Mortgage Relief Scheme Violated New Jersey Consumer Fraud Act

This posting was written by Jody Coultas, Editor of CCH State Unfair Trade Practices Law.

A real estate lawyer and his client engaged in a fraudulent mortgage relief scheme that violated the New Jersey Consumer Fraud Act (CFA) by misleading mortgage holders, according to the U.S. Bankruptcy Court in Trenton, New Jersey.

The mortgage holders filed for Chapter 13 bankruptcy in an attempt to save their home from foreclosure. They then entered into an agreement with the real estate lawyer’s client, Frederick Cleveland, to sell the house for $555,000. Cleveland was to pay off $510,000 on the two existing mortgages on the house and another $46,000 to the mortgage holders to pay for the Chapter 13 plan.

Instead, Cleveland borrowed $646,400 and took $100,000 for himself. The mortgage holders were unaware that the monthly payments they made to Cleveland were not being used to service the financing and did not understand that if Cleveland failed to pay the new lender, they could lose their home.

Misrepresentations

In preparing the closing documents, the real estate lawyer misrepresented the sale price and falsely told the mortgage holders that Cleveland was investing his own cash.

Although the mortgage holders were not going to receive any money, the real estate lawyer told them they would receive payments from a trust account. Cleveland eventually defaulted on the new loan and the lender initiated foreclosure proceedings.

The real estate lawyer and Cleveland violated the CFA by making false and misleading statements regarding a mortgage relief plan, according to the court. The CFA prohibits the use of any unconscionable commercial practice, deception, or fraud.

Sophisticated Consumer Exception

Although Cleveland argued that the mortgage holders could not avail themselves of the CFA because they were sophisticated parties and could not be misled, the court found that there was no statutory exception for sophisticated consumers.

Even if a business practice was not fraudulent or deceptive, that practice could nevertheless violate the CFA if it was unconscionable. Here, Cleveland found the mortgage holders in a very vulnerable position and took advantage of them for personal gain.

Damages, Attorney’s Fees

An award of actual damages, attorneys’ fees, and other appropriate equitable relief was available to the mortgage holders. The mortgage holders suffered an ascertainable loss because the new mortgage was $646,400, even though they had owed only $529,608. Thus, the damage award was over $350,000, treble the difference between the loss and what the mortgage holders actually received.

The court noted that the mortgage holders could submit proof of their attorneys’ fees and costs, as well as seek other equitable remedies. The real estate lawyer was held jointly liable for the damages, costs, and fees because he conspired with his client to violate the CFA.

The mortgage holders' lawyer stated that this was the first reported case in New Jersey concerning mortgage foreclosure rescue schemes.

The decision is In re O'Brien, CCH State Unfair Trade Practices Law ¶32,012.

Pulse Oximeter Maker Liable for Sole Source Discounts, Not Budling

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

A federal district court in California did not err in discarding a jury's finding that a manufacturer of pulse oximeters violated federal antitrust law through its offering of bundled discounts to customers, but confirming the jury's liability finding on two other bases, the U.S. Court of Appeals in San Francisco has decided in an unpublished opinion.

The manufacturer could have acted illegally through sole source agreements and market share discounts it offered to customers, the appellate court said. In addition, the trial court's calculation of damages suffered by a complaining competitor was proper. Therefore, each of the trial court's rulings was upheld.

Antitrust Liability

The manufacturer did not violate Sec. 2 of the Sherman Act through the bundled discounts it offered to customers. The defending manufacturer's discounts were not alleged to have resulted in prices that were below an appropriate measure of its costs. Because no anticompetitive tying or pricing was asserted, the discounts could not, as a matter of law, have violated the statute, the court stated.

Rejected by the appellate court was an argument that the bundling practices were actually illegal market-share agreements, rather than general bundled discounts. Even if it could have been concluded that certain bundling contracts were exclusive dealing arrangements, in that the discounts were conditioned upon a near-complete exclusivity requirement, the evidence concerning the pervasiveness and effects of the varied bundling arrangements was insufficient to support a finding that the arrangements foreclosed competition in a substantial share of the relevant market. Therefore, the trial court did not err in vacating a jury verdict of liability regarding the bundling agreements.

The trial court correctly determined that a reasonable jury, based on the evidence presented at trial, could have concluded that the defending manufacturer violated the federal antitrust laws through sole source agreements and market share discounts it offered to customers. Sufficient evidence had been introduced to support the jury's finding.

