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On January 24, the U.S. Court of Appeals for the Fourth Circuit concluded that a district court did not abuse its discretion when certifying a class action. The lawsuit alleges an individual who orchestrated an online payday lending scheme violated the Racketeer Influenced and Corrupt Organization Act (RICO), engaged in unjust enrichment, and violated Virginia’s usury law by partnering with federally-recognized tribes to issue loans with allegedly usurious interest rates. (Covered by InfoBytes here.) The plaintiffs alleged the defendant partnered with the tribes to circumvent state usury laws even though the tribes did not control the lending operation. The district court stated that, as there was “no substantive involvement” by the tribes in the lending operation and that the evidence showed that the defendant was “functionally in charge,” the lending operation—which allegedly charged interest rates exceeding Virginia’s 12 percent interest cap—could not claim tribal immunity.
After the district court certified two borrower classes, the defendant appealed, arguing, among other things, that “[b]orrowers entered into enforceable loan agreements with lending entities in which they waived their right to bring class claims against him,” and that “common issues do not predominate so as to permit class treatment in this case.” Specifically, the defendant claimed that his role in the lending operations changed throughout the class period, and that individualized “proof” and “tracing” would be necessary to prove that he “participated in the direction of the affairs of the alleged enterprise” or that he received some portion of each borrower’s interest payments.
On appeal, the 4th Circuit disagreed with the defendant’s assertions. It found no reason to question the district court’s conclusion that the defendant was the “de facto” head of the lending operations throughout the class period. “And the fact that [the defendant] served as the ‘de facto head’ of the lending operations for the entire class period supports the district court’s determination that the Borrowers will be able to use common proof to show that [the defendant] ‘participated in the direction of the’ lending operations such that common questions predominate over individual questions[,]” the appellate court stated. The 4th Circuit further concluded that the “record supports the district court’s conclusion that [the defendant] lied when he said he was never involved in receiving or demanding payments on [the lending operation’s] loans.”
On January 19, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of a debt collection action related to alleged violations of the FCRA, FDCPA, and the Racketeer and Influenced and Corrupt Organizations (RICO) Act. Plaintiff filed a complaint against a telecommunications company and related entities concerning a disputed past-due charge and subsequent debt collection proceeding. The district court dismissed the action and denied the plaintiff’s motion for sanctions. In affirming the dismissal, the appellate court concluded that the district court correctly determined that the plaintiff failed to state a claim under the FCRA on the basis that (i) the plaintiff failed to allege cognizable damages caused by the alleged violations; and (ii) the credit reporting agencies corrected the allegedly inaccurate information within 30 days of being notified. The 2nd Circuit held that the plaintiff’s FDCPA claims also failed, pointing to the U.S. Supreme Court’s decision in Henson v. Santander Consumer USA Inc., which found that “you have to attempt to collect debts owed another before you can ever qualify as a debt collector” under the FDCPA. According to the appellate court, the plaintiff claimed that the relevant defendants are or were creditors seeking to collect on debts owed to them, and that, as such, they do not qualify as debt collectors under the statute. Finally, the 2nd Circuit concluded that the district court correctly determined that the plaintiff failed to demonstrate how the communications he received from the defendant qualified as mail or wire fraud under RICO.
On January 19, the U.S. District Court for the District of South Dakota granted a defendant “buy now, pay later” service’s motion to set aside the default judgment in an FDCPA and FCRA suit originally entered in a small claims court. According to the order, the plaintiff filed suit in small claims court alleging violations of the FDCPA and FCRA, but the defendant did not receive notice of the suit and, as such, did not respond to the claim. A default was entered against the defendant thereafter. Upon receiving notice of the default, the defendant removed the case to federal court and moved to set aside the default. With respect to removal, the court held that removal was timely because it was made within 30 days of receiving the notice of default and held that removal was proper based on federal question jurisdiction. With respect to the motion to set aside, the court set aside the judgment, finding that there was no evidence of bad faith on the defendant’s part, that there was no prejudice to the plaintiff, and that the defendant did have “meritorious defenses” to the plaintiff’s claims.
