Deficient Act 91 notices do not divest Pennsylvania courts of subject matter jurisdiction to hear mortgage foreclosure actions

By Stephen J. Shapiro

Pennsylvania’s Homeowner’s Emergency Mortgage Act (Act 91) requires a mortgagee that intends to foreclose on a residential mortgage to send a notice advising the delinquent homeowner that he has “thirty (30) days to have a face-to-face meeting with the mortgagee who sent the notice or a consumer credit counseling agency to attempt to resolve the delinquency.”  In Beneficial Consumer Discount Company v. Vukman, the Pennsylvania Supreme Court held that a mortgagee’s failure to include the entirety of this “face-to-face meeting” language in an Act 91 notice does not divest Pennsylvania’s trial courts of subject matter jurisdiction to hear a foreclosure action by the mortgagee.

In Beneficial, the mortgagor, Pamela Vukman, defaulted on her mortgage and Beneficial, her mortgagee, sent her an Act 91 notice.  The notice informed Vukman of her right to a face-to-face meeting with a counseling agency, but did not say that she also had the option to meet face-to-face with Beneficial.  Beneficial later filed a foreclosure action and, ultimately, obtained a judgment against Vukman and acquired her property through a sheriff’s sale.

Vukman filed a motion to set aside both the judgment and sale.  In that motion, she argued for the first time that Beneficial’s Act 91 notice was deficient and, therefore, that the trial court lacked subject matter jurisdiction to hear Beneficial’s foreclosure action.  The trial court agreed and, because lack of subject matter jurisdiction is a defense that cannot be waived, set aside the sheriff’s sale and the judgment against Vukman.  The Superior Court affirmed.

On appeal, the Pennsylvania Supreme Court first confirmed that Beneficial’s Act 91 notice was deficient because it did not offer Vukman the option of meeting face-to-face with Beneficial (in a concurring opinion, two Justices opined that Beneficial’s notice was sufficient).  However, the Court concluded that “defective Act 91 notice does not implicate the jurisdiction of the court.”  Rather, the Court held that Act 91 imposes procedural requirements that mortgagees must follow before bringing a foreclosure action.  Unlike lack of subject matter jurisdiction, failure to comply with procedural requirements, the Court held, is a defense that can be waived.  Therefore, the Court rejected the trial court’s finding that it lacked subject matter jurisdiction, reversed the trial court’s order, and remanded the case.

It is unclear whether the trial court on remand will simply reenter the judgment against Vukman and reinstate the sheriff’s sale, or entertain further proceedings on the issue of whether Vukman waived her objection to the defect in Beneficial’s Act 91 notice.  The case does, however, send a clear message to mortgagees:  In Act 91 notices, offer mortgagors the choice of meeting face-to-face with either the mortgagee or a counseling agency, or risk litigating the sufficiency of the notice.

The Latest Decision on Expert Testimony at the Class Certification Stage

By Stephen A. Fogdall

A judge in the United States District Court for the Northern District of California just entered an order in  In re Cathode Ray Tube Antitrust Litigation on an issue we follow on this blog:  the evaluation of expert testimony at the class certification stage. (For earlier discussions of this issue, click here.)

The Cathode Ray Tube court granted a motion to certify a class of indirect purchasers who said that they had paid inflated prices due to the defendants’ alleged conspiracy to fix the prices of cathode-ray tube technology. At the same time, the court rejected the defendants’ Daubert challenge to the expert testimony the plaintiffs offered to establish antitrust injury on a classwide basis.

The defendants argued that the expert’s analysis was flawed because it utilized average prices instead of actual prices and was based on erroneous assumptions about the susceptibility of the industry to price-fixing. The court concluded that the defendants were asking for “a full-blown merits analysis, which is forbidden and unnecessary at the class certification stage.”

As we have previously discussed, the U.S. Supreme Court sent somewhat mixed signals this last term regarding the resolution of merits issues on a motion for class certification. On the one hand, the Court held in Behrend that “arbitrary” or “speculative” expert testimony could not support class certification even if the expert’s model would apply on a classwide basis. On the other hand, the Court held in Amgen, an alleged securities fraud case, that the plaintiffs need not establish materiality at the class certifications stage, but need only show that materiality could be established on a classwide basis at trial. Therefore, in one case the Court said that classwide applicability of proof would suffice for class certification, while in another case the Court said that flaws in the evidence could defeat class certification notwithstanding classwide applicability.

The Cathode Ray Tube court essentially put these decisions together and extracted this principle:  if a plaintiff’s expert testimony survives Daubert scrutiny and applies on a classwide basis, then class certification is appropriate.

We will continue to monitor decisions in this area to see if other federal courts adopt this same approach in the wake of Behrend and Amgen.

Third Circuit addresses two issues of first impression regarding the statute of limitations in the Securities Act.

