Dear Members:

Last week, I had the privilege of being invited to a small working dinner by David Liebowitz and Jim McNeilly of Lakelaw Law Offices. Other members of the Section also attended as well as the Director of the Legal Aid Society of Milwaukee, Catey Doyle. The purpose of the dinner was to discuss the current situation relating to mortgage foreclosures in our State and what might be done to curb the abuses or provide for information to those who find themselves in this unfortunate situation.

The statistics are chilling. There are thousands of foreclosures going on as we speak and many of the defendants in these actions do not have lawyers and, frankly, do not know their rights. In many cases, people voluntarily give up their rights in the property as they have no idea that they even have redemption rights.

After a lively discussion, the group decided that something must be done and that this would be a perfect project for the Section which could do an enormous amount of good for both the public and the profession.

We determined that there are really two objectives which need to be met. First of all, we need to create some type of informational pamphlet for the public which, in plain English, tells them what the basic rights are concerning foreclosure. We envision this being distributed through Clerk of Courts offices, Legal Aid Society or Legal Services, the internet and the State Bar website or any other venue which might be effective.

Secondly, we need to put together a handbook for attorneys which in effect would be a primer on defenses to foreclosure, violations of TILA (Truth in Lending Act), RESPA (Real Estate Settlement Procedures Act) and any other regulatory schemes which many of us have no idea how to handle.

We are looking for volunteers to move on this project quickly. It is a worthwhile project that can provide relief to many people while also educating our members in a rather esoteric area of the law, at least to the extent that an intelligent answer can be filed and any counterclaims can be identified for prosecution or referral to our members who might be able to handle this type of case.

This is a call to arms for volunteers. The working groups will be formed shortly so if you have any interest in helping draft either the consumer pamphlet or the attorneys’ handbook, please get back to me.

TILA; Fraud.

Cunningham wanted to refinance her mortgage to do some home improvements, and ended up in the offices of a shady mortgage broker, who helped them fraudulently apply for a $95,000 loan by making up employment records for the borrower, who was apparently fine with going along with that deception. They obtained the loan, the ultimate amount of which included a 7.97% charge for mortgage broker’s fees and also a $10,500 payment to a fictional creditor; that $10,500 check went back to the broker, who cashed it and kept the money.

The Court’s opinion states, without any apparent irony intended, that “Two years after the closing, [Cunningham] realized something was awry.” Her lawyer sent notice of rescission of the loan and sued. The only issue before the appellate court was whether the Truth In Lending Act (TILA, 15 U.S.C. secs. 1602 et seq) had something to say about this transaction. Cunningham insisted that the mortgage broker fee and the $10,500 fake creditor-payment could be added to make this a “high cost” mortgage, which required additional disclosures on the part of the lender.

The District Court said Cunningham was wrong, and the Seventh Circuit affirmed. TILA is “not a general prohibition on fraud,” the Court reiterated, and the heightened disclosures were not invoked merely because an employee of the mortgage broker had defrauded Cunningham while helping her defraud the lender. The Court included a cautionary note: “The legal consequences of Moore's fraud, and the extent to which the Cunninghams must bear responsibility for apparently closing their eyes to it, will have to be sorted out elsewhere.” Cunningham v. Nationscredit Financial Serv. Corp. 497 F.3d 714 (7^th Cir. 2007).

FCRA; FDCPA; Collecting Ones Own Debt.

Nwoke owed Countrywide for a home mortgage. Countrywide messed up and credited only ½ of Nwoke’s payment one month, and then compounded the error by sending Nwoke a letter saying it was a “debt collector” and asking her to pay late fees. Countrywide also reported the late payment to credit bureaus. Nwoke and Countrywide straightened things out eventually, but Nwoke still sued, arguing that Countrywide had violated the FDCPA and had negligently damaged her credit rating, causing her to be denied a refinancing opportunity.

The district court dismissed Nwoke’s claims on summary judgment, and the 7^th Circuit upheld the ruling in a terse opinion that noted that Countrywide, attempting (albeit erroneously) to collect its own debt in its own name was not subject to the FDCPA even though Countrywide called itself a debt collector. As for the negligence claims, the Court noted without much discussion that the Fair Credit Reporting Act (FCRA) pre-empts state law negligence claims like this, requires proof that the creditor acted willfully or maliciously, a standard Nwoke had not met. Nwoke v. Countrywide Home Loans, Inc., 2007 WL 3037118 (7^th Cir. 2007).

FDCPA; Unstated Amount of Debt is not Confusing.

Williams received a dunning letter from OSI Educational Services, Inc., which said she owed $807.89 and broke that amount down by principal, interest and fees as of a given date. The letter also noted that “The balance may not reflect the exact amount of interest which is accruing daily per your original agreement with your creditor.” It instructed Williams to: “Contact [OSI] to find out your exact payout balance.”

