Federal Court Rejects PNC Bank’s Bid to Dismiss Consumer Class Action – Case Update

In February of 2020, Westbrook Law PLLC filed a class action complaint against PNC Bank, captioned Polonowski v. PNC Bank, N.A. The complaint alleges that, contrary to specific requirements of the federal Truth in Lending Act (“TILA”), PNC Bank routinely fails to send consumers periodic loan statements if they are going through a bankruptcy, even if the consumers have reaffirmed their mortgage debts to PNC. The complaint alleges that this practice harms consumers by preventing them from receiving notice of interest rate changes, minimum payment amounts, remaining balance, and other critical information.

In May of 2020, PNC filed a motion to dismiss the complaint, arguing that PNC could not be liable for violating TILA because PNC would have “violated federal law” if it had provided periodic loan statements. PNC argued that the automatic stay provided in the bankruptcy code prohibited the sending of any loan statements, even after the plaintiffs’ loan had been reaffirmed and the plaintiffs’ remaining debts had been discharged. On behalf of the plaintiffs, Westbrook Law opposed the motion to dismiss.

The presiding district judge, Hon. Paul L. Maloney, referred PNC’s motion to the magistrate judge for a report and recommendation. The magistrate judge sided with PNC and recommended the court grant the motion to dismiss. The plaintiffs objected and requested that Judge Maloney conduct a fresh review of the motion.

Today, Judge Maloney issued the court’s opinion, rejecting the report and recommendation and denying PNC’s motion dismiss. The court emphasized that once a discharge order has entered in a bankruptcy case, the bankruptcy code does not prohibit the sending of statements regarding a reaffirmed debt. The court further found that the Real Estate Settlement Procedures Act (“RESPA”) could not be narrowed by its implementing regulations (“Regulation X”), and thus the plaintiffs’ secondary claim that PNC unlawfully failed to correct servicing errors brought to its attention was viable and could not be dismissed.

As a result of today’s decision, the case against PNC will move forward. Westbrook Law hopes to hold PNC accountable for habitual violations of TILA, obtain compensation for a class of consumers affected by these practices, and ultimately force PNC and other lenders to provide critical financial information to consumers.

TJW

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.