By Stephen J. Shapiro

Earlier this week the United States Court of Appeals for the Third Circuit decided two issues of first impression in the Circuit relating to the one-year statute of limitations in Section 13 of the Securities Act of 1933. The Court held that: (1) a plaintiff need not plead compliance with the statute of limitations in order to state a claim under the Securities Act; and (2) the discovery rule, not a more stringent “inquiry notice” standard, applies when analyzing whether a plaintiff timely filed an action under the Securities Act.

In Pension Trust Fund for Operating Engineers v. Mortgage Asset Securitization Transactions, Inc., the plaintiff pension fund purchased through UBS Securities certificates in a mortgage-backed security trust that entitled it to payments from the cash flow of the trust. Alleging that the offering documents for the certificates misrepresented the quality of the loans in the trust, the fund brought several claims against UBS under the Securities Act. The trial court dismissed the original complaint without prejudice because the fund had not pled that it complied with the statute of limitations in Section 13 of the Securities Act. After the fund amended the complaint to so plead, the trial court dismissed the amended complaint as untimely, holding that the fund was on inquiry notice of its claims more than a year before it filed them.

On appeal, the Third Circuit first held that “a Securities Act plaintiff is not required to plead compliance with Section 13” in order to state a claim under the Act. In so holding, the Court joined the Seventh, Ninth and Eleventh Circuits, but departed from contrary holdings by the First, Eighth and Tenth Circuits.

On the issue of whether compliance with the statute of limitations should be measured under the discovery rule or an inquiry notice standard, the Court acknowledged that it had adopted the inquiry notice standard in an earlier case. Under that standard, the statute of limitations begins to run when a reasonably diligent plaintiff would have begun investigating a possible violation, as opposed to when a reasonably diligent plaintiff would have discovered the violation itself (the accrual point under the discovery rule). Because the point at which a reasonably diligent plaintiff would have begun investigating is generally earlier in time than the point at which such a plaintiff would have discovered a violation, inquiry notice is typically a more stringent accrual standard. The Court reevaluated its prior holding that this more stringent standard should be applied in light of the Supreme Court’s intervening decision in Merck & Co., Inc. v. Reynolds, and concluded that “pursuant to the Supreme Court’s decision in Merck, we hold that the discovery standard governs whether Securities Act claims are timely under Section 13.”

Although the Court disagreed with two of the trial court’s legal conclusions, it nevertheless affirmed the dismissal of the action after concluding that the fund’s complaint was untimely even under the more lenient discovery rule. The Court first held that a reasonably diligent plaintiff would have begun investigating its claim when, in September 2008, a class of plaintiffs filed a complaint alleging similar claims in California state court. The Court then concluded that, had the fund performed in September 2008 the same investigation it eventually performed to discover its claims – which investigation the fund alleged took two months to complete – it would have discovered its claims by November 2008. Since the fund did not file its complaint until February 2010, more than a year after it should have discovered its claims, its action was time barred even when applying the discovery rule.

The Seventh Circuit Suggests that Cy Pres Still Has a Place in Class Actions When Potential Individual Awards Seem Too Small to Justify Class Treatment

By Ira Neil Richards and Gary M. Goldstein

A ruling last week out of the Seventh Circuit, Hughes v. Kore of Indiana Enterprise, Inc., suggests that cy pres can be used as a remedy for a class to support class certification even when the size of potential damages awards to individual class members would otherwise seem too small to justify class treatment.

When class action settlements involve high costs of distributing money to eligible class members, or where there is money left over after a settlement fund has been distributed, the settling parties often turn to “cy pres.”  Cy pres is a term borrowed from trust law.  In the class action context, settling parties use it to refer to a distribution of settlement funds to charity or other third parties instead of to class members themselves.  Objectors to class action settlements though increasingly focus on any cy pres component.  The result has been an increase in appellate authority that can help guide parties in determining when and how to use cy pres as part of a class action settlement.

Objections raised in response to cy pres distributions of class action settlement funds include challenges that the awards improperly distribute funds to charity instead of fully compensating class members.  Challenges have also focused on a perceived lack of nexus between the cy pres recipient and the lawsuit’s compensatory objectives. Other objections have questioned whether a judge’s discretion in approving a cy pres recipient, or a party’s (or their counsel’s) ability to direct funds to a chosen charity, creates a conflict of interest. Under the guiding principle that cy pres awards “are inferior to direct distribution to the class” (In re Baby Prods. Antitrust Litig.), courts have rejected cy pres awards because they are susceptible “to the whims and self interests of the parties, their counsel, or the court” and “create an appearance of impropriety.”  Nachsin v. AOL. Objectors have also complained when courts have not discounted any cy pres amount when awarding attorneys’ fees to class counsel.

