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9th Circuit affirms $20.8 million disgorgement award
On August 24, the U.S. Court of Appeals for the Ninth Circuit affirmed a $20.8 million disgorgement award and agreed with a district court’s decision to hold the defendants jointly and severally liable. The defendants appealed the district court’s 2021 final judgment of disgorgement, which ordered them to disgorge more than $20.8 million in an action concerning money that was collected from investors for a cancer treatment center that was never built. As previously covered by InfoBytes, the district court’s order followed a 2020 U.S. Supreme Court ruling (covered by InfoBytes here), in which the high court examined whether the SEC’s statutory authority to seek “equitable relief” permits it to seek and obtain disgorgement orders in federal court. The Supreme Court ultimately held 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 Supreme Court vacated the original $26.7 million judgment and remanded to the lower court to examine the disgorgement amount in light of its opinion. Of the nearly $27 million raised, the SEC alleged the defendants misappropriated approximately $20 million of the funds through payments to overseas marketing companies and to salaries. To calculate the final disgorgement award, the court subtracted what it determined were “legitimate expenses,” including $2.2 million in administrative expenses and $3.1 million in business development expenses, from the nearly $27 million raised.
On appeal, the 9th Circuit reviewed the proper method of calculating disgorgement as an equitable remedy in an SEC enforcement action and found “no error with the district court’s factual findings as to the illegitimate expenses or with the district court’s disgorgement award.” In so finding, the 9th Circuit explicitly rejected appellants argument that disgorgement was improper because the venture resulted in “no revenues and no profit,” finding that such a result “would not produce an equitable remedy.” The appellate court also determined that because the common law “permit[s] liability for partners engaged in concerted wrongdoing,” the district court did not err in holding both defendants jointly and severally liable where there was evidence the appellant in question “played an integral role” in the fraudulent scheme.
California appellate court overturns ruling for collector that stapled note to summons
On August 23, the California Sixth Appellate District overturned summary judgment in favor of a collector (defendant) that was sued for FDCPA and the Rosenthal Fair Debt Collection Practices Act violations. According to the court, the plaintiff incurred an unpaid medical debt, which was referred to the defendant for collection. The defendant sent the plaintiff eight letters; however, the plaintiff was allegedly not aware that the hospital assigned the debt to a debt collector and did not pay the debt. The defendant filed a collection suit against the plaintiff, seeking to recover the unpaid medical debt. The defendant stapled a typewritten note to the summons, which read, “If you have any questions regarding this matter, please contact: []” in English and Spanish. The plaintiff filed a complaint, accusing the defendant of violating the FDCPA and the Rosenthal Act, alleging that “it was unlawful for [the defendant] to send the attachment with the summons and the complaint because the attachment appeared to be a message from the court and did not contain language disclosing that it was sent by a debt collector.” The trial court granted the defendant’s motion for summary judgment, ruling that the communication was lawful, and denied the plaintiff’s cross-request for summary judgment.
On the appeal, the defendant argued that "the attachment is not a ‘communication’ within the meaning of either statute, on the theory that the attachment itself says nothing about the debt." However, the appellate court wrote that the note was not sent “in a vacuum: The attachment, summons, and complaint comprised a collection of documents delivered by a process server—personally to [the plaintiff’s] girlfriend and then by mail to [the plaintiff].” The appellate court further noted that the reference to “this matter” in the note “unmistakably signified the litigation initiated by the accompanying complaint pleading [the plaintiff’s] indebtedness and the amount and source of indebtedness in a common count cause of action.” With regard to whether the note was a communication in connection with the collection of a debt, the appellate court noted that it “fail[ed] to conceive of any subject other than debt collection [the defendant] might think the communication was in connection with. The message in the attachment refers to the existence of a debt, conveys information regarding the debt, and serves the purpose of debt collection by enticing the recipient to contact the debt collector.” The appellate court concluded that “[b]y omitting the mandatory disclosure that this attachment was from [the defendant], a debt collector, [the defendant] made it reasonably likely that the least sophisticated consumer would believe the suggestion to call [the defendant] was from the court that issued the summons to which the suggestion was affixed. [The defendant’s] communication was therefore deceptive.”
Maryland Court of Appeals says law firm collecting HOA debt is not engaged in the business of making loans
On August 11, a split Maryland Court of Appeals held that “a law firm that engages in debt collection activities on behalf of a client, including the preparation of a promissory note containing a confessed judgment clause and the filing of a confessed judgment complaint to collect a consumer debt, is not subject to the Maryland Consumer Loan Law [(MCLL)].” A putative class action challenging the law firm’s debt collection practices was filed in Maryland state court in 2018. According to the opinion, several homeowners associations and condominium regimes (collectively, “HOAs”) retained the law firm to help them draft and negotiate promissory notes memorializing repayment terms of delinquent assessments. These promissory notes, the opinion said, included confessed judgment clauses that were later used against homeowners who defaulted on their obligations. The suit was removed to federal court and was later stayed while the Maryland Court of Appeals weighed in on whether the law firm was subject to the MCLL. Loans made under the MCLL by an unlicensed entity render the loans void and unenforceable, the opinion said.
