InfoBytes Blog

CFPB and NYAG defend Bureau’s constitutionality in 2nd Circuit

On March 15, the CFPB and the New York Attorney General (NYAG) filed opening briefs in the U.S. Court of Appeals for the 2nd Circuit in their appeal of the Southern District of New York’s (i) June 2018 ruling that the CFPB’s organizational structure, as defined by Title X of the Dodd-Frank Act, is unconstitutional; and (ii) the September 2018 order dismissing the NYAG’s claims under the Consumer Financial Protection Act (CFPA). As previously covered by InfoBytes, the Bureau and the NYAG filed a lawsuit in February 2017, alleging that a New Jersey-based finance company and its affiliates (defendants) engaged in deceptive and abusive acts by misleading first responders to the World Trade Center attack and NFL retirees with high-cost loans by mischaracterizing loans as assignments of future payment rights, thereby causing the consumers to repay far more than they received. After the defendants moved to dismiss the actions, the district court allowed the NYAG’s claims to proceed under the CFPA, even though it had dismissed the Bureau’s claims, but then reversed course. Specifically, in September 2018, the court concluded that the remedy for Title X’s constitutional defect (referring to the Bureau’s single-director structure, with a for-cause removal provision) is to invalidate Title X in its entirety, which therefore invalidates the NYAG’s statutory basis for bringing claims under the CFPA. (Covered by InfoBytes here.)

In its opening brief to the 2nd Circuit, the Bureau argues that the district court erred when it held that the for-cause removal provision of the single-director structure is unconstitutional. According to the Bureau, the single director “does not undermine the President’s oversight. If anything, the Bureau’s single-director structure enhances the President’s ‘ability to execute the laws…’” because the President can still remove the director for cause, which allows the director to be held responsible for her conduct. In the alternative, the CFPB argued that should the court find the for-cause removal provision unconstitutional, the proper remedy is to sever the provision from Title X in accordance with the statute’s severability clause and not hold the entire CFPA invalid.

In a separate brief, the NYAG makes similar constitutional and severability arguments as the Bureau, but also argues that even if the entirety of Title X were to be held invalid, the state law claims should survive under the federal Anti-Assignment Act.

Courts CFPB State Attorney General Second Circuit Single-Director Structure CFPA Appellate

2nd Circuit affirms dismissal of FDCPA action

On March 12, the U.S. Court of Appeals for the 2nd Circuit affirmed dismissal of a consumer’s action against a debt collector, holding that the collection letter complied with the FDCPA. According to the opinion, the consumer filed a putative class action alleging the letter he received from the debt collection company violated Sections 1692e and 1692g of the FDCPA because it failed to inform him of details about his debt, such as what portion is principal and if there is interest. Additionally, the consumer alleged the letter conveyed the “mistaken impression ‘that the debt could be satisfied by remitting the listed amount as of the date of the letter, at any time after receipt of the letter.’” The lower court dismissed the action, noting that the letter stated the debt owed as of its date and stated that the amount may increase because of interest and fees, as required by the FDCPA.

On appeal, the 2nd Circuit agreed with the lower court. The appellate court rejected the consumer’s arguments that the letter failed under Section 1692g because it didn’t specify what portion of the debt is principal and if interest applied when it stated, “[a]s of the date of this letter, you owe $5918.69.” The appellate court found that the letter adequately informed the consumer of the total quantity of his debt and emphasized that nothing in Section 1692g requires the debt collector to explain the components of the debt or “precise rates by which it might later increase.” Moreover, the appellate court concluded that nothing about the debt collection letter “could be fairly characterized as ‘false, deceptive, or misleading’” under Section 1692e, as the letter explicitly stated the consumer’s balance may increase based on the day he remitted payment.

Courts Second Circuit Appellate FDCPA Debt Collection

FTC and NY claim of deceptive supplement advertising gets new life

On February 21, the U.S. Court of Appeals for the 2nd Circuit issued a summary order reversing the lower court’s dismissal of an FTC and New York State action, which alleges a biotechnology group’s (defendants) marketing campaign for a dietary supplement was deceptive under the FTC Act. According to the opinion, defendants claimed in advertising and marketing materials that a suite of dietary supplements (i) improve memory and provide other cognitive benefits; (ii) the effects are clinically proven; and (iii) have an active ingredient that “supplements” brain proteins. The FTC and New York State brought an action alleging deceptive marketing in violation of the FTC Act because the defendants study of the supplements showed “no statistically significant improvement in the memory and cognition of the participants,” and the few positive findings did not “provide reliable evidence of a treatment effect.” The lower court dismissed the action, finding the challenge to the study “never proceed[ed] beyond the theoretical” as the complaint only showed there were “possibilities that the study’s results do not support its conclusion.”

