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New Jersey Federal Court Denies Reconsideration Motion, Holds Debt Collector May Have Violated FDCPA by Threatening Litigation Banner Image

New Jersey Federal Court Denies Reconsideration Motion, Holds Debt Collector May Have Violated FDCPA by Threatening Litigation

Month: July 2018

New Jersey Federal Court Denies Reconsideration Motion, Holds Debt Collector May Have Violated FDCPA by Threatening Litigation

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The United States District Court for the District of New Jersey recently denied a debt collector’s motion for reconsideration and held that the debt collector may have violated the Fair Debt Collection Practices Act (the “FDCPA”) by threatening litigation in an initial letter to a consumer when the debt collector always sent at least a second letter before bringing any action.  See Pollak v. Portfolio Recovery Assocs., LLC, 2018 WL 3105424 (D.N.J. June 25, 2018).  In the case, plaintiff brought a putative class action against the defendant debt collector alleging that the collection letter the debt collector sent to plaintiff violated the FDCPA.  Among other allegations, plaintiff claimed that the letter, which included phrases such as “potential litigation” and “we are not obligated to renew this offer,” violated Section 1692e(5) of the FDCPA, which prohibits any “threat to take any action that cannot legally be taken or that is not intended to be taken.”  The debt collector moved for summary judgment.  The Court denied the motion, finding that a reasonable juror could read the letter as a threat to litigate, and that this was a false or misleading threat under the FDCPA.  The debt collector then filed a motion for reconsideration, arguing that the Court erred in denying the motion because, even if the letter threatened litigation, there was no limitation on the debt collector bringing a lawsuit at the time so there was no FDCPA violation.

The Court denied the motion.  Although the Court did not dispute that there was no legal limitation on the debt collector filing a lawsuit after sending the first letter, “the undisputed evidence demonstrated that if [the debt collector’s] debtors did not respond to the . . . Letter, [the debt collector’s] Litigation Department automatically sent [another] Letter, instead of initiating suit.”  Further, this second letter was “always sent prior to initiating a lawsuit[,]” at which point the account would be referred to an attorney for the first time. (Emphasis added).  Thus, the Court found that the denial of summary judgment was correct.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Dylan Goetsch at dgoetsch@riker.com.

New Jersey Court Grants Lender Summary Judgment on Grounds of Estoppel, Ratification, Equitable Mortgage and Equitable Subrogation

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In an
opinion issued earlier this month in a case successfully argued by the firm’s
Co-Managing Partner, Michael O’Donnell, the Superior Court of New Jersey,
Chancery Division, Bergen County held that a property’s transfer to an LLC was
not fraudulent, and that plaintiff Bank of America therefore could exercise the
right of foreclosure because the mortgage was legal and, alternatively, the
doctrines of ratification, equitable mortgage, and equitable subrogation would
have applied.  See Bank of America Nat’l Association v. R.H.
Surgent, LLC, et al., BER-F-9209-17 (July 3, 2018).  This Opinion is
significant in the Court’s application of several doctrines, including
ratification, equitable mortgage, equitable subrogation, judicial estoppel and
sham affidavit.

This case
involves a multi-million dollar property located in Franklin Lakes, New Jersey
(the “Property”), purchased by Defendant Regina Surgent (“Regina”) in 1988 for
$1,350,000.  The Property was briefly transferred to her husband,
Defendant John Surgent (“John”), in 1995 to obtain a secured business loan from
Hudson City Savings, and was then immediately transferred back to Regina.
In August of 1999, Defendant RH Surgent, LLC (the “LLC”) was formed in the
state of Nevada, with Regina identified as manager and organizer. The Property
was then transferred to the LLC.  A special meeting of the LLC was held
and corporate documents filed to make John the manager of the LLC. In January
2000, Bank of America (“Plaintiff”) issued a loan to John and the LLC, to be
used to refinance and renovate the Property, as evidenced by a note executed by
John on his own behalf and on behalf of the LLC.  The loan was secured by
a mortgage on the Property.  On July 6, 2005, John was convicted of three
federal crimes, after which the federal Government (the “Government”) filed a
motion for the forfeiture of John’s property, including the Property, in the
Eastern District of New York (the “Forfeiture Action”).

