Heng v. Heavner, Beyers & Mihlar, LLC

• Decision Date: 17 February 2017
• Docket Number: Nos. 16-1668,16-2051 & 16-2052,s. 16-1668
• Citation: 849 F.3d 348
• Parties: Kimtylery HENG, et al., Plaintiffs–Appellants, v. HEAVNER, BEYERS & MIHLAR, LLC, Defendant–Appellee. Justin Gierke, on behalf of plaintiff and a class, Plaintiff–Appellant, v. Codilis & Associates, P.C., Defendant–Appellee. Laura Zuniga, et al., Plaintiffs–Appellants, v. Pierce and Associates, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

849 F.3d 348

Kimtylery HENG, et al., Plaintiffs–Appellants,

v.HEAVNER, BEYERS & MIHLAR, LLC, Defendant–Appellee.

Justin Gierke, on behalf of plaintiff and a class, Plaintiff–Appellant,

v.Codilis & Associates, P.C., Defendant–Appellee.

Laura Zuniga, et al., Plaintiffs–Appellants,

v.Pierce and Associates, Defendant–Appellee.

Nos. 16-1668

16-2051 & 16-2052

United States Court of Appeals, Seventh Circuit.

Argued October 27, 2016

Decided February 17, 2017

Daniel A. Edelman, Attorney, Edelman Combs Latturner & Goodwin, LLC, Chicago, IL, for Plaintiffs–Appellants.

Stephen R. Swofford, David M. Schultz, Attorneys, Hinshaw & Culbertson LLP, Chicago, IL, for Defendants–Appellees.

Before Wood, Chief Judge, and Bauer and Manion, Circuit Judges.

Bauer, Circuit Judge.

In these three separate cases consolidated on appeal, appellants challenge the dismissal of their claims brought under the Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et. seq. Appellants in Heng, et al., v. Heavner, et al. , separately challenge the district court's order striking an exhibit, and also challenge the district court's denial of their request for leave to amend. We affirm.

I. BACKGROUND

We need not discuss the specifics for each individual case because the underlying facts are consistent (the exception to this is the procedural history in Heng ). Appellants obtained a Federal Housing Administration-insured residential mortgage loan and subsequently defaulted due to financial hardship.¹ Appellees are law firms that represent the loan servicing agents; they filed foreclosure complaints in Illinois state court against appellants. These complaints generally followed the statutory complaint template set forth in Section 15–1504(a) of the Illinois' Mortgage Foreclosure Law. See 735 Ill. Comp. Stat. 5/15–1504(a). The template includes the following language: "Names of defendants claimed to be personally liable for deficiency, if any [,]" and, "[a] personal judgment for a deficiency, if sought." Id. at 5/15–1504(a)(3)(M), (3)(iii). Appellees included both allegations in their foreclosure complaints, and identified appellants to be personally liable for any deficiency.

Appellants filed suit against appellees, alleging violations of the FDCPA. According to the complaints, the FHA does not authorize deficiency judgments where, as here, appellants suffered a financial hardship. Attached as an exhibit to their complaints, appellants included a letter from the FHA responding to a Freedom of Information Act request. In part, the FHA's response provided:

There have been zero foreclosed FHA loans in Illinois in which the pursuit of a deficiency judgment was authorized. FHA is not currently pursuing deficiency judgments .... [T]he Department has determined it is not [in] the best interests of FHA to routinely seek deficiency judgments in connection with [claims without conveyance of title or "CWCOT"] claims. Therefore, FHA is not requesting that the mortgagees pursue any deficiency judgments in connection with CWCOT claims, unless FHA makes a special request pursuant to 24 C.F.R. [§] 203.369.... Since FHA is not currently pursuing deficiency judgments, we do not maintain any reports tracking deficiency judgments.

Appellees filed a motion to dismiss, which the district court granted under Federal Rule of Civil Procedure 12(b)(6). Appellants filed timely notices of appeal. This consolidated appeal followed.

We turn to certain facts pertaining only to the Heng case. As stated above, appellants filed a complaint and appellee filed a motion to dismiss. Shortly thereafter, appellants filed a first amended complaint on December 12, 2015. On December 23, 2015, appellee filed a motion to dismiss the amended complaint. Appellants received a letter dated December 23, 2015, from appellants' loan servicing agent who was represented by appellee. This letter provided an explanation about deficiency judgments and an offer to waive a deficiency judgment.

On February 5, 2016, appellants filed a response to the second motion to dismiss, which included the letter as an exhibit and allegations concerning it. Appellee filed both a reply and a motion to strike on February 19, 2016. Appellants were not given an opportunity to oppose the motion to strike, which the district court granted without comment.

On February 25, 2016, appellants filed a motion to reconsider the district court's order granting appellee's motion to strike and, alternatively, requested leave to amend the first amended complaint to include the exhibit. On March 23, 2016, the district court denied appellants' motion to reconsider and the alternative request for leave to amend, and granted appellee's motion to dismiss.

