Judge Posner, Small Consumer Class Actions and Charities

Judge Posner of the United States Court of Appeals for the Seventh Circuit is one of the most influential judges in the United States. In Hughes v. Kore of Indiana Enterprise, Inc., No. 13-8018 (7th Cir., decided September 10, 2013), the Seventh Circuit, with Judge Posner writing the opinion, allowed an appeal from a district judge’s decertification of a class action to further develop class action law regarding issues of notice in cases in which potential damages per class member are very small and whether class actions are suitable for such cases.

The underlying facts of Kore involved a suit by users of various ATMs near a college campus because the ATMs failed to have notices affixed on the ATMs notifying users that they would be charged a fee for using the ATM and also for the lack of on-screen transactional notice while using the ATM. While the law has since been amended to eliminate the sticker notice requirement, Kore is important because the damages per alleged transaction were assumed to be only $3.57 per transaction at most and required a plaintiff to prove that had he known that there was a $3.00 fee, he would not have used the ATM. The district judge decertified on the grounds that the individuals would do better if they filed an individual lawsuit because the federal statute allowed recovery of more money per individual claimant (i.e. $100 to $1,000 versus the $3.57 per transaction stipulated in the class action) and because ATMs do not store users’ names but instead assign transactional numbers to each transaction.

Judge Posner’s opinion was quick to point out that “the smaller the stakes to each victim of unlawful conduct, the greater economies of class action treatment and the likelier that the class members will receive some money.” Judge Posner also pointed out that because the small amounts of money involved would not provide meaningful relief to the class members, the best solution may be a “cy pres” decree that awards money to a charity instead of the class. According to the Court, payment of $10,000 to a charity whose mission coincided with the interest of the class would amplify the effect of the modest damages in protecting consumers. Judge Posner also suggested that a time saving alternative might be a class action with a stated purpose, at the outset of the suit, of a collective award to a specific charity. Hughes v. Kore of Indiana Enterprise, Inc., No. 13-8018 (7th Cir., decided September 10, 2013).

With respect to the issue of notice to class members only identified by transaction numbers, Judge Posner opined that affixing stickers on the ATMs involved in the lawsuit and notice in the principal newspaper and Kore’s website would be reasonable notice under the circumstances and would avoid the cost involved in trying to subpoena each bank’s records to try and determine the identity of the class members. Finally, Judge Posner warned that class actions should still be permitted when the stakes are small and likely to be swamped by the expenses of litigation. It is up to the Courts to not “allow the litigation expenditure tail to wag the remedy dog.” Hughes v. Kore of Indiana Enterprise, Inc., No. 13-8018 (7th Cir., decided September 10, 2013), citing, In re Baby Products Antitrust Litigation, 708 F.3d 163, 179 (3rd Cir. 2013).

Judge Posner’s suggestions for resolving small dollar class actions have merit and by using the cy pres mechanism, the award can benefit the entire community without breaking the bank or killing the goose that lays the golden egg. The opinions in this blog are solely the author’s and any comments, suggestions or replies can be sent to john@jrjoneslaw.com.

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Standing to Challenge Assignment and Chain of Title

In Texas, nonjudicial foreclosure sales of real property are common and allowed by statute. Under the Texas Property Code, only the mortgagee or the mortgagee servicer acting on behalf of the current mortgagee can initiate a nonjudicial foreclosure sale. See Tex. Prop. Code 51.0001(4) (for the definition of mortgagee). Usually the mortgagee is easy to determine because the mortgagee is named as grantee in the original deed of trust, mortgage, or contract lien. As often is the case, factual disputes arise when the party seeking to foreclose is not the original mortgagee. When that occurs, the foreclosing party must be able to trace its rights under the security instrument to the original mortgagee because as a matter of Texas law, homeowners have a cognizable cause of action to challenge a party’s right to foreclose on their property.

In Miller v. Homecomings Financial LLC, 2012 U.S. Dist. Lexis 111022 (August 8, 2012 S.D. Tex.), borrowers challenged the assignment of a security interest and assignee’s right to foreclose based on the assignee’s inability to show a proper chain of title and filed a lawsuit. The assignee filed a motion to dismiss the borrowers claim based on the failure to state a claim. The Court denied the motion to dismiss and wrote a detailed opinion setting out the grounds under which a borrower can challenge a foreclosure sale. According to the Court, a borrower can challenge the sale on the grounds that there was no default in payment by debtor; violations of the conditions and limitations of the trustee’s power under the deed of trust; non-compliance with the required statutory notices and other requirements of a non-judicial sale, and, no contractual standing by the party seeking to foreclose. Miller v. Homecomings Financial LLC, 2012 U.S. Dist. Lexis 111022 (August 8, 2012 S.D. Tex.), citing, Slaughter v. Qualls, 162 S.W.2d 671, 675 (Tex. 1942), Lido Intern. Inc. v. Lambeth, 611 S.W.2d 622 (Tex. 1981) and Martin v. New Century Mortgage Co., 377 S.W.3d 79 (Tex. App.-Houston [1st Dist.] 2012, n.w.h.).

Recognizing that one way to show the right to foreclose is to “show me the note”, the Court stated that there are other ways to establish the right to foreclose. The traditional way to prove title is via filings of record in the county clerk’s office.  Section 51.0001(4)(C) of the Texas Property Code states that “if the security instrument has been assigned of record, the last person to whom the security interest has been assigned of record is the mortgagee. The Court also noted that another Texas statute declares that any transfer or assignment of a recorded mortgage must also be be recorded in the office of the county clerk. Miller v. Homecomings Financial LLC, 2012 U.S. Dist. Lexis 111022 (August 8, 2012 S.D. Tex.), citing, Texas Local Government Code Section 192.007(a). While noting that the absence of such required filings is the subject of current litigation, the Court held that it was some evidence that no such assignment or transfer has occurred. When, as is the case before the Court, that an assignee cannot show an unbroken chain of title, homeowners may be entitled to an injunction against the threatened foreclosure.

The opinions of this blog are solely the author’s and any comments, suggestions and replies can be sent to John@jrjoneslaw.com. Now that summer is over, the blog will resume a regular publication schedule.