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New York Federal Court Holds Bank Had No Duty to Reverse Fraudulent Payment Order or Freeze Customer’s Account Banner Image

New York Federal Court Holds Bank Had No Duty to Reverse Fraudulent Payment Order or Freeze Customer’s Account

Month: April 2021

New York Federal Court Holds Bank Had No Duty to Reverse Fraudulent Payment Order or Freeze Customer’s Account

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The United States District Court for the Northern District of New York recently granted a bank’s motion to dismiss, holding that the bank had no duty to reverse a non-customer’s payment order or freeze a customer’s account in which fraudulent funds were deposited. Pedersen v. MidFirst Bank, 2021 WL 1062591 (N.D.N.Y. Mar. 19, 2021). In the case, Plaintiffs executed a contract to purchase real estate. Days prior to the closing, Plaintiffs received emails, which appeared to be from their escrow agent, instructing Plaintiffs to wire escrow funds to the title company’s trust account at Defendant Midfirst Bank (“Midfirst”). Thereafter, Plaintiffs requested wire transfers from their respective banks, and the proceeds were deposited into the title company’s account at Midfirst that same day. When Plaintiffs realized that the request to transfer funds was fraudulent, Plaintiffs sent recall requests to Midfirst, explaining that the transfers were the product of fraud. Midfirst rejected Plaintiffs’ requests but suggested that it would return the funds if Plaintiffs’ banks executed hold harmless agreements. Midfirst ultimately reneged on its offer and claimed that the title company declined Midfirst’s request for authorization to return the funds. Plaintiffs then brought a claim for the following causes of action against Midfirst: (1) aiding and abetting fraud, (2) aiding and abetting conversion, (3) aiding and abetting breach of fiduciary duty, (4) conversion, (5) negligence, and (6) unjust enrichment, and the following causes of action against the title company: (1) fraud, (2) conversion, (3) breach of fiduciary duty, (3) negligence, and (5) unjust enrichment. Plaintiffs settled with the title company, but Midfirst moved to dismiss.

The Court granted Midfirst’s motion to dismiss. The Court found that to the extent that Plaintiffs’ claims were based on Midfirst’s processing of the wire transfer, they were preempted by Article 4A of the Uniform Commercial Code and thus, dismissed. Specifically, “‘Article 4A displaces any common law claim if the UCC’s provisions squarely cover the transaction at issue, . . . and was intended to be the exclusive means of determining the rights, duties and liabilities of banks and their customers with respect to such transfers.’” However, to the extent that Plaintiffs’ claims were based on Midfirst’s actions before and after the processing of the wire transfer, such claims were not preempted. Nonetheless, the Court found that Plaintiffs failed to state claims of negligence, aiding and abetting, conversion, and unjust enrichment. Most importantly, the Court agreed with Midfirst that it had no duty to reverse the payment order or freeze the title company’s account. The Court noted that “‘[b]anks do not owe a duty of care to non-customers to protect them from the tortious conduct of the banks’ customers.’” Next, the Court found that Plaintiffs failed to assert sufficient facts from which the Court could plausibly infer that Midland had actual knowledge of the title company’s alleged wire fraud scam prior to or at the time of the wire transfer. Lastly, the Court found that Plaintiffs failed to state a claim for conversion and unjust enrichment because Plaintiffs did not allege any wrongful or improper act of dominion by Midfirst in contravention of Plaintiffs’ rights. Accordingly, the Court granted Midfirst’s motion to dismiss.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Andrew Raimondi at araimondi@riker.com.

New York Lifts Immunity, CMS Updates and Proposed Rules

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For more information about this blog post, please contact Khaled J. Klele, Ryan M. Magee, or Labinot Alexander Berlajolli.

Governor Cuomo Signs Law Lifting Liability Protections for Health Facilities

Governor Cuomo recently signed S5177 into law, repealing the Treatment Protection Act, which prevented healthcare facilities, like nursing homes and hospitals, as well as their administrators and executives, from being held accountable for harm in connection with their treatment of patients with COVID‑19.

CMS Announces Immediate Resumption of All Hospital Survey Activities

Centers for Medicare & Medicaid Services (“CMS”) announced the immediate resumption of all hospital survey activities, including those related to Medicare compliance and patient safety. This comes after the agency hit pause on the surveys while hospitals worked to mitigate the COVID‑19 crisis. CMS previously issued QSO-21-13-Hospitals, which established a 30‑day suspension period limiting hospital surveys to immediate jeopardy complaints, such as allegations that pose patient safety concerns and Medicare noncompliance with hospital conditions of participation. Now that COVID‑19 cases are on the decline, non‑immediate jeopardy hospital complaints that were received during the survey suspension period will be investigated within 45 days of the date of the announcement released on March 26, 2021. Additionally, open enforcement cases that are not considered immediate jeopardy will have between 60 and 90 days to show compliance with outstanding deficiencies.