On January 12, the U.S. District Court for the Eastern District of Virginia ruled that a credit union (defendant) is responsible for $558,000 in compensatory damages for processing a payment order that was allegedly induced through fraud by the beneficiary, but later rescinded its decision to award punitive damages. According to the initial opinion and order, in October 2018, the plaintiff received a “spoofed” email from an unknown third party claiming to be one of the plaintiff’s suppliers. The email instructed the plaintiff to change its banking remittance information for the supplier. However, unknown to the plaintiff, the new banking information contained in the email belonged to an individual who had opened a personal account with the defendant months prior. The order stated that from October to November in 2018, the plaintiff made four payments to the individual’s account held by the defendant, identifying the supplier as the beneficiary. The plaintiff sued alleging that the defendant failed to “comport with basic security standards that resulted in the unlawful diversion of funds.” According to the opinion and order, the court found that Virginia Commercial Code required the defendant to reject the deposits if it knew there was a discrepancy between the intended beneficiary and the account receiving the deposit. The court further wrote that the defendant did not have a duty to “proactively” discover a discrepancy, but found that “the evidence at trial illustrated that [the defendant] did not maintain reasonable routines for communicating significant information to the person conducting the transaction. If [the defendant] had exercised due diligence, the misdescription would have been discovered during the first  transfer.” Additionally, the court stated the defendant did have “actual knowledge” of the fraud because “the transfers generated real-time warnings that the name of the intended beneficiary  did not match the name of the owner of the account receiving the [deposits].” The court awarded the plaintiff $558,000 in compensatory damages and $200,000 in punitive damages. However, the court rescinded the punitive damage award stating that the plaintiff has not provided sufficient evidence to support punitive damages.
On January 13, respondents filed a brief in opposition to a petition for a writ of certiorari filed by the CFPB last November, which asked the U.S. Supreme Court to review whether the U.S. Court of Appeals for the Fifth Circuit erred in holding that the Bureau’s funding structure violates the Appropriations Clause of the Constitution (covered by InfoBytes here). The Bureau also asked the Supreme Court to consider the 5th Circuit’s decision to vacate the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (Payday Lending Rule or Rule) on the premise that it was promulgated at a time when the Bureau was receiving unconstitutional funding. The Bureau requested that the Supreme Court review the case during its current term, which would ensure resolution of the issue by the summer of 2023. Last December, a coalition of state attorneys general from 22 states, including the District of Columbia, filed an amicus brief supporting the Bureau’s petition for a writ of certiorari, while 16 states filed an amicus brief opposing the petition (covered by InfoBytes here).
In their opposition brief, the respondents urged the Supreme Court to deny the Bureau’s petition on the premise that the 5th Circuit’s decision does not warrant review—“let alone in the expedited and limited manner that the Bureau proposes”—because the appellate court correctly vacated the Payday Lending Rule, which, according to the respondents, has “multiple legal defects, including but not limited to the Appropriations Clause issue.” Among other things, the respondents argued that the Bureau erroneously contended that the Appropriations Clause does not limit the manner in which Congress may exercise its authority, claiming that: (i) the Appropriations Clause ensures Congressional oversight of the federal fiscal and executive power; (ii) the Bureau’s funding statute nullifies Congress’s appropriations power in an unprecedented manner; (iii) the Bureau’s merit defenses, including claims that text, history, and precedent support its funding scheme, all fail; and (iv) the Bureau’s remedial defenses of the Payday Lending Rule also fail.
