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Supreme Court Holds That Filing of Bankruptcy Claim on Time-Barred Debt Does Not Violate FDCPA Banner Image

Supreme Court Holds That Filing of Bankruptcy Claim on Time-Barred Debt Does Not Violate FDCPA

Month: May 2017

Supreme Court Holds That Filing of Bankruptcy Claim on Time-Barred Debt Does Not Violate FDCPA

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The United States Supreme Court recently held that a creditor who files a bankruptcy claim on a time-barred debt does not violate the Fair Debt Collection Practices Act (“FDCPA”).  See Midland Funding, LLC v. Johnson, 137 S. Ct. 1407 (2017).  In the case, the debtor filed for bankruptcy under Chapter 13 of the Bankruptcy Code, and the creditor filed a proof of claim asserting that it was owed credit card debt.  However, the credit card had not been used in over ten years, outside Alabama’s six-year statute of limitations.  The bankruptcy court disallowed the claim after the debtor’s counsel objected, and the debtor subsequently brought an action against the creditor under the FDCPA, alleging that the filing of a proof of claim on a time-barred debt was “false, deceptive, or misleading” and used “unfair or unconscionable means” to collect the debt.  15 U.S.C. § 1692e; 1692f.  The district court dismissed the action, but the United States Court of Appeals for the Eleventh Circuit reversed.

In a decision authorized by Justice Breyer and joined by Chief Justice Roberts and Justices Kennedy, Thomas and Alito, the Supreme Court reversed the Eleventh Circuit.  First, the Court held that Alabama law provides that a creditor has a right to payment of a debt even after the limitations period has expired, even if it cannot bring an action on the same.  Accordingly, the Court found that the right to payment constitutes a “claim” under the Bankruptcy Code.  Second, the Court distinguished this case from those in which courts held that attempts to collect time-barred debts via the filing of civil actions violated the FDCPA, stating that a debtor in bankruptcy is protected by a trustee and a claims resolution process which “makes it considerably more likely” that the creditor’s claim will be “met with resistance, objection, and disallowance.”  Similarly, untimeliness is normally treated as an affirmative defense and “the trustee normally bears the burden of investigating claims and pointing out that a claim is stale.”  Finally, the Court noted that the Advisory Committee on Rules of Bankruptcy Procedure “specifically rejected a proposal that would have required a creditor to certify that there is no valid statute of limitations defense” while amending the Rules in 2009.  Therefore, the Court found that there was not an FDCPA violation.

The dissent, authored by Justice Sotomayor and joined by Justices Ginsburg and Kagan, disagreed with the majority’s conclusion that a debtor would be more protected in a bankruptcy action than in a typical lawsuit.  In response to the majority’s claim that the bankruptcy process “makes it considerably more likely” that a time-barred claim will be “met with resistance, objection, and disallowance,” the dissent stated, “such objections require ordinary and unsophisticated people (and their overworked trustees) to be on guard not only against mistaken claims but also against claims that debt collectors know will fail under law if an objection is raised.”  The dissent further held that the filing of such a claim would be a “trap for the unwary” that meets the FDCPA standard of “unfair or unconscionable.”  The dissent concluded by seeking the intervention of Congress, stating “[i]f Congress wants to amend the FDCPA to make explicit what in my view is already implicit in the law, it need only say so.”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Clarissa Gomez at cgomez@riker.com.

Sixth Circuit Holds That Servicer Does Not Have Duty to Respond to Multiple Modification Applications Under RESPA