On appeal, the 2nd Circuit found the complaint adequately alleges that the results of the study contradict representations made in the marketing materials, such as, the supplement “improved memory for most subjects within 90 days,” and concluded the lower court erred in dismissing the action.

Courts Second Circuit Appellate FTC Act FTC

2nd Circuit: Owner personally liable for debt collection companies’ violations

On January 11, the U.S. Court of Appeals for the 2nd Circuit affirmed a district court’s decision that two individual co-owners were jointly and severally liable for nearly $11 million for debt collection activities conducted by their companies (corporate defendants) that violated the Federal Trade Commission Act (FTCA) and the FDCPA. According to the opinion, the corporate defendants misrepresented that they were investigators calling from a “fraud unit” or a “fraud division,” falsely accused debtors of committing check fraud, threatened consumers with criminal prosecution if the debts were not paid, and contacted friends, family, employers, or co-workers, “telling them that the debtors owed a debt, had committed a crime in failing to pay it, and faced possible legal repercussions.” The district court held that the co-owners were personally liable for the $10,852,368 calculated by the FTC, which represented the total amount received by the corporate defendants from consumers as a result of their actions. One of the co-owners appealed the decision that he was personally liable and argued that the district court erred in determining the amount of equitable monetary relief.

On appeal, the 2nd Circuit agreed with the district court that the co-owner “had both sufficient authority over the [c]orporate [d]efendants, and knowledge of their practices, to be held individually liable for their misconduct as a matter of law.” The court also upheld the disgorgement amount, reasoning that the FTC’s process to determine the amount was entitled to a presumption of reliance because it was based on the submission of more than 500 consumer complaints concerning the corporate defendants’ debt collection practices, aggressive collection scripts, and audio recordings of twenty-one of the twenty-five debt collectors “falsely telling consumers that the employees were law enforcement personnel or ‘processors.’” Moreover, the court noted that the co-owner failed to submit proof that the corporate defendants earned some or all of their revenue through lawful means.

Courts Second Circuit Appellate FTCA FDCPA Debt Collection

2nd Circuit: Bank’s suit to recover RMBS losses is untimely

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.

Courts RMBS Second Circuit Appellate Indemnification

Court opens door for CFPB to appeal constitutionality determination to 2nd Circuit

On August 23, the U.S. District Court for the Southern District of New York granted the CFPB’s request for entry of final judgment with respect to the court’s June decision to terminate the CFPB as a party to an action. The court has previously concluded that the CFPB could not proceed with its claims under the Consumer Financial Protection Act (CFPA). The entry of final judgment will allow the CFPB to appeal the court’s constitutionality determination to the U.S. Court of Appeals for the 2nd Circuit. As previously covered by InfoBytes, the CFPB brought the action with the New York Attorney’s General office (NYAG) against a New Jersey-based finance company and its affiliates (defendants). Although the court dismissed the CFPB’s claims, it determined that the NYAG had plausibly alleged claims under New York law and the CFPA and had the independent authority to pursue those claims.

The court also granted the defendants’ request to stay the NYAG case during the pendency of the CFPB’s appeal to the 2nd Circuit.

Courts CFPB CFPA State Attorney General Second Circuit Single-Director Structure

2nd Circuit holds NCUA lacks standing to bring derivative suit against two national banks regarding RMBS claims

On August 2, the U.S. Court of Appeals for the 2nd Circuit held that the National Credit Union Administration (NCUA) lacked standing to bring a suit against two national banks on behalf of trusts created by the agency that held residential mortgage-backed securities (RMBS). According to the opinion, in 2009 and 2010, NCUA took control of five failing credit unions, including ownership of certificates the credit unions held in RMBS trusts. NCUA then transferred the certificates into new trusts and a financial institution was appointed, pursuant to an Indenture Agreement, as Indenture Trustee. NCUA subsequently brought derivative claims on behalf of the trusts against two national banks, trustees of the original RMBS trusts. In affirming the lower court’s dismissal of the claims, the appellate panel found that the NCUA did not have derivative standing to sue on behalf of the trusts because the trusts had granted the right, title, and interest to their assets, including the RMBS trusts, to the Indenture Trustee. The 2nd Circuit reasoned that therefore only the Indenture Trustee possesses the claims, and the NCUA did not have the right to sue on behalf of the Indenture Trustee under the Indenture Agreement.