On appeal, both parties offered the same evidence that had been presented to the jury and reviewed by the district court. The defending manufacturer failed to proffer any reason at appeal that compelled reversal of the jury's verdict.

Damages

The district court did not err in its calculation of damages resulting from the manufacturer's antitrust violations. The court properly determined, based on the evidence presented at trial, that all harm incurred by a complaining competitor on account of the defending manufacturer's anticompetitive business dealings with customers occurred before July 2001, as adherence to that cutoff date did not “absolutely lack evidentiary support.”

The competitor itself had stated that “the period between 1998 and 2001” was “when all harm was done” to it. Therefore, the court did not abuse its discretion in denying the competitor a new trial on damages, the appellate court said.

In addition, an apparent awarding of some post-July 2001 damages was not error, the appellate court noted. That award was based on a conclusion that the competitor should receive damages associated with oximetry monitor sales lost pre-July 2001, which consequently included the flow of lost sensor sales stemming from the lifespan of those devices.

Because of this installed base of monitors, the district court correctly determined that a hard stop on damages would cut them off prematurely. Moreover, because the competitor offered unreasonable models for calculating damages, it was proper for the court to adopt the defendant manufacturer's model—the only reasonable alternative—as its basis for calculating damages, the court concluded.

Concurring Opinion

A concurring opinion contended that the majority arrived at the correct result with respect to the bundling agreements, but for the wrong reason. According to the concurrence, the majority's conclusion—that the evidence on record was insufficient to support the jury's liability verdict that the manufacturer's bundling contracts constituted exclusive dealing arrangements—applied only with respect to the theory that bundling itself was a form of exclusive dealing. However, such a theory no longer held water after Cascade Health Solutions v. PeaceHealth (2007-2 Trade Cases ¶75,846), the concurring opinion argued.

The court should have based its decision instead on the ground that the complaining competitor had waived the argument that the bundling agreements at issue should be treated as market-share discounts.

The October 28 memorandum decision is Masimo Corp.v. Tyco Health Care Group, L.P., 2009-2 Trade Cases ¶76,780.

Good Cause Not Required for Franchise Termination

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A heating and air conditioning business franchisee failed to demonstrate that a manufacturer was required to have good cause before it terminated the parties’ agreement, the U.S. Court of Appeals in Denver has decided. Thus, a federal district court did not err in granting the manufacturer judgment on the claim as a matter of law.

The dispute arose when the manufacturer discovered that the franchisee had been abusing a rebate program that reduced prices charged to dealers, enabling them to meet the prices offered by competitors.

The manufacturer terminated the franchise, the dealer brought a breach of contract action, and the manufacturer counterclaimed based on the dealer’s abuse of the rebate program.

Termination at Will

As written, the agreement entitled either party to terminate at will on 30 days’ notice, the court noted. However, the franchisee argued that the agreement had been modified by the manufacturer’s statements and conduct so that the manufacturer could not terminate it without good cause.

At best, the evidence presented by the franchisee showed that the manufacturer had consistently provided cause when terminating franchises in the past, the court observed. However, a pattern of terminating with cause was not unequivocally inconsistent with the retention of the power to terminate without cause, according to the court.

Unclean Hands

The court agreed with the franchisor’s contention that the franchisee had unclean hands, based on the phony invoices the franchisee's employees had prepared in preparation for the franchisor’s audit of the rebate program.

Although a jury had found that the franchisee should have been equitably estopped from denying that the parties’ agreement required good cause for termination, the district court properly refused to apply the equitable doctrine for the franchisee’s benefit.

Damages

The district court erred by appointing a special master for an equitable accounting on the fraud claim, the court held. The district court found that having a jury “tediously slog through” the individual invoices that the franchisee had fraudulently submitted to the franchisor would prolong the trial.

Because the jury’s general verdict in favor of the franchisor on the fraud claim did not fix the scope of the franchisor’s liability, a new jury could not calculate the franchisor’s damages without resolving the specifics of that liability. Accordingly, the entire fraud claim—not simply the question of the amount of the franchisor’s damages—was required to be retried, the court held.

The decision is Haynes Trane Service Agency, Inc. v. American Standard, Inc., CCH Business Franchise Guide ¶14,125