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The United States Court of Appeals for the Sixth Circuit recently upheld the dismissal of a borrower’s Real Estate Settlement Procedures Act (“RESPA”) complaint, holding that a loan servicer was not required to respond to the borrower’s repeated modification requests.  See Brimm v. Wells Fargo Bank, N.A., 2017 WL 1628996 (6th Cir. May 2, 2017).  In the case, the borrower executed a mortgage in 2006 and defaulted on the loan in 2008.  He modified the loan twice, in 2009 and 2010, but continued to default and a foreclosure action was commenced in 2012.  Although the borrower made several more modifications requests between 2012 and July 2014, they were all rejected for various reasons.  The property was sold at a foreclosure sale in January 2015.  The borrower then brought an action against the servicer in which he alleged, among other things, that the servicer had violated 12 CFR 1024.41 and the implied covenant of good faith and fair dealing.  Specifically, he argued that the servicer did not adequately respond to his final July 2014 modification request.  Under 12 CFR 1024.41, if a servicer receives a loss mitigation application from a mortgagor more than 37 days prior to a foreclosure sale, it must evaluate all loss mitigation options and inform the borrower in writing of its determination regarding the same.  12 CFR 1024.41(c).  A servicer may not conduct a foreclosure sale while a timely and properly-filed application is pending.  Nonetheless, the district court rejected the borrower’s claim and dismissed the action.

On appeal, the Sixth Circuit affirmed the lower court’s decision.  First, it held that the servicer did respond to the July 2014 modification response by informing the borrower that the application was incomplete.  Although the borrower disputed this claim, he was unable to submit proof to the court that his application was complete.  More importantly, the court held that 12 CFR 1024.41(i) states, “[a] servicer is only required to comply with the requirements of this section for a single complete loss mitigation application for a borrower's mortgage loan account.” (emphasis added).  Thus, even if the servicer had not responded to the final modification request, it was not required to do so because it had responded to previous requests.  Finally, the court held that the servicer did not breach the implied covenant of good faith and fair dealing because nothing in the mortgage documents required it to address modification requests.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Clarissa Gomez at cgomez@riker.com.

Facebook Instant Message Notification: You've Been Served in New Jersey

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The crossroads of law (evidence, civil procedure, jurisdiction, legal correspondence and service) and social media continue to be a hot topic for litigators. Every day courts across the country are faced with evidentiary issues regarding communications posted on social media.  But how about starting a lawsuit via social media? How about submitting to jurisdiction due to your use of social media?  If a litigant is unable to serve a summons and complaint by usual means of service, can service be accomplished by Facebook, or LinkedIn, or Twitter? As these social networks continue to grow in scope and utility, attorneys need to be aware of social media as another tool in the toolbox to accomplish procedural goals in a cost and time efficient manner. As recently as ten years ago, it was considered a cutting-edge development in civil practice for a court to allow the service of a summons by email.  Since then, email has all but replaced ordinary mail as a means of written communication. Social media seems to be the next big thing in the development of civil procedure.

The unorthodox use of social media to serve pleadings has been previously allowed in Minnesota and New York, in certain limited circumstances, and now it seems it may become an acceptable practice here in the Garden State.

Last week the Honorable Stephen Hansbury, P.J. Ch. published a Superior Court opinion that allowed the use of Facebook for an out-of-state defendant whose address could not be discovered as a means of substituted service.   Judge Hansbury also determined that the court had limited personal jurisdiction over the defendant since he corresponded to New Jersey residents intentionally and that communication was the subject of the litigation.  In the published opinion in KA v. JL , Judge Hansbury’s decision concluded that service by use of social media was acceptable and that personal jurisdiction existed, stemming from defendant’s use of social media.

In or about 2011, a Minnesota Court also endorsed service of a divorce proceeding via Facebook.  In Mpafe v. Mpafe, Hennepin County, MN No. 27-FA-11-3453, the Minnesota court authorized service of divorce proceedings on defendant, who was believed to have left the country, by email, "Facebook, Myspace or any other social networking site." Judge Burke of Minnesota wrote, "The traditional way to get service by publication is antiquated and is prohibitively expensive.”  In doing so the Order stated:

IT IS HEREBY ORDERED THAT:

It shall be considered sufficient service for Petitioner to serve Respondent by publication on the internet. All information and timing requirements that would go into a newspaper shall be posted online. Petitioner may choose the format in which they believe it is most likely that Respondent will receive notice. This may include but is not limited to the following:

Contact via any facebook, myspace, or other social networking site. . .

In 2014, a Staten Island man also received permission to use Facebook to serve his ex-wife legal notice that he did not want to continue paying child support.  Staten Island Support Magistrate Gregory Gliedman noted in his Order that it was the first of its kind in New York.