CMS Adds 24 New Codes for Temporary Telehealth Coverage

CMS recently expanded its list of telehealth services covered during the COVID‑19 pandemic to include 24 new audiology and speech‑language pathology services. The new services include, among others, diagnosis and treatment of swallowing problems, therapy for improving cognitive function, and assessing speech-generating devices. The full list can be accessed here.

Proposed Payment Rules

CMS has issued four new proposed rules addressing updates and revisions to payment rules for inpatient psychiatric facilities, inpatient rehabilitation facilities, skilled nursing facilities, and hospices. Those rules are explained in detail below. Comments are due by June 7, 2021.

86 FR 19480 – This proposed rule updates the prospective payment rates, the outlier threshold, and the wage index for Medicare inpatient hospital services provided by Inpatient Psychiatric Facilities (“IPFs”), which include psychiatric hospitals. Specifically, the rule proposes raising payments to inpatient psychiatric facilities by 2.3 percent in 2022, amounting to a total increase of $90 million. This rule also would update and clarify the IPF teaching policy with respect to medical residents in the event the hospital closes and proposes a technical change to the 2016‑based IPF market basket price proxies.

86 FR 19086 – This proposed rule updates the prospective payment rates for inpatient rehabilitation facilities (“IRFs”) for 2022. Specifically, the rule proposes increasing payments to inpatient rehabilitation facilities by 2.2 percent in 2022, amounting to an overall payment increase by $160 million that same year. The rule also includes the classification and weighting factors for the IRF prospective payment system’s case‑mix groups and a description of the methodologies and data used in computing the prospective payment rates for 2022. Finally, the rule updates an existing measure used for the IRF Quality Reporting program – a pay‑for‑reporting program.

86 FR 19954 – This proposed rule updates the prospective payment rates for skilled nursing facilities (“SNFs”) for 2022 by proposing to increase payments to SNFs by 1.3 percent in 2022, amounting to a total increase of approximately $444 million in Medicare Part A payments. Additionally, the rule seeks public comment on a proposed methodology for recalibrating the Patient Driven Payment Model amidst the current public health crisis.

86 FR 19700 – This proposed rule updates the hospice wage index, payment rates, and aggregate cap amount for 2022.  Specifically, the proposed rule raises hospice payments by 2.3 percent in 2022, amounting to a total increase of approximately $530 million. Additionally, the proposed rule introduces a new measure for the Hospice Quality Reporting Program, providing ten indicators of care quality derived from claims data. Finally, the proposed rule issues several waivers related to the public health crisis.

Deely' Expands Lender's Use of Equitable Subrogation to Protect Priority Status

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Reprinted with permission from the April 26, 2021, issue of the New Jersey Law Journal. © 2021 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

All practitioners involved in New Jersey real estate litigation need to be aware of the Appellate Division decision in Tr. 2005-3 Mortg.-Backed Notes, U.S. Bank Nat’l Ass’n as Tr. v. Deely, 2021 WL 520063 (App. Div. 2021), which expands the situations in which a lender can use the doctrine of equitable subrogation to protect the priority status of a lien by holding that a lender’s knowledge of a prior competing lien does not bar the application of the doctrine.

Case Law Pre-Deely

To appreciate the import of Deely, some background is helpful. The doctrine of equitable subrogation allows a lender’s refinance mortgage to obtain priority over earlier-recorded mortgages and other property interests by placing the lender’s refinance mortgage by equitable assignment in the position of the mortgage that was discharged by the proceeds of the lender’s refinance loan. See Equity Sav. and Loan Ass’n v. Chicago Title Ins. Co., 190 N.J. Super. 340, 342 (App. Div. 1983). The doctrine is frequently used on behalf of lenders to secure a priority lien position when a mortgage is found to be technically invalid, improperly recorded, or other prior mortgages are not discharged as intended due to mistake, fraud or other circumstances. See Mortg. Elec. Registration Sys. v. Massimo, 2006 WL 1477125, *4 (N.J. Super. Ch. Div. May 26, 2006).  The doctrine is an equitable device intended to avoid the unjust enrichment and “to compel the ultimate discharge of an obligation by the one who in good conscience ought to pay it.”  Standard Acc. Ins. Co. v. Pellecchia, 15 N.J. 162, 171 (1954).

In 1993, the Appellate Division held in Metrobank for Savings, FSB v. National Community Bank of New Jersey, that a lender is not entitled to the application of the doctrine of equitable subrogation if it had actual knowledge of the other encumbrances over which it seeks to obtain priority. 262 N.J. Super. 133, 143-144 (App. Div. 1993). Interestingly, in support of the imposition of this knowledge exception to the doctrine of equitable subrogation, Metrobank relied on Trus Joist Corp. v. Nat’l Union Fire Ins. Co., which actually applied equitable subrogation despite a mortgagee’s knowledge of a prior encumbrance. 190 N.J. Super. 168 (App. Div. 1983), rev’d on other grounds, 97 N.J. 22 (1984).