Regina
ceased making mortgage payments one year later and Plaintiff filed a
foreclosure complaint in 2007 (the “2007 Foreclosure”).  A Consent Order
was entered into between Plaintiff and the Government in both the 2007
Foreclosure and the Forfeiture Action memorializing an agreement that Plaintiff
had a legitimate interest in the Property superior to the Government’s, that
the Government would forbear from divesting Plaintiff’s interest in the
forfeiture action, and that Plaintiff would be permitted to proceed with the
2007 Foreclosure.  Regina retained Steven Kessler, Esq. (“Kessler”) to
represent her in the Forfeiture Action, where he represented to the court on
her behalf that the Property was held solely by the LLC, the transfer of
interest to the LLC was not fraudulent and was done for estate planning
purposes, and Regina was the sole interest holder in the LLC.  Regina
subsequently prevailed in the Forfeiture Action in 2009, with the Court holding
that John held no interest in the Property.  Kessler later filed suit for
amounts due and owing from Regina in the Supreme Court of the State of New York
and prevailed, thus becoming a judgment creditor.  Eventually, the 2007
Foreclosure stalled and was dismissed for lack of prosecution.  Plaintiff
reinstated the foreclosure proceedings in a 2017 complaint, and John, Regina and
Kessler all answered, arguing, among other things, that John did not have the
authority to encumber the Property with the mortgage on the LLC’s behalf.
Following discovery, Plaintiff moved for summary judgment.

The Court
granted Plaintiff’s motion.  First, it agreed with Plaintiff and held that
the transfer of the Property from Regina to the LLC was not fraudulent,
accepting her prior assertion in the Forfeiture Action that the transfer was
made for estate planning purposes.  Second, the Court found that the
mortgage held by Plaintiff is valid because it was granted by the LLC in
exchange for a loan of $1,750,000, and the loan was used to pay off prior
mortgages and for home improvement, as required by the loan documents.
Moreover, the Court held that John had the ability to bind the LLC due to the
internal LLC documents that granted him this authority.  The Court further
held that Regina could not challenge John’s authority to bind the LLC under the
judicial estoppel and sham affidavit doctrines, as she had argued to the
contrary in the Forfeiture Action.  Similarly, although Kessler was not
judicially estopped from making these arguments on his own behalf simply
because he made the opposite representations as counsel on Regina’s behalf in
the Forfeiture Action, “the court does not look favorably or attach great
weight to statements and arguments made in direct contravention of statements
and arguments made in earlier judicial proceedings where no explanation for the
discrepancy has been provided.” Further, the Court found that Kessler, as a
stranger to the dispute between Plaintiff and John and Regina, lacked standing
as a third party judgment creditor.

Finally,
the Court found that most of the opponents’ arguments were moot because of
Plaintiff’s equitable arguments.  Specifically, even if the mortgage were
legally deficient, the Court held that Plaintiff has a right to foreclose based
on doctrines of ratification, equitable mortgage, and equitable
subrogation.  The Court reasoned that, even if John was not authorized to
bind the LLC, Regina and the LLC ratified the mortgage by their conduct in
continuing to make mortgage payments after John was incarcerated.
Further, Regina was not only aware of the mortgage, she executed corporate
documents for the express purpose of giving John the authority to obtain a loan
and execute a mortgage on behalf of the LLC.  When combined with the fact
that she unquestionably benefited from the loan because the proceeds were used
to pay off prior liens and improve the Property where she had been living since
2006 without paying expenses, the Court found sufficient grounds to impose an
equitable mortgage.  Lastly, the Court held that Plaintiff is equitably
subrogated to the lien position enjoyed because it satisfied the prior liens.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Dylan Goetsch at dgoetsch@riker.com.

