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On February 13, the U.S. Court of Appeals for the 7th Circuit vacated a lower court’s decision to rescind class certification for a group of automotive dealerships (plaintiffs), concluding the lower court did not provide a sufficiently thorough explanation of its decision for the appeals court to reach a decision. According to the opinion, the plaintiffs were granted class certification of breach of contract and RICO claims, among others, brought against an inventory financing company for allegedly improperly charging interest and fees on credit lines before the money was actually extended by the company for the automobile purchases. The company had moved the district court to reconsider the class certification, arguing the plaintiffs admitted the financing agreements were ambiguous on their face, and therefore extrinsic evidence on an individual basis would be required to establish the parties’ intent. In response, the plaintiffs had argued that patent ambiguity in the contract does not require consideration of extrinsic evidence and individualized proof. The district court had agreed with the company, concluding that “ambiguity in the contracts requires consideration of extrinsic evidence, necessitates individualized proof, and undermines the elements of commonality and predominance for class certification.”
On appeal, the 7th Circuit concluded the denial of class certification lacks “sufficient reasoning” to ascertain the basis of the decision, noting that while the original decision to grant certification was a “model of clarity and thoroughness,” the decision to withdraw certification provides only a conclusion. Moreover, the appellate court concluded that the mere need for extrinsic evidence does not in itself render class certification improper and therefore the court needed a more thorough explanation of its reasoning to decertify the class.
On February 6, a three-judge panel for the U.S. Court of Appeals for the 4th Circuit affirmed a district court’s denial of a motion to dismiss a proposed class action suit against two tax payment financing companies, finding that (i) the plaintiff had standing under EFTA because he alleged that he suffered an injury in fact; and (ii) a taxpayer payment agreement (agreement) between the plaintiff and the financing companies qualifies as a consumer credit transaction subject to both TILA and EFTA. According to the decision, the plaintiff entered into an agreement to finance the payment of residential property taxes as allowed under state law. The plaintiff subsequently challenged the agreement on several grounds, including that it violated TILA, EFTA, and the Virginia Consumer Protection Act because many of the agreement’s terms had incorrect amounts, there was no itemized list of closing costs, and the agreement did not include “certain allegedly required financial disclosures.” Following the plaintiff’s initiation of a proposed class action, the defendants moved to dismiss for failure to state a claim, arguing, among other things, that the agreement is not a consumer credit transaction and therefore not subject to TILA or EFTA.
The district court, however, determined that the plaintiff had standing under the EFTA because he claimed he suffered an injury in fact—that the agreement was contingent on his agreeing to preauthorized electronic funds transfer payments—and that the agreement was subject to both TILA and EFTA. On appeal, the 4th Circuit agreed that the plaintiff satisfied the injury requirement “because he alleged that he was required to agree to [electronic funds transfer payment] authorization as a condition of the agreement and that the agreement contained terms requiring him to waive EFTA’s substantive rights regarding [electronic funds transfer payment] withdrawal.” Even if the court accepted the defendant’s assertion that there was no injury, it held that the plaintiff would still have standing to challenge the agreement because “there is a ‘realistic danger’ that [the plaintiff] will ‘sustain a direct injury’ as a result of the terms of the [agreement].” The court also found the agreement to be a credit transaction under the meaning of TILA and EFTA because under TILA, a consumer transaction is “one in which the party to whom credit is offered or extended is a natural person, and the money, property, or services which are the subject of the transaction are primarily for personal, family or household purposes.”
One judge concurred in part—regarding standing under EFTA—but dissented also, writing that the agreement does not qualify as a “credit transaction” under TILA because the Virginia code, and not a creditor, grants the taxpayer the right to defer payment of a local tax assessment by entering into an agreement with a third party like the defendant. “A[n] [agreement] is not a ‘credit transaction,’ within the meaning of TILA, because the preexisting obligation of the taxpayer is not severed by the third-party payor’s payment, and the third-party payor does not grant any right to the taxpayer that is not conferred already by statute,” the dissenting judge concluded. The judge further opined that protections for taxpayers who enter into an agreement should be resolved by the state, as the entity creating this form of tax payment.