Williams sued in a class action, alleging the “accruing daily” language violated the FDCPA because it prevented the letter from clearly stating the amount of the debt, a statutory requirement. The district court and the 7^th Circuit disagreed. The appellate court reiterated the longstanding rules that a putative confusing letter must be shown to unacceptably increase the level of confusion in unsophisticated consumers, a showing that is usually (and best) made through a well-crafted survey, but which can be shown simply by focusing on the language itself. Williams chose that evidentiary route and failed. The letter did not create confusion by stating a balance owed as of the date on the letter and saying that the balance might increase because of interest accruing, and did not leave open any other confusing possibilities, either.

The Court noted that OSI did not use safe harbor language previously suggested by the Court, but also noted that the safe harbor language is not a statutory requirement; the gist of the opinion is that debt collectors would be advised to use that language. Williams v. OSI Educational Services, Inc., 505 F.3d 675 (7^th Cir. 2007).

FDCPA; Initial Communication to Debtor; Misleading Settlement Offers.

In this collection of four cases, the Seventh Circuit assesses whether a consumer is better off for having a lawyer, and tells consumer lawyers and debt collectors how to determine if an offer of settlement is deceptive. The ruling parses out several areas of the FDCPA.

First, the Seventh Circuit decided that initial communications made to a lawyer representing a debtor are initial communications made to the debtor for the purposes of 15 U.S.C 1692g, which requires information to be provided to the consumer. The FDCPA, it held, requires the information to be provided whenever information is passed even indirectly to debtors through “any medium,” including a lawyer. Debtors should not get less information because they have retained a lawyer.

Then, the Court decided that other communications to lawyers representing a debtor might be subject to penalties under the Act, too, including false, deceptive or misleading communications. But, the key in dealing with this question is that a communication to a lawyer faces a different standard. The Seventh Circuit uses the “unsophisticated consumer” standard to determine if a letter is confusing or false. That standard makes no sense when applied to lawyers, so the Court crafted a new one: If the debtors’ claim is that the communication to his lawyer violated the Act, he must show that the representation is likely to deceive or mislead a competent lawyer.

Finally, the Court looked at the settlement offers made by debt collectors which prompted some of these cases. Those offers were claimed to be deceptive because (the debtors said), such offers as “TIME’S A WASTIN… Act now and receive 30% off if you pay by March 31^st” made it sound as though if they did not act now, they would never be able to settle their debts again, when most debt collectors would make more offers down the line. The Seventh Circuit decided that those offers could be deceptive, but that you need a properly-crafted survey to prove that it was, in fact, a misleading offer. Evory v. RJM Acquisitions Funding LLC, 505 F.3d 769 (7^th Cir. 2007).

TILA Compliance

The Federal Truth In Lending Act (TILA) requires that a lender include as part of the required disclosures the number, amount, and “due dates or period of payments scheduled.” Federal Reserve Board commentary (which is dispositive in most cases like this) says lenders can do that by listing all the payment due dates or specifying how frequently a payment is due – by saying, for example, “monthly.” And in the Seventh Circuit, “hypertechnicality reigns” when interpreting TILA.

So Ameriquest was liable for violating TILA when for its disclosures, it included a form that said just this:

The problem being that a borrower might have to infer that the payments are monthly, because this document didn’t say so (even though others in the packet said “monthly.”

It should be noted that TILA violations like this can lead to statutory damages of up to $2000 even if the consumer wasn’t harmed, but that there is a one year statute of limitations running from the date of violation. A debtor can use the violation as set off or defense in counterclaim. Hamm v. Ameriquest Mortgage Company, 2007 WL 3010973 (7^th Cir. 2007).

Economic loss rule; Discovery rule not available.

The 52 homeowners in this case had their homes built by the defendant in 1997. In 2005, a home inspector fell through a roof that had rotted because of negligent construction of the roof. The homeowners sued in 2006 alleging breach of contract, negligence, and fraudulent representations in violation of section 100.18. (The alleged misrepresentations were not outlined in the opinion.) The builder moved to dismiss on statute of limitations grounds.

The trial court found, and the Court of Appeals upheld, that the contracts were primarily one for goods, not services. That was the dispositive issue for several reasons.

First, contracts have a six-year statute of limitations in Wisconsin. The homeowners attempted to get around that by asking that the Court of Appeals apply the “discovery rule” to homeowners’ construction contracts. Since the Court of Appeals cannot change the law, it declined to adopt that rule.

Second, a tort claim for negligence can lie even where there is a contract, if the breached duty would exist separate from the contract. The homeowners wanted to bring tort claims because tort claims, unlike contracts, are governed by the discovery rule. However, in contracts for the provisions of goods—which these were-- the duty exists only because of the contract, so the economic loss doctrine barred tort claims and the discovery rule could not apply.