Eighth Circuit Holds That Complaint Alleging That Law Firm Violated FDCPA by Attempting to Charge Compound Interest Should Not Be Dismissed

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The United States Court of Appeals for the Eighth Circuit recently reversed a district court and held that a claim against a law firm should not be dismissed, finding that the firm may have violated the Fair Debt Collection Practices Act (the “FDCPA”) by seeking compound interest on a debt in violation of state law.  See Coyne v. Midland Funding LLC, 2018 WL 3423469 (8th Cir. July 16, 2018).  There, the defendant law firm sent plaintiff a letter claiming he owed an “account balance of $17,230.29 consist[ing] of the principal balance of $13,205.30 and interest of $3,871.39 at the rate of 6.00% plus incurred costs of $153.60” on a credit card debt.  According to plaintiff, the $13,205.30 “principal balance” was actually a combination of both principal and contractual interest.  Thus, because the letter represented that plaintiff was being charged interest on contractual interest, plaintiff brought this action alleging a violation of the FDCPA.  Under Minnesota law, a party cannot charge compound interest without a contractual authorization to do so, and plaintiff alleged that he did not agree to be charged compound interest with regard to this credit card debt.  See Minn. Stat. § 334.01.  The district court dismissed the complaint, finding that plaintiff failed to state a claim under the FDCPA.

On appeal, the Eighth Circuit reversed.  Although the Court acknowledged that defendant had attached a contract to its motion papers that purported to authorize compound interest on plaintiff’s debt, plaintiff “specifically contested the terms as ‘unauthenticated,’ noting they were ‘boilerplate’ and did not ‘identify [him] as a party’ to them. He also noted that [defendant] provided no reason to believe the terms were in any way related to the underlying credit card ‘aside from [defendant] just unilaterally stating that those are the terms . . . that applied.’”  Having found that plaintiff plausibly alleged that defendant sent a letter claiming compound interest was due and that he had not agreed to compound interest, the Court held that the FDCPA claim should not be dismissed and reversed the lower court:  “a false representation of the amount of a debt that overstates what is owed under state law materially violates 15 U.S.C. § 1692e(2)(A) as well. It is material not only because the representation violates the plain language of that subsection prohibiting the ‘false representation’ of the ‘amount’ of ‘any debt,’ but also because an overstatement of the debt’s amount necessarily misleads the debtor about the amount he owes under his agreement with the creditor.”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Dylan Goetsch at dgoetsch@riker.com.

Storm Water Runoff Courses Into an Expanding Gap in CGL Insurance Policies

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New case law suggests that environmental policies may be needed to fill widening gaps in the primary insurance held by most businesses (i.e., Commercial General Liability “CGL” policies).  CGL policies typically contain a “pollution exclusion” that excludes coverage for losses relating to “pollutants,” and the definition of pollutants in standard CGL policies is extremely broad.  In fact, a federal court of appeals recently held that storm water runoff qualifies as a pollutant, and, thus, no coverage exists under a CGL policy for damage relating to such runoff.  While certain jurisdictions, including New Jersey, may interpret this exclusion more narrowly, businesses should carefully consider their insurance portfolios to ensure they have appropriate coverage for their operations.

As noted, the United States Court of Appeals for the Eleventh Circuit determined a few months ago that storm water is subject to the pollution exclusion contained in CGL policies.  Centro Dev. Corp. v. Central Mutual Ins. Co., 720 Fed. Appx. 1004 (11th Cir. 2018).  The pollution exclusion at issue defined pollutant as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, soot, fumes, acids, alkalis, chemicals and waste.”  In reaching its decision, the Eleventh Circuit referred to a prior decision in which it found that storm water qualified as a pollutant under the exact same language.  The circuit court also considered that, under the Clean Water Act “[w]hen rain water flows from a site where land disturbing activities have been conducted, such as grading and clearing,” it qualifies as a pollutant.  Hughey v. JMS Dev. Corp., 78 F.3d 1523, 1525 n.1 (11th Cir. 1996).  As a result, the CGL policy did not provide coverage for the damage from the storm water runoff.

