Fifth Circuit says prevailing lender in a wrongful foreclosure action may seek attorney’s fees under Rule 54(d)(2)

By Stephen J. Shapiro

Under Federal Rule of Civil Procedure 54(d)(2), a prevailing party that has a contractual or statutory right to recover attorney’s fees may request those fees by filing a motion within 14 days of entry of the judgment, “unless the substantive law requires those fees to be proved at trial as an element of damages.” In Richardson v. Wells Fargo Bank, N.A., the Fifth Circuit held that attorney’s fees recoverable under the standard Fannie Mae/Freddie Mac deed of trust are not an “element of damages,” and lenders therefore can seek them by way of a Rule 54(d)(2) post-judgment motion.

In Richardson, after the plaintiff defaulted on her mortgage, her lender sold the property securing the mortgage at a foreclosure sale. The plaintiff then brought claims against the lender relating to the foreclosure. The district court entered judgment in favor of the lender on its motion for summary judgment.

The deed of trust that the plaintiff signed in connection with her mortgage contained an attorney’s fee clause identical to the fee provision in the standard Fannie Mae/Freddie Mac deed of trust for single-family, residential mortgages. Relying on that clause, the lender moved for attorney’s fees under Rule 54(d)(2). The district court denied the lender’s motion, holding that the attorney’s fees were an element of damages that the lender could have sought to recover by pursing a counterclaim, but could not recover under Rule 54(d)(2).

The Fifth Circuit reversed. The Court first noted that, under the controlling Texas law, “collateral” legal costs, such as attorney’s fees incurred in the defense of a claim, are not considered damages. Rather, only attorney’s fees that constitute an independent ground for recovery – such as unpaid legal fees in a suit brought by a lawyer against a client – are considered an element of damages. Because the attorney’s fee clause in the deed of trust permitted the lender to recover fees incurred in defending against the plaintiff’s suit, the fees did not qualify as damages and the lender was entitled to pursue them on a motion under Rule 54(d)(2). Therefore, the Court remanded the case to the district court for further proceedings on the merits of the lender’s motion to recover its legal fees.

Nationwide class allegations dismissed due to plaintiff’s lack of standing in lender-placed insurance case

By Monica C. Platt

In Lauren v. PNC Bank, N.A., a judge in the Western District of Pennsylvania dismissed nationwide class allegations in an action challenging lender-placed insurance practices. The decision limits named plaintiffs’ ability to bring state law claims under the laws of states where they do not reside and where they were not injured.

Ultimately, the issues in this case boiled down to whether a named plaintiff who did not suffer injuries in a particular state has standing to assert a proposed national class action for claims based on that state’s laws, and whether a standing determination must await class certification. The court found—prior to certification—that such a plaintiff lacks standing.

Lauren, whose property was located in Ohio and who was a resident of Ohio, asserted unjust enrichment claims under Ohio law and under other states’ laws on behalf of putative class members. Defendants argued that although she could assert the Ohio claims, she lacked standing to assert unjust enrichment claims under the laws of any other state. The district court agreed. Lauren claimed that because she clearly had standing to assert the Ohio law claims, her fitness to assert claims under the law of other states on behalf of class members should be deferred until after class certification. Circuits are split on this issue, but the court decided that the named plaintiff’s standing to assert state law claims is a threshold issue that should come before class certification.

The court relied primarily on the analysis of the Eastern District of Pennsylvania in In re Wellbutrin XL Antitrust Litigation, which found that standing must be analyzed claim-by-claim and state-by-state. The judge adopted the Wellbutrin court’s analysis that “[a] named plaintiff whose injuries have no causal relation to, or cannot be redressed by, the legal basis for a claim does not have standing to assert that claim.” Therefore, if a named plaintiff’s injuries have no relation to the state in which a claim is made, and that state’s laws cannot provide any remedy, the named plaintiff does not have standing to assert a violation of that state’s laws.

The court also found persuasive the Wellbutrin court’s analysis that to determine standing only after a class is certified would allow the named plaintiffs to engage in time-consuming class discovery in potentially every state and possibly result in named plaintiffs representing the “claims of parties whose injuries and modes of redress they would not share.” This, the Wellbutrin court found, was exactly what the doctrine of standing was designed to prevent, and would result in the court having to address the same question later in litigation.

