This month we consider whether a title insurance company had a duty to indemnify a bank for unauthorized transfer deeds that were fraudulent conveyances, whether a law firm conducting nonjudicial foreclosure proceedings was a debt collector under the Fair Debt Collection Practices Act, whether an arbitrator can decide if the issue before him or her is arbitrable, and whether a bankruptcy trustee can avoid a deficiently executed real estate mortgage.
SPECIAL NOTE: The United States Court of Appeals for the First Circuit in Fawcett v. Citizens Bank, N.A., 919 F.3d 133 (1st Cir. 2019), decided March 26, 2019, held that a “sustained overdraft fee” is not “interest” under the National Bank Act. The trial court decision in this case was discussed in an earlier edition of FLASHPOINTS.
Title Insurance Company Did Not Have To Defend Bank in Fraudulent Conveyance Action
In Banner Bank v. First American Title Insurance Co., 916 F.3d 1323 (10th Cir. 2019), the bank sued First American Title for breach of its duty to defend and indemnify the bank. The trial court in Banner Bank v. First American Title Insurance Co., Case No. 2:16-CV-00200-BSJ, 2017 WL 1378021 (Apr. 12, 2017), had ruled in favor of the bank, even going so far as to award attorneys’ fees. But the appellate court reversed and ruled in favor of First American Title.
The factual background was that one Wendell Jacobson, a purported businessman, obtained loans from the bank for his businesses. He granted mortgages (deeds of trust) to the bank to secure the loans. The bank obtained mortgage policies from First American to support the deeds.
But Jacobson was running a Ponzi scheme, and he was the subject of a Securities and Exchange Commission enforcement action. In that proceeding, a receiver was appointed.
The receiver contested the mortgages as fraudulent conveyances, and the bank asked First American Title to defend it. First American refused to do so, arguing the receiver’s action fell outside the scope of the mortgage policies. Eventually, the bank settled with the receiver with a $675,000 payment, whereupon the bank sued First American Title for failing to defend it against the receiver’s claim.
Applying Utah law, the court said that in adjudicating the title insurer’s duty to defend the bank it would first look to the language of the policy. It noted that expressly excluded from the coverage of the policy was “[a]ny claim, by reason of operation of federal bankruptcy, state insolvency, or similar creditors’ rights laws, that the transaction creating the lien . . . is . . . a fraudulent conveyance or fraudulent transfer.” 916 F.3d at 1327.
The court then directed its attention to the text of the receiver’s complaint against the bank. It noted that the complaint’s sole claim for relief was pursuant to Utah’s Uniform Voidable Transactions Act, Utah Code Ann. §25-6-1, et seq., and that it alleged that the transfer of the mortgages was made with “actual intent to hinder, delay or defraud creditors.” 916 F.3d at 1327. Based on that, the court ruled, “The Receiver’s action falls squarely within the policy’s exception for lawsuits alleging a fraudulent transfer or conveyance.” Id. Judgment was in favor of First American Title.
What’s the point? Lenders should note that although title (mortgage) insurance policies are necessary and important, they do not cover every possible risk.
A Law Firm Conducting a Nonjudicial Foreclosure Is Not a Debt Collector Under the Fair Debt Collection Practices Act
Obduskey v. McCarthy & Holthus LLP, ___ U.S. ___, ___ L.Ed.2d ___, 139 S.Ct. 1029 (2019), was decided by the Supreme Court of the United States on March 20, 2019. It held that a business engaged in no more than nonjudicial foreclosure proceedings is not a “debt collector” under the Fair Debt Collection Practices Act (FDCPA), Pub.L. No. 90-321, Title VIII, 91 Stat. 874 (1977). The case is remarkable because, if for no other reason, the decision was unanimous.
To achieve the desired result, the court had to engage in some journalistic somersaults that need not be repeated here. Suffice it to say, the case only affects banks and law firms that are able to conduct foreclosures on the steps of the local courthouse by public outcry. Bankers and their law firms who are compelled to foreclose through the court system derive no benefit from the case.
And even those who benefit from the outcome of the case would be well advised to heed the following observation by the court: “This is not to suggest that pursuing nonjudicial foreclosure is a license to engage in abusive debt collection practices like repetitive nighttime phone calls; enforcing a security interest does not grant an actor blanket immunity from the Act.” 139 S.Ct. at 1039 – 1040.
It is also notable for the invitation the concurring opinion extended to Congress: “Today’s opinion leaves Congress free to make clear that the FDCPA fully encompasses entities pursuing nonjudicial foreclosures. . . . That too would be consistent with the FDCPA’s broad, consumer-protective purposes.” 139 S.Ct. at 1041.
What’s the point? It will be interesting to see if Congress accepts the invitation and clarifies the language of the FDCPA.
Bankruptcy Trustee Can Avoid Defectively Executed Mortgage in His Status as Judicial Lien Creditor
The United States Court of Appeals for the Sixth Circuit, applying Ohio law, held in In re Oakes, 917 F.3d 523 (6th Cir. 2019), that a bankruptcy trustee exercising his status as a judicial lien creditor may avoid a deficiently executed mortgage. This was despite the fact that the Ohio legislature passed a statute effective March 27, 2013, that effectively precludes a bankruptcy trustee from attacking a defectively executed mortgage as a bona fide purchaser.
