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11th Circuit vacates punitive damages award against CRA for FCRA violation
On June 19, the U.S. Court of Appeals for the Eleventh Circuit vacated a magistrate judge’s final judgment in an FCRA action, concluding that there was no competent proof of a willful violation of the Act on the part of a consumer reporting agency (CRA). According to the opinion, a consumer brought an action against the CRA and other defendants alleging, among other things, that the CRA “negligently and willfully” violated the FCRA by not reinvestigating an item on his credit report he alleged was reported in error. Approximately 75 days after a small claims debt against the consumer was dismissed with prejudice, the consumer and his attorney ran his credit report and finding the debt still reported, wrote to the CRA with the dismissal order and requested that it reinvestigate the debt listing and remove it. The CRA diverted the letter under its suspicious mail policy for unknown reasons (since the CRA did not have a system to record the reason a letter was marked as suspicious), and sent a letter to the consumer informing him that it had determined the letter was suspicious and was not sent by him, but suggesting he call if he believed his credit report was in error. Less than two months later, the CRA removed the credit line after receiving a communication from the debt holder, but the consumer had already filed the action five days prior to that time. A jury trial found that the CRA’s “negligent failure to reinvestigate” caused harm to the consumer and awarded $5,000 in compensatory damages and further concluded that the violation of the FCRA was willful, assessing $3 million in punitive damages. Subsequently, the magistrate judge remitted the punitive damages to $490,000 on due process principles.
On appeal, the 11th Circuit vacated the magistrate judge’s final judgment on the willfulness claim, noting that the consumer “offered no evidence of a broad or systemic problem with [the CRA]’s suspicious mail policy,” and that the consumer did not establish by clear and convincing evidence that the CRA “ran an unjustifiably high risk of violating its duties under the FCRA.” Moreover, the actions of the CRA “had a foundation in the statutory text,” even if the policy’s application was negligent when applied to the consumer. Because the appellate court concluded the violation was not willful, the punitive damages judgment was eliminated.
U.S. Supreme Court upholds SEC’s disgorgement authority with limits
On June 22, in an 8-1 ruling, the U.S. Supreme Court vacated the U.S. Court of Appeals for the Ninth Circuit’s judgment in Liu v. SEC, holding that the SEC may continue to collect disgorgement in civil proceedings in federal court as long as the award does not exceed a wrongdoer’s net profits, and that such awards for victims of the wrongdoing are equitable relief permissible under §78u(d)(5). The ruling impacts petitioners who were ordered by a California federal court to disgorge $26.7 million in money collected from investors for a cancer treatment center that was never built, with the related SEC investigation finding that more than $20 million was spent on ostensible marketing expenses and salaries, far in excess of what the offering memorandum permitted. As previously covered by InfoBytes, the Court examined whether the SEC’s statutory authority to seek “equitable relief” permits it to seek and obtain disgorgement orders in federal court. The petitioners asked the Court to bar the SEC from seeking court-ordered disgorgement (covered by InfoBytes here), arguing that Congress never authorized the SEC to seek disgorgement in civil suits for federal securities fraud as a form of equitable relief or otherwise. The petitioners pointed to the Court’s 2017 decision in Kokesh v. SEC, in which the Court reversed the ruling of the U.S. Court of Appeals for the Tenth Circuit when it unanimously held that disgorgement operates as a penalty under 28 U. S. C. §2462, which establishes a 5-year limitations period for “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture.”
The Court rejected the petitioners’ argument, noting that equity practice has “long authorized courts to strip wrongdoers of their ill-gotten gains,” although “to avoid transforming an equitable remedy into a punitive sanction, courts restricted the remedy to an individual wrongdoer’s net profits to be awarded for victims.” As such, the Court determined that the SEC’s disgorgement remedy must be limited in various ways. The Court discussed three limits: (i) the “profits remedy” must return the defendant’s wrongful gains to those harmed by the defendant’s actions, as opposed to depositing them in the Treasury; (ii) disgorgement under the statute requires a factual determination of whether petitioners can, consistent with equitable principles, be found liable for profits as partners in wrongdoing or whether individual liability is required; and (iii) disgorgement must be limited to “net profits” and therefore “courts must deduct legitimate expenses before ordering disgorgement” under the statute. The Court vacated the judgment against the petitioners and remanded to the lower court to examine the disgorgement amount in light of its opinion.
Justice Clarence Thomas dissented, however, stating that he would have barred the SEC from seeking disgorgement in federal court under the statute rather than limiting the remedy, because while 15 U. S. C. §78u(d)(5) allows the SEC to seek equitable relief that may be appropriate or necessary for the benefit of investors, “disgorgement is not a traditional equitable remedy.”