The homeowners did not appeal from the dismissal of the misrepresentation claims. The Court of Appeals acknowledged that this ruling is a harsh one for homeowners, who will likely not discover defects within the statute of limitations, but felt that was an issue for the legislature to decide. Aslani v. Country Creek Homes, Inc., 2008 WL 220714

Equitable Subrogation; Mortgage Lien Priority.

In January, 2002, Watson agreed to purchase a home from Williams, allegedly acting on behalf of his company, America’s Best Buildings, LLC. Williams obtained a loan from Cambridge State Bank, who recorded a construction mortgage. Watson filed an action against Williams and America’s Best for failure to construct the home, seeking an equitable lien on the property, which was titled in Williams’s name. Four months later, Cambridge commenced a foreclosure action against Watson, Williams and America’s Best. Williams obtained a new mortgage loan from Fremont Investment, which was used to satisfy Cambridge’s loan.

In January, 2004, Ocwen, as Freemont’s loan servicer, filed a foreclosure action against Williams and Watson. Williams defaulted, and the action dealt solely with the priority of interests between Watson and Ocwen. Later that month, Watson obtained a judgment in her action against Williams and America’s Best, giving her an equitable lien on the property, which was deemed to have attached in January, 2002. Watson docketed the equitable lien in February, 2004. In the Ocwen foreclosure action, the trial court held that Ocwen’s interest, although junior in time to Watson’s interest, was equitably subrogated to the first priority position of Cambridge. Equitable subrogation occurs where one who has paid off another’s mortgage obligation is treated as the owner of that obligation. Watson appealed.

Watson contended that the loan Williams obtained from Freemont was not a refinance, and that Fremont was aware of Watson’s interest when it lent money to Williams. Watson’s arguments were rejected by the appellate court. The Court found that the Freemont loan was a refinance and that Fremont intended to have a first mortgage on the property. The Court found that Watson’s rights were subordinate to Cambridge’s prior loan to Williams, and that equitable subrogation was applicable. Ocwen Loan Servicing, LLC v. Williams, 2007 WI App 229, 741 N.W.2d 474

Equitable Subrogation.

Mayer contracted to purchase real estate from Schmidt, who backed out of the deal. Mayer sued for specific performance and prevailed. While Mayer’s action was pending, Countrywide lent Schmidt money secured by a mortgage on the property. Part of the money lent by Countrywide was used to pay off two prior mortgages with the balance going to Schmidt. When Countywide foreclosed, the parties stipulated that Countrywide was entitled to equitable subrogation, but disagreed as to the amount. The trial court held Countrywide could recoup the amount paid to the prior mortgage holders under equitable subrogation, but not subsequent interest, taxes or insurance. Countrywide appealed.

Countrywide argued for a bright line rule that an equitable subrogee may always have interest at the rate of the prior mortgage. The appellate Court disagreed, holding that the object of subrogation is “to do substantial justice independent of form or contract relations between the parties,” and that that case required a balancing of the equities. Equitable subrogation cannot be applied if it will injure innocent third parties. Based upon the equities, the appellate Court affirmed the decision, and Countrywide was only equitably subrogated to the amount it expended to pay off the prior mortgages. Countrywide Home Loans, LLC v. Schmidt, 2007 WI App 243, 742 N.W.2d 901

Promissory Note; Consideration; Illusory Promise.

In connection with a complicated real estate transaction, a promissory note was signed by 435 Partners, LLC. in favor of Eli Environmental Contractors. The note wasn’t paid at maturity and Eli commenced suit. 435 Partners contended the note was unenforceable for lack of consideration. The trial court found the promissory note was issued as a gesture of goodwill in anticipation of future work. The court found the promise was not illusory, and upheld the promissory note. 435 Partners appealed.

The burden of proving failure of consideration (by clear and satisfactory evidence) is on the party asserting such failure. 435 Partners contended that the promise was discretionary and illusory, neither party performed its promise, and that consideration must be tested at the time the promise is to be enforced, not the time of the contract. The appellate Court held that the parties’ promises themselves, and not their ultimate performance, were the consideration upon which the note was based. The bilateral promises were sufficient consideration. The immediacy and unconditional nature of the obligations between the parties removed the note from the realm of illusory unenforceable promises. Eli Environmental Contractors, Inc. v. 435 Partners, LLC, 2007 WI App 119, 300 Wis. 2d 712, 731 N.W.2d 354

Forgery; Motor Vehicle; Replevin.

