PA Supreme Court Addresses Recovery of Costs and Fees Under Act 6

By Stephen J. Shapiro

Under a Pennsylvania statute commonly referred to as “Act 6,” a lender must give a residential borrower at least thirty days’ notice before it may commence foreclosure proceedings.  If a lender violates Act 6 and the borrower brings and “prevails in an action arising under” Act 6, the borrower may recover his costs, expenses and attorneys’ fees.  The Pennsylvania Supreme Court recently held that a borrower who prevails on an affirmative defense alleging a violation of Act 6 is not entitled to recover costs and attorneys’ fees because such an affirmative defense is not an “action arising under” Act 6.  The Court’s ruling likely will encourage borrowers to pursue alleged violations of Act 6 in separate lawsuits and/or as counterclaims in foreclosure actions.

In Bayview Loan Servicing, LLC v. Lindsay, a borrower defaulted on his mortgage and his lender commenced a mortgage foreclosure action.  The borrower alleged, as an affirmative defense, that the lender violated Act 6 by failing to provide him with thirty days’ advance notice of its intent to commence the foreclosure action.  After the trial court denied the lender’s motion for summary judgment, the lender discontinued the foreclosure action without prejudice.  Alleging that he had prevailed on his affirmative defense under Act 6, the borrower requested that the trial court award him costs and attorneys’ fees.   The trial court denied the request and the Superior Court affirmed.

On appeal, the Pennsylvania Supreme Court also affirmed the trial court’s refusal to award the borrower costs and attorneys’ fees.   The Court first noted that the lender’s “foreclosure action did not ‘arise under [Act 6].’”  The Court then explained that “[t]he term ‘action’ in [Act 6] clearly refers to the filing of a civil action in a court of competent jurisdiction seeking one or more of the designated forms of relief.”  As such, the Court concluded, “the assertion of an affirmative defense . . . in a residential foreclosure action does not constitute ‘an action arising under [Act 6].’”

The Court stated that a “counterclaim would undoubtedly qualify as an action arising under Act 6,” but noted that existing case law may have left it “unclear as to whether an Act 6 violation may be raised as a counterclaim in a mortgage foreclosure action.”  Because the borrower in Bayview did not pursue a counterclaim, the Court was “not presented with the opportunity to determine the propriety of such a counterclaim.”  It is likely that the Bayview decision will lead borrowers to initiate separate actions and/or plead counterclaims in foreclosure actions to pursue alleged violations of Act 6.

 

ALI Approves Restatement of the Law of Liability Insurance

By Gordon S. Woodward

On May 22 the American Law Institute voted final approval for the Restatement of the Law of Liability Insurance (RLLI). This was eight years in the making (including 29 drafts) but now sets forth ALI’s positions on numerous important coverage issues. This invaluable resource included input from insurers and policyholders and sets forth the majority and minority positions in its comments. Insurance industry professionals and business leaders may want to pay special attention to issues where the RLLI may differ somewhat from prevalent legal precedent in their jurisdiction. See ALI’s announcement and read “5 Key Rules In The ALI’s Liability Insurance Guidelines” by Law360.

 

SCOTUS Holds that Class Action Waivers in Employment Contracts Must be Enforced

By Stephen A. Fogdall

In a landmark decision, the U.S. Supreme Court has ruled 5-4 that arbitration clauses in employment contracts requiring individual dispute resolution procedures and prohibiting class actions and other collective litigation procedures must be enforced under the Federal Arbitration Act.  The Court rejected the position taken by the National Labor Relations Board and some private plaintiffs that employees’ right to engage in “concerted activities” for their “mutual aid or protection” recognized in Section 7 of the National Labor Relations Act makes such class and collective action waivers unenforceable.  The Court issued its ruling in three consolidated cases:  Epic Systems Corp. v. Lewis, Ernest & Young LLP v. Morris and National Labor Relations Board v. Murphy Oil USA, Inc.  In the latter case, the Fifth Circuit reversed the NLRB’s determination that the employer violated Section 7 by including an individual arbitration clause in its employment contract.  In the former two cases, the Seventh and Ninth Circuits respectively adopted the NLRB’s position and allowed private plaintiffs to pursue collective actions under the Fair Labor Standards Act notwithstanding that they had agreed to individual arbitration clauses in their employment contracts.