New Jersey Supreme Court holds that state fiduciary law does not permit affirmative cause of action against bank
On June 17, the New Jersey Supreme Court reversed an appellate division’s judgment and dismissed a complaint against a bank after concluding that the New Jersey Uniform Fiduciaries Law (UFL) does not permit an affirmative cause of action against banks but rather provides them with limited immunity for failing to take notice of and action on the breach of a fiduciary’s obligation. In 2015, the plaintiff filed a complaint on behalf of himself and his dental practice against two of his employees who allegedly took insurance company checks issued to the plaintiff and his practice totaling “several hundred thousand dollars,” forged his endorsement on them, and deposited the checks into personal accounts held by a bank who was sued in the same lawsuit for common law claims of conversion and negligence. The trial court dismissed the cause of action against the bank for failure to state a claim, reasoning that “‘common law negligence is not such a remedy’ in the absence of a ‘special relationship’ between [the plaintiff] and the bank.” The trial court also rejected the plaintiff’s argument that the UFL provided the basis for a cause of action, concluding that the individuals acted as “errant employees”—not as fiduciaries—and that the bank had no fiduciary relationship with the plaintiff who was not a bank customer. The appellate division partially reversed, concluding that plaintiff should be allowed to plead a UFL claim. Among other things, the plaintiff argued that the employees were acting in a fiduciary capacity as “constructive trustees” of the funds and the bank met a bad faith requirement under the UFL in depositing the checks.
The New Jersey Supreme Court disagreed, holding that “[n]othing in the plain language of the UFL suggests that the UFL is itself the basis for an affirmative cause of action.” Moreover, the “UFL does not provide for a recovery through a private action or set forth remedies or a statute of limitations—all indicia of a statutory cause of action.” According to the New Jersey Supreme Court, “[w]hen an action is brought against a bank, the UFL provides that a bank’s liability depends on whether the bank acted with actual knowledge or bad faith in the face of a fiduciary’s breach of his obligations.”
7th Circuit dismisses FDCPA action over interest accrued post-write off
On June 19, the U.S. Court of Appeals for the Seventh Circuit affirmed the dismissal of an action alleging a debt collector violated the FDCPA by attempting to collect interest that accrued on a debt after the creditor wrote off the debt but before the collector acquired it. According to the opinion, the plaintiffs’ original unpaid debt was $3,226.35 before the original creditor ceased collection efforts and stopped sending monthly statements. Approximately two years later, the creditor sold the debt to the collection agency, and approximately two years after that, the debt collector sent a demand letter seeking payment of $5,800, which included around $1,600 in interest for the months after the original creditor ceased collection efforts. The debt collector sent a second letter two months later, and a third letter the following year to their attorney in response to the attorney’s request to verify the debt, but the third letter did not explain how much of the debt was interest. The plaintiffs filed the action against the debt collector, alleging the collector violated the FDCPA’s prohibition on false, deceptive, or misleading representations in connection with collection of a debt by demanding interest that accrued between charge-off and sale. The district court dismissed the action as untimely.
On appeal, the 7th Circuit affirmed dismissal, but determined the suit was filed timely. Specifically, the appellate court concluded that the one year statute of limitations applied to the third letter the debt collector sent to the plaintiffs’ lawyer in response to a demand for debt verification. However, the appellate court concluded that the third collection letter did not violate the FDCPA, arguing the plaintiffs “promised to pay interest, and [the debt collector]’s computer used the correct rate.” Moreover, the appellate court stated that “[a] statement is false, or not, when made; there is no falsity by hindsight,” and previous instances in the circuit “in which a letter was deemed to have falsely stated the amount of the debt dealt with errors known or readily knowable when the letter was sent.” Lastly, the appellate court rejected the plaintiffs’ post-argument submission that the debt collector “must openly state the legal position behind its calculation” in order to avoid having the letter be misleading, noting that the third letter was sent to their lawyer, and it “would not have misled a competent lawyer.”
