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.

 

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.

Pennsylvania’s Superior Court creates a conflict with the Third Circuit by holding that UTPCPL claims are not subject to the economic loss doctrine

By Stephen J. Shapiro

The Pennsylvania Superior Court’s recent decision in Knight v. Springfield Hyundai is notable for two reasons.  First, addressing an issue of first impression, the Court held that disputes arising in connection with automobile installment sale contracts are not subject to arbitration unless the installment sale agreement itself contains an arbitration clause.  Second, and contrary to a decision by the Third Circuit, the Court held that the economic loss doctrine does not apply to claims under Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (UTPCPL).

In connection with her purchase of a used car, plaintiff Beverly Knight signed two documents – a Buyer’s Order, which included the terms of the purchase, and a Retail Installment Sales Contract (RISC), which detailed her financing agreement.  The Buyer’s Order contained an arbitration clause, but the RISC did not.

Alleging that the car dealer had misrepresented the condition of the vehicle she purchased, Knight sued the dealer and financing company in Pennsylvania state court.  Among other claims, Knight alleged that defendants violated the UTPCPL, which prohibits sellers from engaging in unfair or deceptive acts or practices, by misrepresenting characteristics of the vehicle.  The defendants filed the state law equivalent of a motion to dismiss, arguing, among other things, that the arbitration clause in the Buyer’s Order required Knight to bring her claims in arbitration and that Knight’s UTPCPL claim was barred by the economic loss doctrine.

The trial court dismissed several of Knight’s claims, including her UTPCPL claim, and held that she was required to arbitrate her surviving claims. Knight then proceeded to arbitration, at the conclusion of which the arbitrator awarded her $971.41, plus costs and fees.  Knight filed a motion in the trial court to vacate the arbitration award, which the trial court denied.

On appeal, the Superior Court first held that the trial court erred in compelling arbitration.  Under Pennsylvania’s Motor Vehicle Sales Finance Act (MVSFA), an installment sale contract for the purchase of an automobile “shall contain all of the agreements between the buyer and seller relating to the installment sale of the motor vehicle sold.”  The Court held that this language clearly and unambiguously provides that “when a buyer makes a purchase of a vehicle by installment sale, the RISC subsumes all other agreements relating to the sale.”  Therefore, the Court held that the Buyer’s Order was subsumed by the RISC, and since the RISC did not contain an arbitration clause, no enforceable agreement to arbitrate existed.

The Superior Court also held that the economic loss doctrine, which prohibits plaintiffs from recovering in tort for purely economic damages, does not prohibit Knight from pursuing her UTPCPL claim on remand.  This holding contradicts the 2002 case Werwinski v. Ford Motor Company, in which the Third Circuit predicted that the Pennsylvania Supreme Court would hold that the economic loss doctrine bars claims under the UTPCPL.  The Superior Court did not discuss Werwinski, instead relying on Excavation Technologies, Inc. v. Columbia Gas Co., a 2009 decision in which the Pennsylvania Supreme Court stated that the economic loss doctrine bars claims “for negligence that result solely in economic damages unaccompanied by physical injury or property damage.”  From this statement, the Superior Court concluded that the economic loss doctrine only bars negligence-based claims and, because UTPCPL claims are statutory claims that do not sound in negligence, they are not barred by the doctrine.

The Superior Court’s reliance on Excavation Technologies for the proposition that the economic loss doctrine only applies to claims sounding in negligence is questionable.  The sole claim at issue in Excavation Technologies was one for negligent misrepresentation, so the Supreme Court was not faced with the question and did not hold that the economic loss doctrine is inapplicable to claims that do not sound in negligence.

Unless and until the Pennsylvania Supreme Court resolves the discrepancy, the economic loss doctrine will not be a viable defense to a UTPCPL claim in the Pennsylvania state trial courts, which are bound by Knight, but may still be a viable defense to a UTPCPL claim in the federal trial courts in the Third Circuit, which are bound by Werwinski.

Third Circuit Predicts Punitive Damages Available Under the Pennsylvania Uniform Fraudulent Transfer Act

By Edward J. Sholinsky

The United States Court of Appeals for the Third Circuit has predicted that the Pennsylvania Supreme Court would hold that punitive damages are available in cases under the Uniform Fraudulent Transfer Act (UFTA).

The court in Klein v. Weidner, reasoned that even though the UFTA does not specifically provide for punitive damages, they are available because the UFTA gives courts “broad authority” to award a “package of remedies” based on a case’s individual circumstances.

In Klein, the plaintiff brought a claim under the UFTA against her ex-husband, his current wife, and his business.  In response to a California judgment awarding the plaintiff spousal and child support, the ex-husband defendant transferred his assets and an interest in his business to his wife to insulate them from the California judgment and the plaintiff.  The district court held that this violated the Act and awarded $548,797.07 in punitive damages.  The defendants appealed.

After affirming the district court’s decision that the defendants violated the UFTA, the Third Circuit addressed the issue of punitive damages.  While the UFTA does not expressly provide that punitive damages are available, it contains three provisions that the court believed pointed to an overall statutory scheme to permit punitive damages.  Specifically, the court considered that the Act contained a “catch-all” provision providing for “any other relief the circumstances may require”; a provision awarding all damages necessary to make the creditor whole; and a provision stating that all remedies available under law and equity are available unless specifically displaced by the UFTA.  The court reasoned that because the remedies under the UFTA are “cumulative,” and punitive damages are available at both law and equity in Pennsylvania, the UFTA permitted punitive damages.   The court also held that under the UFTA it was appropriate to consider the ex-husband’s outrageous conduct in conjunction with the fraudulent transfers—including harassing the plaintiff and threatening her attorney—which supported the district court’s award of punitive damages.

The court distinguished the UFTA from cases where the Pennsylvania Supreme Court has held that punitive damages were not available when not directly provided for in the statute.  Specifically, the court focused on the Pennsylvania Supreme Court’s holding in Hoy v. Angelone that punitive damages were not available under the Pennsylvania Human Relations Act.  The court held that the UFTA differed from the Human Relations Act, because the latter was remedial in nature and required “affirmative action” to remedy discrimination.  The UFTA, however, was at least in part based on common law fraud, under which punitive damages have historically been available.  Thus, the court held that punitive damages could supplement the remedies specifically provided for by the UFTA.

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