Courts Second Circuit Appellate RMBS Standing Securities

2nd Circuit reverses district court, holds fair debt collection claim can proceed when dispute notice is included

On July 27, the U.S. Court of Appeals for the 2nd Circuit held that a lower court erred when it concluded that a consumer was prevented from alleging violations of the Fair Debt Collection Practices Act where a debt collector sought payment on a previously settled debt because the debt collector had included a notice of the right to dispute the debt, which the consumer did not exercise. According to the 2nd Circuit panel, the consumer plausibly argued that consumers could be misled by collection notices that misstate debts whether or not there is an option to dispute the debt, especially because the debt collector told her it might report her account information to credit bureaus. “A least sophisticated consumer who was so advised might understand her right to dispute the misstated debt but, nevertheless, pay the debt out of fear that there was already an adverse effect on her credit that would continue as long as the obligation remained outstanding,” the panel opined. Moreover, a debt dispute notice does not preclude claims for misrepresenting the debt. The appellate court vacated the lower court’s judgment and remanded for further proceedings.

Courts Debt Collection FDCPA Appellate Second Circuit

2nd Circuit affirms no securities fraud in mortgage bundle sale

On July 24, the U.S. Court of Appeals for the 2nd Circuit affirmed a district court’s decision, holding that a group of securities investment firms (defendants-appellees) did not unlawfully hide concerns about a mortgage bundle it sold to a Luxemburg-based financial institution (plaintiff-appellant) when it marked down the value of certain junior securities within the bundle. The three judge panel affirmed the lower court’s decision to dismiss securities fraud and breach of contract claims, which alleged that the defendants-appellees’ undisclosed markdown concealed its view that the mortgage bundle would underperform. The defendants-appellees contended that the markdown was related to commonly-used accounting strategies designed to manage risk tied to the preference shares, to which the lower court agreed—ruling that the plaintiff-appellant had failed to show evidence proving its claims of fraud. The appellate court agreed, holding that the plaintiff-appellant “has thus failed to raise a material issue of fact as to [the defendants-appellees’] knowledge that there was anything wrong with the underlying assets, which is essential to establishing its theory of fraud.” The appellate court further upheld the breach of contract dismissal because the offering circular and marketing materials for the mortgage bundle did not specify the value of the preference shares.

Courts Appellate Second Circuit Securities Mortgages

Supreme Court upholds credit card company’s anti-steering provisions

On June 25, the U.S. Supreme Court in a 5-4 vote held that a credit card company did not unreasonably restrain trade in violation of the Sherman Act by preventing merchants from steering customers to other credit cards. As previously covered by InfoBytes, in September 2016, the U.S. Court of Appeals for the 2nd Circuit considered the non-steering protections included in the credit card company’s agreements with merchants and concluded that such provisions protect the card company’s rewards program and prestige and preserve the company’s market share based on cardholder satisfaction. Accordingly, the 2nd Circuit concluded that “there is no reason to intervene and disturb the present functioning of the payment‐card industry.” In June 2017, a coalition of states, led by Ohio, petitioned the Supreme Court to review the 2nd Circuit decision, arguing the credit card industry’s services to merchants and cardholders are not interchangeable and therefore, the credit card market should be viewed as a two-sided market, not a single market. The Supreme Court disagreed with the petitioners’ arguments, finding that the credit card industry is best viewed as one market. The court reasoned that while there are two sides to the credit card transaction, credit card platforms “cannot make a sale unless both sides of the platform simultaneously agree to use their services,” resulting in “more pronounced indirect network effects and interconnected pricing and demand.” Accordingly, the two-sided transaction should be viewed as a whole for purposes of assessing competition. The court further concluded that the higher merchant fees the credit card company charges result in a “robust rewards program” for cardholders, causing the company’s anti-steering provisions to not be inherently anticompetitive, but in fact to have “spurred robust interbrand competition and has increased the quality and quantity of credit-card transactions.”

Courts U.S. Supreme Court Credit Cards Antitrust Appellate Second Circuit