Then in March, 2015, New York followed in another domestic dispute. The New York County Supreme Court ruled that plaintiff-wife could serve her husband with a divorce summons via Facebook, through a private message.  In Baidoo v. Blood-Dzraku (N.Y. Mar. 27, 2015), the New York court determined that since the defendant’s address was unknown, and there was evidence that the defendant regularly checked his Facebook account, service through a Facebook message was acceptable.

In the KA v. JL case, the biological out-of-state father contacted an adopted New Jersey child for whom he had never had any contact, through Facebook.  He then began sending messages to the child through social media advising the child of his identity, the mother’s identity and other personal information.  The adoptive parents sought an injunction in family court.  Judge Hansbury concluded that the defendant’s intentional interaction with New Jersey via the Internet was enough to confer limited personal jurisdiction over the defendant related to the social media activity.

With regard to service of the pleadings, the Court concluded that under the circumstances presented here, service by Facebook, albeit novel and non-traditional, is the form of service that most comports with the constitutional standards of due process. Not only is it reasonably calculated to provide defendant with notice that he is being sued for divorce, but every indication is that it will achieve what should be the goal of every method of service: actually delivering the summons to him.

The footnote here is that Judge Hansbury ultimately issued the restraining order restraining the defendant from making any further posts or messages, it was served via Facebook, and the defendant has since ceased all communication.

In time we can expect to see more contexts for which the use of service via social media and limited jurisdiction over litigants arise in family matters and the balancing act of a litigant’s due process rights.  It is something to think about the next time you receive a notification on Facebook from your ex-spouse ---- you may be served with more than a cute meme.

New York District Court Holds Plaintiff’s Failure To Properly File the Statutorily Required Notice of Pendency Warrants Denial of Motion For Default Judgment

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The United States District Court, Northern District of New York, recently denied plaintiff’s motion for default judgment and for judgment of foreclosure and sale of certain property, finding plaintiff’s notice of pendency to be ineffective and, therefore, void.  See Ditech Financial LLC v. Frantz, 2017 WL 1184206 (N.D.N.Y. March 29, 2017).  In the case, plaintiff filed the action pursuant to Article 13 of the New York Real Property Actions and Proceedings Law (“RPAPL”) seeking to foreclose a mortgage executed by defendants.  After defendants failed to answer, plaintiff moved for default judgment.  In addressing plaintiff’s motion, the court first found that plaintiff met all of the common law requirements to foreclose its mortgage: plaintiff sufficiently demonstrated that defendants executed a note secured by a mortgage on the property and that those defendants defaulted on the note.  However, the court found that plaintiff did not meet all of the procedural requirements.  Section 1331 of the RPAPL requires that “[t]he plaintiff, at least twenty days before a final judgment directing a sale is rendered, shall file in the clerk’s office of each county where the mortgaged property is situated a notice of pendency of the action, which shall specify, in addition to other particulars required by law, the date of the mortgage, the parties thereto and the time and place of recording.”  Pursuant to CPLR 6511(a), the notice of pendency must also be filed with a copy of the complaint, unless the complaint has already been filed in that county.  The court found that plaintiff did not file the complaint with the notice of pendency as required by CPLR 6511(a), and that the only document attached to the notice of pendency was a legal description of the property.  The court noted that the purpose of a notice of pendency is to provide constructive notice to a purchaser from any defendant named in the notice and bind a purchaser by all proceedings taken in the action after such filing.  In this case, the failure to file a complaint with the notice rendered plaintiff’s notice defective and void.  Therefore, the court denied plaintiff’s motion for default judgment without prejudice.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Clarissa Gomez at cgomez@riker.com.

