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District Court: Law firm's professional debt-collection services exempt from MCPA
On September 17, the U.S. District Court for the District of Maryland partially granted a law firm’s motion for summary judgment in a consolidated debt-collection action concerning alleged violations of the Maryland Consumer Debt Collection Act (MCDCA) and the Maryland Consumer Protection Act (MCPA). The law firm, which collects debts from consumers relating to residential leases, filed breach of contract actions against four plaintiffs seeking damages resulting from residential lease breaches. According to two of the plaintiffs, the law firm violated the FDCPA, the MCDCA, and the MCPA when it charged a 10-percent post-judgment interest rate, 4 percent higher than the applicable statutory rate legally allowed. The other two plaintiffs alleged violations of the FDCPA and the MCDCA. In 2018, following the court’s decision to certify the question of law to the Maryland Court of Appeals, the appeals court found that “a post-judgment interest rate of six [percent] applies” in circumstances where a trial court enters judgment in a landlord’s favor, including damages for unpaid rent and other expenses.
The court first addressed the plaintiffs’ FDCPA claims, ruling that the claims are time-barred as the statute of limitations expired prior to the filing of each plaintiff’s complaint. With regard to the plaintiffs’ MCDCA claim, the court concluded that the law firm’s use of a 10-percent post-judgment interest rate is “the type of unauthorized charge proscribed by the MCDCA,” dismissing the law firm’s argument that the interest rate was a “mistake regarding the amount owed on the underlying debt. . .and that a challenge to the amount of interest owed is a challenge to the validity of the underlying debt.” Additionally, the court denied the law firm’s motion for summary judgment on the MCDCA claim because lack of knowledge “‘does not immunize debt collectors from liability for mistakes of law.’”
However, the court granted the law firm’s motion for summary judgment on the MCPA claim because law firms engaged in professional debt-collection services are exempt from liability under the MCPA, and that exemption does not require a relationship between the parties.
CFPB informs two courts its director structure is unconstitutional
On September 18, the CFPB issued letters in pending litigation to inform the courts that it was changing its position regarding the constitutionality of the for-cause removal provision of the Consumer Financial Protection Act (CFPA). As previously covered by InfoBytes, the DOJ and the CFPB filed a brief with the U.S. Supreme Court arguing that the for-cause restriction on the president’s authority to remove the Bureau’s single Director violates the Constitution’s separation of powers. The brief was filed in response to a petition for a writ of certiorari by a law firm contesting the May decision by the U.S. Court of Appeals for the Ninth Circuit, which held that, among other things, the Bureau’s single-director structure is constitutional. The brief noted that, since the appellate opinion was issued, “the Director has reconsidered that position and now agrees that the removal restriction is unconstitutional.” The Bureau has now issued letters (available here and here) to the 9th Circuit in two cases noting that the Bureau will no longer defend the constitutionality of the for-cause removal restriction. The Bureau also submitted a similar letter with the U.S. District Court for the District of Utah. In each letter, the Bureau argues that, while it now believes the for-cause removal provision is unconstitutional, this does not change its position with regard to the judgments made in any of the cases, noting that the provision should be severed from the rest of the CFPA.
District Court dismisses suit claiming banks evading Iran sanctions
On September 16, the U.S. District Court for the Eastern District of New York dismissed an action alleging 10 financial institutions (defendants) conspired to evade U.S. sanctions on financial and business dealings with Iran, resulting in the direct and indirect material support for terrorism. According to the opinion, the plaintiffs—a group of veterans who served in Iraq from 2004 to 2011 and were injured or killed by terrorist attacks during that time—alleged that the defendants conspired with the Government of Iran, and multiple state-affiliated and private Iranian entities that work with the Islamic Revolutionary Guard Corps’s (IRGC) and Hezbollah’s terrorist activities, to evade U.S. sanctions and conduct illicit trade-finance transactions, which helped to facilitate Iran’s provision of material support to terrorist activities. The defendants moved to dismiss the action and, in July 2018, a magistrate judge issued a Report and Recommendation (R&R) recommending that the motions be denied in their entirety.