Nonetheless, following Metrobank numerous New Jersey cases recognized and/or applied this knowledge exception. See, e.g., First Fidelity Bank, NA, South v. Travelers Mortgage Servs., 300 N.J. Super. 559, 568 (App.Div.1997); First Union Nat. Bank v. Nelkin, 354 N.J. Super. 557, 565 (App. Div. 2002); U.S. Bank Nat. Ass’n v. Hylton, 403 N.J. Super. 630, 638 (Ch. Div. 2008). The main justification given for this rule was that “a new lender would not be ‘unjustly’ enriching an intervening lienor if it deliberately loaned new funds to the creditor well aware of the existence of that prior lien.” Sovereign Bank v. Gillis, 432 N.J. Super. 36, 45 (App. Div. 2013).

Almost a decade after Metrobank, courts began to question the wisdom of the knowledge exception. In a footnote in its 2012 decision in Investors Savings Bank v. Keybank Nat’l Ass’n, the Appellate Division acknowledged, but did not adopt, the modern trend set forth in the Third Restatement of Property §7.6 that “even actual knowledge of an intervening recorded lien should not defeat the right to equitable subrogation in the absence of a showing that the intervening lienor was prejudiced by the refinancing of the original mortgage.” 424 N.J. Super. 439, 446 fn.3 (App. Div. 2012).

In Ricchi v. American Home Mortgage, Servicing, the U.S. Bankruptcy Court for the District of New Jersey analyzed equitable subrogation law and concluded that the New Jersey Supreme Court would not adopt the knowledge exception. 470 B.R. 715 (Br. D.N.J. 2012). Then, in Gillis, the Appellate Division again questioned the knowledge exception and carefully analyzed the merits of the Third Restatement of Property’s approach to equitable subrogation. 432 N.J. Super. at 46. The Gillis court ultimately found it unnecessary to decide whether to adopt a new rule as to equitable subrogation because it decided the case based on the loan replacement and substitution theory also promulgated by the Third Restatement. Both Investors and Gillis recognized that a number of other jurisdictions had rendered decisions adopting the Third Restatement’s approach that actual knowledge of a pre-existing lien should not bar a refinancing lender from obtaining equitable subrogation. See, e.g., Bank of N.Y. v. Nally, 820 N.E.2d 644, 652–54 (Ind. 2005); Bank of Am., N.A. v. Prestance Corp., 160 P.3d 17, 21–19 (Wa. 2007); Am. Sterling Bank v. Johnny Mgmt. LV, 245 P.3d 535, 539 (Nev. 2010).   

The Appellate Division's Deely Decision

It is with this history that the Deely case came before the Court.  In Deely the borrowers executed a first mortgage secured by their home. Three months later, they executed a second mortgage that secured a home equity credit line account (HECLA). Later, the borrowers refinanced the first mortgage. At the time of closing, the refinancing lender was advised that the HECLA mortgage had a zero balance. Nonetheless, the HECLA mortgage was never discharged, and the borrowers later successfully increased the credit limit of the HECLA from $80,000 to $200,000 and then drew down on it. When the borrowers defaulted on the refinancing loan, the assignee of the refinancing lender sought to foreclose based on the doctrine of equitable subrogation. The assignee of the HECLA mortgage opposed that relief based on the fact that the refinancing lender had actual knowledge of the HECLA mortgage. The trial court granted summary judgment in favor of the refinancing lender based on the court’s finding that the lender was entitled to equitable subrogation.

In its decision, the Appellate Decision acknowledged its prior case law holding that actual knowledge prevents application of the doctrine of equitable subrogation. Nonetheless, relying heavily on the analysis in Gillis, the court formally adopted the Third Restatement’s approach to equitable subrogation. Specifically, the court held that:

Equitable subrogation is appropriate when loan proceeds from refinancing satisfies the first mortgage, the second mortgage is paid in full as part of the transaction, and the transaction is based on a discharge of the second mortgage, so long as the junior lienor, here defendant, is not materially prejudiced. Under such circumstances, equitable subrogation should not be precluded by the new lender’s actual knowledge of the intervening mortgage.

Id. (citation omitted). Quoting Gillis, the court held that “[t]o do otherwise would allow [defendant] to reap an undeserved windfall” by “allowing the junior lienor to vault over the priority of the refinancing mortgage lender.” Id. Finding no prejudice would inure to the HECLA lender, the court therefore affirmed the decision of the trial court that the refinancing lender was entitled to equitable subrogation.

