., 430 F.3d 1078 (9th Cir.2005) (a debt collector’s notice violates the FDCPA in so far as it states that disputes of validity of debts must be in writing). Nonetheless, the law firm was let off the hook by invoking the bona fide error defense. Relying on opinions from the Tenth and Seventh Circuit, the Sixth Circuit held that the bona fide error defense under the FDCPA applies to mistakes of law as well as to clerical errors. In ruling this way the Court distinguished the contrary authority which analogized the FDCPA’s bona fide error defense with the nearly identical language found in TILA’s bona fide error defense provision (which has been held to apply only to clerical errors). Because “TILA’s bona fide error provision expressly excludes errors of legal judgment while the analogous provision in the FDCPA does not have such limitation suggests that, unlike the TILA, Congress did not intend to limit the defense to clerical errors”. The case also instructs how a firm can “maintain procedures reasonably adapted to avoid error”. The law firm’s practice of designating its senior principal, who regularly attends conferences and seminars that focus on FDCPA issues, as the individual responsible for compliance with the FDCPA and the firms regular subscription to CLE materials on FDCPA and other efforts to keep abreast of the law were deemed sufficient to demonstrate the maintenance of procedures reasonably adapted to avoid errors in legal judgment.