While many courts across the country are likely to reach a similar conclusion, see, e.g., Devcon Int'l Corp. v. Reliance Ins. Co., 609 F.3d 214 (3d Cir. 2010) (finding that CGL policy excluded coverage relating to dust and fumes from a construction site), it is not clear whether more policy-holder friendly jurisdictions would reach the same result.  For instance, the Supreme Court of New Jersey, which generally tends to be more protective of policy holders than other jurisdictions, has interpreted the pollution exclusion considered by the Eleventh Circuit as applying only to “injury or property damage arising from activity commonly thought of as traditional environmental pollution,” that is, those hazards that were historically thought of as “environmental catastrophe(s) related to intentional industrial pollution.”  Nav-Its Inc. v. Selective Ins. Co., 183 N.J. 110, 124 (2005).  Storm water runoff would not seem to be related to “intentional industrial pollution,” but there have been few cases applying this standard in New Jersey.  In one recent case, the District Court of New Jersey applying New Jersey law determined after extended motion practice that a CGL policy did not provide coverage for cleanup of accumulated construction debris.  Castoro & Co. v. Hartford Accident and Indem. Co., 2018 WL 3217409 (D.N.J. March 16, 2018).  The accumulation of construction debris similarly does not seem tantamount to intentional industrial pollution, so New Jersey may, at least in this instance, be expanding the breadth of the pollution exclusion.

Nonetheless, these cases, and many others on this same topic, highlight a gap in CGL policies. Environmental insurance policies, e.g. Pollution Legal Liability policies, have traditionally been purchased in more limited instances when there are substantial environmental risks at play, but such policies may provide a broader range of coverages that apply to more every day risks, such as in the examples note above.  In fact, Pollution Legal Liability policies often provide express coverage for “pollution conditions,” and this term generally is defined to include those items excluded as pollutants in a CGL policy.  Businesses should carefully consider their insurance portfolios to determine whether their operations may trigger the pollution exclusion in their CGL policy such that additional environmental coverage is worthwhile.

For more information, please contact any attorney in our Environmental Practice Group.

Kansas Federal Court Dismisses RESPA and FDCPA Claims Against Loan Servicer

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The United States District Court for the District of Kansas recently granted a loan servicer’s motion for summary judgment dismissing claims under the Real Estate Settlement Procedures Act (“RESPA”) and the Fair Debt Collection Practices Act (the “FDCPA”).  See Boedicker v. Rushmore Loan Mgmt. Servs., LLC, 2018 WL 828039 (D. Kan. 2018).  In the case, the defendant loan servicer serviced a mortgage loan for the plaintiff borrowers.  In January 2016, when the borrowers were in default, the servicer sent the borrowers a reinstatement payment plan letter that incorrectly inserted an amount in place of a date, stating “[t]he amount required to reinstate your loan in full as of 7392.91 is $6,686.55.”  After the borrowers defaulted again, they sought another modification that the servicer denied on September 1, 2016.  The borrowers then sent two “Notices of Error” to the servicer on September 14, 2016.  In the first, they claimed defendant erred by not providing an appraisal and a waterfall analysis.  In the second, they inquired as to “whether the ‘trial loan modification’ was a forbearance agreement or modification and what would happen to” a particular payment the servicer had requested.  The servicer responded to these inquiries on November 1, 2016, but the borrowers found some of the servicer’s responses to be inadequate.  The borrowers then brought this action and made claims under RESPA and the FDCPA, and the servicer filed a motion for summary judgment.