The respondents also maintained that the case “is neither cleanly presented . . . nor ripe for definitive resolution at this time,” and argued that the Supreme Court could address the validity of the Payday Lending Rule without addressing the Bureau’s funding issue. Explaining that the 5th Circuit’s decision “simply vacated a single regulation that has never been in effect,” the respondents claimed that the appellate court should have addressed questions about the Rule’s validity before deciding on the Appropriations Clause question. The respondents claimed that the appellate court incorrectly rejected two antecedent grounds for vacating the Payday Lending Rule: (i) the Rule’s “promulgation was tainted by the removal restriction later held invalid in Seila Law” (covered by a Buckley Special Alert); and (ii) the Rule exceeds the Bureau’s authority “because the prohibited conduct falls outside the statutory definition of unfair or abusive conduct.” “Given the significant prospect that this Court will be unable to resolve the constitutional question in this case, it should await a better vehicle,” the respondents wrote, adding that “[i]f and when some judgment in some future case has ‘major practical effects,’  the Bureau should seek this Court’s review then—which may well present a better vehicle.”
Further, the respondents stated that if the Supreme Court grants review of the case, it “should proceed in a more deliberative fashion than the Bureau has urged.” The respondents asked the Supreme Court to expressly include the antecedent questions by either granting the respondents’ cross-petition or adding them to the Board’s petition in order to provide clarity about whether the Supreme Court intends to consider the alternative grounds. They further urged the Supreme Court to wait until next term to review the case, writing that the Bureau “cannot justify its demand for a case of this complexity and importance to be briefed, argued, and decided in a few months at the end of a busy Term.”
On January 11, a coalition of 22 state attorneys general from Massachusetts, California, Colorado, Connecticut, Delaware, the District Of Columbia, Hawaii, Illinois, Maryland, Michigan, Minnesota, Nevada, New Jersey, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, Washington, and Wisconsin, filed an amicus brief with the U.S. Supreme Court in two pending actions concerning challenges to the Department of Education’s student loan debt relief program. At the beginning of December, the Supreme Court agreed to hear the Biden administration’s appeal of an injunction entered by the U.S. Court of Appeals for the Eighth Circuit that temporarily prohibits the Secretary of Education from discharging any federal loans under the agency’s student debt relief plan (covered by InfoBytes here). In a brief unsigned order, the Supreme Court deferred the Biden administration’s application to vacate, pending oral argument. Shortly after, the Supreme Court also granted a petition for certiorari in a challenge currently pending before the U.S. Court of Appeals for the Fifth Circuit, announcing it will consider whether the respondents (individuals whose loans are ineligible for debt forgiveness under the plan) have Article III standing to bring the challenge, as well as whether the Department of Education’s debt relief plan is “statutorily authorized” and “adopted in a procedurally proper manner” (covered by InfoBytes here). Oral arguments in both cases are scheduled for February 28.
The states first pointed out that under the Higher Education Act, Congress gave the Secretary “broad authority both to determine borrowers’ loan repayment obligations and to modify or discharge these obligations in myriad circumstances.” The Secretary was also later granted statutory authority under the HEROES Act to take action in times of national emergency, which includes allowing “the Secretary to ‘waive or modify any statutory or regulatory provision applicable to the student financial assistance programs’ if the Secretary ‘deems’ such actions ‘necessary’ to ensure that borrowers affected by a national emergency ‘are not placed in a worse position financially’ with respect to their student loans.” The states stressed that while “the magnitude of the national emergency necessitating this relief is unprecedented, the relief offered to borrowers falls squarely within the authority Congress gave the Secretary to address such emergencies and is similar in kind to relief granted pursuant to other important federal student loan policies that have concomitantly advanced our state interests.”
The states went on to explain that the Secretary tailored the limited debt relief using income thresholds to ensure that “the borrowers at greatest risk of pandemic-related defaults receive critical relief, either by eliminating their loan obligations or reducing them to a more manageable level,” thus meeting the express goal of the HEROES Act to “prevent affected borrowers from being placed in a worse position because of a national emergency.” The states also stressed that the Secretary reasonably concluded that targeted relief is necessary to address the impending rise in pandemic-related defaults once repayment restarts. The HEROES Act expressly permits the Secretary to “exercise his modification and waiver authority ‘notwithstanding any other provision of law, unless enacted with specific reference to [20 U.S.C. § 1098bb(a)(1)],” the states asserted, noting that “relevant statutory and regulatory provisions related to student loan repayment and cancellation contain no such express limiting language.”