New York State Court Discharges and Cancels Mortgage Which Plaintiff Sought to Foreclose Due to Plaintiff’s Wrongful Conduct

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The Supreme Court of New York, Tompkins County, recently granted the “drastic remedy” of dismissing plaintiff bank’s residential foreclosure action against defendant debtors, cancelling the notice of pendency filed in the action and discharging and cancelling the mortgage which plaintiff sought to foreclose, all because of plaintiff’s “pattern of conduct which gave rise to an inference of willfulness.”  See Citibank, N.A. v. Bravo, 2017 WL 935519 (N.Y. Sup. Ct. March 7, 2017).  There, plaintiff commenced a foreclosure action in 2013.  In 2014, after a series of delays caused by plaintiff, the trial court issued an order precluding plaintiff “from offering at the trial of this action, or upon any dispositive motion made herein, proof of the indebtedness alleged in the complaint or that the plaintiff is the current holder of the note.”  Specifically, in granting the preclusion motion, the Court found that plaintiff engaged in a pattern of conduct which gave rise to an inference of willfulness, such as refusing to appear for a deposition, cancelling depositions at the last minute, missing a CPLR 3408 mandatory conference, and failing to comply with a court-ordered deposition deadline.  The Third Department affirmed this decision.  See Citibank, N.A. v. Bravo, 140 A.D.3d 1434, 1435-36 (3d Dept. 2016).

Defendants then moved for summary judgment dismissing the complaint with prejudice, on the basis that the preclusion order prevents plaintiff from establishing that it is the holder of the underlying indebtedness, which is necessary to permit foreclosure of the mortgage.  In granting defendants’ motion for summary judgment, the Court acknowledged that the remedy sought by defendants is drastic, “however, that course was chartered when the Appellate Division affirmed that the preclusion order was an appropriate sanction for plaintiff’s own wrongful conduct.”  Therefore, “dismissal on the merits is a proper sanction where a party willfully fails to provide disclosure or where an order of preclusion prevents a party from proffering evidence in support of its claims.”  Accordingly, the Court dismissed the action with prejudice, discharged and cancelled the mortgage and cancelled the notice of pendency.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Clarissa Gomez at cgomez@riker.com.

Minnesota Appellate Court Holds Title Insurance Company Not Liable for Boundary Line Dispute Under the Defective Description and Survey Exceptions

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In a noteworthy decision for the title insurance industry, the Minnesota Court of Appeals recently held on April 10, 2017 that a title insurance company had no duty to defend its insured in a boundary line dispute when the policy contained defective-description and survey exceptions. See Fischer Sand & Aggregate, LLP v. Old Republic Nat'l Title Ins. Co., 2017 WL 1316130 (Minn. Ct. App. 2017). In the case, in conjunction with the purchase of a property, the insured sought title insurance from defendant title insurance company. The title insurance company issued a title commitment that included exceptions, including (i) a defective-description exception, because the insured’s proposed legal description of the property was based on acreage and not metes and bounds, and (ii) a survey exception. The insured did not remedy either exception before the title insurance company issued the policy. The insured later became involved in litigation with its neighbor over the insured’s claim that it had obtained a gap parcel located between the parties’ properties via adverse possession. The neighbor contested the claim and later amended his counterclaim to challenge the boundary between the insured’s parcel and the gap parcel. The insured prevailed in the litigation, then sought reimbursement of its attorneys’ fees incurred in the boundary-line dispute. The title insurance company denied coverage, citing the policy’s defective-description and survey exceptions. The insured sued the title insurance company for breach of contract, and the trial court granted the title insurance company’s motion for summary judgment.

On appeal, the appellate court affirmed the lower court’s decision. The Court held that the neighbor’s claims had “evolved continuously throughout the litigation,” but could be grouped into two categories: claims relating to the insured property’s allegedly improper legal description and claims relating to a historic fence that the neighbor claimed set the boundary between the properties. For the legal description claims, the Court affirmed that the title commitment provided the insured notice that the acreage description was defective, but the insured nonetheless chose not to provide a metes and bounds description. Thus, rather than rectifying the issue, the insured accepted the policy without this coverage. For the boundary fence claims, the Court held that an accurate survey would have disclosed the proper boundary between the parcels. As with the legal description, the insured was given notice of this deficiency in the title commitment but elected not to rectify it. Accordingly, the title insurance company did not have to provide coverage for these excepted issues.

