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11th Circuit: Borrowers’ state-law claims not preempted by Higher Education Act
On April 10, the U.S. Court of Appeals for the Eleventh Circuit vacated a district court’s dismissal of borrowers’ state law claims against a student loan servicer, holding that the claims were not preempted by the federal Higher Education Act (HEA). The decision results from a lawsuit filed by two federal student loan borrowers who alleged the servicer violated the Florida Consumer Collection Practices Act (FCCPA) and other state laws by making “affirmative misrepresentations to them and to other borrowers that they were on track to have their student loans forgiven based on their public-service employment when, in fact, their loans were ineligible for the forgiveness program.” The borrowers claimed that, after making years of payments, they discovered they were not eligible for the Public Service Loan Forgiveness (PSLF) Program because most of their loans were not federal direct loans. Both borrowers contended that had they not been misinformed, they would have taken the necessary steps to ensure eligibility. The district court dismissed the borrowers’ claims on the grounds that they were expressly preempted under section 1098g of the HEA, which prohibits the application of state-law disclosure requirements to federal student loans.
On appeal, the 11th Circuit determined that the borrowers’ claims were not expressly preempted by the HEA, concluding that the precise language in section 1098g “preempts only state law that imposes disclosure requirements; state law causes of action arising out of affirmative misrepresentations a servicer voluntarily made that did not concern the subject matter of required disclosures imposes no ‘disclosure requirements.’” Among other things, the appellate court noted that the borrowers did not allege that the servicer failed to provide information it was legally obligated to disclose, but rather that the information provided to the borrowers concerning their eligibility for the PSLF program was false. “Holding [the servicer] liable for offering false information would therefore neither impose nor equate to imposing on servicers a duty to disclose information,” the appellate court wrote. In addition to dismissing the servicer’s field preemption argument, the appellate court reasoned that its decision “does no harm to standardization of disclosures for federal student loan programs.” The court vacated the district court’s dismissal, and remanded the case for further proceedings.
CFTC charges commodity trading group with fraudulent digital token scheme
On April 16, the CFTC filed a complaint in the U.S. District Court for the Middle District of Florida against a commodity trading adviser and the companies he controlled (collectively, “defendants”) for allegedly soliciting customers and prospective customers to buy now-delisted and worthless digital tokens. The CFTC alleged that the defendants violated the Commodity Exchange Act by making untrue and materially misleading representations about their digital tokens’ function and the performance of a proprietary foreign exchange trading algorithm that the defendants claimed would deliver high rates of return. According to the CFTC, while the defendants knew that none of the customers could lawfully use the algorithm until the defendants’ risk disclosures were approved by the National Futures Association, they still sold the tokens and raised more than $1.6 million based on the premise that the algorithm was ready to be released on the open market. The CFTC claimed, however, that the disclosures were never approved, customers never gained access to the algorithm, and the tokens were eventually delisted by all the digital asset exchanges. The CFTC seeks to enjoin the defendants’ allegedly unlawful acts and practices and to compel compliance with the Commodity Exchange Act and regulations. In addition, the CFTC seeks restitution, civil money penalties, trading and registration bans, and other statutory, injunctive, or equitable relief as deemed necessary and appropriate.
FCRA class action dispute stayed for Supreme Court appeal
On April 15, the U.S. Court of Appeals for the Ninth Circuit granted a joint motion to stay a mandate pending a credit reporting agency’s (CRA) filing of a petition for writ of certiorari with the U.S. Supreme Court. If a petition is filed, the stay will continue until final disposition by the Court. As previously covered by InfoBytes, in February the 9th Circuit reduced punitive damages in a class action against the CRA for allegedly violating the FCRA by erroneously linking class members to criminals and terrorists with similar names in a database maintained by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC). The appellate court found that all class members had standing due to, among other things, the CRA’s alleged “reckless handling of information from OFAC,” which subjected class members to “a real risk of harm,” and rejected the CRA’s request for judgment as a matter of law or a new trial on the basis that the class had failed to provide sufficient evidence of injuries or to support the damages award. The appellate court concluded, however, that the $52 million punitive damages award was “unconstitutionally excessive,” explaining that, although the CRA’s “conduct was reprehensible, it was not so egregious as to justify a punitive award of more than six times an already substantial compensatory award.”
