Mortgage Servicer Disregarded Loan Modification Agreement and Is Liable for Debt Collection Abuses, Federal Court Finds

The United States District Court for the Western District of Michigan issued an important published opinion early this month in the case of Macholtz v. Carrington Mortgage Services, LLC, finding, after a “journey through a thick summary judgment record” that detailed a “15-year struggle between plaintiff and a series of lenders,” that the mortgage servicer defendant’s refusal to acknowledge a loan modification agreed to by its predecessor made it liable to the consumer plaintiff under various state and federal consumer protection laws. The lawsuit, filed in early 2019 by Westbrook Law PLLC in Grand Rapids, Michigan, seeks damages for the plaintiff and to unwind a foreclosure sale.

The lawsuit challenged the conduct of the mortgage servicer, Carrington Mortgage Services, LLC, and the bank it worked for, Wilmington Savings Fund Society FSB. Carrington qualified as a “debt collector” under the Fair Debt Collection Practices Act (“FDCPA”) because it began servicing the mortgage after the predecessor servicer, CitiMortgage, had declared a default. CitiMortgage had also previously entered into a modification agreement with the plaintiff, but failed to ever “on-board” the modification or acknowledge its existence. Eventually, after demanding to be paid huge sums of money that were not justified under the modified terms of the loan, Carrington and Wilmington foreclosed on the plaintiff’s Berrien County home, which he had owned for 22 years.

The lawsuit alleged violations of the Real Estate Settlement Procedures Act (“RESPA”); Truth in Lending Act (“TILA”); FDCPA, Michigan Mortgage Brokers, Lenders and Servicers Licensing Act (“MBLSLA”); Michigan Regulation of Collection Practices Act (“MRCPA”), and common-law wrongful foreclosure and breach of contract. The court found violations of TILA, FDCPA, MBLSLA, and MRCPA on the part of Carrington and Wilmington and set the case for trial regarding damages and other remedies.

Consumer advocates in Michigan have often lamented the erosion of protections for homeowners under state and federal law over the last 20 years. It is true that consumers in Michigan have fewer protections than they did during the 1980s and 1990s. However, while holding mortgage servicers and banks accountable remains challenging, the Macholtz opinion shows that the remaining federal and state protections can be potent tools for redressing consumer abuses.

TJW

Westbrook Law PLLC Notches Win in Wrongful Repossession Trial/Westbrook Law of Grand Rapids, Michigan

After a trial in December of 2017, the Montcalm County Circuit Court ruled in favor of the defendant and counter-plaintiff, represented by Westbrook Law PLLC, in a case that began as a $5,000.00 deficiency claim by the plaintiff/counter-defendant car dealer, and ended with a judgment against the car dealer for more than $10,000.00.

The case, Powers v. Brown, resulted from the dealer’s claim that the buyer missed an installment payment on his auto loan, thus entitling the dealer to repossess the vehicle and collect a deficiency balance on the loan. However, the evidence introduced at trial showed that the dealer had no contractual right to repossess the vehicle. Relying on Michigan’s conversion statute, M.C.L. ยง 600.2919a, Westbrook Law PLLC argued on behalf of the buyer that the dealer was liable for damages. The court (J. Schafer) agreed, finding that the dealer was liable for double damages and attorney fees.

TJW

Banks and Stolen Money/Westbrook Law of Grand Rapids, Michigan

It is surprisingly common for company bookkeepers, controllers and accountants to steal company funds and funnel the money to their banks and other creditors.  Today’s Ponzi schemes (think Bernie Madoff, or the closest local analogue, CyberNET) also cannot survive without using bank services like credit accounts, deposit accounts and wire transfer facilities.  More than once in my practice I have faced the questions: when the fraudster no longer has the ill-gotten funds, what can the victim do?  Do the banks and other creditors have to account for the stolen funds?  These are simple questions with complex answers.

In the case of CyberNET (also called Cyberco), the company was engaged in a Ponzi-like scheme amounting to a $100 million fraud on its creditors, mostly consisting of equipment leasing companies.  CyberNET’s line bank, Huntington National Bank, saw warning signs that CyberNET’s business was not what it appeared to be.  It even went so far as to tell CyberNET to find a new bank, and negotiated accelerated paydowns of its $17 million line of credit to CyberNET.  That credit line was fully repaid just before an FBI raid of the company effectively shut it down. The creditors left holding the bag asked the question: would Huntington have to account for any of the tens of millions it received that were proceeds of the fraud?  The answer was yes, but not without a complicated and protracted legal fight.

Michigan law and the bankruptcy code each provide specific means of recovering stolen money and fraudulent transfers of funds.  In Huntington’s case, while the bank successfully defended claims that it had “aided and abetted” the CyberNET fraud, it ultimately lost in an adversary proceeding in bankruptcy court on theories of avoidance of fraudulent transfers.  These theories depended upon the bank failing to prove that it accepted the illegitimate funds “in good faith.”  The judgment against Huntington, totaling over $80 million, is currently on appeal to the Sixth Circuit.

An avoidance theory may also be useful outside the bankruptcy context, where defrauded parties may be able to make use of Michigan’s Uniform Fraudulent Transfers Act to pull back ill-gotten funds that were subsequently transferred to a bank, creditor or another.  In that instance, the pivotal questions are again the recipient’s “good faith,” along with an inquiry whether the recipient “gave value” for the transfer.

Even negligence and unjust enrichment theories may be relied upon to hold recipient of stolen or fraudulently obtained funds accountable.  In Michigan, for example, a common-law “duty of inquiry” exists whereby a bank must conduct a “reasonable inquiry” to ensure that when it receives funds from a third party that does not owe it money (through, e.g., a company check stolen by its bookkeeper), that the presenter is authorized to use those funds.  Otherwise, it accepts third-party funds at its own peril.  It cannot simply look the other way and accept what it should know are stolen or ill-gotten funds.

Litigating against banks is never a simple proposition, and should not be done lightly.  Banks are accustomed to fighting lawsuits and can afford teams of skilled attorneys.  However, in the right case, and pursuing the right legal strategy, they are not untouchable–as the Huntington case clearly shows.