Consumer advocacy groups claim CFPB taskforce is illegally chartered
On June 16, several consumer advocacy groups filed a lawsuit in the U.S. District Court for the District of Massachusetts against the CFPB claiming that the Bureau’s Taskforce on Federal Consumer Financial Law was “illegally chartered” and violates the Federal Advisory Committee Act (FACA). As previously covered by InfoBytes, the taskforce was established last year to examine the existing legal and regulatory environment facing consumers and financial services providers. As also covered by InfoBytes, the taskforce recently outlined its future plans, which include analyzing comments received from a March request for information, holding a public hearing, and participating in public listening sessions with the Bureau’s four advisory committees. The complaint argues, however, that the taskforce’s membership lacks balance, and that the appointed members who “uniformly represent industry views” have worked on behalf of several large financial institutions or work as industry consultants or lawyers. This composition, the consumer advocacy groups argue, undermines the purpose of the taskforce and is a violation of FACA and the Administrative Procedure Act. The complaint also states that while FACA requires advisory committee meetings to be open to the public and that records be disclosed, the taskforce has held closed-session meetings without providing public notice and has failed to make available any of the records related to these meetings or its other work.
The complaint seeks declaratory and injunctive relief and asks the court to (i) set aside the taskforce’s charter, all orders and decisions, and the appointments of the taskforce members; (ii) enjoin the taskforce from meeting, or otherwise conducting taskforce business; (iii) order the Bureau to immediately release all materials prepared for the taskforce; and (iv) enjoin the Bureau from relying upon taskforce recommendations or advice. The complaint also seeks costs and attorneys’ fees.
District court holds text system is not an autodialer under 7th Circuit definition
On June 15, the U.S. District Court for the Southern District of Indiana granted a motion for summary judgment in favor of a collection agency and another company (collectively, “defendants”) with respect to the plaintiff’s TCPA allegations, holding that the system used to send text messages to class members’ cell phones is not an automatic telephone dialing system (autodialer). According to the opinion, the plaintiff filed the class action alleging, among other things, that the defendants violated the TCPA by sending unsolicited text messages using an autodialer to cell phones after the recipients replied with “stop.” The parties submitted cross-motions for summary judgment, which were stayed pending the outcome of the U.S. Court of Appeals for the Seventh Circuit decision in Gadelhak v. AT&T Servs., Inc. As previously covered by InfoBytes, the 7th Circuit held in February that to be an autodialer under the TCPA, the system must both store and produce phone numbers “using a random or sequential number generator.” After reviewing the cross-motions in light of the 7th Circuit decision, the court concluded that the system used by the defendants is not an autodialer under the controlling definition because the defendants’ system sends text messages to cell phone numbers from stored customer lists. Notwithstanding the fact that neither party disputes that the text messages sent to the class members post-“stop” message were without their consent, the court granted summary judgment in favor of the defendants because the text messages were not sent using an autodialer.
California Court of Appeal: FTC Holder Rule preempts state law authorizing recovery of certain attorney fees
On June 9, the California Court of Appeal for the First Appellate District affirmed a trial court’s judgment in favor of a bank (defendant), holding that the FTC’s Holder Rule preempts California Civil Code section 1459.5, which authorizes a plaintiff to recover attorney fees on a Holder Rule claim even if it results in a total recovery that exceeds the amount the plaintiff paid under the contract. According to the court, the plaintiff sued the defendant (who was assigned the vehicle credit sale contract) after he discovered that the seller failed to disclose that the vehicle had been in a major collision, thus reducing its value. The parties settled for a sum equal to the vehicle’s purchase price, and the plaintiff filed a motion for attorney fees. The trial court denied the motion, determining that the plaintiff was not entitled to fees under a holding in Lafferty v. Wells Fargo Bank, which stated that a debtor cannot recover damages and attorney fees for a Holder Rule claim that collectively exceed the amount paid by the debtor under the contract. The plaintiff appealed.
The Court of Appeal agreed with the trial court, determining that it did not need to resolve the parties’ dispute as to whether Lafferty correctly construed the Holder Rule’s limitation on recovery because the FTC’s construction of the Holder Rule is entitled to deference. The Court of Appeal referenced the FTC’s 2019 confirmation of the Holder Rule (Rule Confirmation), after Lafferty issued, which addressed, among other things, several comments related to whether the Holder Rule’s “limitation on recovery to ‘amounts paid by the debtor’ allows or should allow consumers to recover attorneys’ fees above that cap.” The FTC provided the following statement within the Rule Confirmation: “We conclude that if a federal or state law separately provides for recovery of attorneys’ fees independent of claims or defenses arising from the seller’s misconduct, nothing in the Rule limits such recovery. Conversely, if the holder’s liability for fees is based on claims against the seller that are persevered by the Holder Rule Notice, the payment that the consumer may recover from the holder—including any recovery based on attorneys’ fees—cannot exceed the amount the consumer paid under the contract.”
