Size Matters: Seventh Circuit Rejects Subway Footlong Settlement Because It Provided No Meaningful Benefit To Class Members

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

Subway (pd)I am a regular Subway customer, so I read the Seventh Circuit's opinion, In re. Subway Footlong Sandwich Marketing and Sales Practices Litigation, with great interest. You probably remember the events that spawned this litigation. As the Seventh Circuit described it: "In January 2013 Matt Corby, an Australian teenager, purchased a Subway Footlong sandwich and, for reasons unknown, decided to measure it. The sandwich was only 11 inches long. He took a photo of the sandwich next to a tape measure and posted the photo on his Facebook page. Thus a minor social-media sensation was born." And, "[w]ithin days of Corby's post, the American class-action bar rushed to court," therefore, a class action lawsuit was also born. It ended a few years later with a settlement, which the Seventh Circuit just overturned.

To say that the Seventh Circuit was critical of the settlement would be an understatement. Its opinion is filled with subtle, and not so subtle, criticisms of the settlement and plaintiffs' counsel. For example, early in its opinion, the court observed: "In their haste to file suit [ ] the lawyers neglected to consider whether the claims had any merit. They did not." It did not get much better for plaintiffs from that point on.

The court noted that the parties engaged in limited, informal discovery early on in the case, with the intent of going to mediation. This discovery revealed that plaintiffs' claims were deficient. It showed that "the length of the [baked] bread has no effect on the quantity of food each customer receives." First, all of Subway's raw dough is exactly the same size. So, even the few rolls that bake to approximately a quarter-inch less than 12 inches because of natural, and unpreventable, "vagaries in the baking process" provide the same bread as those that bake to the full 12 inches. Second, Subway standardizes the amount of meat and cheese that its "sandwich artists" put on each sandwich, so whether the bread is 12 inches long or a quarter-inch short, the customer still gets the same amount of food. (In the interest of full disclosure, because I am a regular, I do occasionally get an extra slice of ham, salami, and pepperoni on my six-inch BMT at my local Subway.) "This early discovery, limited though it was, extinguished any hope of certifying a damages class."

"Rather than drop the suits as meritless," however, plaintiffs shifted the focus of the lawsuit from one seeking damages to one seeking injunctive relief. THey filed an amendec complaint and, after mediation, reached a settlement with Subway, under which Subway would, for four years, implement practices designed to ensure, the the extent possible, that its sandwich rolls measured at least 12 inches long. But, the settlement noted that "because of the inherent variability in food production and the bread baking process, Subway could not guarantee that each sandwich roll [would] always be exactly 12 inches or greater in length after baking." In other words, Subway would try to fix, but could not guarantee that it would fix, the problem that spawned the lawsuit. 

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NJ Supreme Court: If Borrower Abides By Terms Of Settlement Agreement, Lender Must Modify Mortgage

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

Mortgage (pd)Lawsuits arising out of foreclosures and mortgage modifications are common. (Even more common than lawsuits about gyms or health clubs if you can believe that.) Nearly every day there is a decision from the Appellate Division arising out of a residential foreclosure. Most of these fall into the same category — borrower defaults and loses home through foreclosure then challenges lender's standing to foreclose after the fact — but some are more interesting. That was the case with GMAC Mortgage, LLC v. Willoughby, a decision released yesterday by the New Jersey Supreme Court involving a mortgage modification agreement entered into to settle a foreclosure lawsuit.

Almost two years ago, I wrote a post about Arias v. Elite Mortgage, a lawsuit over the alleged breach of a mortgage modification agreements. In that case, borrowers entered into a mortgage modification agreement with their lenders that included a Trial Period Plan ("TPP"). As the name suggests, a TPP requires borrowers to make reduced monthly payments in a timely manner for a trial period, after which, if they make the payments, the lender agrees to modify their mortgage. In Arias, the Appellate Division held, as a matter of first impression, that if a borrower makes the trial payments under the TPP, the lender must modify the mortgage, and if it doesn't, the borrower can sue for breach. However, the holding was purely academic because the borrower in that case failed to make one of the trial payments in a timely manner so it could not sue. 

In GMAC Mortgage, the New Jersey Supreme Court faced a similar situation with a much less academic result. 