Finally, the Court rejected the insured’s claim that these exceptions rendered coverage under the policy illusory. The insured did not proffer any evidence that it reasonably believed that a portion of the premium was allocated to these issues, nor could it contest the fact that the policy still covered other title issues. The fact that the policy “clearly states that [the title insurance company] would not cover claims like those in [this] litigation [proves] there was no illusion of coverage.”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Clarissa Gomez at cgomez@riker.com

Coming of Age for Spill Act Liability: The State Is Not Considered a “Person” with Liability until after 1977

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Last month the New Jersey Supreme Court held that the State of New Jersey does not have cleanup liability for its actions that pre-date the 1977 enactment of the New Jersey Spill Compensation and Control Act (the “Spill Act”).  NL Industries, Inc. v. State of New Jersey,  (A-44-15)(076550)(Sup. Ct., March 27, 2017).  This decision creates a disparity in liability for private parties, which have retroactive Spill Act liability, and the State, which does not.  This case will certainly impact sites involving pre-1977 discharges where the State may have responsibility and now, as a result of this decision, will not have to contribute to the cost of the remediation.  But, perhaps most striking about this decision is the Court’s rigorous application of the rules of statutory construction in reviewing the enactment of and amendments to the Spill Act.  As a result, after a detailed and somewhat convoluted review, the Court said it could find no evidence that the Legislature clearly and unambiguously intended to abrogate the State’s sovereign immunity for pre-1977 discharges. 

By way of brief background, NL Industries, Inc. (“NL”) brought the case after being compelled to conduct an expensive remediation of the Raritan Bay Slag Superfund Site.  NL brought its action against the State under the Spill Act based upon actions the State took, or failed to take, in the 1960’s and early 1970’s in connection with the construction of a seawall to address beach erosion in the Laurence Harbor.  Material used in the construction included slag, an industrial byproduct, some of which was allegedly brought from the former NL secondary lead smelter in Perth Amboy.  NL’s complaint sought recovery from the State for providing a grant to riparian land owned by the State upon which the seawall was constructed.  In addition, NL alleged that the State had liability because the New Jersey Department of Environmental Protection knew that slag was being used in the construction that was completed in the early 1970’s, but took no action.  All of the State’s actions occurred prior to the 1977 enactment of the Spill Act. 

In response, the State moved to dismiss NL’s complaint, arguing in part that sovereign immunity barred NL’s claims.   The parties did not dispute that, upon the enactment of the Spill Act in 1977, the State has potential liability because the State is expressly included in the Act’s definition of “person.”  N.J.S.A. 58:10-23.11b.  Rather, the question was whether that liability applies retroactively to encompass activities that occurred before the Spill Act became effective. 

The Court engaged in a detailed review of the Spill Act and its various amendments looking for an express intent by the Legislature to have the statute apply retroactively to the State in abrogation of its sovereign immunity.  Even though the Spill Act defines the State as a “person,” and there were amendments that applied Spill Act liability retroactively and that provided the right to contribution from any “person” responsible for a discharge, the Court determined that it could not find the express intent that is needed.   

Justice Albin, the lone dissenter, found that the majority engaged in “interpretive acrobatics” leading to an “absurd result” and that a clear reading of the Spill Act requires treating both private parties and the State the same way because they are both defined as “persons.”  Thus, to the extent the Spill Act applies retroactively to a private entity, it should also apply against the State. 

While the effect of this decision is somewhat limited because it only applies to cases where the State may have liability for pre-1977 discharges, on a broader level, the NL decision appears to be a departure from the long line of cases in New Jersey that have applied the rules of statutory interpretation to limit the defenses available under the Spill Act. For example, as recently as 2015, the Supreme Court held that there is no statute of limitations for private party contribution claims because such a defense is not listed among the available defenses in the Act.  Of course, this case addresses claims against the government, which involves overlapping, but not identical, policy considerations from matters affecting private entities.  Whether in response to this decision the Legislature will act to unequivocally waive sovereign immunity for pre-1997 discharges by amending the Spill Act remains to be seen.  Until that happens, however, do not look to the State to contribute to the cost of remediating their pre-1977 discharges.  

For more information, please contact the author Alexa Richman-La Londe at alalonde@riker.com or any attorney in our Environmental Practice Group.   