The Court, in a majority opinion written by Justice Gorsuch, began its analysis by noting that arbitration clauses in employment contracts fall squarely within the FAA’s command that all arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  The Court then rejected the argument that the final clause of this command, called the “savings clause,” implicates Section 7 of the NLRA.  The Court explained that the savings clause permits a party to oppose arbitration based on defenses, such as fraud in the inducement or duress, that might apply to “any contract.”  However, the savings clause does not allow a court to refuse to enforce an arbitration agreement based on defenses that specifically target arbitration.   The Court reasoned that a putative defense to enforcement of an individual arbitration clause on the theory that such a clause violates employees’ right to engage in “concerted activities” under Section 7 is precisely the type of defense that is not preserved by the savings clause because it specifically targets the alleged illegality of such clauses in the employment setting.  It is, by definition, not a defense of general applicability.

The Court likewise rejected the argument that there is a “conflict” between the FAA and Section 7 of the NLRA such that Section 7 overrides or impliedly repeals the FAA to the extent the FAA would require enforcement of an individual arbitration clause in an employment contract.  The Court held that there could be no conflict between Section 7 and the FAA because “Section 7 doesn’t speak to class and collective action procedures” and contains no “hint about what rules should govern the adjudication of class or collective actions in court or arbitration.”  The Court reasoned that “[u]nion organization and collective bargaining in the workplace are the bread and butter of the NLRA,” and it is “more than a little doubtful that Congress would have tucked into the mousehole” of Section 7 “an elephant that tramples the work done by” the FAA and other laws governing “the particulars of dispute resolution procedures in Article III courts or arbitration procedures.”

Lastly, the Court rejected the argument that the NLRB’s position was entitled to deference under the Chevron doctrine (which requires courts to defer to a federal agency’s interpretation of the statute it administers in certain circumstances).  The Court explained that Chevron was inapplicable because the NLRB did not confine itself to interpreting NLRA, the statue it administers, but rather “sought to interpret this statute in a way that limits the work of a second statute,” the FAA.  If an agency’s “reconciliation” of allegedly competing statutes were subject to deference under Chevron, then “[a]n agency eager to advance its statutory mission, but without any particular interest in or expertise with a second statute, might (as here) seek to diminish the second statute’s scope in favor of a more expansive interpretation of its own,” thus “bootstrapping itself into an area in which it has no jurisdiction.”

The decision is a significant win for employers seeking to limit the costs and risks of class and collective litigation by employees.

Chief Justice Roberts and Justices Kennedy, Thomas and Alito joined Justice Gorsuch’s majority opinion.  Justice Ginsburg wrote a dissenting opinion, joined by Justices Breyer, Sotomayor and Kagan.  The Schnader firm submitted an amicus brief in support of the enforceability of class action waivers in employment contracts in all three cases on behalf of the Mortgage Bankers Association and several state mortgage lending associations.

The Third Circuit holds that the discovery rule does not apply to the FDCPA’s one-year statute of limitations, but that the doctrine of equitable tolling might apply.

By Stephen J. Shapiro

In a precedential decision diverging from holdings in the Fourth and Ninth Circuits, the United States Court of Appeals for the Third Circuit, sitting en banc, held that the one-year statute of limitations in the FDCPA runs from the date the alleged violation occurs, not from the date a claimant discovers the violation. The Court noted, though, that the FDCPA’s statute of limitations may be equitably tolled under the proper circumstances.

In Rotkiske v. Klemm, a collection agency filed a lawsuit against a debtor in 2009 to collect an unpaid credit card debt. When the debtor did not respond to the lawsuit, the collection agency obtained a default judgment against him. The debtor claimed that he did not learn about the lawsuit or the judgment until September 2014 when he applied for a mortgage. Nine months later, in June 2015, the debtor brought a claim against the collection agency alleging that its actions in filing the lawsuit violated the Fair Debt Collection Practices Act (FDCPA).

The FDCPA contains a one-year statute of limitations: “An action to enforce any liability created by this subchapter may be brought in any appropriate United States district court . . . within one year from the date on which the violation occurs.” 15 U.S.C. § 1692k(d). Because the debtor filed his claim more than six years after the alleged violation, the collection agency moved to dismiss the suit on the grounds that it was time barred. Rejecting the debtor’s argument that the FDCPA’s statute of limitations begins to run when the debtor discovers the alleged violation, the district court granted the motion to dismiss.