On review, the district court declined to adopt the R&R and granted the defendants’ motion to dismiss. The court noted that the plaintiffs’ allegations indicate that Iran conspired to provide material support to the terrorist organizations, but failed to establish that the defendants “agreed to provide illegal financial services to Iranian financial and commercial entities . . . with the intent that those services would ultimately benefit a terrorist organization.” Moreover, the court reasoned that “it is up to Congress, and not the judiciary, to authorize terrorism victims to recover damages for their injuries from financial institutions that conspire with state sponsors of terrorism like Iran to evade U.S. sanctions under circumstances such as those presented in this case.”
New York Supreme Court Appellate Division says repurchase obligations not limited to defaulted loans
On September 17, the New York Supreme Court, Appellate Division, affirmed a trial court’s decision to grant partial summary judgment in favor of four residential mortgage-backed securities (RMBS) trusts (plaintiffs) on breach of contract allegations related to pooling and servicing agreement (PSA) repurchase obligations. The appellate court also concluded that the trial court correctly denied a motion for summary judgment filed by the seller of the mortgage loans (defendant). At issue were PSAs—entered between the plaintiffs and the defendant—containing a “repurchase protocol,” which dictate that the defendant is required to “cure, substitute, or repurchase” any defective loans “within 120 days of the earlier of the discovery by the defendant . . . or [the defendant’s] receipt of written notice from any party of a breach of any representation or warranty in the PSAs which ‘materially and adversely affects’ the interest of certificateholders in any mortgage loan.” The trial court denied the defendant’s motion for summary judgment, which, among other things, sought dismissal of claims related to the defective loans that the defendant argued were not specifically identified in timely breach notices. According to the appellate court, the trial court had correctly held that the trustee had delivered “timely presuit letters” concerning the defective loans that were placed in the trusts and had provided sufficient “notice that the breaches plaintiffs were investigating might uncover additional defective loans for which claims would be made.” The appellate court also agreed with the trial court’s decision to grant the plaintiffs’ motion for partial summary judgment to the extent that it sought a ruling that a breach that “materially and adversely” affects the certificateholders’ interest—as outlined in the repurchase protocol—is not limited to loans in default, but also “applies to any breach that ‘materially increased a loan’s risk of loss.’” Further, the appellate court also concurred with the trial court’s decision to grant the plaintiffs’ motion for partial summary judgment and deny the defendant’s motion concerning the use of statistical sampling to prove breach of contract claims for both liability and damages. However, both courts agreed that the defendant will have an opportunity to raise those arguments if it chooses to challenge the sample size or the loans chosen as part of the sample.
Kraninger tells Supreme Court CFPB structure is unconstitutional
On September 17, the DOJ and the CFPB filed a brief with the U.S. Supreme Court arguing that the for-cause restriction on the president’s authority to remove the Bureau’s single Director violates the Constitution’s separation of powers. The brief was filed in response to a petition for a writ of certiorari by a law firm, contesting the May decision by the U.S. Court of Appeals for the Ninth Circuit, which held that (i) the Bureau’s single-director structure is constitutional, and that (ii) the district court did not err when it granted the Bureau’s petition to enforce a law firm’s compliance with a 2017 civil investigative demand (CID) (previously covered by InfoBytes here). The brief cites to a DOJ filing in opposition to a 2018 cert petition, which also concluded that the Bureau’s structure is unconstitutional by infringing on the president’s responsibility to ensure that federal laws are faithfully executed, but urged the Court to deny that writ as the case was a “poor vehicle” for the constitutionality consideration (previously covered by InfoBytes here).
In contrast to the December brief, the DOJ now asserts that the present case is a “suitable vehicle for resolving the important question,” noting that only the constitutional question was presented to the Court and the 9th Circuit has stayed its CID mandate until final disposition of the case with the Court. Moreover, the government argues that until the Court resolves the constitutionality question of the Bureau’s structure, “those subject to the agency’s regulation or enforcement can (and often will) raise the issue as a defense to the Bureau’s efforts to implement and enforce federal consumer financial law.” While the Bureau previously defended the single-director structure to the 9th Circuit, the brief notes that since the May decision was issued, “the Director has reconsidered that position and now agrees that the removal restriction is unconstitutional.”
