Saturday, July 18, 2015

Fifth Circuit Report: June 2015

This month's Fifth Circuit report doesn't have a lot of bankruptcy sizzle:  an interesting case on abstention and remand,  two unpublished cases about how not to reserve a claim under a plan and a case about suing a trustee.   However, there are some fascinating cases about lenders, liens, fraudulent transfers, the Texas Debt Collection Act and the Fair Debt Collection Practices Act.    The big news here is that the Fifth Circuit vacated its Golf Channel decision and instead certified the question to the Texas Supreme Court.   Here are June's decisions.   (Click on the style of the case to go to the actual opinions).

Bankruptcy; Abstention; Remand

This case is significant because it is a rare case where an appellate court considered and vacated an order for abstention and remand.    The plaintiffs were Louisiana pension funds which invested in a feeder fund in the Cayman Islands that was part of another fund which was part of a master fund entity.    The plaintiffs filed suit in state court against various parties for violations of the Louisiana securities laws.  The case was removed to U.S. District Court because it was related to the Chapter 11 bankruptcy of the master fund and based on diversity.   (In order to make the diversity allegation work, the plaintiffs had to allege that law firm Skadden Arps was improperly joined.   Because Skadden Arps is a partnership whose members include U.S. citizens living abroad, it is considered stateless and therefore non-diverse).    The plaintiffs moved for abstention and remand.    Meanwhile, the actual funds that the plaintiffs invested in filed for liquidation in the Cayman Islands and received recognition of their proceedings in chapter 15 petitions filed in New York.

The District Court granted the motions to abstain and remand without addressing the impact of the Chapter 15 proceedings.    The Court of Appeals found that it did have authority to review the remand order.   While remand decisions are generally non-reviewable, there is an exception where the remand exceeds the authority of the remand statute.   Here, 28 U.S.C. Sec. 1334(c)(1) allows permissive abstention "except with respect to a case under chapter 15."   Because Chapter 15 cases were not subject to permissive abstention, the Court of Appeals had jurisdiction to determine whether this exception applied.

In a case of first impression, the Court concluded that the reference to "a case under chapter 15" included "both the Chapter 15 case itself and cases 'arising in or related to' Chapter 15 cases."   Opinion, p. 8.    Although the remand statute does not contain a chapter 15 exception, the court read the two statutes together.
Reading §§ 1334(c)(1) and 1452(b) together, then, the prohibition against abstention from proceedings related to Chapter 15 cases also applies to bar the equitable remand of those proceedings under § 1452.  
 Opinion, p. 9.    Thus, the Court reversed the remand and abstention orders.
We hold that a district court cannot permissively abstain from exercising jurisdiction in proceedings related to Chapter 15 cases. Accordingly, we conclude that the district court erred by permissively abstaining and equitably remanding the case in the face of the Chapter 15 bankruptcies.
Opinion, p. 10.
Bankruptcy; Barton Doctrine

This case involves debtors who sued their trustee for violating their Fourth Amendment rights.    A couple and their corporation each filed for bankruptcy.   Abide was appointed trustee for both estates.  A dispute arose between the trustee and the individual debtors' children as to who owned certain property.   Following Stern v. Marshall, the District Court withdrew the reference on the case from the bankruptcy court.   It then entered an order for the debtors and their children to deliver all of the records and computers of the bankrupt company to the trustee.   The trustee showed up at their home and began taking things, including a computer which they contended was personal.    

The individual debtors filed a motion to compel the trustee to return their computer.   The District Court allowed the trustee to retain the computer to have a forensics expert examine it.   A year later, the District Court granted summary judgment to the trustee and ordered him to return the computer.   After the computer was returned, the individual debtors determined that it had been accessed on multiple occasions while in the possession of the trustee.    They then sued the trustee alleging that he had violated their Fourth Amendment rights by seizing and accessing their personal computer and that the trustee had conducted an unconstitutional search of their home.