The Court granted the servicer’s motion and dismissed the action.  The Court first found that the servicer did not violate RESPA.  None of the alleged issues raised in the Notices of Error are enumerated in 12 CFR 1024.35(b), which “defines the types of errors that are subject to RESPA resolution procedure.”  Thus, even if the servicer had failed to properly respond, it would not have been a violation.  Further, the Court found that the servicer had adequately responded.  The Court also found that defendant did not violate the FDCPA.  The borrowers had made two claims under the FDCPA:  first, that the reinstatement amount in the January 2016 reinstatement letter differed from the amount the servicer reported as due to a credit reporting agency that same month, and second, that the incorrect insertion of an amount in place of a date in the January 2016 letter was a false or misleading representation.  With regard to the first claim, the Court held that the borrowers failed to produce the credit report they claim was at issue and, therefore, there was no proof supporting the borrowers’ allegation.  Moreover, even if the amounts differed, this would only mean that the reinstatement amount was different from the amount due, which is not a violation of the FDCPA.  With regard to the second claim, the Court found that “[t]he insertion of the first number into what was clearly supposed to be a date would have been understood by any reasonable person to be a typographical error, and not a representation of the amount of the debt.”  Thus, the Court dismissed the action.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Dylan Goetsch at dgoetsch@riker.com.

New York Supreme Court Annuls Insurance Regulation 208

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On July 5, 2018, Justice Rakower of the New York County Supreme Court issued a decision annulling the recently-enacted and controversial Insurance Regulation 208.  See New York State Land Title Association, Inc. v. New York State Department of Financial Services, 2018 WL 3306755 (N.Y. Sup. Ct. July 5, 2018).  The New York State Department of Financial Services (“DFS”) issued the regulation after purportedly finding that title insurance companies, title agents, and title insurance closers employed practices that resulted in higher premiums and closing costs for consumers.  Per DFS, these practices included calculating future title insurance rates by incorporating millions of dollars spent on “marketing costs” such as meals, entertainment, gifts, vacations, and free classes; encouraging consumers to pay gratuities and pick-up fees to title insurance closers for satisfying prior mortgages; and charging excessive ancillary fees.

DFS intended Insurance Regulation 208, inter alia, to (1) prevent marketing expenses from being passed on to consumers through increased premiums; (2) prohibit in-house closers—title insurance closers engaged by the title insurance companies or title agents—from receiving pick-up fees from consumers; and (3) cap the fees charged for ancillary services concerning residential real property closings, including Patriot searches and bankruptcy searches.  The regulation ultimately placed restrictions on non-quid pro quo marketing expenses, barred in-house closers from receiving fees for their services from consumers, and placed a 200% of the out-of-pocket costs cap on ancillary fees.  The title insurance industry considered these restrictions to be fundamentally misguided and economically devastating.  Insurance Regulation 208 became effective on December 18, 2017.

In the case, the New York State Land Title Association, Inc., The Great American Title Agency, Inc., and Venture Title Agency, Inc. (collectively as the “Petitioners”) challenged Insurance Regulation 208 as inconsistent with Insurance Law § 6409(d) under which DFS promulgated the regulation.  Insurance Law § 6409(d) states:

No title insurance corporation, title insurance agent, or any other person acting for or on behalf of the    title insurance corporation or title insurance agent, shall offer or make, directly or indirectly, any rebate of any portion of the fee, premium or charge made, or pay or give . . . either directly or indirectly, any commission, any part of its fees or charges, or any other consideration or valuable thing, as an inducement for or as compensation for any title insurance business.

Petitioners argued that the statute only prohibited “quid pro quo inducements,” more commonly referred to as kickbacks; whereas, DFS argued the statute applied broadly to quid pro quo and non-quid pro quo inducements.  Additionally, the Petitioners argued that the sections of Insurance Regulation 208 barring only in-house closers from receiving pick-up fees from consumers and setting a cap on fees for ancillary services, without any economic or other analysis supporting the limitation, were arbitrary and capricious.