Deely thus expands the situations in which the doctrine of equitable subrogation may be applied by confirming the end to the prohibition against the application of the doctrine in situations where a refinancing lender had knowledge of a prior lien. So long as an existing lender is not materially prejudiced, a refinancing lender whose funds were used to pay off a first mortgage may now be able to assert a viable claim for prior-lien status, even if it knew of the existence of a property interest over which it seeks priority at the time it made a loan.

Ronald Z. Ahrens is Counsel in the Commercial Litigation, Title Insurance and Construction Practice Groups of Riker Danzig Scherer Hyland & Perretti LLP. Michael R. O’Donnell is Co-Managing Partner of Riker Danzig, practicing in the Firm’s Commercial Litigation, Title Insurance and Financial Services Practice Groups.

California Appellate Court Affirms Lack of Constructive Knowledge Required for Protection Under Quiet Title Act

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The Court of Appeal of California, Second Appellate District, Division Two, recently upheld a trial court’s finding that a later purchaser or encumbrancer for value seeking protection under the Quiet Title Act from the invalidation of an earlier quiet title judgment may only do so if it lacked constructive knowledge of some “defects or irregularities in [the earlier quiet title] judgment or proceedings” at the time it obtained its interest in the property. Tsasu LLC v. U.S. Bank Tr., N.A., 2021 WL 1220171 (Cal. Ct. App. Apr. 1, 2021). The Court also, crucially, found that as it pertained to constructive knowledge in this regard, a title company’s knowledge of such facts are imputed to the purchaser/encumbrancer.

In this case, the borrower at issue originally filed a quiet title action against the listed beneficiary of the deed of trust on her property. However, borrower failed to serve the beneficiary properly, and she also did not join the record assignee of the deed of trust as a party to the action, despite the assignee holding the deed of trust at the time of the quiet title action. Borrower initially obtained a judgment against the beneficiary quieting title to the property, but the assignee who had not been joined in the action later obtained an order vacating the quiet title judgment. After the original quiet title judgment was entered but prior to its vacation, a new lender, Tsasu, issued a loan to borrower, which was secured with a properly recorded deed of trust on the property. After borrower stopped making payments on the property, Tsasu sued the current holder of the original deed of trust, US Bank, seeking to quiet title to the property and obtain a declaratory judgment stating that the Tsasu deed of trust had priority over the original deed of trust. Tsasu and US Bank filed cross-motions for summary judgment, and the trial court granted summary judgment in favor of US Bank, resulting in an appeal from Tsasu.

The appellate court affirmed summary judgment in favor of US Bank and the denial of summary judgment for Tsasu. The Court examined section 764.060 of California’s Quiet Title Act, which insulates the lien priority of a person who has “act[ed] in reliance” on a quiet title judgment from the effects of a subsequent invalidation of that judgment if that person was a “purchaser or encumbrancer for value of the property . . . without knowledge of any defects or irregularities in the [quiet title] judgment or the quiet title proceedings.” The Court affirmed that according to the statute’s plain language as well as cases defining “knowledge” in the quiet title context, a party must not only lack actual knowledge as to defects or irregularities concerning the quiet title judgment in order to be insulated under the Act, but also constructive knowledge. After making this finding, the Court found that there was a “defect or irregularity” in the initial quiet title judgment, that the borrower had failed to join or serve the current owners of its original deed of trust. “Tsasu,” the Court further held, “had constructive knowledge of this defect or irregularity in two different ways.” First, the record of title contained both the recorded assignments of the original deed of trust as well as the quiet title judgment itself, which set forth that the sole defendant was the deed’s original holder. Taken together, these documents showed a defect in the quiet title judgment. Second, the Court held that because Tsasu’s title insurer prepared a preliminary report of title which laid out the status of the assignments and quiet title judgment as stated above, and Tsasu had “treated its title insurer as its agent when [its] CEO relied on the insurer’s preliminary report . . . Tsasu also had constructive knowledge of the defect and irregularity in the 2015 Quiet Title judgment by virtue of its insurer’s awareness of these circumstances that is imputed to Tsasu.” Given the foregoing, the Court stated that Tsasu indeed had constructive knowledge of defects or irregularities in the 2015 quiet title judgment at the time it acquired its interest in the property, and that therefore, the Act does not insulate Tsasu” from the judgment’s subsequent invalidation and expungement. Therefore, “the [original] Deed of Trust—as the lien recorded first-in-time—[had] priority over the Tsasu Deed of Trust.”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Andrew Raimondi at araimondi@riker.com.