The District Court dismissed the case under the Barton doctrine which says that a trustee cannot be sued without permission of the Court which appointed him.   The Court found an exception to the Barton doctrine on the basis that the claim arose from the trustee's actions pursuant to an order of the District Court.   Where the trustee was acting under the District Court's authority, the District Court "shared the strong interest in protecting Abide from personal liability for acts taken within the scope of official duties under the supervision of the district court."    

The Court distinguished the case from last month's Villegas decision.   In that case, the debtors filed suit in the District Court under the belief that the Bankruptcy Court would have lacked authority under Stern v. Marshall and that the District Court had supervisory power over the Bankruptcy Court.  Here, the District Court was not the appointing court, but it was the court that authorized the trustee to act.   This was sufficient to bring the case out from under the Barton doctrine.  

 Bankruptcy; Reservation of Claims

 Chapter 11 debtors sued their former Texas lawyers.    The lawyers moved to dismiss on the ground that the confirmed plans did not contain a "specific and unequivocal" reservation of the claims.   The District Court agreed and dismissed the case.   The Fifth Circuit held that general language reserving claims was not sufficient.   The interesting thing here is that the plans were confirmed in California.  The Ninth Circuit allows general reservations of claims.   The Court acknowledged that the result might have been different in the Ninth Circuit but followed its own precedent rather than the law that would have been applied by the California bankruptcy court.

Disbursing Agent under confirmed plan sued Debtor's former lawyers.   District Court dismissed the claims on the basis that the claims were not specifically reserved under the confirmed plan.    The Disbursing Agent argued that because the attorneys were not creditors, they were not affected by failure to specifically reserve the claims against them since they were not able to vote on the plan.   The Fifth Circuit ruled that the Disbursing Agent had waived this argument because he did not raise it until a motion for reconsideration in the District Court.    The Plan reserved certain avoidance actions.   However, the claims against the lawyers were common law tort claims.   As a result, the claims were not preserved.

Debt Collection; Fair Debt Collection Practices Act

The Fifth Circuit affirmed a summary judgment for the plaintiff finding violation of the FDCPA.   A debtor who lived in San Antonio borrowed money from a Delaware bank.    After default, a debt buyer acquired the debt and filed suit in Justice Court in Houston.   The JP suit gave the debtor's address for service as San Antonio which showed that the debt collector knew that he was filing suit in the wrong forum.
To make out a claim for venue abuse under the FDCPA, Serna must show that (1) Onwuteaka is a “debt collector”; (2) Onwuteaka brought “a legal action on a debt”; (3) Serna is a “consumer,” meaning that he is “obligated to pay [a] debt” incurred “primarily for personal, family, or household purposes”; and (4) Onwuteaka’s debt-collection suit was not brought in a venue “in which [Serna] signed the contract sued upon” or “in which [Serna] reside[d] at the commencement of the action.” 15 U.S.C. §§ 1692a, 1692i, 1692k.
Opinion, p. 8.    The Court found that the debtor met his burden to establish these elements.   In particular, his statement in his affidavit that the debt was for personal, family or household purposes was not an improper conclusionary statement that could not be considered since it was based on his personal knowledge of his purpose for incurring the debt.

The Court rejected the debt collector's bona fide error defense on the basis that mistakes of law do not qualify.    The Court stated:
Onwuteaka’s argument is not only meritless, but frivolous and sanctionable. Onwuteaka’s sole authorities for the premise that mistakes of law qualify for the bona fide error defense are Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 538 F.3d 469 (6th Cir. 2008), and Taylor v. Luper, Sheriff & Niedenthal Co., L.P.A., 74 F. Supp. 2d 761 (S.D. Ohio 1999). The Supreme Court granted certiorari in Jerman and ultimately reversed the Sixth Circuit on precisely this point. See Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 130 S. Ct. 1605, 1624–25 (2010) (holding that “the bona fide error defense in § 1692k(c) does not apply to a violation of the FDCPA resulting from a debt collector’s incorrect interpretation of the requirements of that statute” and reversing the contrary judgment of the court of appeals). Despite including outdated subsequent history in his citation indicating that the Supreme Court had granted certiorari in Jerman, Onwuteaka retained this citation and presented the Sixth Circuit’s now-rejected original holding to this Court as valid law. Taylor, for its part, predates both opinions in Jerman, and it pertains to a mistake about the requirements of state law rather than about the requirements of the FDCPA itself. Taylor, 74 F. Supp. 2d at 765.
Opinion, p.15.   Jerman was a big deal when it came out five years ago.  It is hard to believe that a debt collection lawyer would not know about it.   Thus, the court was right to classify this argument as sanctionable.