Despite the recent skepticism towards cy pres class action settlement payments, courts continue to recognize that there are times when cy pres makes sense.  The Seventh Circuit’s decision in Hughes is the most recent example.  In that case, the Seventh Circuit reviewed a district court’s decision decertifying the class because the district court believed the potential recoveries of individual class members were too small to justify class treatment and because it would be hard to give class members individual notice.  The plaintiff claimed that he and other potential class members were entitled to statutory damages under the Electronic Funds Transfer Act because the defendant had not provided required notices of ATM fees.  The district court concluded that the statutory limit on damages made class members better off if they filed their own claims.

On the notice question, Judge Posner, writing for the Seventh Circuit, explained that notice can be given by publication when individual class members’ addresses cannot be obtained from available records.  With respect to the district court’s conclusion that a class action recovery would not provide meaningful recovery, Judge Posner suggested that cy pres might provide the best option.  Since the cost of distribution of any recovery to individual class members would outweigh the recoveries, a “[p]ayment … to a charity whose mission coincided with, or at least overlapped, the interest of the class … would amplify the effect of the modest damages in protecting consumers.”

The Seventh Circuit’s opinion that cy pres can be appropriate where the distribution costs are high relative to any individual class member’s share is consistent with the Ninth Circuit’s decision in Lane v. Facebook.  In that case, the Ninth Circuit rejected challenges to a settlement that included a cy pres distribution because paying small amounts to individual class members would not be feasible and because the recipient of the cy pres distribution had a relationship to the subject of the litigation (online privacy).  Notably, the Court rejected a challenge to the settlement based on the fact that a Facebook employee sat on the board of directors of the recipient of the cy pres distribution.

While cy pres can attract the attention of objectors to class settlements, which can lead to delays in settlement finality and increased litigation costs, cy pres can still have a place in a settlement.  Parties need to be mindful that courts will scrutinize any proposed cy pres payments as they relate to the cost to give money directly to class members.  In addition, designating a cy pres recipient that has some connection to the subject matter of the litigation might also help in getting final settlement approval.

Circuit split widens on actions borrowers must take to preserve their right to rescind under TILA

By Stephen J. Shapiro

Several circuit courts have reached conflicting conclusions about the actions borrowers must take to exercise their right to rescind a loan under the Truth in Lending Act. Recent opinions from the Eighth Circuit widen the divide.

Under TILA, lenders are required to make certain disclosures to borrowers. If a lender fails to make those disclosures, the borrower may rescind the loan within “three years after the date of the consummation of the transaction or upon the sale of the property, whichever occurs first.” The question that has divided the circuits is: what action must borrowers take to exercise their rescission rights? Is it sufficient for borrowers simply to notify their lenders that they are exercising their right to rescind, or must borrowers file suit-seeking rescission?

As we previously reported, earlier this year the Third Circuit, in Sherzer v. Homestar Mortgage Services, joined the Fourth Circuit in holding that mere notice by the borrower is sufficient to exercise the right to rescind under TILA.  This holding contradicted decisions by the Ninth Circuit and the Tenth Circuit, both of which held that a borrower must file suit to exercise the right to rescind.

The Eighth Circuit joined the fray earlier this summer with Keiran v. Home Capital, Inc., and Hartman v. Smith. In those cases, the Eighth Circuit sided with the Ninth and Tenth Circuits in holding that borrowers seeking to exercise their right to rescind under TILA must file suit, not just notify their lenders.

However, another recent opinion shows that considerable disagreement on this issue exists among the judges within the Eighth Circuit. In Jesinoski v. Countrywide Home Loans, Inc., two borrowers notified their lender that they were invoking their right to rescind their loan under TILA during the three-year period following consummation of the loan, but did not bring a rescission claim against the lender until after the three-year period expired. The trial court entered judgment on the pleadings in favor of the lender and the Eight Circuit, relying on its earlier decisions in Keiran and Hartman, affirmed. However, two of the three judges on the Jesinoski panel stated in concurring opinions that they believed Keiran and Hartman were wrongly decided and noted that, had they not been required to follow the decisions of those prior panels, they would have joined the Third and Fourth Circuits in holding that mere notice by borrowers of their intent to invoke their right to rescind under TILA is sufficient. This issue likely will continue to engender differences of opinion both between and within the circuits unless and until the Supreme Court resolves it.

UPDATE (4/29/14): The United States Supreme Court granted cert in the Jesinoski case.

Presentment Warranties Under the UCC Do Not Apply to Counterfeit Checks

By Edward J. Sholinsky

Recently, a Pennsylvania trial court recognized the distinction between counterfeit checks and altered checks. In doing so, the court followed the lead of other states that have recognized that the depository bank does not violate the Uniform Commercial Code’s presentment warranties when it accepts in good faith a counterfeit check.  The decision reinforces that drawee banks must be aware of their customers’ signatures or risk being stuck with the loss stemming from a counterfeit check.

