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District Court rejects sampling-related expert discovery in RMBS action
On November 18, the U.S. District Court for the Southern District of New York denied an investment company’s request to use “sampling-related expert discovery” in its action against a trustee of five residential mortgage-backed securities (RMBS), concluding that the proposal was not proportional to the needs of the case. As previously covered by InfoBytes, the investment company filed suit against the trustee alleging the trustee “failed to fulfil certain contractual duties triggered by the discovery of breaches of ‘representations and warranties’” when the underlying mortgages allegedly were found not to be of the promised quality. The investment company also alleged that the trustee failed to exercise its rights to require the companies that sold the mortgages in question “to cure, substitute, or repurchase the breaching loans.” After being denied class certification by the court in February, the investment company preemptively moved for an order from the court allowing it to use sampling-related expert discovery—a process which “engage[s] experts to select samples of mortgage loans from each of the five trusts and to perform analyses on those samples of loans to extrapolate information about the quality of all of the loans in the trusts.”
The court denied the request, calling the proposed sampling a “blind corner.” The court noted that the “breach rate evidence” that would be discovered by the sampling “only provides substantial probative value for [the investment company’s] claims if [the investment company] can demonstrate that [the trustee] was under an obligation to conduct an investigation of the loans in each of the trusts,” which the investment company has failed to do. Because “the probative value of that discovery hinges upon a factual theory that [the investment company] has yet to demonstrate is viable,” the court could not justify allowing the parties to expend hundreds of thousands of dollars on the proposed sampling.
11th Circuit vacates class certification in TCPA action against satellite TV provider
On November 15, the U.S. Court of Appeals for the Eleventh Circuit vacated the district court’s certification order of a class action alleging a national satellite TV company violated the TCPA by contacting individuals who had previously asked to not be contacted. According to the opinion, a consumer filed a class action against the company alleging that the company failed to maintain an “internal do-not-call list,” which allowed the company and its telemarketing service provider to contact him eighteen times after he repeatedly asked to not be contacted. The consumer sought certification “of all persons who received more than one telemarketing call from [the telemarketing service provider] on behalf of [the company] while it failed to maintain an internal do-not-call list.” The district court certified the class and the company appealed.
On appeal, the 11th Circuit disagreed with the district court, concluding the court incorrectly determined that issues common to the class predominated over issues individual to each member. Specifically, the appellate court noted that the class consisted of unnamed class members who may not have asked the company to stop calling and therefore, would never have been on an internal do-not-call list, had one been properly maintained. Thus, these members were not injured by the company’s failure to comply and their injuries are then “not fairly traceable to [the company’s] alleged wrongful conduct,” resulting in a lack of Article III standing to sue. The appellate court emphasized that recertification is still possible, but the district court would need to determine which of the class members made the request to not be contacted. However, if “few made [the] request[], or if it will be extraordinarily difficult to identify those who did, then the class would be overbroad” and individualized issues may “overwhelm issues common to the class.”
District Court enters stipulated final judgment against debt collector
On November 15, the U.S. District Court for the Northern District of Georgia entered a stipulated final judgment and order to resolve allegations concerning one of the defendants cited in a 2015 action taken against an allegedly illegal debt collection operation. As previously covered by InfoBytes, the CFPB claimed that several individuals and the companies they formed attempted to collect debt that consumers did not owe or that the collectors were not authorized to collect. The complaint further alleged uses of harassing and deceptive techniques in violation of the CFPA and FDCPA, and named certain payment processors used by the collectors to process payments from consumers. While the claims against the payment processors were dismissed in 2017 (covered by InfoBytes here), the allegations against the outstanding defendants remained open. The November 15 stipulated final judgment and order is issued against one of the defendants who—as an officer and sole owner of the debt collection company that allegedly engaged in the prohibited conduct—was found liable in March for violations of the FDCPA, as well as deceptive and unfair practices and substantial assistance under CFPA.
Among other things, the defendant, who neither admitted nor denied the allegations except as stated in the order, is (i) banned from engaging in debt collection activities; (ii) permanently restrained and enjoined from making misrepresentations or engaging in unfair practices concerning consumer financial products or services; and (iii) prohibited from engaging in business ventures with the other defendants; using, disclosing or benefitting from certain consumer information; or allowing third parties to use merchant processing accounts owned or controlled by the defendant to collect consumer payments. The stipulated order requires the defendant to pay a $1 civil money penalty and more than $5.2 million in redress, although full payment of the judgment is suspended upon satisfaction of specified obligations and the defendant’s limited ability to pay.