9th Circuit: Payday arbitration remanded because of new California interest rate law
On June 9, the U.S. Court of Appeals for the Ninth Circuit remanded a case against a payday lender back to district court because a newly issued California amendment took effect—which prohibits lenders from issuing loans between $2,500 and $10,000 with charges over 36 percent calculated as an annual simple interest rate (covered by InfoBytes here)—which may impact the court’s analysis. As also previously covered by InfoBytes, plaintiffs filed a putative class action suit against the payday lender alleging the lender sells loans with usurious interest rates, which are prohibited under California’s Unfair Competition Law and Consumer Legal Remedies Act. The lender moved to compel arbitration, but the district court concluded the arbitration provision was unenforceable. In addition to finding the arbitration provisions procedurally unconscionable, the court found that the provision contained a waiver of public injunctive relief, which was substantively unconscionable based on the California Supreme Court decision in McGill v. Citibank, N.A (covered by a Buckley Special Alert here).
On appeal, the 9th Circuit remanded the case back to the district court to reconsider whether the consumer’s requested injunction enjoining the payday lender from issuing loans above $10,000 would actually prevent a threat of future harm in light of the new California law and considering the operative complaint does not allege the lender issued or continues to issue loans above $10,000. Additionally, the appellate court rejected the lender’s arguments that McGill was preempted under the Federal Arbitration Act (FAA) and agreed with the district court’s application of California law, because “Kansas law is contrary to California policy and [] California holds a materially greater interest in this litigation.”
D.C. Circuit says consumer failed to show injury in FDCPA action
On June 9, the U.S. Court of Appeals for the D.C. Circuit vacated the district court’s judgment in favor of a consumer, concluding that the consumer failed to demonstrate a concrete injury-in-fact traceable to the FDCPA violations she alleged. According to the opinion, the consumer brought the putative class action against the debt collector after the collector sued the consumer to collect an outstanding auto loan debt. The collector allegedly used affidavits in its lawsuit against the consumer that were signed by an agent of the collector, not by an employee as attested. As requested by the debt collector, the action was then dismissed with prejudice. Subsequently, the consumer filed the putative class action against the debt collector and its agent alleging various violations of the FDCPA. The defendants moved to dismiss the action, which the district court denied. Subsequently, the district court granted their motion for summary judgment, concluding that any “any falsehoods in the [] affidavits were immaterial—and thus not actionable—because they ‘had no effect on [the consumer]’s ability to respond or to dispute the debt.’”
On appeal, the D.C. Circuit disagreed with the district court, concluding that the consumer lacked standing to sue the defendants altogether. Specifically, the appellate court held that the consumer failed to identify a traceable injury to the “false representations” made in the affidavits, citing to the fact that the consumer “testified unequivocally that she neither took nor failed to take any action because of these statements.” Moreover, citing to the U.S. Supreme Court decision in Spokeo, Inc. v. Robins, the appellate court emphasized that “[n]othing in the FDCPA suggests that every violation of the provisions implicated here…create[] a cognizable injury.” The appellate court vacated the district court’s judgment and remanded the case with instructions to dismiss the complaint.
7th Circuit upholds summary judgment in favor of debt collector
On June 9, the U.S. Court of Appeals for the Seventh Circuit affirmed summary judgment in favor of a third-party debt collector in a class action asserting violations of the FDCPA. According to the opinion, a consumer filed a putative class action alleging the debt collector sent a misleading letter in violation of the FDCPA because the letter stated that her debt “may be reported to the national credit bureaus.” The consumer argued that the use of the word “may” was deceptive, as it implied “future reporting” even though the debt had already been reported at the time she received the letter. The debt collector moved to dismiss the action, which the district court denied, concluding that whether a communication is misleading is a question of fact and therefore, “dismissal would be premature.” After class certification, the consumer and the debt collector submitted cross-motions for summary judgment, and the district affirmed in favor of the debt collector.
On cross-appeals, the 7th Circuit agreed with the district court’s denial of the debt collector’s motion to dismiss, stating that “[w]hether a significant fraction of debtors would be misled as [the consumer] describes is questionable, but it is not so implausible….” As for summary judgment, the appellate court also agreed with the district court, concluding that the consumer “failed to present any evidence beyond her own opinion” that the collection letter was misleading. The appellate court rejected the consumer’s assertion that her own opinion was evidence enough and noted that the consumer cited to cases using the “least sophisticated consumer standard,” which the 7th Circuit has rejected. Moreover, the appellate court emphasized that the consumer failed “to provide any outside evidence as to the likelihood that a hypothetical unsophisticated debtor (or even the least sophisticated debtor) would in fact be confused by the language in [the debt collector]’s letter.”