The CRA subsequently filed a petition for rehearing (which the appellate court denied), challenging, among other things, the 9th Circuit’s conclusion that the CRA’s decision to make the credit reports available to numerous potential creditors and employers was “sufficient to show a material risk of harm to the concrete interest of all class members.” The CRA argued that this was “exactly the sort of hypothetical risk of injury the Supreme Court has made clear does not cut it” to establish concrete injury, and that the decision was inconsistent with the 9th Circuit’s own precedent, in which the appellate court determined that “the risk of injury becomes material only when the document gets into third-party hands.” The CRA also argued that the 4 to 1 benchmark ratio between punitive damages and statutory damages was still too high, because it “conflicts not just with the Supreme Court’s commands, but with decisions from other circuits finding much lower compensatory-damages awards sufficiently ‘substantial’ to demand a 1:1 ceiling.”
Supreme Court schedules oral arguments to review TCPA debt collection exemption
On April 15, the U.S. Supreme Court announced it will hear oral arguments via telephone conference on May 6 in a case concerning an exemption to the TCPA that allows debt collectors to use an autodialer to contact individuals on their cell phones without obtaining prior consent to do so when collecting debts guaranteed by the federal government. As previously covered by InfoBytes, the U.S. Court of Appeals for the Fourth Circuit held that the government-debt exemption contravenes the First Amendment’s Free Speech Clause, and found that the challenged exemption was a content-based restriction on free speech that did not hold up to strict scrutiny review. The petitioners—Attorney General William Barr and the FCC—ask the Court to review whether the government-debt exception to the TCPA’s automated-call restriction is a violation of the First Amendment, and if so, whether the proper remedy is to sever the exception from the remainder of the statute.
9th Circuit: Trustees’ loan transaction is entitled to state and federal consumer disclosure protections
On April 14, the U.S. Court of Appeals for the Ninth Circuit reversed a district court’s dismissal of claims under TILA, RESPA, and California’s Rosenthal Fair Debt Collection Act, holding that a loan transaction made by a borrower in her capacity as a trustee (appellant-borrower) remained a consumer credit transaction entitled to state and federal consumer disclosure protections. According to the opinion, the appellant-borrower obtained a loan to finance repairs to a personal residence that was occupied by her niece—the trust’s sole beneficiary. The appellant-borrower alleged that the lender’s (defendant-appellee) loan disclosures were materially inconsistent with the loan’s terms and filed a complaint alleging that “the due date disclosures did not accurately reflect the terms of the loan.” The complaint sought rescission of the loan under TILA, damages against the defendant-appellee under the Rosenthal Fair Debt Collection Act due to the alleged use of unfair means to collect her debt, and inaccurate disclosure damages and reimbursements for payments she claimed she was not obligated to make. Under TILA and RESPA, rescission and damage remedies are only available to consumer credit transactions, and the defendant-appellee moved to dismiss on the ground that a residential loan to a trust can only qualify as a consumer credit transaction where a trustee-borrower lives at the residence. The appellant-borrower countered that the CFPB’s Official Staff Commentary (Commentary) to Regulation Z, which implements TILA, explains “that ‘[c]redit extended for consumer purposes to certain trusts is considered to be credit extended to a natural person rather than credit extended to an organization.’” The district court agreed with the defendant-appellee’s position that the loan was not a consumer credit transaction and dismissed the complaint.
On appeal, the 9th Circuit noted that the Commentary states that “a loan for ‘personal, family, or household purposes’ of the beneficiary of this type of trust is a consumer credit transaction,” and that furthermore, “trusts should be considered natural persons under TILA, so long as the transaction was obtained for a consumer purpose, because, ‘in substance (if not form) consumer credit is being extended.” The appellate court rejected the defendant-appellee’s argument and concluded that the loan should be considered a consumer credit transaction under all three statutes. Holding that the district court erred in dismissing the complaint by construing the statutes too narrowly, it reversed and remanded for further proceedings.
2nd Circuit: Interest disclosure in collection letter did not violate FDCPA
On April 9, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s dismissal of an FDCPA action, holding that a debt collection letter that stated interest, late charges, and other charges “may” vary from day to day is not deceptive or misleading. According to the opinion, the plaintiff co-signed a student loan that fell into default and was charged-off. The creditor purchased the debt and placed the account with a collection agency (collectively, defendants), and a letter was sent to the plaintiff that included a “‘time sensitive’ offer” to pay a slightly reduced amount, as well as the following language: “Because of interest, late charges, and other charges that may vary from day to day, the amount due on the day you pay may be greater.” The plaintiff filed a class action complaint against the defendants, claiming the letter violated the FDCPA because it suggested that late fees and other charges could accrue, even though “such charges are not legally or contractually available.” After the defendants filed a motion to dismiss, the plaintiff filed an amended complaint adding more allegations. However, the amended complaint was marked as “deficient,” and because the 21-day window had closed, the plaintiff was required to request leave from either the defendants or the district court to re-file. The defendants did not consent to re-filing, and the district court denied the plaintiff’s motion for leave and granted the defendants’ motion to dismiss.