11th Circuit reinstates FCRA suit, addresses “false pretenses”
On November 12, the U.S. Court of Appeals for the Eleventh Circuit issued an order reversing in part and affirming in part a district court’s dismissal of claims brought by a consumer who claimed a bank violated the Fair Credit Reporting Act (FCRA) and the FDCPA when it allegedly provided debt information using a “false name” to a credit reporting agency and requested the consumer’s credit report without a proper purpose. In 2016, the consumer filed a lawsuit asserting the bank (i) violated the FDCPA by using a name other than its true name in connection with the collection of debt; and (ii) violated the FCRA when it failed to investigate the accuracy of the information provide to the credit reporting agency, and requested his credit report without a permissible purpose. The district court dismissed the complaint for failure to state a claim.
On appeal, the 11th Circuit affirmed the dismissal of the FDCPA claim, concluding that, while the false-name exception stipulates that the FDCPA applies to a creditor that uses any name other than its own when collecting its own debts (which may indicate a third party was collecting or attempting to collect the debt), the exception does not apply in this instance because “even the least sophisticated consumer” would understand that the bank and the entity named in the consumer report were related. However, the appellate court held that the district court erred in dismissing the FCRA claims. According to the opinion, the consumer stated three plausible claims for relief, including that the bank failed to investigate the accuracy of the information it sent, as required when a dispute arises, and that it unlawfully obtained his credit report. The 11th Circuit noted that while it has never addressed the meaning of “false pretenses” under the FCRA, it now joins other courts in holding that “intentionally obtaining a credit report under the guise of a permissible purpose while intending to use the report for an impermissible purpose can constitute false pretenses.” Moreover, the appellate court noted that while the bank may have obtained the consumer’s credit report for proper purposes, or that it may have disclosed the true purpose to the credit reporting agency, “this fact question cannot be resolved on a motion to dismiss.”
7th Circuit: Collection letter tax filing language may violate the FDCPA
On November 8, the U.S. Court of Appeals for the Seventh Circuit reversed a district court’s dismissal of an action against a debt collector, concluding that tax consequence language in a debt collection letter may violate the FDCPA. According to the opinion, the debt collector sent a consumer four collection letters with at least one letter stating in part that “[s]ettling a debt for less than the balance owed may have tax consequences and [the creditor] may file a 1099C form.” The consumer filed an action against the debt collector alleging that the language violated the FDCPA because the creditor is not obligated to file a 1099C with the IRS unless it has forgiven at least $600 in principal. The consumer also claimed that the creditor at issue would never file a 1099C unless it was legally obligated to do so, and as applied to the consumer’s debt at issue, none of the settlement options offered in the dunning letter would have reached the $600 threshold. The district court granted the debt collector’s motion to dismiss the action and the consumer appealed.
On appeal, the 7th Circuit focused on the letter’s reference to the possible 1099C filing. The court noted that “it is impermissible for a creditor to make a ‘may’ statement about something that is illegal or impossible,” and while it is not technically illegal or impossible for the creditor to file a 1099C form for amounts less than $600, the debt collector did not dispute that the creditor “would never file a 1099C form with the IRS unless required to do so by law.” The court observed that the “language of a collection letter can be literally true and still be misleading in a way that violates the Act.” Thus, the consumer plausibly alleged that “it is, in fact, misleading to state that [the creditor] may file a Form 1099C, when it never would.” And because questions as to whether specific statements are deceptive or misleading are “almost always questions of fact,” the appellate court reversed the dismissal and remanded the case back to district court for further proceedings.