In one final did at the deficient debt collector, the Court stated:

In light of Onwuteaka’s persistently deficient briefing and misrepresentation of legal authority, we tax the costs of this appeal against Onwuteaka consistent with Federal Rule of Appellate Procedure 39(a)(2).
Opinion. p. 22.   

Debt Collection; Texas Debt Collection Act

This is a case where the plaintiff recovered damages for violation of the Texas Debt Collection Act (TDCA).    Allie McCaig was the mother of David McCaig.   She bought a home with financing from Wells Fargo.   When she died, David and his wife Marilyn took over the payments.    When they fell behind, Wells Fargo entered into a settlement agreement with them which recognized that David and Marilyn were not the obligors on the debt and establishing a period for curing defaults under the loan.   Wells Fargo also agreed to waive certain costs if the McCaigs completed the forebearance agreement.

The McCaigs successfully completed the terms of the agreement.   However, Wells Fargo made repeated mistakes in servicing the loan.   As a result, the McCaigs received notices of default, statements indicating that they were being charged for amounts that had been waived and at least one foreclosure notice.   The McCaigs complained to the Texas Attorney General.   In response, Wells Fargo erroneously claimed that the McCaigs had broken the agreement.    
For over two years, the McCaigs were subjected to intermittent and repeated threats of foreclosure. Their attempts to correct the problems were met with misinformation at times, non-responsiveness at times, and at times, apologies—followed by still more of the same “mistakes.” Eventually, they sued Wells Fargo in state court. Wells Fargo removed to federal court on the basis of diversity jurisdiction, and the case went to trial on breach of contract and TDCA claims. In addition to establishing the facts set forth above, the McCaigs testified that Wells Fargo’s mistakes took a toll on their mental health. David and Marilyn testified on this issue, as did their son and an expert witness.
Opinion, p. 3.    The jury ruled for the plaintiffs and awarded them $75,000 each for mental anguish, $1,900 for expenses incurred, $500 each for making incorrect statements to a third party and attorney's fees of $200,000.    

The Court rejected Wells Fargo's argument that the McCaigs lacked standing to assert a claim under the TDCA.  The Court found that anyone injured by a violation of the TDCA could bring suit even if they were not the obligor.    The Court found that the fact that Wells Fargo's conduct was also a breach of contract did not preclude liability under TDCA.   The Court stated, "A statutory offender will not be shielded from liability simply by showing its violation also violated a contract."   Opinion, p. 9.  

The Opinion contains an interesting discussion of the jury charge.   The charge consisted of a single question asking if five sections of the TDCA had been violated.   Ordinarily, the case would need to be remanded for a new trial if one of the items included was legally or factually insufficient since the reviewing court could not tell whether the jury made its decision based upon the invalid item.   However, in this case when Wells Fargo proposed multiple questions and the judge suggested a single question, Wells Fargo's counsel replied, "“If I had to draft this over again, that’s the way I’d draft it.”   Because this constituted "invited error" Wells Fargo waived the chance to complain about the broad form submission.   This shows that deference to the trial court is not a good idea when the trial court is wrong.