The Court examined the legislative history of Insurance Law § 6409(d) and reviewed its statutory construction to interpret the law, and rejected each and every one of the DFS’s arguments.  First, in an opinion highly critical of DFS, the Court held that the Legislature amended the law to “remedy the mischief of kickbacks, not marketing and entertainment expenses.”  Indeed, the Court noted that the statute’s very title, “Filing of policy forms; rates; classification of risks; commissions and rebates prohibited,” supported its conclusion that the Legislature never intended to prohibit “ordinary marketing and entertainment expenses.”  Further, the Court stated “[i]t is common sense that marketing is an inducement for business” and that it would be an “absurd” result “to hold that the Legislature intended to prohibit title insurance corporations from marketing themselves.”  Finding that the current Insurance Law did not authorize DFS to regulate the ordinary marketing and entertainment expenses of the title insurance industry, the Court declared that the Legislature must pass new legislation if it intends to allow such regulation.

Second, DFS attempted to justify prohibiting in-house closers from receiving reasonable pick-up fees while allowing independent closers to charge pick-up fees for the remittal of a loan payoff as a “valid exercise of regulatory authority.”  The Court rejected DFS’s exception for independent closers.  It classified the regulation as “unreasonable and irrational” because DFS asserted that premium fees encompassed closer fees and, therefore, closer fees should be covered by the premium regardless of in-house or independent closer status.  Likewise, if premium fees did not include pick-up fees, the regulation would not be rational.

Finally, Petitioners argued that the cap imposed on ancillary services regarding real estate property closings was arbitrary and lacked supporting economic or other analysis.  In response, DFS argued that capping these fees was a valid exercise of regulatory authority and necessary to protect consumers from excessive fees.  Nonetheless, in the absence of any record to establish that the 200% cap was based on sound reasoning and facts, the Court rejected the cap as arbitrary.

This decision overturning Insurance Regulation 208 in its entirety is a significant victory for the title insurance industry.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Goldie Bryant at gbryant@riker.com.

New Jersey Federal Court Dismisses RESPA and Consumer Fraud Act Claims Arising Out of Loan Modification But Allows FDCPA Claim to Proceed

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The United States District Court for the District of New Jersey recently granted in part and denied in part a loan servicer’s motion for summary judgment seeking dismissal of a host of claims arising out of a purported loan modification, including claims under the Fair Debt Collection Practices Act (the “FDCPA”), the New Jersey Consumer Fraud Act (the “CFA”), and the Real Estate Settlement Procedures Act (“RESPA”).  See Dautrich v. Nationstar Mortg., LLC, 2018 WL 3201786 (D.N.J. June 29, 2018).  In the case, the plaintiff borrowers owned a beach home and defaulted on the mortgage.  Defendant, the servicer on the loan, sent plaintiffs a proposed modification agreement that expired three days later.  Plaintiffs called defendant and reached an agreement that plaintiffs instead had one month to accept the modification.  Plaintiffs then executed the modification, but handwrote a change that delayed their payment obligations by 30 days.  Defendant never countersigned this modified agreement.  Nonetheless, plaintiffs began making payments pursuant to their modified payment schedule (i.e., 30 days late).  Each time defendant received a check, it placed the funds in a suspense account, did not apply the funds towards the debt, and returned the check to plaintiffs with a letter stating that the funds were insufficient to bring the account current and that “the total amount required to bring your account current is $99999.99.”  The actual amount required to bring the account current was over $200,000, but a computer glitch resulted in this incorrect amount being placed on each of the twelve letters sent by defendant to plaintiffs.  Eventually, plaintiffs filed this lawsuit alleging a breach of contract and violations of the FDCPA, the CFA and RESPA.  The breach of contract and the CFA claim were based on defendant’s refusal to accept plaintiffs’ payments, the RESPA claim was based on defendant’s initial requirement that the loan modification be executed within three days, and the FDCPA claim was based on the incorrect dollar amounts given in the letters defendant sent to plaintiffs.  The parties cross-moved for summary judgment.  Although the Court denied plaintiffs’ motion in its entirety, it granted defendant’s motion only on the breach of contract, the CFA, and the RESPA claims, allowing the FDCPA claim to proceed.