CFPB argues private class action settlement interferes with its CFPA enforcement authority
On November 6, the CFPB filed an amicus brief with the Court of Appeals of Maryland in a case challenging a private class action settlement against a structured settlement company, which purports to “release the Bureau’s claims in a pending federal action, to enjoin class members from receiving benefits from the Bureau’s lawsuit, and to assign any benefits the Bureau might obtain for class members to the class-action defendants.” As previously covered by InfoBytes, in 2017, the U.S. District Court for the District of Maryland allowed a UDAAP claim brought by the CFPB to move forward against the same structured settlement company, where the Bureau alleged the company employed abusive practices when purchasing structured settlements from consumers in exchange for lump-sum payments. A similar action was also brought by the Maryland attorney general against the company. In addition to the state and federal enforcement actions, the plaintiffs filed a private class action against the company, and a trial court approved a settlement. The Court of Special Appeals reversed the lower court’s approval of the settlement, concluding that it “interferes with the [state’s] and Bureau’s enforcement authority.” The company appealed.
In its brief to the Maryland Court of Appeals, the Bureau argues that the Court of Special Appeals decision should be affirmed because the settlement provisions “threaten to interfere with the Bureau’s authority under the [Consumer Financial Protection Act] in two significant ways.” Specifically, the Bureau argues that the settlement (i) could interfere with the Bureau’s statutory mandate to remediate consumers harmed through the Civil Penalty Fund; and (ii) would interfere with the Bureau’s authority to use restitution to remediate consumer harm. The Bureau states that “the risk of windfalls to such wrongdoers could force the Bureau to decline to award Fund payments to victims,” and would “threaten to offend basic principles of equity.”
2nd Circuit denies three petitioners seeking whistleblower awards for SEC settlement
On November 8, the U.S. Court of Appeals for the Second Circuit denied petitions from three whistleblowers seeking awards following a $55 million settlement between the SEC and a global financial institution, which the SEC previously denied. According to the opinion, multiple individuals disclosed information to the SEC during an investigation into the financial institution’s financial statements. In 2015, the SEC reached a settlement with the institution, and nine whistleblower claimants filed applications to receive awards based on the information they provided. The SEC granted the applications for two claimants and denied the rest. The three individuals involved in this action were denied the awards because the SEC concluded that the individuals “did not provide ‘original information that led to a successful enforcement action,’” as required by the Securities and Exchange Act’s whistleblower provisions. Specifically, for the two named individuals, the SEC determined that it had already received the information they provided through an individual known as “Claimant 2,” who had previously submitted an expert report prepared by the two individuals to the SEC. The appellate court agreed with the determination made by the SEC, concluding that “their [] submission did not significantly contribute to the success of the [] action; Claimant 2ʹs submissions did.” The appellate court noted that the individual’s expert report did not qualify for Rule 21F‐4’s “original source exception,” which was designed to treat information submitted to another federal agency as though it had been submitted to the SEC directly.
As for the third, unnamed individual, the appellate court also denied the petition, concluding that the unnamed individual’s interpretation of the whistleblower program would “disincentivise whistleblowers from curating their submissions.” Specifically, the SEC asserted that the unnamed individual “‘appeared to be very disjointed and had difficulty articulating credible and coherent information concerning any potential violation of the federal securities laws’” and “‘brought with him to the meeting a wet brown paper bag containing what he claimed to be evidence.’” The SEC further noted that the documents were “jumbled and disorganized” and ultimately used similar information brought by a subsequent whistleblower. The appellate court noted that “[a] whistleblower might still be rewarded for being the first to bring incriminating information to the SECʹs attention, but only if that information is contained in a credible, and ultimately useful submission.”
Government says CFPB should have authority to continue enforcement actions even if declared unconstitutional
On November 6, the CFPB and the DOJ filed a brief with the U.S. Supreme Court arguing that the Bureau should still “have the authority to commence or continue enforcement proceedings” in the event that the Court declares the Bureau’s structure unconstitutional. The brief was filed in response to a petition for writ of certiorari by two Mississippi-based payday loan and check cashing companies (collectively, “petitioners”) urging the Court to grant certiorari before the U.S. Court of Appeals for the Fifth Circuit renders a decision on a challenge to the Bureau’s single-director structure. The petitioners are not only challenging the Bureau’s structure but also arguing that the asserted constitutional violation requires the dismissal of the underlying lawsuit brought by the Bureau.