The Opinion contains a very good discussion of how Wells Fargo's conduct violated the TDCA.   Among other things, Wells Fargo threatened to take an action prohibited by law, attempted to collect a charge or fee not authorized and misrepresented the nature of the debt.    When a lender threatens to foreclose after it has entered into a forbearance agreement, this is a threat to take an action prohibited by law.   When a lender attempts to collect charges it agreed to waive, this is a threat to collect an unauthorized charge even if the charge was not paid.   Finally, a bank's “failure to keep accurate records” can lead to damages for misrepresenting the nature of the debt.  

The Court of Appeals affirmed the award of damages except for the out of pocket expenses.   Because the plaintiffs did not trust Wells Fargo, they sent their payments by priority mail and used cashier's checks.   The Court found that these damages were not caused by Wells Fargo's violations of TDCA and reversed the $1,900 attributable to this item of damages. 

The Opinion has an excellent discussion of the standard for awarding mental anguish damages.  

Under Texas law, to show an entitlement to mental anguish damages, the plaintiff must put on evidence showing “the nature, duration, and severity of their mental anguish, thus establishing a substantial disruption in the plaintiffs’ daily routine,” or showing “‘a high degree of mental pain and distress’ that is ‘more than mere worry, anxiety, vexation, embarrassment, or anger.’” Plaintiffs are not required to show the mental anguish resulted in physical symptoms.

“[D]amages for mental anguish are recoverable under the [TDCA].” Expert testimony is not required to show compensable mental anguish, which may be proven by the “claimants’ own testimony, that of third parties, or that of experts.”
Opinion, p. 23 (internal citations omitted).   The Court credited the following testimony in upholding the mental anguish damages:
Marilyn testified that dealing with Wells Fargo was “outrageous and angering,” that “[i]t’s like this ominous cloud over you all the time, and everything is related to this,” and that she was “very upset and angry.” She also testified she obsessed over the matter and experienced an “ongoing fear” that Wells Fargo would take the house away. Additionally, she testified she had to “try to keep [herself] calm,” when observing her husband’s related stress—stress she feared might cause him a heart attack. In her own words:
It’s just heart stopping; it’s panic; it’s fear. It’s what—what can you do? I mean, it’s like just—and hopelessness is mixed in there, as well, and then also just plain anger that—just out—that’s just outrageous. It’s just unbelievable that this could continue this way, on an on, and be ignored and be—just not—just not respected.
There is evidence David experienced anxiety and chest pain based on stress related to Wells Fargo’s misconduct. According to the testimony, he had to visit the emergency room twice as a result of this pain. David testified that the events were “extremely upsetting” and affecting his family, and also that the experience left him “very anxious” and “very fearful.” David testified that Wells Fargo’s misconduct affected him every day over a two-and-a-half-year span. Marilyn testified that David “was becoming more anxious; he was becoming more withdrawn . . . it just wasn’t his usual self. He would wake up and be thinking about this.” The McCaigs’ son also testified to a change in David—that he was “tense, stressed, frustrated, worried.”
Opinion, pp. 23-24.

The Court of Appeals also reversed the $1,000 in damages for making a false statement about a debt to a third party.   When the McCaigs complained to the Texas Attorney General, Wells Fargo's response to the complaint acknowledged that there was a dispute and told its erroneous story that the McCaigs had defaulted.    This did not constitute a statement “to any person other than the consumer that a consumer is wilfully refusing to pay a nondisputed consumer debt when the debt is in dispute and the consumer has notified in writing the debt collector of the dispute.”

The net effect of the opinion is that $2,900 in damages was subtracted from the judgment while the major portion of the award remained intact.

This opinion is significant for two reasons, one legal and one philosophical.   On the legal side, this case illustrates the use of the Texas Debt Collection Act in a case where the federal Fair Debt Collection Practices Act would not be available because the lender was not a debt collector.   While TDCA and FDCPA have many similar provisions, they are not identical and knowing the difference can be critical.