The presentment warranties in the Pennsylvania Commercial Code provide in pertinent part that, when a depository bank presents a draft for payment, it warrants that “the draft has not been altered.”  The Code defines an alteration as:  1) an unauthorized change in an instrument that purports to modify in any respect the obligation of a party, or 2) an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party.  Indeed, courts throughout the country have held that an “alteration” is a change to, or on, a preexisting document, not the creation of a new check.   So, presentment warranties only apply when a depository bank presents a genuine instrument that has been changed, and not a completely counterfeit instrument.  Put another way, a counterfeit document is not an “alteration” of an instrument for the purposes of the Code.

The Court of Common Pleas of Indiana County adopted this approach in S&T Bank v. Regions Bank (ST Bank v. Regions Bank No 10945 CD 2012).  In S&T, a thief intercepted a check written by an S&T customer.  The thief then created a new check using the same amount, account number, and serial number, along with a scanned signature of S&T’s customer.  The recipient of the counterfeit check deposited it into her account at Regions.  Regions forwarded the check for payment to S&T through the Federal Reserve Bank System.  S&T accepted the check and deducted the check amount from its customer’s account.  About a week later, the customer notified S&T that the check was counterfeit.

The Court held that the presentment warranties did not apply, stating that “the distinction between an altered check and a counterfeit check is significant, since the presentment warranties apply to altered checks but not counterfeit checks.”  The Court reasoned a counterfeit check is not an “altered” check under the Code, and, therefore, presentment warranties do not apply when a thief creates a new, counterfeit check.  As a result, the Court sustained Regions’s preliminary objections and dismissed with prejudice the presentment warranty claims against the bank.

S&T makes clear that, under the Pennsylvania Commercial Code, the presentment warranties under Articles III and IV of the Code do not apply to counterfeit checks.  S&T is consistent with the national body of case law on the distinction between counterfeit checks, on one hand, and altered checks, on the other, and the resulting allocation of liability.  For banks in Pennsylvania it means that drawee banks assume the risk of making a payment on a counterfeit check.  The Code puts the onus on drawee banks to know their customers’ signatures and decisions on presentment warranties reinforce that burden.

Edward J. Sholinsky of Schnader represented Regions Bank in the above action. The trial court also sustained Regions’s preliminary objections to S&T’s transfer warranty claims on the ground that Regions did not transfer the checks to S&T.

Pennsylvania’s Superior Court Addresses the Format and Location of Confession of Judgment Clauses

By Stephen J. Shapiro

The Pennsylvania Superior Court recently rejected a debtor’s attempt to escape from three confessed judgments by challenging the format of the confession of judgment clauses at issue. In First National Community Bank v. The Powell Law Group, P.C., the defendant law firm guarantied the repayment of three loans, and the documents that memorialized the guaranties contained confession of judgment clauses. When the borrowers defaulted on the underlying loans, the lender confessed judgments against the law firm.

The firm petitioned the Court of Common Pleas of Luzerne County to strike the confessed judgments, arguing that: (1) the confession of judgment provisions were not in the correct format and location; and (2) the attorneys’ fees added to the judgments were grossly excessive. The trial court denied the petitions to strike, but slashed the amount of the attorneys’ fees included in each judgment by 50% or more.

On appeal, the firm argued that the confession of judgment provisions in the guaranties were invalid under Pennsylvania law because they: (a) did not have headings; (b) were spread over more than one page; (c) were in fine print; and/or (d) were not on the same page as the signature line. Superior Court rejected this argument and affirmed the trial court in three separate but similar opinions (which are available through these links: Opinion 1, Opinion 2 and Opinion 3).  The Court held that, because the confession of judgment provisions appeared in all capital letters in documents that were not particularly lengthy (between 3 and 11 pages), the provisions were conspicuous to the debtor, regardless of the absence of a heading or the location of the signature line.

The Court also rejected the firm’s argument that the judgments should be stricken because the attorneys’ fees included in them – even as reduced by the trial court – were grossly excessive. Each guaranty provided that, in the event of default, the lender would be entitled to confess judgment in the amount of the loan balance, plus attorney’s fees in the amount of a specified percentage of the unpaid loan balance. After noting that the lender properly followed the formula in the confession of judgment provision when calculating attorneys’ fees, the Court first seemed to suggest that it might have affirmed a judgment that included the original, unreduced attorneys’ fees had that issue been before it (it was not). Ultimately, the Court concluded that the firm failed to establish that the reduced fees were excessive.

Although the First National opinions teach that confession of judgment provisions need not contain headings, be confined to a single page or appear on a page of the agreement that the borrower or guarantor signs, lenders should consider formatting agreements in a fashion that strips debtors of the ability to make these arguments in the first place. Minor formatting changes today could reduce defense costs tomorrow.

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