On appeal, the 2nd Circuit first examined whether the plaintiff had timely filed her amended complaint. In concluding that the amended complaint was timely filed (notwithstanding the deficiency notice), the appellate court stated that “when a plaintiff properly amends her complaint after a defendant has filed a motion to dismiss that is still pending, the district court has the option of either denying the pending motion as moot or evaluating the motion in light of the facts alleged in the amended complaint.” However, the appellate court nevertheless concluded that the district court properly dismissed the plaintiff’s amended complaint on the merits because she failed to sufficiently state a plausible claim for relief. Furthermore, because the initial letter said that interest and late charges “may” be applied to the balance, the appellate court concluded that the letter was not inaccurate and therefore not deceptive or misleading under the FDCPA even though the debt collector had not previously charged interest and did not intend to do so in the future. Moreover, acknowledging that interest may accrue is not “threatening” language under the FDCPA, the appellate court wrote.
District court says CARES Act does not provide a private right of action under PPP loan provisions
On April 13, the U.S. District Court for the District of Maryland denied plaintiffs’ request for a temporary restraining order and preliminary injunction against a national bank, ruling that “the CARES Act does not expressly provide a private right of action” and that the bank’s Paycheck Protection Program (PPP) eligibility restrictions do not violate the Act. As previously covered by InfoBytes, the plaintiffs alleged that the bank prioritized existing lending clients in the PPP and limited access to depository-only customers that did not have a credit card or loan with another financial institution. The plaintiffs argued that the bank had no legal authority under the Act to deny, restrict, or impede access, even though there is no such prohibition in the Act.
The court first determined that the Act contains neither an express nor implied private right of action. Moreover, even if Congress did intend to provide a private right of action, the bank’s alleged conduct “does not run afoul” of the law. While the Act outlines requirements that banks must consider when offering loans to small businesses, it “does not constrain banks such that they are prohibited from considering other information when deciding from whom to accept applications, or in what order to process applications it accepts.” The court also rejected the plaintiffs’ argument that Congress waived the “credit elsewhere” requirement with respect to PPP loans. According to the court, “[t]ypically, when an entity applies for an SBA loan, it has to certify that it could not obtain a loan from a different source. . . . In this case, [the bank] has imposed no such requirement on businesses’ eligibility for the PPP.” The court also concluded that the plaintiffs failed to demonstrate irreparable harm, and that imposing a temporarily restraining order could disincentivize lenders from participating in the program and reduce small businesses’ access to PPP loans. “[G]iven the competing policy interests, the need to balance the desire to assist the widest swath of small businesses with the need to incentivize lender participation, and the overall fluidity of this epidemic, Congress is better positioned to remedy any defects in the CARES Act, and to pass the supplemental legislation it believes best aimed at ameliorating the effects of the COVID-19 crisis,” the court wrote.
On April 14, the plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the Fourth Circuit.
2nd Circuit joins 9th Circuit in broadening the definition of an autodialer under TCPA
On April 7, the U.S. Court of Appeals for the Second Circuit vacated a district court’s order granting summary judgment in favor of a defendant in a TCPA action. The decision results from a lawsuit filed by a plaintiff who claimed to have received more than 300 unsolicited text messages from the defendant through the use of an autodialer after the plaintiff texted a code to receive free admission to a party. The defendant countered that the programs used to send the text messages were not autodialers because they “required too much human intervention when dialing,” and therefore did not fall under the TCPA. The district court granted the defendant’s motion for summary judgment, agreeing that the defendant’s programs were not autodialers because a human being determined when the text messages are sent.
On appeal, the 2nd Circuit concluded that while human beings do play some role in the defendant’s systems, “[c]licking ‘send’ does not require enough human intervention to turn an automatic dialing system into an non-automatic one.” According to the appellate court, “[a]s the FCC additionally clarified in 2012, the statutory definition of an [autodialer] ‘covers any equipment that has the specified capacity to generate numbers and dial them without human intervention regardless of whether the numbers called are randomly or sequentially generated or come from calling lists.’” (Emphasis in the original.) “The FCC’s interpretation of the statute is consistent with our own, for only an interpretation that permits an [autodialer] to store numbers—no matter how produced—will also allow for the [autodialer] to dial from non-random, non-sequential ‘calling lists.’ . . . What matters is that the system can store those numbers and make calls using them.”