When debtor entered into installment sales agreement to purchase motor vehicle from dealer, simultaneously granting credit union a security interest, the certificate of title form filed with Wisconsin Department of Motor Vehicles (“DMV”) inadvertently listed a different lender as the lien-holder. Later, the certificate of title was corrected to reflect the credit union as the lien-holder and the corrected form filed with the DMV. After debtor defaulted for failure to keep the car insured, credit union brought action for replevin of vehicle, and debtor pro se brought a “counter action” alleging that credit union forged her signature on the document filed with the DMV correcting the name of the lien-holder. Although circuit court found that there was no forgery and awarded judgment to credit union, the court’s order did not specifically address the “counter action,” which was, in effect, a counterclaim.

On appeal, Court of Appeals affirmed but remanded for determination whether the trial court’s judgment dismissed, or alternatively overlooked, debtor’s counterclaim. The Court examined the statute that requires the lien-holder to be listed on the title document filed with the DMV, Wis. Stats. §342.19(1), which provides: “Unless excepted by s. 342.02, a security interest in a vehicle of a type for which a certificate of title is required is not valid against creditors of the owner or subsequent transferees or secured parties of the vehicle unless perfected as provided in this chapter.” The Court found that the statute protects third parties; it does not nullify between the parties to a security agreement an otherwise valid security interest. Landmark Credit Union v. Borum, 2007 WI App 251, 742 N.W.2d 76

Deficiency Judgment; Election of Remedies; Lease; Not a Commercially Reasonable Sale.

After lessee of meat processing equipment defaulted on equipment leases, lessor sued seeking replevin and damages, obtaining an order for pre-judgment replevin. Lessor then obtained possession and two years later sold the equipment for $197,000, several hundred thousand dollars less than the $900,000 price of the equipment at the time of the lease. However, the purchaser of the equipment was, rather than an end buyer, the same party who lessor had hired to assist it with the equipment’s liquidation sale. Trial court determined that lessor’s sale of the equipment was not commercially reasonable and dismissed lessor’s claim for a deficiency judgment. Lessor appealed.

The Court of Appeals affirmed the portion of the judgment determining that the sales of equipment were not commercially reasonable. The Court determined that the trial court’s finding that the equipment was unique and had hardly been used, that there was a small market for the equipment, that lessor’s reliance on its usual marketing practices did little to demonstrate that the sales were commercially reasonable, and that the purchase by the very company that was hired to sell the equipment raised a conflict of interest, were not clearly erroneous. The fact that lessor followed a procedure in collecting and disposing of defaulted property that may have been customary and usual for it did not mean that the sale was commercially reasonable as a matter of law. The Court reversed the portion of the judgment determining that the lessor was equitably estopped from obtaining a deficiency judgment, and remanded to the trial court for further proceedings to determine the proper amount of the deficiency.

The Court also rejected lessee’s claim that lessor’s claim for deficiency judgment should be denied under the election-of-remedies doctrine in which lessee contended that under Chapter 810 of the Wisconsin Statutes, a plaintiff does not have the right to dispose of collateral until the right of possession is fully adjudicated. Lessee could not demonstrate that it had the financial means to meet the statutory possession requirements, that it ever attempted to exercise any statutory rights it might have had to possession, or that it would have sought possession if given the opportunity. CIT Group Equipment Financing, Inc. v. FRS Farms, Inc., 2008 WI App 17, 745 N.W.2d 88

Replevin; Self Help.

A seller of a truck brought a replevin action against buyer alleging non-payment. The trial court allowed the buyer to keep the truck, gave the seller a lien, and set terms for paying the loan. Seller, instead, took the truck and retitled it in her name. The court found seller in contempt. On appeal, seller argued she had a right to self-help repossession, under Wis. Stat. §409.609(2)(b). The Court of Appeals affirmed, ruling that the statute gives a secured party the right to either self-help or judicial process, but not both. Having availed herself of judicial process, she could not subsequently resort to self-help. Further, the statute applies only to contractual rights; her lien was judicial, not contractual. Finally, the personal judgment was conclusive between the parties. The claim for breach of contract was extinguished and merged in the judgment. Her remedy was to enforce the judgment. Kartes v. Schoenbeck, 2008 WL 185549

Collection; Garnishee liable; Vacating Default Judgment.

Garnishor obtained a default judgment against garnishee bank. The garnishment had been served on an assistant vice president of the bank, who was in charge of garnishments, but who failed to process the garnishment because she mistakenly viewed Wisconsin procedure as the same as Minnesota procedure, where the bank would have received additional documentation before responding. The Court of Appeals concluded that the circuit court acted within its discretion when it determined that the bank’s conduct was not excusable neglect and denied the bank’s motion for relief from the default judgment. The bank also argued that the court did not have personal jurisdiction over it, because the pleadings identified a different bank. The Court of Appeals noted that such a misnomer may be corrected if service is made on the party intended to be sued, and remanded the case for further proceedings to determine whether service was made on the right bank, where the particular funds sought to be garnished were on deposit. Eagle Mortg. & Loan, LLC v. Rodriguez, 743 N.W. 2d 167 (Ct. App. 2007).