Jerry Wayne and Jennifer Ann Oakes filed a Chapter 7 bankruptcy petition on September 17, 2013. Included in that petition was real property located at 41 Noelle Court, Franklin, Ohio, that was valued at $160,000. The Oakeses acquired the property on May 15, 2002.
PNC Mortgage Company filed a mortgage against the property securing the sum of $144,000 on May 30, 2003. That mortgage, however, was not executed in accordance with the laws of Ohio, as the Oakeses’ signatures were not acknowledged before a notary public. (Ohio law requires that “a . . . mortgage . . . shall be signed by the . . . mortgagor. . . . The signing shall be acknowledged by the . . . mortgagor . . . before a . . . notary public . . . who shall certify the acknowledgment and subscribe [his] name to the certificate of the acknowledgment.” Ohio Rev. Code Ann. §5301.01.) The parties agreed that the acknowledgment clause in the mortgage was defective.
Donald Harker, the bankruptcy trustee for Oakes’ estate, attacked the mortgage because it had not been properly executed, invoking §544(a)(1) of the Bankruptcy Code, 11 U.S.C. §101, et seq., which gave him the status of a judicial lien creditor as of the date the bankruptcy petition was filed. He was faced with overcoming Ohio Rev. Code §1301.401(C), which stated, “Any person contesting the validity or effectiveness of any transaction referred to in a public record is considered to have discovered that public record and any transaction referred to in the record as of the time that the record was first filed.” That and the fact that the Ohio Supreme Court had ruled in In re Messer, 145 Ohio St.3d 441, 50 N.E.3d 495, 2016-Ohio-510 (2016), that the statute provides constructive notice of a recorded mortgage even if it was not properly executed. That meant the trustee could not attack the Oakeses’ mortgage as a bona fide purchaser without notice.
But did it stand in the way of attacking it as a judicial lien creditor? The court answered that question in the negative because “[n]otice . . . is not relevant to the status of a judicial lien creditor.” 917 F.3d at 530.
And further, “Under Ohio law, notice — whether constructive or actual — does not affect the priority of recordings. That is, regardless of notice, a defectively executed mortgage is not ‘perfected’ so it does not trump a subsequently perfected lien.” [Emphasis added by Oakes court.] 917 F.3d at 531. Thus, even though the Oakeses’ mortgage was recorded on May 30, 2003, and Ohio law imputed notice of it to the bankruptcy trustee when he took office at a later date, the mortgage was not deemed a perfected lien (which would otherwise take precedence over the trustee) because of its defective execution. The court’s final comment was “because the Trustee was the first to record a perfected lien, the Trustee’s lien has priority — the Trustee cuts ahead of PNC in line.” 917 F.3d at 532.
What’s the point? Decisions such as this point to the need for mortgagees to be certain that their mortgages are prepared and executed with all the formalities required by local law.
Arbitrator Can Decide What Is Arbitrable Under Credit Card Agreement
Charlene Novic had a credit card agreement with Credit One Bank, N.A. It stated that any controversy or dispute between the parties was to be submitted to mandatory, binding arbitration. Novic v. Credit One Bank, National Ass’n, 757 Fed.Appx. 263 (4th Cir. 2019). It also stated, “Claims subject to arbitration include, but are not limited to, disputes relating to . . . the application, enforceability or interpretation of this Agreement, including this arbitration provision.” 757 Fed.Appx. at 264.
Novic became past due on her credit card balance. Her account was assigned to Midland Funding for collection. Midland sued Novic in a Maryland state court but lost. Heartened by that outcome, Novic sued Credit One for alleged violation of the Fair Credit Reporting Act (FCRA), Pub.L. No. 90-321, Title VI, 84 Stat. 1128 (1970). Her claim was based on her allegation that her purported past-due balance arose due to identity theft and that Credit One failed to conduct a reasonable investigation of that claim.
In the trial court, Credit One sought to compel Novic to submit the dispute to arbitration. The court refused to do so, concluding that Credit One lost its right to compel arbitration when it assigned Novic’s account to Midland for collection.
On appeal, however, the outcome was far different. The court sustained Credit One’s assertion that the arbitrator was to decide both the “gateway” question of arbitrability as well as the merits of the dispute.
Although the court noted the federal presumption favoring arbitration, it also was wary of going too far saying, “The federal presumption generally favoring arbitration is not applicable when a court determines who the parties intended to decide issues of arbitrability.” [Emphasis added by Novic court.] 757 Fed.Appx. at 265.
It further noted, “To place such power in an arbitrator’s hands, the parties must agree, in ‘clear and unmistakable’ language, that an arbitrator will decide which disputes the parties have agreed to arbitrate.” Id.
The court went on to state that that standard is “exacting” — in other words, stringently applied — and that a general agreement to arbitrate is not enough to establish the parties’ intent.
Reaching a conclusion in favor of Credit One, the court said that “the delegation clause before us . . . unambiguously require[s] arbitration of any issue concerning the ‘enforceability’ of the arbitration provisions entered into by the respective parties.”
What’s the point? A bank that wishes the whole of a dispute with a customer or vendor to be settled by arbitration, including what the arbitrator can decide, would be well advised to adopt language such as the bank did in this case.
For more information about financial services, see COMMERCIAL AND INDUSTRIAL LOAN DOCUMENTATION — 2018 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.