On appeal, the Third Circuit affirmed the dismissal. The Court held that the language “within one year from the date on which the violation occurs” in the FDCPA’s statute of limitations made clear that Congress intended the limitations period to begin running on the date of the alleged violation, not on the date of discovery of the alleged violation.

The debtor argued that the discovery rule should apply to FDCPA claims because Congress did not expressly state in the act that the discovery rule did not apply. The Court flatly rejected this argument, holding that “Congress’s explicit choice of an occurrence rule implicitly excludes a discovery rule.” The debtor also argued that application of the occurrence rule would thwart the purpose of the FDCPA because the Act is designed to protect consumers from fraudulent debt collection practices that creditors may conceal from debtors. The Court disagreed with the premise that the Act is designed to protect consumers against concealed fraudulent practices, noting that many of the actions the FDCPA proscribes (for instance, repetitive contacts by telephone or mail) “will be apparent to consumers the moment they occur.”

The Court also backed away from its dicta in Oshiver v. Levin, Fishbein, Sedran & Berman. In that Title VII case from 1994, the Third Circuit mentioned in passing the “general rule” that limitations periods in federal statutes begin to run on the date a plaintiff discovers his or her injury. The Court noted, however, that more recent United States Supreme Court decisions, such as TRW Inc. v. Andrews, suggest that the previously-cited “general rule” is not correct and that the discovery rule may not be implied into federal statutes.

The Court also refused to follow decisions from the Fourth Circuit and Ninth Circuit in which those courts held that the FDCPA’s statute of limitations contains an implied discovery rule. The Third Circuit noted that neither court analyzed the “date on which the violation occurs” language in the FDCPA’s statute of limitations, and that the Ninth Circuit relied upon the defunct “general rule” that federal limitations period run from the date of discovery. The Court also noted that the Fourth Circuit appeared to have applied the doctrine of equitable tolling rather than the discovery rule.

Finally, after pointing out that the debtor did not pursue the issue of equitable tolling on appeal, the Court explained that “our holding today does nothing to undermine the doctrine of equitable tolling for civil suits alleging an FDCPA violation” and that “our opinion should not be read to foreclose the possibility that equitable tolling might apply to FDCPA violations that involve fraudulent, misleading, or self-concealing conduct.”

Although not addressed in the Court’s opinion in Rotkiske, the Third Circuit previously has explained that “even in situations in which equitable tolling initially applies, a party must file suit within a reasonable period of time after realizing that such a suit has become necessary.” Walker v. Frank, 56 Fed. Appx. 577, 582 (3d Cir. 2003). It is possible, then, that the debtor in Rotkiske chose not to invoke the equitable tolling doctrine on appeal because he would have had difficulty arguing that his nine month delay in filing his lawsuit after he discovered the alleged FDCPA violation was “a reasonable period of time.”

In sum, debtors who wish to pursue FDCPA claims in the Third Circuit must do so within one year of the date the alleged violation occurred, or within a reasonable period of time after discovering the violation.

 

Servicer Violated RESPA but Caused no Damages: Eighth Circuit

By Stephen A. Fogdall

The U.S. Court of Appeals for the Eighth Circuit concluded earlier this month in Wirtz v. Specialized Loan Servicing, LLC, that a mortgage loan servicer violated Section 6 of the Real Estate Settlement Procedures Act (RESPA) by failing to obtain a borrower’s complete payment history from a previous servicer and to provide a copy of the history to the borrower in response to his qualified written requests.  However, the court concluded that the borrower nevertheless failed to state a claim under RESPA because there was no evidence that he suffered any actual damages as a result of the violation.

The main RESPA compliance lesson from Wirtz is that if the information a servicer needs to respond to a borrower’s qualified written request is in the possession of a prior servicer, the servicer itself should take reasonable steps to obtain that information from the prior servicer rather than tell the borrower to obtain it.

The servicer in Wirtz received a partial payment history (beginning in mid-2011) from the prior servicer when it acquired the servicing rights to the loan.  The first entry in the history appeared to show that the borrower was delinquent by one month.  Later entries suggested the borrower had missed other payments in 2012 and 2013.  The borrower believed all of these entries were in error and sent qualified written requests to the servicer in order to challenge them.  Among other things, the borrower requested that the servicer provide a complete payment history for the loan from origination to the present.