On the same day, Director Kraninger sent letters (here and here) to House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Mitch McConnell (R-Ky.) supporting the argument that the for-cause restriction on the president’s authority to remove the Bureau’s single Director, violates the Constitution’s separation of powers. Kraninger notes that while she is urging the Court to grant the pending petition for certiorari to resolve the constitutionality question, her position on the matter “does not affect [her] commitment to fulfilling the Bureau’s statutory responsibilities” and that should the Court find the structure unconstitutional, “the [Consumer Financial Protection Act] should remain ‘fully operative,’ and the Bureau would ‘continue to function as before,’ just with a Director who “may be removed at will by the [President.]’”
CFPB argues no “benign language” exception under FDCPA
On September 5, the CFPB filed an amicus brief in a case on appeal to the U.S. Court of Appeals for the Seventh Circuit concerning a debt collector’s use of language or symbols other than the collector’s address on an envelope sent to a consumer. Under section 1692f(8) of the FDCPA, debt collectors are barred from using any language or symbol other than the collector’s address on any envelope sent to the consumer, “except that a debt collector may use his business name if such name does not indicate that he is in the debt collection business.” In the case at issue, a consumer received a debt collection letter enclosed in an envelope stamped with the words “TIME SENSITIVE DOCUMENT” in bold font. The consumer filed a complaint against the defendant asserting various claims under the FDCPA, including that inclusion of “TIME SENSITIVE DOCUMENT” on the envelope was a violation of section 1692f(8). The defendant argued that an exception should be carved out for “benign” language in this instance, and the district court agreed, ruling that the language “‘does not create any privacy concerns for [the consumer] or expose potentially embarrassing information by giving away the fact that the letter is from a debt collector.’”
On appeal, the 7th Circuit invited the Bureau to file an amicus brief on whether there is a benign language exception to section 1692f(8)’s prohibition, and, if so, whether the phrase “TIME SENSITIVE DOCUMENT” falls within that exception. The Bureau asserted that there is no benign language exception, and stressed that while section 1692f(8) recognizes that debt collectors may be permitted to include language and symbols on an envelope that facilitate the mailing of an envelope, section 1692f(8), by its own terms, does not allow for benign language. Additionally, the Bureau commented that section 1692f’s prefatory text does not “provide a basis for reading a ‘benign language’ exception into section 1692f(8),” nor does the prefatory text suggest that the prohibition applies only in instances where it may be “‘unfair or unconscionable’” in a general sense. Moreover, if Congress wanted to allow for markings on envelopes provided they did not reveal the debt-collection purpose, then it would have done so, the Bureau argued, concluding that if the court did adopt a benign language exception, then whether “TIME SENSITIVE DOCUMENT” would fall within that exception would be a question of fact.
3rd Circuit: FCA does not guarantee an in-person hearing before dismissal
On September 12, the U.S. Court of Appeals for the Third Circuit held that the False Claims Act (FCA) does not guarantee relators an automatic in-person hearing before a case can be dismissed. According to the opinion, a relator filed a qui tam action against a Delaware non-profit organization, asserting claims on behalf of the United States and the State of Delaware under the FCA and the Delaware False Claims Act (DFCA), alleging the organization received funding from state and federal governments by misrepresenting material information. Delaware and the federal government declined to intervene and, three years later, both moved to dismiss the case. Both governments argued that the relator’s allegations were “factually incorrect and legally insufficient.” The district court granted the motions without conducting an in-person hearing. The relator appealed, arguing that the FCA guarantees an automatic in-person hearing before a case can be dismissed.
On appeal, the 3rd Circuit disagreed with the relator. The appellate court noted that the government “has an interest in minimizing unnecessary or burdensome litigation costs,” and, once the government moved to dismiss, the burden shifted to the relator to prove that dismissal would be “fraudulent, arbitrary and capricious, or illegal.” The appellate court concluded that the relator failed to do so, and rejected his argument that he should have been allowed to introduce evidence during a hearing to satisfy his burden. While the FCA and the DFCA state that a relator has an “‘opportunity for a hearing’ when the government moves to dismiss,” it is the relator’s responsibility to avail himself or herself of this opportunity, according to the appellate court. The court concluded that the FCA and DFCA do not guarantee an automatic in-person hearing and, because the relator failed to request a hearing and his motions failed to prove the dismissal was fraudulent, arbitrary, capricious, or illegal, the district court did not err in dismissing the action.