On February 7, the U.S. Court of Appeals for the 7th Circuit held that arithmetic does not affect a debt’s “character” under the FDCPA, reversing the district court’s judgment against a debt collector. A debt collector reported to a credit bureau that the debtor had nine unpaid bills of $60, rather than one aggregate debt of $540. The debtor filed suit, arguing that the debt collector violated the FDCPA’s prohibition on making a “false representation” about “the character, amount, or legal status of any debt.” The district court agreed with the debtor, determining that the debt collector should have reported the amount in the aggregate and imposing a $1,000 penalty for the violation.
On appeal, the 7th Circuit noted a lack of authoritative or persuasive guidance discussing whether aggregation of all amounts owed to a creditor “concerns the ‘character’ of a debt” under the FDCPA. The appeals court concluded that the number of specific transactions between a debtor and a creditor “does not affect the genesis, nature, or priority of the debt” and, therefore, does not concern its character. Moreover, the court noted that “‘amount’ rather than the word ‘character’ is what governs reporting the debt’s size”; otherwise, there would be no distinction in the FDCPA’s prohibition on false representations about the “character, amount, or legal status” of a debt. Because it was undisputed that the debtor incurred nine debts of $60 each to a single creditor, the debt collector did not misstate the “character” of the debt under the FDCPA.
On January 31, NYDFS issued Supplement No. 2 to Insurance Circular Letter No. 1 (2003), which provides guidance to the title insurance industry following a January 15 unanimous decision by the Appellate Division of the New York State Supreme Court to uphold Insurance Regulation 208. The Appellate Division’s decision vacated the majority of a trial court order annulling Regulation 208, which limits title insurers’ ability to offer inducements to obtain business. (See previous InfoBytes coverage here.)
The NYDFS supplement highlighted three critical holdings from the Appellate Division’s decision. First, the court upheld Regulation 208’s ban on inducements for future title insurance business, recognizing that NYDFS had found that lavish gifts were routinely offered to intermediaries such as lawyers in anticipation of receiving business. Second, the appellate court held that Insurance Law § 6409(d), which prohibits a commission, rebate, fee, or “other consideration or valuable thing,” is not limited to a prohibition on quid pro quo exchanges for specific business. Third, the court annulled Regulation 208’s ban on certain closer fees and fees for ancillary searches.
On February 6, the U.S. Court of Appeals for the 2nd Circuit affirmed the judgment of the district court dismissing, as untimely, a trustee’s breach of contract and indemnity claims related to losses resulting from alleged defects in mortgage loans. At issue are three pools of residential home mortgages that at the time of sale had an aggregate principal balance exceeding $3.4 billion. These loans were sold by a mortgage company to Lehman Brothers Holding Inc. and Lehman Brothers Bank FSB in 2006 and subsequently securitized into three trusts. In addition to the representations and warranties made and the remedies provided in the Mortgage Loan Purchase Agreements (MLPAs) and Trust Agreements, the mortgage company, Lehman, and the depositor entered into a separate Indemnification Agreement for each trust, which contained its own representations and warranties indemnification provision. Investors, including Freddie Mac, purchased certificates in the trusts.
According to the court, Freddie Mac conducted a forensic review of the trusts six years after the sale, which allegedly revealed that an “overwhelming percentage” of the loans in the trusts breached the mortgage company’s representations and warranties (R&W). Shortly after discovery, the trustee submitted breach notices to the mortgage company, which did not cure or repurchase the loans.
The Federal Housing Finance Agency (FHFA), as conservator for Freddie Mac, filed a complaint against the mortgage company asserting breach of contract and indemnification claims. After the FHFA dropped out of the litigation, the trustee filed an amended complaint that included two breach of contract counts and two indemnification counts—one seeking indemnification based on the MLPAs and Trust Agreements and another seeking indemnification based on the Indemnification Agreements.