Georgia Federal Court Grants Title Insurer’s Motion to Dismiss Breach of Contract and Conversion Claims

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The United States District Court for the Northern District of Georgia recently granted a title insurance company’s motion to dismiss claims for breach of contract and conversion, finding that: (1) the closing protection letter at issue was not in effect at the time of the closing due to a subsequently-issued letter; and (2) the lender’s conversion claim was precluded under Georgia law.  See First IC Bank v. N. Am. Title Ins. Co., 2021 WL 732354 (N.D. Ga. Jan. 21, 2021).  In the case, a lender issued a loan to finance the purchase of a property located in Johns Creek, Georgia. The loan agreement provided that a portion of the loan would be used to satisfy an existing security interest, thereby giving the lender a first priority interest in the property after the closing. Prior to the closing, the closing attorney, acting on behalf of Defendant North American Title Insurance Company (“North American”), issued a closing protection letter which confirmed North American’s agreement to indemnify the lender for certain potential losses in connection with the closing on the sale of the property. Three weeks later, unbeknownst to the lender, North American terminated the closing attorney as the issuing agent and Defendant Investors Title Insurance Company (“Investors”) issued a second closing protection letter. According to the lender, the closing attorney did not inform the lender of the change in title insurance companies or provide the lender with a copy of the second closing protection letter. On the date of the closing, the lender sent the closing attorney its closing instructions and wired the funds for the purchase of the property. However, according to the lender, the closing attorney misappropriated the settlement funds instead of using them to satisfy the existing loan on the property. To avoid foreclosure proceedings on the property, the lender paid the existing loan. After Investors refused to indemnify the lender pursuant to the closing protection letter, the lender filed an action for breach of contract and conversion solely against North American, and subsequently added Investors as a defendant. North American then moved to dismiss.

The Court granted North American’s motion to dismiss. First, the Court found that the lender’s breach of contract claim against North American must be dismissed because the closing protection letter issued by North American was not in effect at the time of the closing. Investors’ closing protection letter explicitly provided that it “‘supersede[d] and cancel[led] any previous letter or similar agreement for closing protection that applie[d] to the Real Estate Transaction and may not be modified by the Issuing Agent or Approved Attorney.’” Moreover, the lender’s wiring of money to the closing agent constituted acceptance of Investors’ closing protection letter. The Court also found that even if the closing attorney did not inform the lender of the second closing protection letter, the lender was nonetheless charged with constructive notice. Here, the closing attorney acted as the lender’s agent for closing at all relevant times, and “‘[u]nder Georgia law, the knowledge of an agent is imputed to the principal.’” Further, “an agent’s actions are binding on, and enforceable against, the principal.” The lender was also charged with actual notice because the lender reviewed the settlement statement, which expressly provided that the closing attorney used the settlement funds to pay Investors. Second, the Court found that the conversion claim must be dismissed because although the lender wired the closing attorney a specific and identifiable amount of money, the lender only sought to recover the amount paid to satisfy the existing security interest on the property.  In other words, the lender sought to “‘recover a certain amount of money generally.’” However, “[t]his is precisely the type of conversion claim precluded by Georgia law.” Based on the foregoing, the Court granted North American’s motion to dismiss and dismissed the lender’s claims against North American with prejudice.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Andrew Raimondi at araimondi@riker.com.

New York Federal Court Grants Bank’s Motion to Compel Arbitration in PPP Class Action

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On April 8, 2021, the United States District Court for the Southern District of New York granted a national bank’s motion to compel arbitration in a Paycheck Protection Program ("PPP") class action, finding that the issue of arbitrability must be decided by an arbitrator pursuant to the terms of the bank’s Deposit Account Agreement and Online Service Agreement. See KPA Promotion & Awards, Inc. et al v. JPMorgan Chase & Co. et al, 2021 WL 1317163 (S.D.N.Y. Apr. 8, 2021). In JPMorgan Chase & Co., plaintiffs KPA Promotions & Awards, Inc. ("KPA") and Above & Beyond Preschool, LLC ("A&B") applied for PPP loans from the defendant bank (the "Bank"). Although KPA’s application was approved, the Bank backdated the deposited funds, thereby allegedly limiting the amount of time by which KPA could use the funds. A&B submitted two applications, which were both denied. As a result, plaintiffs brought a putative class action alleging that, in violation of the PPP Loan Program Requirements that required processing applications on a first-come, first-served basis, the Bank favored commercial and private banking clients over its small business banking customers. Specifically, plaintiffs alleged that small business banking customers were required to apply for loans through the Bank’s online portal and wait for further assistance from a representative, while private or commercial banking customers "were assigned to employees who provided them with 'concierge treatment,' allowing them to bypass the queue set up for small banking customers."