First, the Court granted defendant’s motion with regard to the breach of contract claim.  Although the Court held that plaintiffs “just barely” raised a material issue of fact with regard to whether the parties agreed to adjourn plaintiffs’ payment schedule by 30 days, there was no  issue of fact that plaintiffs immediately breached the agreement when they failed to make the required monthly escrow payment.  In granting this portion of the motion, the Court rejected plaintiffs’ claim that they did not know how much they needed to pay for their monthly escrow payment because “ignorance of the terms of a contract does not excuse a breach of the contract.”  Thus, plaintiffs breached the modification agreement “almost immediately after the contract was formed. Therefore, as matter of law, the alleged subsequent breaches by Nationstar were excused.”

Second, the Court denied defendant’s motions for summary judgment on the FDCPA claim.  The Court first found that the FDCPA applied here despite the fact that plaintiffs sometimes rented out their beach house, because there was no dispute that the debt “was incurred primarily for personal, family, or household purposes.”  Additionally, the Court found that defendant was not entitled to summary judgment on its claim that any FDCPA violations were excused under a bona fide error defense.  Instead, the Court found that there was a dispute as to whether the incorrect $99,999 figure was the result of a bona fide error because “[a] reasonable juror could conclude that Nationstar’s repeated conduct of sending twelve erroneous letters in a row—four of which undisputedly are dated after Nationstar asserts that it fixed the glitch—is evidence that Nationstar intentionally failed to correct the $99,999.99 error.”

Third, the Court granted defendant’s motion regarding the CFA, finding that plaintiffs’ claim—arising from the fact that defendant placed plaintiffs’ payments into a suspense account rather than applying the funds to the debt—was nothing more than a breach of contract claim and that “a mere breach of contract, without more, is not actionable under the NJ CFA.”  Finally, the Court granted defendant’s motion dismissing the RESPA claim.  Although plaintiffs argued that defendant violated RESPA because it did not give them at least 14 days to accept a loss mitigation proposal, the Court found that defendant gave plaintiffs a one-month extension to accept the modification and that this extension satisfied defendant’s RESPA obligations.  See 12 C.F.R. § 1024.41(e)(1).  The Court further rejected plaintiffs’ argument that the agreement to extend needed to be in writing under RESPA, finding instead that only the modification offer must be in writing, and that there is no such requirement for extensions.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Dylan Goetsch at dgoetsch@riker.com.

New Jersey Court Holds Actual Knowledge Does Not Bar Equitable Subrogation

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In a letter opinion issued on June 21, 2018, the Superior Court of New Jersey, General Equity Part in Hudson County, held that a lender’s actual knowledge of a prior mortgage does not operate as a bar to equitable subrogation.  See Citizens Bank, N.A. v. Davis, et al., HUD-F-18941-17 (June 21, 2018).  While unpublished, this opinion is significant in that it is a continuation of the departure by New Jersey courts from prior precedent holding that actual knowledge of a lien bars the application of equitable subrogation, as expressed in First Union Nat. Bank v. Nelkin, 354 N.J. Super. 557 (App. Div. 2002) (“the new lender is not entitled to subrogation, absent an agreement or formal assignment, if it possesses actual knowledge of the prior encumbrance”).

In this case, the owner of a residential property encumbered the property with two mortgages in 2011 (the “Prior Mortgages”).  In May 2012, the owner sold the property to her nephew.  On October 19, 2012, the nephew obtained a home equity line of credit secured by a mortgage on the property from Citizens Bank (the “First Mortgage”).  The First Mortgage was recorded in November 2012.  On October 26, 2012—after the First Mortgage was executed but before it was recorded—the nephew obtained another loan and executed a mortgage to MERS, as nominee for TD Bank (the “Second Mortgage”) that was recorded in December 2012.  After the nephew defaulted on his loan with Citizens Bank, Citizens Bank brought this foreclosure action.  TD Bank contested the action by arguing that its Second Mortgage should have priority over the First Mortgage pursuant to the doctrine of equitable subrogation because the proceeds from TD Bank’s loan paid off the Prior Mortgages.  At trial, TD Bank’s representative testified that TD Bank believed it was getting a first mortgage on the property because it purportedly was unaware of the then-unrecorded First Mortgage and that the documentary evidence demonstrated that its funds were used to satisfy the Prior Mortgages.  Citizens Bank’s representative at trial testified that it ran a title search that did not reveal any prior mortgages, and that it also believed it was getting a first mortgage on the property.