The mortgage company moved for summary judgment on the first three claims and moved to dismiss the fourth claim. The district court granted the motion. It found that the breach of contract claims were time-barred because the FHFA filed the summons with notice more than six years after the limitations period at issue, which begins to run on the effective date of the R&Ws. The court also found the trustee’s indemnification claim based on the MLPAs and Trust Agreements to be time-barred because it was “merely a reformulation of its breach-of-contract claims.” The district court dismissed the other indemnification claim based on the Indemnification Agreements as time-barred because it involved a new set of operative facts and thus could not relate back to the original complaint filed by the FHFA.
On review, the 2nd Circuit affirmed the lower court’s decision. As to the breach of contract claims, the 2nd Circuit relied on two New York Court of Appeals cases: Ace Securities Corp. v. DB Structured Products, which held that the six year statute of limitations begins to run on the effective date of R&Ws, and Deutsche Bank National Trust v. Flagstar Capitals Market Corporation which held that an express accrual clause in a contract cannot delay the start of a limitations period under New York law. With respect to the third cause of action for indemnification under the MLPAs and Trust Agreements, the 2nd Circuit stated that absent unmistakably clear language in an indemnification agreement that demonstrates that the parties intended this clause to cover first-party claims as opposed to third-party claims, an agreement between two parties to indemnify each other does not mean that one party’s failure to perform gives rise to an indemnification claim. In reviewing the claim at issue in count three, the court found that the claim sought payment to the trustee arising from the mortgage company’s alleged breach of R&Ws, which is a breach of contract claim. The trustee argued that the indemnification section provided an independent remedy, but the 2nd Circuit rejected that argument stating that a claim is not independent if its success directly depends on the breach of the R&Ws in the MLPAs outlined in the contract claims. Finally, with respect to the fourth clause of action for indemnification, the 2nd Circuit held that this claim filed in 2016, would only be timely if it related back to the facts of the earlier claims, but since it arose out of different contracts it therefore could not relate back.
On January 29, the U.S. Court of Appeals for the 9th Circuit held that the defendant employer violated the Fair Credit Reporting Act’s (FCRA) standalone document requirement when it included extraneous state disclosure requirements within a disclosure to obtain a consumer report on the plaintiff, a prospective employee. The panel also concluded that the defendant’s form failed to satisfy both the FCRA and the California Investigative Consumer Reporting Agencies Act’s (ICRAA) “‘clear and conspicuous’ requirements because, although the disclosure was conspicuous, it was not clear.” According to the opinion, the plaintiff signed a “Disclosure Regarding Background Investigation,” and was employed for several months before voluntarily terminating her employment. Following her departure from the company, the plaintiff filed a putative class action against the defendant, alleging a failure to make proper disclosure under the FCRA and the ICRAA. The plaintiff claimed that the disclosure form included not only a disclosure as required by the FCRA stating that the defendant could obtain a consumer report on her, but also additional disclosure requirements for several other states.
The district court initially granted the defendant’s motion for summary judgment as to the FCRA and as to ICRAA’s clear and conspicuous requirement, holding that the disclosure form complied with both statutes. On appeal, the 9th Circuit first rejected the plaintiff’s assertion that the disclosure form violated the standalone document requirements because it included all the application materials she filled out during the employment process. The panel declined to extend this principle to the FCRA’s definition of a “document,” stating that the employment packet was distinct from the disclosure form. However, the 9th Circuit cited to its 2017 decision in Syed v. M-I, LLC, which held that “‘a prospective employer violates Section 1681b(b)(2)(A) when it procures a job applicant’s consumer report after including a liability waiver in the same document as the statutorily mandated disclosure.’” Noting the statute’s plain language, the 9th Circuit concluded in Syed that the FCRA meant what it said—“the required disclosure must be in a document that ‘consist[s] ‘solely’ of the disclosure.’” Moreover, the panel stated that Syed considered the standalone requirement with regard to any surplusage, and that the “FCRA should not be read to have implied exceptions, especially when the exception—in that case, a liability waiver—was contrary to FCRA’s purpose.”