The servicer responded that if the borrower wanted to contest the missed payments, he himself would need to obtain the documents necessary to do so.  Thereafter, the borrower obtained the complete payment history to address the initial alleged missing payment, and obtained other bank records (for which he paid $80) to address the alleged missing payments in 2012 and 2013.  He then renewed his qualified written requests.  Unsatisfied with the servicer’s responses to these renewed requests, he brought suit under Section 6 of RESPA.

Section 6 of RESPA requires a servicer receiving a qualified written request to conduct “an investigation” and then to “provide the borrower with a written explanation or clarification that includes” the “information requested by the borrower or an explanation of why the information requested is unavailable or cannot be obtained by the servicer.”  Section 6 further provides that the borrower may recover from the servicer “any actual damages” the borrower suffered “as a result of” a violation of these obligations, as well as “any additional damages, as the court may allow, in the case of a pattern or practice of noncompliance,” not to exceed $2,000.00, plus costs and attorneys fees.

The district court found that the servicer did not violate Section 6 with respect to its handling of the borrower’s requests relating to the alleged missing payments in 2012 and 2013.  However, the district court concluded that the servicer “made minimal effort to investigate the error” relating to the initial alleged missing payment, and failed to provide the borrower with the payment history he requested.  The district court awarded as actual damages the $80 the borrower had spent to obtain the bank records relating to the alleged missing payments in 2012 and 2013 (for which the district court had found no violation), then awarded a further $2,000.00 in statutory damages, along with attorneys fees of over $45,000.00.

On appeal, the Eighth Circuit affirmed the district court’s conclusion that the servicer violated Section 6 by failing to obtain the borrower’s complete payment history.  The Eighth Circuit explained that Section 6 “imposes a substantive obligation on mortgage loan servicers to conduct a reasonably thorough examination before responding to a borrower’s qualified written request.”  In addition, the court held that the servicer could not claim that the borrower’s payment history was “unavailable” simply because the servicer itself did not possess it, when that history “could be obtained” by the servicer from the prior servicer “through reasonable investigation.”

Nevertheless, the Eighth Circuit reversed the district court’s finding of damages.  The court held that the only violation found by the district court related to the initial alleged missing payment, whereas the $80 the borrower spent to obtain bank records related to the alleged missing payments in 2012 and 2013.  The $80 expense was therefore not the “result of” the violation the district court found.  The court further held that the borrower could not recover statutory damages because such damages are characterized in the statute as “additional damages,” implying that they can only be awarded if the borrower can first establish actual damages.  Lastly, because damages are an “essential element” of a Section 6 claim, the court held that the borrower had failed to establish any claim for relief under Section 6 and directed entry of judgment in favor of the servicer on that claim.

Although the servicer in Wirtz ultimately escaped liability under RESPA, servicers should still carefully consider the court’s guidance that Section 6 imposes a substantive obligation to conduct a reasonably thorough investigation before responding to a qualified written request, as well as take heed that information cannot be considered “unavailable” merely because it is in the hands of a prior servicer.  Servicers should proceed on the assumption that courts will expect them to take reasonable steps to obtain needed information from a prior servicer rather than put the onus on borrowers to do so.

 

Pennsylvania Supreme Court Extends Reach of Unfair Trade Practices and Consumer Protection Law to Transactions Occurring Outside Pennsylvania and to Non-Pennsylvanians

By Edward J. Sholinsky

The Supreme Court greatly expanded the territorial reach of the Unfair Trade Practices and Consumer Protection Law recently, holding that the Law reaches the alleged acts of Pennsylvania-based companies outside the Commonwealth.

Answering a certified question from the United States Court of Appeals for the Third Circuit, the Court in Danganan v. Guardian Protection Services held that the UTPCPL could reach the extraterritorial acts of companies headquartered in Pennsylvania, no matter how tenuous Pennsylvania’s link to the alleged act.  In doing so, the Court rejected years of federal district court decisions concluding that the UTPCPL only may be invoked: (1) by Pennsylvania plaintiffs; and (2) where the alleged wrongful acts have a sufficient nexus to Pennsylvania.