Secretary Miguel Cardona issued the following statement in response to the filing of more than a dozen amicus curiae briefs: “The broad array of organizations and experts—representing diverse communities and different perspectives—supporting our case before the Supreme Court today reflects the strength of our legal positions versus the fundamentally flawed lawsuits aimed at denying millions of working and middle-class borrowers debt relief.” A summary of the briefs can be accessed here.
On January 11, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s decision to grant summary judgment in favor of defendants accused of violating the FDCPA when attempting to collect on a judgment that was later vacated. According to the opinion, the plaintiff was sued in state court for an unpaid debt. Contradictory orders were entered by the Superior Court, one which dismissed the action due to one of the defendant’s failure to attend trial, and another that entered default judgment against the plaintiff (which was confirmed two years later by the state court).
A few years later, an attempt was made to collect on the debt. The plaintiff disputed the debt and later sued, claiming the defendants “knew or should have known” that the debt was unenforceable. The plaintiff later filed a motion in state court to vacate the default judgment and declare it “void ab initio,” which was eventually granted by the state court after it determined that the judgment was erroneously entered by the clerk after the court had already dismissed the case due to the debt collector’s failure to appear for trial. The plaintiff filed a cross-motion for summary judgment in the district court.
The district court, however, found that the defendants’ alleged efforts to collect the debt were not false or misleading because the now-invalid default judgment at issue was technically still valid and existed when the collection attempts were made. The plaintiff appealed, arguing that the summary judgment violated the Rooker-Feldman doctrine because the district court “‘could not have reached the decision that it did without necessarily supplanting’ the Superior Court’s order vacating the judgment against her.” The plaintiff also argued that the district court erred when it found the Superior Court judgment against the plaintiff to be “in effect . . . until such time as it was vacated, . . . rather than ‘per se not valid’” when the defendants engaged in their efforts to collect the debt.
On appeal, the 3rd Circuit disagreed with the plaintiff’s assertions. According to the appellate court, the plaintiff satisfied none of the four requirements to trigger the Rooker-Feldman doctrine, adding that regardless of whether the state court declared the judgment “void ab initio,” it was in effect when the defendant attempted to collect on the debt. Moreover, the appellate court noted that the plaintiff “failed to present a triable issue that any communication from Defendants to [the plaintiff] regarding the collection of the default judgment was made unlawful retroactively upon the Superior Court vacating its default judgment order.”
On January 10, the CFPB filed an amicus brief in a case before the U.S. Court of Appeals for the Fourth Circuit concerning the scope of accounts covered under EFTA and Regulation E. (See also CFPB blog post here.) As previously covered by InfoBytes, last August the U.S. District Court for the District of Maryland dismissed a putative class action alleging violations of EFTA and state privacy and consumer protection laws brought against the national bank on behalf of consumers who were issued prepaid debit cards providing pandemic unemployment benefits. The named plaintiff alleged that he lost nearly $15,000 when an unauthorized user fraudulently used a prepaid debit card containing Pandemic Unemployment Assistance (PUA) funds that were intended for him. However, the district court dismissed the class claims with respect to EFTA and Regulation E, finding that the PUA payments were “qualified disaster relief payments” and, as such, they were excluded from Regulation E’s definition of a “prepaid account.”
The Bureau disagreed. In its amicus brief, it argued that a prepaid debit card loaded with PUA funds is a “government benefit account” subject to EFTA and Regulation E and their error resolution requirements, which apply to alleged unauthorized transfers such as the one at issue in the case. Writing that the district court erred by applying “a regulatory exclusion to hold that prepaid accounts loaded with pandemic unemployment benefits were excluded from coverage,” the Bureau claimed that the holding is not supported by statutory and regulatory text and “undermines the primary purpose of EFTA to provide individual rights to consumers.” According to the Bureau, a “prepaid account” under Regulation E includes specific categories of accounts, including a “government benefit account,” which is not subject to the prepaid account exclusions.