New York Supreme Court Dismisses Plaintiff’s Complaint to Foreclose on Tax Liens Against Bona Fide Purchasers For Value, but Finds City Liable for Negligence in Mistakenly Marking the Liens as Satisfied

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In an action to foreclose on two tax liens that were assigned to plaintiff, the New York Supreme Court, Westchester County, recently granted defendant purchasers’ motion for summary judgment dismissing plaintiff’s complaint as against them on grounds that they are bona fide purchasers for value, as well as plaintiff’s motion for summary judgment against the defendant city for negligence mistakenly marking the liens as satisfied.  See Equity Inv. & Mortg. Co. v. Smith, 2017 WL 1066109 (Sup. Ct. March 21, 2017).  In the case, plaintiff purchased tax liens on the property at issue in 2011 and were assigned the same.  However, the city mistakenly marked the liens as having been satisfied.  In 2014, defendant purchasers bought the property.  Before doing so, they obtained a title report that did not disclose any open or unpaid tax liens against the premises.  After the purchasers bought the property, the city realized its mistake and corrected the records.  In 2015, plaintiff commenced an action seeking to foreclose the property.  After the purchasers answered and claimed to be bona fide purchasers for value, plaintiff amended the action to assert a negligence claim against the city.  The purchasers moved for summary judgment dismissing the claim as against them, and plaintiff moved for summary judgment on its negligence claim against the city.  The city opposed both motions, arguing that (i) the purchasers should have examined the actual paper copies of the tax liens and not just the records, and (ii) it was immune from liability for the negligence claim.  The Court granted both motions.

In granting the purchasers’ motion and dismissing plaintiff’s complaint as against them, the Court found that it is undisputed that the city’s official tax records indicated that the two liens were marked cancelled and satisfied at the time of their purchase, and the purchasers were entitled to rely on the public records.  Therefore, the purchasers were bona fide purchasers and are entitled to a cancellation of the tax liens.  As to plaintiff’s motion for summary judgment against the city, the Court found that plaintiff demonstrated the existence of a special relationship with the city because, by selling the tax liens that were assigned to plaintiff, the city had a form of direct contact with plaintiff and knowledge that selling an invalid tax lien could lead to harm.  The Court further found that plaintiff justifiably relied on the city’s affirmative undertaking of selling what should have been valid and enforceable tax liens.  Accordingly, the city “is not entitled to a windfall due to its own error in marking the tax liens as satisfied and cancelled.”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Clarissa Gomez at cgomez@riker.com.

Supreme Court Holds That Cities May Have Standing to Bring Discriminatory Lending Lawsuits Under the FHA for Banks’ Alleged Redlining Practices

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In a groundbreaking decision issued Monday, the United States Supreme Court held that a city may have the right to bring an action against a lender for violations of the Fair Housing Act of 1968 (“FHA”) when the lender's allegedly discriminatory lending caused large-scale foreclosures and vacancies in predominantly minority neighborhoods. See Bank of Am. Corp. v. City of Miami, Fla., 2017 WL 1540509 (U.S. May 1, 2017). Under the FHA, it is unlawful for “any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin.” See 42 U.S.C. 3605(a). The FHA further provides standing for any “aggrieved person” to bring an action for these discriminatory practices. See 42 U.S.C. 3613.

In this case, the City of Miami brought two actions in which it claimed that two defendant banks, Bank of America and Wells Fargo, issued predatory loans to minority customers which, inter alia, caused a disproportionate number of foreclosures and vacancies in predominantly minority neighborhoods. The presence of these foreclosed and vacant properties allegedly injured the City in two ways. First, it decreased property values in these neighborhoods, which reduced the property tax revenue collected by the City. Second, the vacant properties caused blight and unsafe conditions, which forced the City to increase spending on municipal services to protect these neighborhoods. The banks filed motions to dismiss, arguing that the City’s alleged injuries were not within the “zone of interests” protected by the FHA and that the City did not allege a sufficient causal connection between the allegedly discriminatory actions and its injuries. The district court agreed and dismissed the actions. On appeal, the Eleventh Circuit reversed the lower court’s decisions and held that the City could pursue its actions. The Supreme Court granted certiorari, and on May 1, 2017 it vacated and remanded the Eleventh Circuit’s order in a 5-3 decision authored by Justice Breyer and joined by Chief Justice Roberts and Justices Ginsburg, Sotamayor and Kagan.