The plaintiff in Danganan alleged that he purchased home alarm services for his Washington, D.C. residence from Guardian, a company headquartered in Pennsylvania.  He signed a three-year agreement, which he allegedly attempted to cancel when he sold his D.C. home and moved to California.  Danganan alleged, however, that Guardian continued billing him for the services.  Danganan filed a putative class action in the Court of Common Pleas of Philadelphia County alleging, among other things, that the defendant violated the provision of the UTPCPL stating that:  “[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce . . . are . . . unlawful.”  The UTPCPL defines “commerce,” in relevant part as “any trade or commerce directly or indirectly affecting the people” of Pennsylvania.  The defendant removed to federal court, with the case ultimately ending up in the United States District Court for the Western District of Pennsylvania.  The District Court granted Guardian’s motion to dismiss, holding that plaintiff had not established a “sufficient nexus” between the alleged acts and Pennsylvania and that the UTPCPL generally applied only to Pennsylvania residents.  Danganan appealed to the Third Circuit, which certified two questions to the Pennsylvania Supreme Court, including whether a non-Pennsylvania resident could bring suit against a Pennsylvania company for a transaction occurring outside of Pennsylvania.

The Court adopted a broad reading of the UTPCPL, heavily relying on a 2015 Washington Supreme Court decision, Thornell v. Seattle Service Bureau, Inc., 363 P.3d 587, which interpreted a similar Washington State law.  In particular, the Court adopted Thornell’s broad definitions of the words “person” and “commerce” and the phrase “indirectly affecting the people of Washington.”

As a result, the Court found that there are no territorial limitations in the terms “person,” “trade” and “commerce” in the UTPCPL and no explicit requirement that a plaintiff reside in Pennsylvania.  The Court also put great weight on the broad remedial purpose of the UTPCPL.  Thus, the Court found “that the Law’s prescription against deceptive practices employed by Pennsylvania-based businesses may encompass misconduct that has occurred in other jurisdictions.”

In so holding, the Court rejected the “sufficient nexus” test relied on by the District Court.  The Court held that “there is no textual basis in the UTPCPL for its imposition, and the Court may not supply additional terms to, or alter, the language that the Legislature has chosen.”

In apparent recognition of the potentially broad application of its opinion, the Court stated that the rule it announced could be limited through jurisdictional and choice-of-law principles.

Nevertheless, the rule announced by the Court in Danganan represents a major expansion of the reach of the UTPCPL.  It potentially expands the remedies available to foreign plaintiffs in their dealings with Pennsylvania-based companies—no matter how remote the connection to Pennsylvania is to any specific act—and may encourage these plaintiffs to bring suit in Pennsylvania rather than their home states or in the state where the acts occurred in the hopes that courts will apply the UTPCPL.  While that may seem like a hassle, the broad remedies of the UTPCPL, including treble damages and attorneys’ fees, could make it a worthwhile effort for plaintiffs and their counsel.

PHH Mortgage Settles Lawsuit with States for $45 Million

By Emily P. Daly

PHH Mortgage Corporation, the ninth largest residential mortgage servicing company in the country, agreed Wednesday to pay over $45 million to settle claims brought against it by the Attorneys General of 49 states and the District of Columbia. Consent Judgment ¶ 4.

The coalition of Attorneys General filed a complaint against PHH Mortgage in the United States District Court for the District of Columbia on January 3, 2018, alleging that PHH Mortgage violated the Unfair and Deceptive Acts and Practices laws of the respective states and the Consumer Financial Protection Act of 2010 for conduct occurring between January 1, 2009 and December 31, 2012.  Compl. ¶¶ 17, 19, 22, 25, 27.

According to the complaint, PHH Mortgage, as a servicer of residential mortgage loans, “regularly reviews mortgage loans for potential loss mitigation or loan modification options, and conducts or manages foreclosures.”  Compl. ¶ 16.  The Complaint alleges that PHH charged unauthorized fees, used incomplete information in the foreclosure process, and failed to apply payments made by borrowers. Compl. ¶ 17

The $45 million monetary settlement will be distributed among borrowers, the Attorneys General, and the states as an administrative penalty. Consent Judgment ¶ 5.  Over $31 million of the settlement amount will go to “(a) borrowers whose loans were serviced by PHH at the time the foreclosure was completed and whose homes were sold or taken in foreclosure between and including January 1, 2009, and December 31, 2012, or (b) all other borrowers whose loans were serviced by PHH and referred to foreclosure during that same time period and not accounted for in (a) above.”  Consent Judgment ¶ 6.

In addition to the monetary settlement, PHH Mortgage is required to adopt new servicing standards, which are attached as Exhibit A to the Consent Judgment.  Consent Judgment ¶ 9.  PHH issued a press release in response to the settlement and stated that the new servicing standards are “largely PHH’s servicing standards today.”

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