The Bank moved to compel arbitration and stay the action based on arbitration provisions in its Online Service Agreement and Deposit Account Agreement (the "DAA"). Specifically, the DAA provided that the parties "agree that upon the election of either [party], any dispute relating in any way to your account or transactions will be resolved by binding arbitration as discussed below, and not through litigation in any court (except for matters in small claims court)." The DAA further explained that "[c]laims are subject to arbitration, regardless of what theory they are based on or whether they seek legal or equitable remedies." Like the DAA, the Online Service Agreement also contained an agreement to arbitrate and an express class action waiver. Nonetheless, the DAA contained a right to opt out of arbitration if the Bank was notified within 60 days of the opening of the account, but neither plaintiff exercised that option.

The Court granted the Bank’s motion to compel arbitration and stay the action. The Court first noted that when determining whether a claim falls within the scope of a mandatory arbitration clause, there is a general presumption that courts, not arbitrators, decide issues of arbitrability. However, "this presumption is rebutted with 'clear and unmistakable evidence from the arbitration agreement, as construed by the relevant state law, that the parties intended that the question of arbitrability shall be decided by the arbitrator.'" Here, the Court found that the Bank had established that plaintiffs agreed to the terms of the DAA and Online Service Agreement when plaintiffs opened accounts with the Bank. The DAA and the Online Service Agreement both provided that a party must submit its claims to either the Judicial Arbitration and Mediation Services or the American Arbitration Association, whose procedures were to apply. Further, the Online Service Agreement explicitly provided that "any claim ‘regarding the applicability of this arbitration clause’ is subject to arbitration[.]" Thus, the Court found that the issue of arbitrability must be decided by an arbitrator “because here, there [was] 'clear and unmistakable evidence . . . that the parties intended that the question of arbitrability shall be decided by the arbitrator.'" Given the foregoing, the Court granted the Bank’s motion to compel arbitration and stay the action.

­­­­­­JPMorgan Chase & Co. highlights the strength of a well-drafted arbitration provision. This case, however, is far from over. An appeal will probably be filed on the District Court’s decision. Moreover, it is important to note that an arbitrator may still find that claims arising from the Bank’s PPP lending practices fall outside of the scope of the arbitration provisions.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Andrew Raimondi at araimondi@riker.com.f

New Jersey Legislation Update

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Every year, New Jersey proposes dozens of statutes that impact healthcare. The below statutes have already passed both the State Senate and Assembly and are on their way to become law unless vetoed by the Governor, with the exception of one statute that has already been approved and is now law.

For more information about this blog post, please contact Khaled J. Klele, Ryan M. Magee, or Labinot Alexander Berlajolli.

Hospital Wrap-Around Services

Pursuant to S1676, hospitals are allowed to construct housing and provide wrap-around services for individuals who are homeless or housing insecure. Wrap-around services may include referrals to outpatient primary care and behavioral health services, as well as assistance with procuring sources of health benefits coverage. Additionally, these housing and wrap-around services are exempt from the certificate of need requirement.

Consideration of Criminal History Records

S942 sets the standards for professional and occupational boards considering applicants with criminal history records. Under this bill, an entity shall not disqualify a person from obtaining or holding any certificate solely because the person has been convicted of or engaged in acts constituting any crime or offense. Rather, only crimes or offenses that have a “direct or substantial relationship to the activity regulated by the entity or is of a nature such that certification, registration or licensure of the person would be inconsistent with the public’s health, safety, or welfare” are disqualifying. The bill sets forth factors to be considered in making that determination, including the nature and seriousness of the crime, and whether there is any evidence of rehabilitation of the person.

Implicit Bias Training

S703 requires healthcare professionals providing perinatal care to pregnant persons undergo explicit and implicit bias training. Under the bill, such training is required for physicians, physician assistants, professional and practical nurses, midwives, staff members who interact with pregnant persons, and members of the New Jersey Board of Medical Examiners and New Jersey Board of Nursing. Hospitals and birthing centers that do not implement an explicit and implicit bias training program are subject to penalties.

County Option Hospital Fee Pilot Program

S3252 clarifies that the County Option Hospital Fee Pilot Program in the Department of Human Services shall expire five years after each participating county has collected a local healthcare‑related fee, as authorized under N.J.S.A. 30:4D-7t(3)(c). This bill passed both houses and has been approved.

Screening for Depressive Disorders

A3548 requires insurance coverage for expenses incurred in screening adolescents between the ages of 12 and 18 for major depressive disorder, so long as screening for major depressive disorder in adolescents continues to receive a rating of “A” or “B” from the United States Preventative Services Task Force. The bill applies to hospital, medical, and health service corporations, commercial individual, small employer, and larger group insurers, health maintenance organizations, and the State Health Benefits Program and the School Employees’ Health Benefits Program. The bill provides that the benefits are to be provided to the same extent as for any other condition under the contract or policy, except that the insurer may not impose on covered persons receiving these services any form of cost sharing, including, but not limited to, copayments, deductibles, or coinsurance.