On a philosophical level, this case is heartening because it shows the small guy standing up to a big bank and being vindicated.    Banks are not evil.   However, they are frequently unable to perform their required functions in an accurate manner.   This case demonstrates that it is not acceptable for a bank to make a deal and then refuse to adhere to it whether this is through negligence, stupidity or bureaucratic ineptitude.    The complaints made by the McCaigs are very familiar to any practitioner who represents consumer debtors.    Usually the mistakes are remedied after a lot of effort and sleepless nights by the consumer.    However, the experience is distasteful.   This case demonstrates that these slights are in fact wrong.

I would be remiss if I did not add one very important caveat.  Much of this opinion turned on the fact that the McCaigs were not in default on the forbearance agreement.    In the typical case, the consumer is in fact in default and the dispute is over the extent of the default or the lender's failure to work with the borrower.   The outcome of this case turned on the fact that throughout their travails, the McCaigs continued to make their payments on time.   A borrower who becomes frustrated with the lender and stops sending payments would not be able to prove many of the violations in this case.

FDIC/RTC; Tax Sales

This is not a bankruptcy case but deals with issues relating to title to real estate and liens.   The debtor granted a deed of trust to a savings & loan.    The lender failed and was taken over the RTC.    The debtor also failed to pay its property taxes.   In 1990, the Georgetown Independent School District filed suit to foreclose its tax lien.   The RTC answered and appeared at trial.  The school district obtained a foreclosure judgment and acquired the property.   The property was sold to subsequent purchasers who developed the property.    In 1996, the FDIC (which had taken over for the RTC) sold the debt and liens to a debt buyer.   After several transfers, CAP Holdings acquired the debt.   In 2013, some 23 years after the tax sale, it filed suit for a declaration that the sale was void ab initio because it was conducted without the consent of the RTC.    

The defendants moved to dismiss based on the statute of limitations.    CAP Holdings argued that the purchasers could not assert the limitations defense because they were not in privity with the original owner.    According to CAP, if the foreclosure sale was completely void, then the purchasers never obtained title and therefore could not assert limitations.   The District Court granted the motion to dismiss based on limitations.

On appeal, the Fifth Circuit reversed and remanded.     It held that the District Court did not engage in sufficient analysis to determine whether limitations applied.  

Under 12 U.S.C. Sec. 1825(b)(2), property of the FDIC is not subject to levy or foreclosure without its consent.    The Fifth Circuit held that if the property was sold without the consent of the RTC that the sale would be completely void.    This would reinstate the property in the name of the original debtor subject to the lien of the FDIC.   The Court rejected the argument that the sale would be void only as to the lien of the FDIC.   

The Fifth Circuit remanded to the District Court to determine whether the RTC had consented to the sale by appearing at trial and not raising its immunity from foreclosure.   The Court said that if the District Court concluded that consent was lacking, it should consider whether under Texas law a purchaser at a void sale is in privity with the original owner and can assert the personal defense of limitations.   

I included this case because it is a reminder of the bad old days when I was a young lawyer.   In those days, almost all of the banks and S & Ls in the state failed and were taken over by the FDIC and the RTC.    These statutory successors claimed immunity from most defenses that would have been applicable to the original lender.    This case illustrates the broad powers granted to the government.  Hopefully the District Court will take the Fifth Circuit's hint and find that the RTC consented to the sale.   Anything else would lead to an absurd result.

Fraudulent Transfers

The Fifth Circuit drew a lot of attention when it ruled that The Golf Channel received a fraudulent transfer when it was paid for advertising purchased by the Stanford Ponzi scheme.   The Court ruled that whether value was provided must be viewed from the perspective of the debtor's creditors.   Thus, if the advertising helped perpetuate the Ponzi scheme by making it look respectable, it did not provide value.   The  Fifth Circuit rejected the Golf Channel's argument that value should be viewed from its perspective, namely that because advertising is a valuable commodity in the market, it must provide value.    The opinion was reported at Janvey v. Golf Channel, 780 F.3d 641 (5th Cir. 2015).