The majority first held that a plaintiff could only have standing if its “interests fall within the zone of interests protected by the law in question.” In determining whether the City’s interests fell within the “zone of interests” for the FHA, the Court referenced prior decisions in which it interpreted the FHA’s use of “aggrieved person” broadly, including Trafficante v. Metropolitan Life Insurance Company, 409 U.S. 205 (1972) and Gladstone Realtors v. Vill. of Bellwood, 441 U.S. 91 (1979). It noted that Congress had amended the FHA in 1988 and did not significantly change the definition of “aggrieved person” even though it was aware of these prior decisions. Moreover, the Court relied on its holding in Gladstone Realtors, in which it held that residents and a village had a cause of action against realtors under the FHA based on the realtors’ racially-motivated steering of prospective purchasers to different neighborhoods, because the realtors’ conduct “produc[ed] a ‘significant reduction in property values [that] directly injures a municipality by diminishing its tax base, thus threatening its ability to bear the costs of local government and to provide services.’” Accordingly, the Court found that the City is an aggrieved person with standing under the statute.

Nonetheless, the Court held that the Eleventh Circuit had not adequately addressed whether the banks’ allegedly predatory loans proximately caused the City’s damages in this matter. Although the Eleventh Circuit determined that the City’s injuries were foreseeable, “foreseeability alone does not ensure the close connection that proximate cause requires.” Instead, the City was required to prove a “direct relation” between the banks’ allegedly discriminatory lending practices and the City’s injuries, and the Eleventh Circuit did not address this issue. The Court declined the parties’ invitation to “draw the precise boundaries of proximate cause” under the FHA, noting that neither the Eleventh Circuit nor any other court of appeals had weighed in on the issue, and stated that “[t]he lower courts should define, in the first instance, the contours of proximate cause under the FHA and decide how that standard applies to the City’s claims for lost property-tax revenue and increased municipal expenses.” The Court then vacated the Eleventh Circuit’s judgment and remanded the action to make this determination.

Justice Thomas concurred in part and dissented in part, and was joined by Justices Kennedy and Alito. The dissent primarily disagreed with the majority’s holding regarding the FHA’s zone of interests. Although the dissent acknowledged the broad definition of “aggrieved person” used in Trafficante and Gladstone Realtors, it stated that, in Thompson v. North American Stainless, LP, 562 U.S. 170 (2011), the Court had found the relevant language from those decisions to be “‘ill-considered’ dictum leading to ‘absurd consequences.’” In that vein, “nothing in the text of the FHA suggests that Congress was concerned about decreased property values, foreclosures, and urban blight, much less about strains on municipal budgets that might follow.” The dissent further noted that the Gladstone case addressed other injuries beyond the “budget-related injur[ies]” pled by the City, and that the City’s injuries alone are insufficient to satisfy the FHA’s zone-of-interests limitation. The dissent also maintained that the majority’s conclusion here was narrow and that the Opinion “should not be read to authorize suits by local businesses alleging the same injuries that Miami alleges here.”

Finally, although the dissent agreed that the City must sufficiently allege a direct connection between the alleged wrongdoing and the City’s injuries, it argued that the remand was unnecessary because the Court had enough information before it to hold that there was no proximate cause. The dissent argued that the City’s theory, which the dissent characterized as being that “petitioners’ allegedly discriminatory mortgage-lending practices led to defaulted loans, which led to foreclosures, which led to vacant houses, which led to decreased property values, which led to reduced property taxes and urban blight” was too attenuated and remote for proximate cause.

Although the Court leaves open the question of how the City can sufficiently allege proximate cause under the FHA, this decision nonetheless adds to the forms of statutory relief municipalities now have to remedy the economic woes caused by foreclosures, whether rightly or wrongly.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Stuart Lederman at slederman@riker.com.

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