The 2nd Circuit’s opinion is consistent with the 9th Circuit’s holding in Marks v. Crunch San Diego, LLC (covered by InfoBytes here). However, these two opinions conflict with holdings by the 3rd, 7th, and 11th Circuits, which have held that autodialers require the use of randomly or sequentially generated phone numbers, consistent with the D.C. Circuit’s holding that struck down the FCC’s definition of an autodialer in ACA International v. FCC (covered by a Buckley Special Alert).
2nd Circuit: Collection letter failed to properly identify creditor in violation of FDCPA
On April 3, the U.S. Court of Appeals for the Second Circuit reversed and vacated the dismissal of an FDCPA action against a debt collector (defendant), holding that a collection letter failed to identify the correct creditor to whom a debt was owed. The consumer (plaintiff) alleged that the defendant sent him a collection letter concerning a private-label credit card account offered by a merchant. The defaulted debt originally was owned by one national bank and later acquired by a different national bank. The collection letter, however, identified the merchant (the servicer of the account) and the original credit grantor, but failed to disclose the current creditor. The plaintiff filed a class-action complaint alleging that the defendant violated Section 1692g of the FDCPA by not properly identifying the name of the creditor to whom the debt was owed, and violated Section 1692e by making a “false or misleading communication in connection with a debt.” The district court granted the defendant’s motion for judgment on the pleadings and dismissed the complaint, concluding that the merchant, as servicer, was the creditor to whom the debt is owed and that the failure to name the current creditor “would not have materially affected a consumer’s decision-making process.”
On appeal, the 2nd Circuit concluded that, because the cardmember agreements between the merchant, the current creditor, and the plaintiff clearly acknowledge that the national bank—and not the merchant—is the creditor, the defendant violated Section 1692g by not naming the correct creditor in the letter. With respect to the plaintiff’s Section 1692e claim, the appellate court determined that “it is far from clear that [the defendant’s] failure to identify [the current creditor] constituted a materially misleading statement under Section 1692e.” In fact, the appellate court stated that “it might be argued that if [the defendant] had identified [the current creditor] and not [the merchant], such an action ‘likely would have caused confusion.’” (Emphasis in the original.) However, the 2nd Circuit determined that the claim should not have been dismissed because the district court erroneously concluded that the merchant was the creditor to whom the debt was owned, and that the district court failed to address whether the defendant’s failure to identify the current creditor was a materially misleading statement under Section 1692e. The appellate court vacated the district court’s judgment and remanded the case for further proceedings.
2nd Circuit: New York usury law does not apply to interest rate applied after default
On March 30, the U.S. Court of Appeals for the Second Circuit affirmed multiple orders issued by a district court in favor of an assignee mortgage holder (plaintiff), concluding that a borrower (defendant) was liable for interest at a default rate of 24 percent per year. After the defendant fell behind on his mortgage payments, the debt ultimately was assigned to the plaintiff, who initiated a foreclosure action. The plaintiff alleged a default date of February 1, 2008, and contended that the defendant was liable for interest at the 24 percent per year default rate. The district court granted the plaintiff’s motion for summary judgment, holding that the motion was supported by record evidence and that defendant’s affirmative defenses were meritless. The defendant’s motion for reconsideration was denied. A court-appointed Referee issued a report calculating the amount due on the note and mortgage, which the defendant appealed on several grounds, arguing, among other things, that (i) the plaintiff is a “debt collection agency” under New York City Administrative Code, and is precluded from taking action without being licensed; (ii) the 24 percent default interest rate applied by the Referee violates New York’s civil usury stature (which caps interest rates at 16 percent); and (iii) “the Referee erred by applying the default interest rate from the date of default rather than from the date of acceleration.”
On appeal, the 2nd Circuit concluded that, regardless of whether the plaintiff allegedly failed to obtain a debt collection agency license, the plaintiff was not necessarily barred from foreclosing on the mortgage and collecting the debt at issue. The appellate court also determined that New York’s civil usury statute “‘do[es] not apply to defaulted obligations . . . where the terms of the mortgage and note impose a rate of interest in excess of the statutory maximum only after default or maturity.” The appellate court further held that the mortgage note and agreement clearly stated that a lender is “entitled to interest at the [d]efault [r]ate . . . from the time of said default. . . .”