The 9th Circuit also concluded that the district court erred in holding that the disclosure form was clear because the form (i) contained language a reasonable person would not understand, and (ii) the language combined federal and state disclosures, which would confuse a reasonable reader. However, the panel held that the disclosure form met the conspicuous requirement since the defendant capitalized, bolded, and underlined the headings for each section of the disclosure and labeled the form so an applicant could see what she was signing. Accordingly, the 9th Circuit affirmed in part and vacated in part the district court’s decision, and remanded the case for further proceedings.
On January 15, the U.S. Court of Appeals for the 9th Circuit held that the Americans with Disabilities Act (ADA) applies to a national pizza chain’s website and mobile app “even though customers predominantly access them away from the physical restaurant” because the “statute applies to the services of a public accommodation, not services in a place of public accommodation.” According to the opinion, the plaintiff sued the defendant seeking damages and injunctive relief, contending that the defendant’s website and app did not work with his screen-reading software. The plaintiff requested that the court order the defendant to alter its website and app to comply with Web Content Accessibility Guidelines (WCAG) 2.0 and make it accessible to individuals with disabilities as required by Title III of the ADA. The defendant argued that the ADA does not apply to its online offerings, and that applying the ADA would violate its due process rights.
Although the district court held that Title III of the ADA applied to the defendant’s website and app, it granted defendant’s motion to dismiss under the primary jurisdiction doctrine, stating that in order to “cure” due process concerns, it would require “meaningful guidance” on website accessibility standards yet to be issued by the DOJ in order “to determine what obligations a regulated individual or institution must abide by in order to comply with Title III.” On appeal, the 9th Circuit reversed the district court’s reliance on the primary jurisdiction doctrine, finding it to be inapplicable since waiting for the DOJ to provide guidance on accessibility standards would cause “needless” delay of a resolution the lower court could determine. Moreover, the fact that the DOJ has not articulated a website accessibility standard does not violate a defendant’s due process rights because the “ADA articulates comprehensible standards to which [the defendant’s] conduct must conform.”
District Court allows TCPA action to proceed, citing 9th Circuit autodialer definition as binding law
On January 17, the U.S. District Court for the District of Arizona denied a cable company’s motion to stay a TCPA action, disagreeing with the company’s arguments that the court should wait until the FCC releases new guidance on what constitutes an automatic telephone dialing system (autodialer) before reviewing the case. A consumer filed a proposed class action against the company, arguing that the company violated the TCPA by autodialing wrong or reassigned telephone numbers without express consent. The company moved to stay the case, citing the FCC’s May 2018 notice (covered by InfoBytes here), which sought comments on the interpretation of the TCPA following the D.C. Circuit’s decision in ACA International v. FCC (setting aside the FCC’s 2015 interpretation of an autodialer as “unreasonably expansive”). The company argued that the FCC would “soon rule on what constitutes an [autodialer], a ‘called party,’ in terms of reassigned number liability, and a possible good faith defense pursuant to the TCPA,” all of which would affect the company’s liability in the proposed class action. The court rejected these arguments, citing as binding law Marks v. Crunch San Diego, LLC, a September 2018 decision from the U.S. Court of Appeals for the 9th Circuit that broadly defined what constitutes an autodialer under the statute (covered by InfoBytes here), and therefore, determining there was nothing to inhibit the court from proceeding with the case. As for the FCC’s possible future guidance on the subject, the court concluded, “there seems little chance that any guidance from the FCC, at some unknown, speculative, future date, would affect this case.”
On January 14, acting Director of the FHFA, Joseph Otting, filed a supplemental brief with the U.S. Court of Appeals for the 5th Circuit stating the agency will no longer defend the constitutionality of the FHFA’s structure in the upcoming en banc rehearing. As previously covered by InfoBytes, in July 2018, the 5th Circuit concluded that the FHFA’s single-director structure violates Article II of the Constitution because the director is too insulated from removal by the president. In August, while the agency was still under the leadership of Mel Watt, it petitioned the court for an en banc rehearing, challenging the constitutionality holding. Now, according to the supplemental brief, the FHFA states it “will not defend the constitutionality of [the Housing Economic Recovery Act’s] for-cause removal provision and agrees with the analysis in [the relevant portion] of Treasury’s Supplemental Brief that the provision infringes on the President’s control of executive authority.” The en banc rehearing, which will address the constitutionality issue as well as the plaintiff’s other statutory claims in the case, is scheduled for January 23.