The government argues that dismissal of the underlying enforcement action is not the way to remedy a constitutional structure violation, at least in a situation where “an official fully accountable to the President determines that it should go forward.” The brief notes that, in this case, then-Acting Director Mulvaney, to whom the Bureau has argued the limitation to for-cause removal did not apply, had ratified the enforcement action against petitioners at issue. While the Bureau and the DOJ acknowledge that lower courts “have not yet addressed the particular issue here,” they make the case that “the few reasoned decisions that address related issues are in accord: A separation-of-powers problem with an agency does not compel invalidation of the agency’s actions if those actions are subsequently approved in compliance with separation-of-powers requirements.”
In its brief, the Bureau and the DOJ also argue that questions presented to the Court do not warrant review of the case before the 5th Circuit has an opportunity to rule. The government emphasizes that the Court has already agreed to hear a different case, Seila Law LLC v. CFPB, to answer the question of whether an independent agency led by a single director violates the Constitution’s separation of powers under Article II (covered by InfoBytes here). In doing so the Court also directed the parties to that action to brief and argue whether 12 U.S.C. §5491(c)(3), which established removal of the Bureau’s single director only for cause, is severable from the rest of the Dodd-Frank Act, should it be found to be unconstitutional.
9th Circuit allows FCRA action to move forward against national bank
On October 31, the U.S. Court of Appeals for the Ninth Circuit, in a split panel decision, reversed the district court’s dismissal of a consumer’s FCRA action against a national bank alleging the bank obtained her credit report for an impermissible purpose. According to the opinion, the consumer filed the complaint against the bank after reviewing her credit report and noticing the bank had submitted “numerous credit report inquiries” in violation of the FCRA because she “did not have a credit relationship with [the bank]” as specified in the FCRA and, therefore, the inquiries were not for a permissible purpose. The bank moved to dismiss the action, arguing that the consumer did not suffer any injury from the credit inquiries. The district court agreed, and dismissed her claim with prejudice for lack of standing and failure to state a claim.
On appeal, the majority disagreed with the district court, concluding that (i) a consumer suffers a concrete injury in fact when a credit report is obtained for an impermissible purpose; and (ii) a consumer only needs to allege that her credit report was obtained for an impermissible purpose to survive a motion to dismiss. The appellate majority emphasized that the consumer does not have the burden of pleading the actual purpose behind the bank’s use of her credit report; the burden is on the defendant to prove the credit report was obtained for an authorized purpose. Moreover, the majority noted that the consumer alleges she only learned about the bank’s inquiry after reviewing her credit report and, therefore, it is implied “that she never received a firm offer of credit from [the bank],” and taken together with the fact that the bank actually obtained her credit report, she stated a plausible claim for relief.
One panel judge concurred in part and dissented in part, arguing that the consumer had standing but failed to state a plausible claim. Specifically, the judge argued that “the majority characterize[d] [the] plaintiff’s claim in terms of ‘possibility,’” but “mere possibility of liability does not plead a plausible claim.” Moreover, the judge disagreed with the majority’s conclusion that the defendant bears the burden of proof in these instances, stating “the Supreme Court has expressly placed the burden of pleading a plausible claim squarely on the plaintiff rather than on the defendant.”
District Court orders millions in restitution and civil penalties against two foreclosure relief companies
On November 4, the U.S. District Court for the Western District of Wisconsin ordered restitution and disgorgement, civil penalties, and permanent injunctive relief in an action brought by the CFPB against two former foreclosure relief companies and their principals (collectively, “defendants”) for violations of Regulation O. As previously covered by InfoBytes, in 2014, the CFPB, FTC, and 15 state authorities took action against foreclosure relief companies and associated individuals, including the defendants, alleging the use of deceptive marketing tactics to obtain business from distressed borrowers. The CFPB filed three suits, the FTC filed six, and the state authorities collectively initiated 32 actions. Specifically, the CFPB alleged that the companies and individuals (i) collected fees before obtaining a loan modification; (ii) inflated success rates and likelihood of obtaining a modification; (iii) led borrowers to believe they would receive legal representation; and (iv) made false promises about loan modifications to consumers, in violation of Regulation O, formerly known as the Mortgage Assistance Relief Services (MARS) Rule. Among other things, the court order holds company one and its principals jointly and severally liable for over $18 million in restitution, while company two and its same principals are jointly and severally liable for nearly $3 million in restitution. Additionally, the court ordered civil penalties totaling over $37 million against company two and four principals.