Temporary Licenses in Mental Health

Pursuant to A4246, a professional licensing board regulating a mental health profession may expedite the issuance of a temporary license or certificate of registration to practice a mental health profession to a recent graduate in New Jersey or another state who earned a master’s degree or higher from a program that is intended to lead to a career in mental health. The individual with the temporary credential is to be supervised by someone licensed in New Jersey in the same profession that the individual is temporarily practicing. Once the Governor lifts the state of emergency or when the temporary license or certificate expires, whichever is sooner, and if the individual intends to remain in New Jersey and practice the mental health profession, the individual is to apply for a full license or certificate to the requisite professional board.

Optometrists and Vaccines

This bill, A5222, provides that the New Jersey State Board of Optometrists may certify an optometrist to administer immunizations for COVID-19 and influenza when a public health emergency has been declared. At a minimum, immunization administration training based on guidance from the Centers for Disease Control and Prevention is a prerequisite for certification to administer an immunization pursuant to the bill’s provisions.

Third Circuit Affirms Itemization of Interest and Fees on “Static” Debt Collection Letter Does Not Violate FDCPA

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The United States Court of Appeals for the Third Circuit recently affirmed a District Court’s finding that a debt collection letter that itemizes a “static” debt as including “$0.00” in interest and fees, despite the fact that the debt cannot accrue interest and fees, does not violate the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. (“FDCPA”).  See Hopkins v. Collecto, Inc., 2021 WL 1345203 (3d Cir. Apr. 12, 2021).  In the case, the owner of a particular debt employed a debt collector to send a collection letter to Debtor which itemized the debt as “Principal- $1088.34” and “$0.00” in both “Interest” and “Fees/Collection Costs,” for a total balance of $1,088.34. Debtor filed a putative class action complaint against both the lender and the debt collector in the District Court for the District of New Jersey, claiming that the letter violated the FDCPA. Debtor’s argument was that the debt could not or was not intended to accrue interest or collection fees, and by assigning a “$0.00” to those columns, the letter falsely implied to a debtor that interest and fees might accrue over time and increase the amount of the debt in the future. The lender and debt collector moved to dismiss the Debtor’s complaint, and the District Court dismissed the complaint with prejudice. Debtor appealed.

On appeal, the Third Circuit affirmed the District Court’s dismissal. The Court noted that in the Third Circuit, the compliance of a debt collection letter with the FDCPA is determined from the perspective of the “least sophisticated debtor.” The Court then summarized decisions from the Seventh and Fifth Circuits which found that listing a balance of zero for interest and fees on static debts were not materially misleading, as simply raising an open question about the future assessment of other charges would not mislead an unsophisticated customer into thinking it was certain that such an assessment would happen. Debtor attempted to distinguish this law from the law applied in the Third Circuit, as the Seventh and Fifth Circuits use an “unsophisticated debtor” standard to evaluate FDCPA claims while the Third Circuit uses a “least sophisticated debtor” standard. The Court rejected this reasoning for two reasons. First, the Court stated that that the two approaches, despite using slightly different language, are “functionally equivalent,” and the Third Circuit’s approach does not imply a higher standard of scrutiny used to evaluate FDCPA claims as opposed to other circuits. Second, the Court stated that even “were we constrained to focus on a hypothetical debtor less savvy than the ‘unsophisticated debtor’, we would still affirm [the dismissal of the Complaint].” “The least sophisticated debtor of our case law, though gullible,” the Court explained, “does not subscribe to bizarre or idiosyncratic interpretations of collection notices.” Here, the Court found that “even the least sophisticated debtor understands that collection letters—as reflected by their fonts, formatting, contents, and fields—often derive from templates and may contain information not relevant to his or her situation.”  This debtor, the Court found, would understand that the “$0.00” balance in the interest/fees columns of a collection letter was likely the product of such a form letter, and any contrary interpretation that the reflection of such a balance implied that Debtor “needs to pay off the debt post haste” was not supported by “FDCPA case law[, which] does not support attributing to the least sophisticated debtor simultaneous naïveté and heightened discernment.” Given the foregoing, the Court found that Debtor had failed to state a claim, and affirmed the District Court’s dismissal of Debtor’s complaint.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Andrew Raimondi at araimondi@riker.com.