District Court rules cardholder agreement transferred arbitration rights to third party
On September 10, the U.S. District Court for the Eastern District of Arkansas granted a motion to compel arbitration in a putative class action alleging violations of the Arkansas Fair Debt Collection Practices Act (AFDCPA) and the FDCPA. According to the order, the plaintiffs contended that the defendants—a debt buyer and its law firm—attempted to collect charged-off credit card debts “through standardized, form debt collection complaints . . . that fraudulently and falsely averred that [the debt buyer] ‘holds in due course a claim . . . pursuant to a defaulted [bank] credit card account.” While the plaintiffs did not dispute that the arbitration provision contained within the cardholder agreement entered into with the bank was valid and that their state and federal claims fell within its scope, they argued that the debt buyer was not a “holder in due course” of the accounts in questions, and as such, the arbitration provision contained within the cardholder agreement was not assigned to the defendants. The court disagreed, ruling that the cardholder agreements specifically permitted the original creditors to assign their rights to a third party, which includes the right to arbitration and the right to enforce the class action prohibition.
FCA claims move forward against California mortgage company
On September 11, the U.S. District Court for the Southern District of California denied a mortgage company’s motion to dismiss an action by the U.S. government alleging the company violated the False Claims Act by falsely certifying compliance with FHA mortgage insurance requirements. According to the opinion, the government intervened in a former employee’s suit against the company and alleged that the company, a participant in HUD’s Direct Endorsement Lender program, had failed to report loans to HUD that presented “material risk and ‘[f]indings of fraud or other serious violations’ discovered during the ‘normal course of business and by quality control staff during reviews/audits of FHA loans.’” The company moved to dismiss the action, arguing that the government failed to allege a scheme that was designed to flout specific FHA requirements. In denying the motion, the court concluded that the government sufficiently alleged the “who, what, where, how, and why” of the company’s misconduct, noting that the company “knew, or should have known, that the certifications of compliance it made at the time of endorsement were false because the falsities were facially apparent from the loan files that it was required to underwrite in accordance with HUD’s requirements.” The court also concluded that the government sufficiently pleaded its breach of fiduciary duty and breach of contract claims.
FDIC and OCC critique Madden in amicus brief
On September 10, the FDIC and the OCC filed an amicus brief in the U.S. District Court for the District of Colorado, supporting a bankruptcy judge’s ruling, which refused to disallow a claim for a business loan that carried a more than 120 percent annual interest rate, concluding the interest rate was permissible as a matter of federal law. After filing bankruptcy in 2017, a Denver-based business sought to reject the claim under Section 502 of the Bankruptcy Code, and sought equitable subordination under Section 510 of the Code, arguing that the original promissory note, executed by the debtor and a Wisconsin state chartered bank, and subsequently assigned to a nonbank lender, was invalid under Colorado’s usury law. The bankruptcy judge disagreed, declining to follow Madden v. Midland Funding, LLC (covered by a Buckley Special Alert here). The judge concluded that the promissory note was valid under Wisconsin law when executed as that state imposes no interest rate cap on business loans, and the assignment to the nonbank lender did not alter this, stating “[i]n the Court’s view, the ‘valid-when-made’ rule remains the law.” The debtor appealed the ruling to the district court.
In support of the bankruptcy judge’s opinion, the FDIC and the OCC argue that the valid-when-made rule is dispositive. Specifically, the agencies assert that the nonbank assignee may lawfully charge the 120 percent annual rate, because the interest rate was non-usurious at the time when the loan was made by the Wisconsin state chartered bank. Moreover, the agencies state that it is a fundamental rule of contract law that “an assignee succeeds to all the assignor’s rights in the contract, including the right to receive the consideration agreed upon in the contract—here, the interest rate agreed upon.” Hence, the nonbank lender inherited the same contractual right to charge the annual interest rate. The agencies also argue that the Federal Deposit Insurance Act’s provisions regarding interest rate exportation (specifically 12 U.S.C. § 1831d) requires the same result, noting that “Congress intended to confer on banks a meaningful right to make loans at the rates allowed by their home states, which necessarily includes the ability to transfer those rates.” The agencies conclude that the bankruptcy judge correctly rejected Madden, calling the 2nd Circuit’s decision “unfathomable” for disregarding the valid-when-made doctrine and the “stand-in-the-shoes-rule” of contract law.