On January 6, the U.S. District Court for the Northern District of Georgia granted preliminary approval of a $11.5 million settlement in a class action FCRA suit, resolving allegations that a credit reporting agency (CRA) reported inaccurate or incomplete criminal and civil records. According to the plaintiffs’ motion for preliminary approval of the proposed settlement and memorandum in support, the defendant violated the FCRA by attributing criminal records to consumers that did not belong to them. The plaintiffs further alleged that “misattribution resulted from [the defendant’s] unreasonable procedures related to its using or failure to use certain identifying information in its matching algorithm.” In addition, the plaintiffs claimed that the defendant failed to report favorable dispositions in landlord-tenant records. The plaintiffs also alleged that the defendant “did not obtain complete and up-to-date public records from the source, instead relying on old or incomplete data obtained from its vendor(s) or retrieved through automated processes.” If final approval of the settlement is granted, attorney fees will account for about a third of the $11.5 million settlement amount. The estimated number of people who could benefit from the settlement is approximately 90,000, with awards for this group ranging from $40 to $800. The defendant will also be obliged under the settlement to provide data needed to identify members of the class. Further, class members whose names were misreported as tied to felonies or sex offenses, or who disputed their criminal records, will be paid higher payments than those linked to misdemeanors, lower-level offenses, or eviction records.
In December, the U.S. Court of Appeals for the Ninth Circuit reversed and remanded a district court’s decision to dismiss a suit alleging that a multinational technology company used persistent identifiers to collect children’s data and track their online behavior surreptitiously and without their consent in violation of the Children’s Online Privacy Protection Act (COPPA). According to the opinion, the company used targeted advertising “aided by sophisticated technology that delivers curated, customized advertising based on information about specific users.” The opinion further explained that “the company’s technology ‘depends partly on what [FTC] regulations call ‘persistent identifiers,’ which is information ‘that can be used to recognize a user over time and across different Web sites or online services.’” The opinion also noted that in 2013, the FTC adopted regulations under COPPA that barred the collection of children’s “persistent identifiers” without parental consent. The plaintiff class claimed that the company used persistent identifiers to collect data and track their online behavior surreptitiously and without their consent, and alleged state law claims arising under the constitutional, statutory, and common law of California, Colorado, Indiana, Massachusetts, New Jersey, and Tennessee, in addition to COPPA violations. The district court ruled that the “core allegations” in the third amended complaint were squarely covered, and preempted, by COPPA.
On appeal, the 9th Circuit considered whether COPPA preempts state law claims based on underlying conduct that also violates COPPA’s regulations. To determine this, the appellate court examined the language of COPPA’s preemption clause, which states that state and local governments cannot impose liability for interstate commercial activities that is “inconsistent with the treatment of those activities or actions” under COPPA. The opinion noted that the 9th Circuit has long held “that a state law damages remedy for conduct already proscribed by federal regulations is not preempted,” and that the statutory term “inconsistent” in the preemption context refers to contradictory state law requirements, or to requirements that stand as obstacles to federal objectives. The appellate court stated that it was not “persuaded that the insertion of ‘treatment’ in the preemption clause here evinces clear congressional intent to create an exclusive remedial scheme for enforcement of COPPA requirements.” The opinion noted that because “the bar on ‘inconsistent’ state laws implicitly preserves ‘consistent’ state substantive laws, it would be nonsensical to assume Congress intended to simultaneously preclude all state remedies for violations of those laws.” As such, the appellate court held that “COPPA’s preemption clause does not bar state-law causes of action that are parallel to, or proscribe the same conduct forbidden by, COPPA. Express preemption therefore does not apply to the children’s claims.”