II. DISCUSSION

On appeal, appellants challenge the dismissal of their claims that were brought under the FDCPA. Appellants in the Heng case separately challenge the order granting appellee's motion to strike the exhibit attached to their response to appellee's motion to dismiss; they also challenge the denial of their request for leave to amend.

A. FDCPA Claim

We review de novo a district court's decision granting a motion to dismiss under Rule 12(b)(6), accepting all well-pleaded factual allegations in the complaint as true and drawing all reasonable inferences in favor of the appellants. St. John v. Cach, LLC , 822 F.3d 388, 389 (7th Cir. 2016). To avoid dismissal, the complaint must "state a claim to relief that is plausible on its face." Jackson v. Blitt & Gaines, P.C. , 833 F.3d 860, 862 (7th Cir. 2016) (quoting Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ).

The main issue is whether appellants stated a plausible claim under the FDCPA. The FDCPA provides that "[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt." 15 U.S.C. § 1692e. This broad prohibition is accompanied by a non-exhaustive list specifying sixteen potential violations, including the "threat to take any action that cannot legally be taken or that is not intended to be taken." Id. § 1692e(5). "[R]epresentations may violate § 1692e of the FDCPA even if made in court filings in litigation."

Marquez v. Weinstein, Pinson & Riley, P.S. , 836 F.3d 808, 812 (7th Cir. 2016). We apply the "unsophisticated consumer" standard when evaluating whether a debt collector's representations comply with the FDCPA. Avila v. Rubin , 84 F.3d 222, 226–27 (7th Cir. 1996).

Appellants contend that appellees violated the FDCPA by alleging in their state-court foreclosure complaints that appellants are "claimed to be personally liable for the deficiency, if any," and by requesting "[a] personal judgment for a deficiency, if sought." See 735 Ill. Comp. Stat. 5/15–1504(a)(3)(M), (3)(iii). Appellants argue that appellees included these allegations even though appellees knew that the FHA, the insurer of appellants' loan, had a longstanding policy of not authorizing mortgagees to pursue deficiency judgments. Appellants assert that not only did appellees pursue a deficiency judgment without FHA's prior authorization, but also that the FHA's policies prohibited appellees from taking such action in the first place. Appellants, therefore, contend that appellees made threats to seek a deficiency judgment and had no particularized intention of actually enforcing this legal remedy against appellants. Appellants also assert that appellees falsely represented that this legal remedy was available. Based on these suppositions, appellants argue that "[b]ecause the request for a deficiency was not authorized, [appellants'] FDCPA complaint stated a claim." Appellant's Br. at 17.

As a preliminary matter, we note that the crux of appellants' argument rests on the assumption that unless the FHA provides prior authorization to appellees to pursue a deficiency judgment against appellants, appellees are prohibited from engaging in the complained of conduct. We will therefore see if appellants have any plausible basis for this assumption.

First, the regulation governing deficiency judgments provides that "the Secretary may require the mortgagee diligently to pursue a deficiency judgment in connection with any foreclosure." 24 C.F.R. § 203.369(a)(1) (emphasis added); see also 24 C.F.R. § 203.402(o) (reimbursement for certain costs when Commissioner requires or requests the mortgagee to seek a deficiency judgment pursuant to § 203.369 ). This regulation gives FHA the authority to require a mortgagee to pursue a deficiency judgment on a FHA-insured loan, but does not prohibit the mortgagee from seeking a deficiency judgment. So the regulation does not support the position that appellees are prohibited from engaging in the complained of conduct without FHA's prior authorization.

Second, appellants provide references to HUD Mortgagee Notice 1994–89, and Mortgagee Letters 2006–15, and 2013–15. However, although neither party pointed this out, these documents are out-of-date; the letters and notice were superseded by HUD's FHA Single Family Housing Policy Handbook 4000.1 (or "Handbook").² These Mortgagee Letters and Notice also do not help appellants' position.

Lastly, the Handbook provides that "[u]nless specifically requested by FHA, the Mortgagee is not required by FHA to pursue any deficiency Judgments in connection with CWCOT procedures." Handbook at III.A.2.u.ii.³ It further states that a "[m]ortgagee may engage in Judgment collection activities if a claim for FHA insurance benefits is not filed." Id. at III.A.2.u.iii.(B). Appellees contend that the Handbook supports its position that a mortgagee is allowed to pursue a deficiency judgment if it chooses not to file a claim for insurance benefits. In response, appellants argue that the decision to pursue a deficiency judgment "belongs to HUD at all relevant times," and to accept appellees' interpretation takes that decision-making away from the FHA. Appellant's R. Br. at 7. Not exactly, the Handbook follows the wording of 24 C.F.R. § 203.369...