You Can’t Be Compelled To Arbitrate In A Nonexistent Forum

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

This one may seem obvious, but, in MacDonald v. Cashcall, Inc., the U.S. Court of Appeals for the Third Circuit held that a contractual arbitration provision that calls for arbitration in an "illusory forum" is not enforceable. So, if you were thinking about trying to compel arbitration in Wakanda or before the Jedi Council, better think twice.

In MacDonald, plaintiff entered into a loan agreement with a entity known as Western Sky in connection with a $5,000 loan. The loan agreement stated that it was "subject solely to the jurisdiction of the Cheyenne River Sioux Tribe," and "governed by the . . . laws of the Cheyenne River Sioux Tribe." It also contained an arbitration provision requiring that any disputes arising out of the agreement be "conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative in accordance with its consumer dispute rules and the terms of [the agreement]." But the agreement also provided that either party, after demanding arbitration, could select an arbitrator from the American Arbitration Association ("AAA") or Judicial Arbitration and Mediation Services ("JAMS") to administer the arbitration, and, if it did, "the arbitration [would] be governed by the chosen arbitration organization's rules and procedures" to the extent that they did not contradict the "law of the Cheyenne River Sioux Tribe." The agreement also contained a severability clause, providing that, if any provision of the agreement was deemed invalid, the remaining provisions would remain in effect.

Although plaintiff originally borrowed $5,000, "[h]e was charged a $75 origination fee and a 116.73% annual interest rate over the seven-year term of the loan, resulting in a $35,994.28 finance charge." After paying approximately $15,493 on the loan, which included $38.50 in principal, $15,256.65 in interest, and $197.85 in fees, plaintiff filed a putative class action lawsuit against defendants, asserting federal RICO claims and state law claims for usury and consumer fraud. Defendants moved to compel arbitration. The district court denied the motion, holding that the loan agreement's "express disavowal of federal and state law rendered the arbitration agreement invalid as an unenforceable prospective waiver of statutory rights." Defendants appealed.

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On Cloaking Devices And Usury: Lender Can Be Sued If It Uses Corporate Shell To Cloak A Personal Loan As A Business Loan

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Cloaking devices are common in sci-fi movies like Star Trek and Star Wars. They are used to render an object, usually a spaceship, invisible to nearly all forms of detection. Although scientists are apparently working to make real-life cloaking devices, at this point they exist only in the movies and, apparently, in New Jersey courts, at least according to the Appellate Division in Amelio v. Gordon.

In Amelio, plaintiff owed an apartment building in Hoboken. He approached defendants about obtaining a loan to finish renovations on three units in the building, along with the common areas. Plaintiff claimed that defendants instructed him to create a corporate entity to obtain the loan. Plaintiff did as he was instructed, and formed a limited liability company, which obtained the loan from defendants. Plaintiff, who was identified as the managing member of the limited liability company, signed the loan documents on behalf of the company.

Plaintiff later sued, arguing that the fees and interest payments under the loan exceeded the amounts allowable under New Jersey's usury laws. He also claimed that defendants fraudulently convinced him to create a limited liability company and have that entity obtain the loan, just so they could charge him usurious fees and interest. Plaintiff sued in his individual capacity, not on behalf of the limited liability company. On the day of trial, defendants argued that the complaint had to be dismissed because plaintiff lacked standing to sue since the company was the borrower, not plaintiff. With little explanation, the trial court granted the motion and dismissed the complaint. Plaintiff appealed.

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Supreme Court: Party That Buys Defaulted Debt Not A “Debt Collector” Under The Fair Debt Collection Practices Act

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

In Henson v. Santander Consumer USA Inc., Justice Gorsuch delivered his first opinion for the Supreme Court, and in doing so, provided an interesting opinion on a relatively boring issue, and subconsciously (I assume) invoked the movie Repo Man, a classic (?) mid-1980's movie starring Emilio Estevez and Harry Dean Stanton, which the website, imdb.com, summarized as follows: "Young punk Otto [Estevez] becomes a repo man after helping to steal a car, and stumbles into a world of wackiness as a result."