National banks should be unhappy with the Supreme Court’s new removal decision

By Stephen A. Fogdall

At one time, regulations issued by the Office of the Comptroller of the Currency prohibited state officials from bringing enforcement actions against national banks under state law. The OCC perceived such actions as an exercise of “visitorial powers,” which state officials might assert over their own state-charted banks, but which they could not assert over national banks. Then, in 2009, the U.S. Supreme Court decided Cuomo v. Clearing House Association, L.L.C. That decision rejected the OCC’s position and held that a national bank can be sued by a state attorney general acting to enforce a state law against the bank (at least if the state law is not itself substantively preempted by federal law).

While Clearing House left national banks exposed to state enforcement actions, it said nothing about where these actions could be litigated. Some federal courts interpreted a provision of the Class Action Fairness Act in a way that would permit a national bank to remove such actions from state court to federal court. This provision states that a so-called “mass action” — meaning an action “in which monetary relief claims of 100 or more persons are proposed to be tried jointly on the ground that the plaintiffs’ claims involve common questions of law or fact” — is removable to federal court so long as it meets the removal requirements otherwise applicable to class actions. Some courts, including the U.S. Court of Appeals for the Fifth Circuit, interpreted the language “100 or more persons” to include not only cases involving 100 or more named plaintiffs, but also cases seeking monetary relief on behalf of 100 or more real parties in interest. On this interpretation, an enforcement action filed by a state attorney general seeking monetary relief on behalf of residents of a state would be removable under CAFA, provided at least 100 residents were putatively entitled to relief.

Last week, the U.S. Supreme Court unanimously rejected this interpretation in Mississippi ex rel. Hood v. AU Optronics Corp. The Court held that “100 or more persons” in CAFA means 100 or more named plaintiffs. In a typical enforcement action brought by a state attorney general, there is only one named plaintiff (the attorney general). Thus, the Court concluded, such an action is not removable as a “mass action” under CAFA.

The combined effect of Clearing House and AU Optronics is that national banks now not only are subject to enforcement actions brought by state attorneys general under state law, but they will generally be stuck litigating such actions in state court.

PA shares tax: Disparate treatment of bank mergers ruled constitutional

By Sekou Lewis

On December 27, 2013, in Lebanon Valley Farmers Bank v. Commonwealth of Pennsylvania, No. 78 MAP 2011 (Pa. December 27, 2013), the Pennsylvania Supreme Court held that a bank formed from the merger of an in-state bank and an out-of-state bank may be subject to lower Shares Tax liability than a bank formed from the merger of two in-state banks. The Court ruled that the Pennsylvania Shares Tax’s “combination provision,” 72 P.S. §7701.1(c)(2), is not a violation of the Pennsylvania Constitution’s Uniformity Clause, notwithstanding that under certain circumstances, it may result in a lower tax burden in the context of an out-of-state bank merger than an in-state bank merger.

The Shares Tax

The Shares Tax is imposed on every banking institution conducting business in Pennsylvania that has shares of capital stock.  The Shares tax has three relevant provisions to this case.  First, the calculation of the tax is based on the six-year average book value of the bank’s net assets.  Second, the tax is only imposed upon “institutions,” which includes any bank incorporated under Pennsylvania law or is located in Pennsylvania. 72 P.S. §7701.5.  Third, the “combination provision” provides that in a combination or merger, the surviving entity shall be treated as if it had been “a single institution in existence prior to as well as after the combination and the book values . . . of the constituent institutions shall be combined.” 72 P.S. §7701.1(c)(2).

Taxpayer’s Argument

In 2005, the appellant Pennsylvania bank filed a petition with the Pennsylvania Board of Appeals, seeking a refund of the portion of its 2002 Bank Shares Tax payment attributable to one of the pre-merger bank’s share value.  The appellant, which merged with another Pennsylvania bank, argued that under the Commonwealth Court’s interpretation of the combination provision, as set forth in First Union Nat’l Bank v. Commonwealth, 867 A.2d 711 (Pa. Commw.Ct.), exceptions dismissed, 885 A.2d 112 (Pa. Commw. Ct. 2005), aff’d per curiam, 901 A.2d 981 (Pa. 2006), a merger of two in-state banks could result in substantially higher tax liability than the liability arising from an in-state bank’s merger with an out-of-state bank, because the combination provision is inapplicable when mergers involve out-of-state banks, thus violating the Uniformity Clause.  After the Board of Appeals and the Commonwealth Court rejected the petition, the appellant appealed to the Pennsylvania Supreme Court.