New York Court Denies Summary Judgment in Action to Enforce a Restrictive Covenant

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The New York Supreme Court, Kings County, recently denied a property owner’s motion for summary judgment, holding that there were issues of fact as to whether a restrictive covenant applied to the property at issue. See Fenimore Civic Block Ass’n Inc. v. 1919 Bedford Realty LLC, (N.Y. Sup. Ct. Mar 31, 2021). In the case, Defendant purchased a corner lot (the “Property”) with the intent of constructing three four-story apartment buildings thereon. According to Defendant, a title search completed before Defendant acquired the Property did not reveal any encumbrances, defects, or restrictions to the use of the Property. Moreover, the title search indicated that both streets abutting the Property were zoned “R6,” which allowed for multifamily residential buildings. In connection with its development plan, Defendant’s application to convert the Property into three lots was approved by the NYC Department of Finance. After Defendant received a demand letter from Plaintiffs’ counsel to cease and desist, Defendant conducted a public record search and discovered that the original deed contained a provision restricting the use of the Property for “one family only.” However, for at least 50 years, the deeds conveying ownership of the Property did not contain the deed restriction. Plaintiffs brought an action to enforce the restrictive covenant within the original deed. Defendant filed a counterclaim to terminate the restriction and moved for summary judgment dismissing Plaintiffs’ complaint for lack of standing. Plaintiffs then cross-moved for a declaratory judgment to enforce the restrictive covenant.

Defendant’s motion and Plaintiffs’ cross-motion were both denied.  The Court noted that to determine the relief requested, the Court must consider “whether the subject property is part of a general scheme or plan of development and [if] defendant had notice, at the time the subject property was purchased, of the common scheme or plan.” First, the Court held that there were issues of fact as to whether the restrictive covenant applied to the Property. Relying on Lefferts Manor Ass'n, Inc. v. Fass, 211 N.Y.S.2d 18 (Sup. Ct. 1960), which addressed the same restrictive covenant at issue, the Court found that as a matter of law, the Property was embraced by a general plan of development through “clear and definite proof.” However, a public record search conducted by Defendant revealed that the neighborhood covered by this general plan included the north side of the Fenimore Street, but not the south side (where the Property is located).  In so holding, the Court noted that zoning and historic district designations are not dispositive as to the limitations of use imposed by restrictive covenants. Second, the Court found that the inclusion of restrictive language in the deeds of neighboring properties raised an issue of fact as to Defendant’s actual or constructive notice of the restricted use of the Property. Based on the foregoing, the Court found that it was premature to render a judgment regarding the restrictive covenant and whether the construction on the Property was prohibited.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Andrew Raimondi at araimondi@riker.com.

New York Court Expands Borrower’s Entitlement to Legal Fees After Foreclosure Action Successfully Defended

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The New York Supreme Court, New York County, recently held that a borrower on a mortgage is entitled to recover reasonable legal fees pursuant to Real Property Law § 282(a) so long as a successful defense to foreclosure is asserted, even where it is undisputed that the borrower failed to make their monthly mortgage payments. NRZ Pass-Through Trust IV v. Rouge, 2021 WL 465982 (N.Y. Sup. Ct. Feb. 9, 2021). In the case, the Lender initially sought to foreclose on a mortgage given to it by the Borrower on her property. Although the record was clear that Borrower had not made her monthly mortgage payments, the foreclosure action was dismissed because she successfully argued that she had not been at her apartment when she was allegedly served with process. However, the Court’s dismissal in the initial foreclosure action did not address borrower’s claim for legal fees pursuant to RPL § 282(a), which was enacted in 2010 and states that attorney’s fees in certain litigations may be recovered when “supported by statute, court rule, or written agreement of the parties.” Lender moved for reargument on the dismissal, arguing that Borrower had actually appeared in the case, waiving the service issues. Borrower cross-moved for reargument, asserting that the Court had overlooked her claim for legal fees.

The Court granted Borrower’s motion for reargument and denied Lender’s motion for reargument. The Court first noted that the relevant section of RPL § 282 provided that whenever a mortgage encumbering residential real property contains a covenant that the lender may recover attorney’s fees upon a borrower’s breach of the mortgage agreement, it is also implied that the borrower may recover reasonable attorney’s fees incurred “in the successful defense of any action or proceeding commenced by the [lender] against the [borrower] arising out of the contract.” There was such a covenant contained in the mortgage agreement in the instant matter, and Borrower asserted a successful defense based on Lender’s failure to serve.  Thus, the Court was compelled to award Borrower reasonable legal fees, “even [though] it [was] undisputed that” Borrower failed to make her monthly mortgage payments. The Court also addressed Lender’s motion for reargument, which was predicated on its argument that it had newly discovered evidence that Borrower’s attorney had filed a notice of appearance in the foreclosure action. The Court found that because the notice had been filed with the Court in 2016, it was not newly discovered evidence, and the fact that “plaintiff never bothered to check the file does not constitute a reason why it was unable to raise this argument in connection with previous motions.” Consequently, Lender’s motion for reargument was denied while Borrower’s motion was granted, and the Court found that Borrower “was entitled to reasonable legal fees to be determined at a hearing to be [later] scheduled.”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Andrew Raimondi at araimondi@riker.com.

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