On January 10, the U.S. Court of Appeals for the 3rd Circuit held that a student (plaintiff) attending an online school (defendant) consented to an arbitration agreement and waiver of jury trial when she electronically signed an enrollment packet. According to the opinion, when the defendant moved to dismiss the plaintiff’s lawsuit and compel arbitration, the plaintiff argued that she did not realize the enrollment packet contained an arbitration agreement. She maintained that her e-signature was applied to the agreement without her permission. The lower court, however, granted the defendant’s motion to dismiss and entered an order to compel arbitration.
On appeal, the 3rd Circuit agreed with the lower court in a non-precedential decision that her contentions that she was never presented with the agreement and that the defendant had applied an e-signature on file were insufficient to create an issue of material fact. It observed, “[t]he most reasonable inference we can draw from the evidence presented is that [the plaintiff] simply did not read or review the [e]nrollment [p]acket PDF closely before she e-signed it, which will not save her from her obligation to arbitrate.” The 3rd Circuit further noted that Pennsylvania allows electronic signatures as a valid way to register assent, and that a “physical pen and ink signature” is not required.
- Daniel P. Stipano to discuss "Dynamic customer due diligence and beneficial ownership from KYC to ongoing CDD and the new rule implementation" at the Puerto Rican Symposium of Anti-Money Laundering
- Michelle L. Rogers to discuss "Preparing for servicing exams in the current regulatory environment" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jon David D. Langlois to discuss "Regulatory risks of convenience fees" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- APPROVED Webcast: NMLS Annual Conference & Ombudsman Meeting: Review and recap
- Brandy A. Hood to discuss "Keeping your head above water in flood insurance compliance" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Melissa Klimkiewicz to discuss "Servicing super session" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jessica L. Pollet to discuss "Law & compliance speedsmarts" at the American Financial Services Association Law & Compliance Symposium
- Daniel P. Stipano to discuss "Lessons learned from recent high profile enforcement actions" at the Florida International Bankers Association AML Compliance Conference
- Moorari K. Shah to provide "Regulatory update – California and beyond" at the National Equipment Finance Association Summit
- Sasha Leonhardt and John B. Williams to discuss "Privacy" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Aaron C. Mahler to discuss "Regulation B/fair lending" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Heidi M. Bauer to discuss "'So you want to form a joint venture' — Licensing strategies for successful JVs" at RESPRO26
- Jonice Gray Tucker to to discuss "DC policy: Everything but the kitchen sink" at CBA Live
- Jonice Gray Tucker to discuss "Small business & regulation: How fair lending has evolved & where are we heading?" at CBA Live
- Daniel P. Stipano to discuss "Lessons learned from ABLV and other major cases involving inadequate compliance oversight" at the ACAMS International AML & Financial Crime Conference
- Daniel P. Stipano to discuss "A year in the life of the CDD final rule: A first anniversary assessment" at the ACAMS International AML & Financial Crime Conference
- Moorari K. Shah to discuss "State regulatory and disclosures" at the Equipment Leasing and Finance Association Legal Forum
- Hank Asbill to discuss "Creative character evidence in criminal and civil trials" at the Litigation Counsel of America Spring Conference & Celebration of Fellows
- Hank Asbill to discuss "Pay no attention to the man behind the curtain: Addressing prosecutions driven by hidden actors" at the National Association of Criminal Defense Lawyers West Coast White Collar Conference
- Daniel P. Stipano to discuss "Keep off the grass: Mitigating the risks of banking marijuana-related businesses" at the ACAMS AML Risk Management Conference
- Daniel P. Stipano to discuss "Mid-year policy update" at the ACAMS AML Risk Management Conference
- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program