On June 30, the panel withdrew its opinion.   Instead, it certified the following question to the Texas Supreme Court:
Considering the definition of “value” in section 24.004(a) of the Texas Business and Commerce Code, the definition of “reasonably equivalent value” in section 24.004(d) of the Texas Business and Commerce Code, and the comment in the Uniform Fraudulent Transfer Act stating that “value” is measured “from a creditor’s viewpoint,” what showing of “value” under TUFTA is sufficient for a transferee to prove the elements of the affirmative defense under section 24.009(a) of the Texas Business and Commerce Code?
Opinion, p. 13.  

Fraudulent transfer law is codified in two different but related systems.   Most fraudulent  transfer law is based on state versions of the Uniform Fraudulent Transfer Act.   Bankruptcy trustees can either rely on the UFTA under 11 U.S.C. Sec. 544 or the Bankruptcy Code's own statute found at 11 U.S.C. Sec. 548.    Both sets of laws revolve around the concepts of transfers made with intent to hinder, delay or defraud and transfers made for lack of reasonably equivalent value while insolvent.  However, there are differences.   The main one is that the Bankruptcy Code has a two year look back while UFTA allows creditors to unravel transfers made up to four years previously.   

While the Fifth Circuit could draw on a wide range of federal fraudulent transfer decisions, the statute at issue was a state one.   This allowed the Court to send the legal question over to their brethren on the Texas Supreme Court based on the following logic:
Given the possible tension within TUFTA with respect to the perspective from which to measure “reasonably equivalent value,” that this is a question of state law that no on-point precedent from the Supreme Court of Texas has resolved, that the Supreme Court of Texas is the final arbiter of Texas’s law, and that the meaning of “reasonably equivalent value” is central to this case as well as other pending cases filed by Stanford’s receiver, we believe it is best to certify the question at issue.
 Id.     Thus, the case of the receiver and the Golf Channel is not ready to head into the clubhouse just yet.

Liens; MERS

Consumer debtor's lawyers have launched many challenges against MERS.   MERS is a private company that acts as a nominee for lenders.  Under the MERS system, debtors grant liens to MERS as nominee for the actual lender.   So long as the lender transfers its note and lien to another MERS subscriber, there is no need to record a document in the public records.   MERS simply acts as nominee for the new lienholder.    Critics of MERS argue that it subverts the public recording system by allowing lenders to conceal the actual holder of the deed of trust.   

A group of Texas counties sued MERS because they didn't like the fact that MERS was allowing lenders to skip paying recording fees by transferring title privately.    The Counties claimed that MERS violated the Texas Local Government Code and the Texas Civil Practice and Remedies Code and engaged in fraudulent misrepresentation and unjust enrichment.   It is one thing to play a shell game with home owners, but the Counties did not want MERS to mess with Texas filing fees.   

The District Court dismissed some claims and granted summary judgment on others.     The Fifth Circuit ruled that Texas law does not require lenders to record assignments of deeds of trust whenever the underlying note is transferred.    The Court also affirmed the dismissal of Dallas County's claims that MERS was recording fraudulent liens in violation of state law.   One element of this claim is that the person recording the instrument intended to harm the plaintiff.   This statute was intended to deal with militia and sovereign citizen groups that were filing fraudulent liens against government officials in support of their theory that the United States had no authority over them.   The Court held that because there was no duty to record assignments that MERS was not trying to harm the counties by not recording assignments.    Finally, the Court rejected the argument that MERS was committing a fraudulent misrepresentation when it claimed to be the beneficiary under the deed of trust.   

The take away here is that the attacks on MERS have likely run their course.   If entities as powerful as Dallas and Harris counties couldn't take MERS down, then individual property owners stand little chance of success.  MERS messed with Texas and emerged victorious.

1 comment:

Paige said...

Interesting cases. Thanks for sharing! I think reading example cases helps people understand many of these legal terms.