Pennsylvania’s Uniformity Clause, Pa. Const. art. VIII, §1, requires all taxes to be uniform upon the same class of subjects.  The Court in Lebanon Valley Farmers Bank treated the two types of mergers as members of the same class for purpose of the Uniformity Clause.

The Pennsylvania Supreme Court’s Holding

The Court concluded that the pre-merger book value of an out-of-state bank is not included in the surviving institution’s historical averaging calculation to determine its current value for purposes of computing its tax liability.  The Court held that the Shares Tax’s combination provision does not apply to a combination of a Pennsylvania bank and an out-of-state bank because an out-of-state bank is not an “institution” under the statute.   The Court held when a Pennsylvania bank merges with an out-of-state bank, the out-of-state bank’s pre-merger assets are not accounted for in the post-merger bank’s six-year average value calculation under Pennsylvania’s Shares Tax, 72 P.S. §§7701-7706; and, when two in-state banks merge, the pre-merger value of both banks are included in the post-merger bank’s six-year average value.

The Court found that while this may result in unequal tax burdens – an out-of-state merger may be subject to a lower tax liability than an in-state merger – the Court justified the disparity on the basis that the out-of-state bank’s assets were not previously subject to Pennsylvania state tax.  Thus, unlike an in-state merger, an out-of-state merger “enriches the public coffers” by “the adding of assets to the reach of Pennsylvania’s tax law[.]”  Therefore, the Court ruled, “[t]his in turn justifies the short-term disparity of result that lies at the heart of the present appeal, for the situations are sufficiently distinguishable to warrant distinguishable results.”  “The merger or combination of two institutions, both previously taxed on their historic average values, is a different scenario than a combination that introduces previously untaxable assets to the calculation.”

In his dissent, Justice Saylor noted “that the Bank Shares tax’s combination provision violates tax uniformity insofar as it has been interpreted to exclude out-of-state banks.”  Justice Saylor found the majority’s justification “difficult to support,” and maintained that the distinguishing circumstance identified by the majority of the Court was arbitrary, and “that it is unclear whether [the majority’s] factual premise can withstand scrutiny.”

Seventh Circuit holds that FIRREA’s time limit for seeking judicial review of a disallowed claim is jurisdictional

By Stephen J. Shapiro

Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), customers of failed banks that have been taken over by the Federal Deposit Insurance Corporation (FDIC) must, in the first instance, submit any claims they may have against the bank for resolution by the FDIC. If the FDIC disallows the claim, either expressly or by failing to act on the claim within 180 days, the claimant has 60 days to seek judicial review of the FDIC’s decision. In a recent opinion, the Seventh Circuit held that, when a claimant does not seek judicial review during that 60-day period, the courts are divested of jurisdiction to review the FDIC’s disallowance of the claim.

In Miller v. Federal Deposit Insurance Corporation, the FDIC took over a failed bank.  Sidney Miller, a customer of the bank, submitted $6 million in claims against the bank to the FDIC, which the FDIC disallowed.  The FDIC mailed a letter to Miller at the address in the bank’s files informing Miller that it had disallowed his claims, but the postal service returned the letter to the FDIC as undeliverable.  Almost 90 days after the FDIC mailed the letter, Miller learned that the FDIC had disallowed his claims, and filed an action seeking judicial review of that decision. The district court dismissed the action because Miller filed his lawsuit more than 60 days after the FDIC sent notice that it had disallowed his claims.

On appeal, Miller first argued that the clock on the 60-day period for seeking judicial review of a disallowance should begin to run on the date the claimant receives notice of the disallowance. The Seventh Circuit rejected this argument, holding that the plain language of FIRREA makes clear that the 60-day period begins on the date the FDIC sends the notice. The Court acknowledged that “[t]his strict rule may seem harsh,” but reasoned that it “makes sense when considered in light of FIRREA’s goal of promoting the quick and efficient resolution of claims against a failed bank.”

Miller next argued that the 60-day period for seeking judicial review is a standard statute of limitations that can be equitably tolled, and, in his case, should have been equitably tolled. The Court rejected this argument, holding that filing a lawsuit within 60 days is a jurisdictional prerequisite to seeking judicial review of a disallowance of a claim by the FDIC. Because Miller did not file his action within 60 days of the FDIC’s notice of disallowance, the courts lacked jurisdiction to review his claim.

For customers who wish to pursue claims against failed banks that are under FDIC receivership, the Miller case highlights the importance of closely monitoring the status of one’s claim with the FDIC.

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