Neither the facts nor the law in Henson were wacky. Plaintiffs took out loans from CitiFinancial Auto to buy cars, but later defaulted on those loans. Defendant purchased the defaulted loans and sought to collect the debt from plaintiffs in ways that plaintiffs claimed violated the Fair Debt Collection Practices Act. The Act, which was designed to curtail "[d]isruptive dinnertime calls, downright deceit and more besides" authorizes private lawsuits and "weighty fines" for anyone who engages in "wayward collection practices." But, it only applies to "debt collectors," a term that is defined to include anyone who "regularly collects or attempts to collect . . . debts owed or due . . . another." The question in Henson was whether a party who purchases debts originated by someone else and then seeks to collect those debts for its own account qualifies as a debt collector." Justice Gorsuch framed the issue as follows:

Everyone agrees that the term ["debt collector"] embraces the repo man – someone hired by a creditor to collect an outstanding debt. What if you purchase a debt and then try to collect it for yourself – does that make you a "debt collector" too? That 's the nub of the dispute now before us.

The district court and the U.S. Court of Appeals for the Fourth Circuit sided with defendant, holding that a party that buys defaulted debt and collects it for its own account is not a "debt collector." In doing so, however, the Fourth Circuit acknowledged that other circuit courts had come to the opposite conclusion. The U.S. Supreme Court took the case to clear up this split.

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Borrower Allowed To Sue Lender For Breaching Mortgage Modificaton Agreement

In a decision that all lenders should read carefully, the Appellate Division recently reiterated that a borrower may have a private cause of action against a lender if the lender breaches the terms of a mortgage modification agreement under the Home Affordable Modification Program ("HAMP").

Earlier this year, I wrote about the Appellate Division's decision in Arias v. Elite Mortgage. (In case you forgot, click here to review the post.) In that case, the Appellate Division faced an issue of first impression involving mortgage modifications under HAMP. Specifically, the Appellate Division was faced with the question of whether a borrower could sue a lender if the lender breached the terms of a Trial Period Plan (“TPP”) agreement. As I noted in that post, a TPP is essentially the first step in obtaining a mortgage modification under HAMP. In a TPP agreement, the borrower agrees, among other things, to make reduced monthly payments in a timely manner during a relatively short period. As the name suggests, this is a trial period during which the lender can determine whether the borrower is able to make payments similar to those the borrower would be required to make under a modified mortgage. If the borrower satisfies the conditions of the TPP, including making the monthly payments, then the lender agrees to modify the mortgage. In Arias, the Appellate Division held that a lender could face a lawsuit from a borrower if it failed to hold up its end of this bargain. In that case, however, the borrower had not made the required payments in a timely manner during the trial period — i.e., the borrower failed to hold up its end of the bargain — so the lender did not have to offer the borrower a modified mortgage.

Now, the Appellate Division has returned to the same issue in Aiello v. OceanFirst Bank. In Aiello, plaintiffs entered into a TPP agreement with defendant that required them to provide certain financial documentation, submit to credit counseling if necessary, and make monthly payments of $1,386.75 during the trial period.The TPP agreement stated that it was not a loan modification and that if plaintiffs failed to comply with its terms, no modification would be offered. It also stated that the monthly payment during the trial period was an estimate of the payment that would be required under a modified mortgage, and the actual amount under a modified mortgage might be greater.

Unlike Arias, plaintiffs in Aiello complied with the terms of the TPP agreement. Nonetheless, Fannie Mae initially rejected plaintiffs' application for a modified mortgage because their loan was originated prior to January 1, 2009, a fact, the Appellate Division observed, that defendant was aware of when it first entered into the TTP agreement with plaintiffs. Defendant eventually did offer plaintiffs a modification, but it included monthly payments almost $400 higher than the payments made under the TPP agreement. Plaintiffs rejected the offer and sued defendant for breaching the TPP agreement. Both sides moved for summary judgment. The trial court denied plaintiffs' motion and granted defendant's motion.

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