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Settlement Stands Even Though Lawyer Allegedly Settled For Less Than Authorized

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

Contract(pd)
Embarrassing as this is to admit, there was a time when I did not entirely understand the difference between "net" and "gross." I would like to say that time was long ago, but it wasn't that long ago. Rest assured, however, that I know the difference now. The difference between the two was at the heart of Thakkar v. Allers, an unpublished decision from the Appellate Division in which plaintiff claimed that he authorized his attorney to settle for a net recovery of $80,000 but his lawyer settled for the gross amount of $80,000. In other words, plaintiff thought he would receive $80,000 from the settlement but he actually received less than $80,000 after fees and costs were deducted from the gross settlement amount. Plaintiff tried to undo the settlement, but the trial court denied his request and the Appellate Division affirmed.

Thakkar involved a personal injury lawsuit. Plaintiff was awarded $50,000 through mandatory, pre-trial arbitration, but rejected that award and demanded trial de novo. Prior to trial, plaintiff claims that he authorized his attorney to settle the case for "an amount that would yield an $80,000 recovery to [plaintiff], after deductions for fees and costs." He claimed that he gave his attorney these instructions over the telephone and in a letter. Several days after the alleged telephone conversation between plaintiff and plaintiff's counsel, plaintiff's counsel settled the case in a call with defendants' counsel and later confirmed the settlement in an email to defendants' counsel, which read: "As discussed at 5 PM today, [plaintiff] has authorized [plaintiff's counsel] to accept $80,000.00 in settlement."

Four days later, plaintiff's counsel wrote to defendants' counsel to report that plaintiff refused to sign a release because he wanted a settlement yielding a net recovery of $80,000, a fact that plaintiff's counsel indicated was "in no way" communicated to him by plaintiff before plaintiff's counsel advised defendants' counsel that plaintiff's counsel was authorized to settle the case for "the sum of $80,000.00."

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Divorce Equality Comes To New Jersey

by:  Peter J. Gallagher (@pjsgallagher)

When asked about same-sex marriage, the musician/politician/author Kinky Friedman is quoted as having said: “I support gay marriage. I believe they have a right to be as miserable as the rest of us.” In a recent decision, Groh v. Groh, a New Jersey trial court ruled that, if same-sex partners are "as miserable as the rest of us" (present company excluded, natch), they can now get a divorce for the same reason as "the rest of us" — irreconcilable differences. Interestingly, while Groh dealt with the often divisive issue of same-sex marriage (or, more accurately, divorce), it was a lesson in the much less divisive practice of statutory interpretation.  

In Groh, plaintiff and defendant entered into a civil union only to file competing claims to dissolve the civil union five years later on the no-fault grounds of irreconcilable differences. The parties entered into a written settlement agreement that resolved all of their differences, and “sought to conclude the proceedings via dual judgment of dissolution.” However, N.J.S.A. 2A:34-2.1, which sets forth the grounds upon which the dissolution of a civil union can be based, does not include irreconcilable differences. Accordingly, the court had to decide whether it could grant the dissolution on those grounds.

 

 

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Lender Allowed To Foreclose But Punished By Court For Violating Consumer Fraud Act

by: Peter J. Gallagher

A New Jersey trial court issued an interesting opinion last week, allowing a lender to foreclose but imposing significant limitations on the lender because the court concluded that the lender had violated the Consumer Fraud Act.

In Freedom Mortgage Corporation v. Mamie E. Major, borrower wanted to refinance the mortgage on her home to lower the 5 5/8 interest rate and take out additional money to help pay for her grandson’s college tuition. Defendant was 70 years old, earned approximately $30,000 per year and owed $341,500 on her existing mortgage. At the time of the refinance her home had a market value of $365,000, but she eventually abandoned her plan to obtain more equity from the home and instead refinanced just to lower the interest rate.

Her existing home loan was an FHA-insured loan and was current, so Freedom Mortgage Company treated the refinance as an FHA “Streamline loan,” which required little or no new or extra documentation and did not require a new appraisal. According to Freedom, FHA guidelines allowed it to rely on the underwriting performed by the prior lender. Nonetheless, before approving the refinance, Freedom used a “net benefit” test to determine whether it was justified, and concluded that it was because both the interest rate and the monthly payment would be lower under the new loan.

At the closing, borrower signed a HUD-1A Settlement Statement that showed a new loan of $354,005, which included the payoff of the prior loan, the payoff of open tax balances, and $11,479.65 in settlement charges, payable to Freedom, for, among other things, a loan discount fee, commitment fee, application fee, and courier fee.