The Court agreed with TD Bank and held that TD Bank is entitled to have the Second Mortgage equitably subrogated to the first lien position on the property.  After explaining the doctrine of equitable subrogation, the Court noted that the court in In re Ricchi, 470 B.R. 715 (Bankr. D.N.J. 2012) predicted that the New Jersey Supreme Court would adopt the holding of Restatement (Third) of Prop. Mortgages § 7.6 that rejects the traditional view that actual knowledge operates as a bar to equitable subrogation.  Instead, the court in In re Ricchi held that actual knowledge is not a bar and that the inquiry should instead focus on “unjust enrichment or prejudice to the junior mortgagee.”  The Court here agreed with that analysis and, although it found that there was no cognizable evidence that TD Bank had actual knowledge of the First Mortgage, it held that “[e]ven if Plaintiff demonstrated that Defendant had actual knowledge of Plaintiff’s prior mortgage, the Court finds that Defendant would still be protected by equitable subrogation under the [R]estatement approach, as the pertinent factor is not the Defendant’s knowledge, but rather whether there has been ‘material prejudice’ to the intervening lienor, or in this instance, Citizens Bank.”  The Court then proceeded to state:  “While it is unfortunate that Plaintiff was the victim of a defective title search, the Court will not simply ignore the two (2) prior mortgages on the property because of a third-party’s mistakes. . . . the Court finds that Plaintiff will not suffer prejudice by the imposition of equitable subrogation, and that any harm to the Plaintiff was caused by a third party, which is of no moment to the case at hand.”  Thus, because TD Bank paid off the Prior Mortgages, it was entitled to equitable subrogation despite being the second mortgage recorded on the property.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Dylan Goetsch at dgoetsch@riker.com.

Texas Federal Court Dismisses Claim Against Title Insurance Company

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The United States District Court for the Northern District of Texas recently denied in part and granted in part a title insurance company’s motion to dismiss an insured’s bad faith claims.  See Hall CA-NV, LLC v. Old Republic Nat’l Title Ins. Co., 2018 WL 298486 (N.D. Tex. June 14, 2018).  In the case, the plaintiff insured loaned money to a non-party to finance a construction project for a resort along the California-Nevada border, and the defendant title insurance company issued title insurance policies with regard to the same.  The project eventually ran into issues that resulted in mechanics’ liens.  The title insurance company refused to indemnify the insured, and the insured sued the title insurance company for “breach of contract, violations of Chapters 541 and 542 of the Texas Insurance Code, and breach of the duty of good faith and fair dealing.”  The title insurance company moved to dismiss the claims under the Texas Insurance Code by arguing that only California or Nevada law should apply and that, even if Texas law applied, Section 542, which involves an insurance company’s bad faith, does not apply to title insurance companies.

The Court denied the motion in part and granted it in part.  First, it found that Texas law applied because the title insurance company had failed to point to any substantive differences between Texas law and California or Nevada law.  Thus, it denied the motion to the extent it sought to dismiss any claims arising out of Texas law.  Second, and more importantly, the Court granted the motion dismissing the claim under Texas Insurance Code § 542, finding that the statute did not apply to title insurance policies.  In doing so, it rejected the insured’s argument that, even if a duty to indemnify under a title insurance policy is not covered under the statute, a duty to defend “involve[s] more than title insurance” and should be covered.  “Old Republic’s duty to defend Hall is not distinct from the title coverage because the policies only require Old Republic to defend Hall against ‘claim[s] covered by [the policies],’ or in other words, title-related claims.”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Dylan Goetsch at dgoetsch@riker.com.

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