After making six payments on the new loan, borrower defaulted. Freedom filed a foreclosure complaint, which borrower answered. Freedom then moved to strike the answer and proceed with the foreclosure as uncontested. The court granted this motion, but found that there was a factual issue as to whether Freedom violated the New Jersey Consumer Fraud Act (“CFA”) in connection with the refinance. After trial on this issue, the court concluded that Freedom had, in fact, violated the CFA.

 

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Hell Hath No Fury Like . . . An Angry Litigant And Former Fiance?

by:  Peter J. Gallagher

Courts don't often impose sanctions for frivolous litigation, but when they do, it usually involves something unusual (apologies to John Winger). Unusual — and perhaps even unfortunate — would be the only way to describe the facts of a recent decision from the Appellate Division that revived a party's request for legal fees in a case involving a failed (alleged) engagement and the return of a (purported) engagement ring that the recipient initially claimed to have lost, but later (apparently) found.

 

 

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When Can Foreclosing Lenders Be Accused Of Acting In Bad Faith?

 by:    Peter J. Gallagher

In a recent decision, the Chancery Division denied a lender’s motion to strike a borrower’s contesting answer in a foreclosure lawsuit, holding that the borrower had adequately pled a claim that the lender acted in bad faith.  While this decision is unique based on the facts of the underlying dispute, it does, by contrast, serve as a reminder that lenders generally cannot be held to have acted in bad faith when they simply attempt to enforce the terms of loan documents as written. 

In Wells Fargo Bank, N.A. v. Schultz, plaintiff obtained a mortgage from World Savings Bank (which later changed its name to Wachovia Mortgage, FSM, which was later acquired by and merged into Wells Fargo) under a “Pick-a-Payment” mortgage program.  Several years later, this program became the subject of a class action lawsuit, the settlement of which provided that Wells Fargo both pay class members, including defendant Schultz, a small sum and also make loan modifications available to them.  It is the second of these requirements that ended up getting Wells Fargo in trouble.  Defendant presented evidence to the court that led Judge Doyne to conclude that she was “getting the run around” from Wells Fargo, including by being told that she failed to submit documents that she certified that she had submitted, and when Wells Fargo eventually confirmed that she had submitted the documents, telling her that the modification program was no longer available.  Judge Doyne observed that defendant may not have a right to be approved for a specific modification, but that once Wells Fargo made one available to her, it was obligated to “act in good faith as to the provision of the modification.”  To be clear, Judge Doyne did not rule that Wells Fargo had acted with bad faith; instead, he simply ruled that defendant had pled enough in connection with her claims related to the modification that her answer could not be stricken. 

While this case presents a situation where a lender is alleged to have acted in bad faith after agreeing to entertain an application for a loan modification, the law in New Jersey is well settled that a lender cannot generally be deemed to have acted in bad faith when it seeks to enforce the terms of a note or mortgage as written.  Stated differently, lenders cannot be barred from enforcing loan and mortgage documents merely because they seek to enforce their express contractual rights.  Indeed, “a creditor's duty to act in good faith does not extend to foregoing its right to accelerate upon default or otherwise compromising its contractual rights in order to aid its debtor.” Glenfed Financial Corp. v. Penick Corp.   For instance, in Creeger Brick & Building Supply, Inc. v. Mid-State Bank & Trust Co., — a decision cited by the Appellate Division with approval in Glenfed — a Pennsylvania appeals court held:

. . . a lending institution does not violate a separate duty of good faith by adhering to its agreement with the borrower or by enforcing its legal and contractual rights as a creditor. The duty of good faith imposed upon contracting parties does not compel a lender to surrender rights which it has been given by statute or by the terms of its contract. Similarly, it cannot be said that a lender has violated a duty of good faith merely because it has negotiated terms of a loan which are favorable to itself. As such, a lender generally is not liable for harm caused to a borrower by refusing to advance additional funds, release collateral, or assist in obtaining additional loans from third persons. A lending institution also is not required to delay attempts to recover from a guarantor after the principal debtor has defaulted.

In other words, if the defendant in Schultz was accusing Wells Fargo of bad faith simply because the lender was seeking to enforce its rights under the plain language of the relevant note and mortgage, the result would likely have been different.