Class members claimed that the law firm is in the business of making loans and that the promissory notes are subject to the MCLL and “constitute ‘loans’ because they are an extension of credit enabling the homeowners to pay delinquent debt to the HOAs.” Because neither the law firm nor the HOAs are licensed to make loans the promissory notes are void and unenforceable, class members argued. The law firm countered that it (and the HOAs) are not obligated to be licensed because they are not lenders that “engage in the business of making loans” as provided in the MCLL.
On appeal, the majority concluded that there is no evidence that the state legislature intended to require HOAs to be licensed “in order to exercise their statutory right to collect delinquent assessments or charges, including entering into payment plans for the repayment of past-due assessments.” Moreover, in order to qualify for a license, an applicant “must demonstrate, among other things, that its ‘business will promote the convenience and advantage of the community in which the place of business will be located[]’”—criteria that does not apply to an HOA or a law firm, the opinion stated. Additionally, applying class members’ interpretation would lead to “illogical and unreasonable results that are inconsistent with common sense,” the opinion read, adding that “[t]o hold that the MCLL covers all transactions involving any small loan or extension of credit—without regard to whether the lender is ‘in the business of making loans’—would cast a broad net over businesses that are not currently licensed under the MCLL.”
The dissenting judge countered that the law firm should be subject to the MCC because to determine otherwise would allow law firms to engage in the business of making loans in the form of new extensions of credit with confessed judgment clauses and would “create a gap in the Maryland Consumer Loan Law that the General Assembly did not intend.”
3rd Circuit overturns decision in WESCA suit
On August 16, the U.S. Court of Appeals for the Third Circuit overturned a district court’s decision in a Wiretapping and Electronic Surveillance Control Act (WESCA) suit against a retailer and third-party marketing company (collectively, “defendants”). According to the opinion, the plaintiff searched the retailer’s website while the “browser simultaneously communicated” with both the retailer and a third-party marketing service. The messages to the third party marketing service alerted it to how the plaintiff was interacting with the website, including which pages she visited, when she filled in an email address, and when she added an item to her cart. The plaintiff filed suit against the defendants for using a software that used a code that placed “cookies on the user’s browser so that her activity on the webpage had an associated visitor ID,” and “told the user’s browser to begin sending information to [the third party marketing service] as she navigated through the website, such as communicating that the user had clicked the ‘add to cart’ button or tabbed out of a form field,” in violation of WESCA. The district court dismissed the common law claim and subsequently granted summary judgment to the defendants on the WESCA claim, finding that the defendants were exempt from liability as direct parties to the electronic communications.
The 3rd Circuit reversed and remanded, stating that the district court “never addressed whether [the retailer] posted a privacy policy and, if so, whether that policy sufficiently alerted [the plaintiff] that her communications were being sent to a third-party company.” The appellate court further disagreed “with the District Court’s holding that [the third party marketing company] is exempt from liability because it was a direct party to [the plaintiff’s] communications and that interception only occurred at the site of [the third party marketing company] servers in Virginia.”
8th Circuit affirms rulings for defendant in FCRA suits
On August 16, the U.S. Court of Appeals for the Eighth Circuit affirmed a district court’s dismissal of a complaint in an FCRA case. According to the opinion, the plaintiff filed for Chapter 7 bankruptcy protection. The bankruptcy court entered a discharge, and when the plaintiff obtained the credit reports, among other things, one debt was still being reported as “Current; Paid or Paying as Agreed” with an outstanding balance. The plaintiff filed suit, alleging the defendants violated the FCRA because they “do not maintain reasonable procedures to ensure debts that are derogatory prior to a consumer’s bankruptcy filing do not continue to report balances owing or past due amounts when those debts are almost certainly discharged in bankruptcy.” The plaintiff claimed to suffer emotional distress and obtained credit at less favorable rates. The defendants jointly moved to dismiss the complaint, contending that the plaintiff failed to plausibly allege the reporting. The district court granted the motion and dismissed the case with prejudice.
According to the 8th Circuit, the plaintiff’s complaint was “too thin to raise a plausible entitlement to relief.” The appellate court noted that, “[i]t is not the credit reporting agencies’ job to “wade into individual bankruptcy dockets to discern whether a debt survived discharge.” The appellate court ultimately agreed with the district court that “’there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.’”
The same day, in a separate suit, the 8th Circuit affirmed another district court’s dismissal of a complaint in an FCRA case. According to the opinion, the plaintiff filed for Chapter 7 bankruptcy protection, and after the debts were discharged, the plaintiff’s credit report still listed a debt with an outstanding balance that was noted as “open” and “past due.” The plaintiff filed suit, alleging the defendants violated the FCRA “by neglecting to ‘maintain reasonable procedures to ensure debts that are derogatory prior to a consumer’s bankruptcy filing do not continue to report balances owing or past due amounts when those debts are almost certainly discharged in bankruptcy.’” The plaintiff sought damages resulting from emotional distress and financial harm, but the district court granted summary judgment in favor of defendants, agreeing that plaintiff failed to show proof of actual damages.
On the appeal, the 8th Circuit noted that it was the bankruptcy, not the information in plaintiff’s credit report, that led to her applications for credit cards being denied. Regarding her allegation about emotional distress, the appeals court reasoned that plaintiff “‘suffered no physical injury, she was not medically treated for any psychological or emotional injury, and no other witness corroborated any outward manifestation of emotional distress.’” Accordingly, the court concluded that defendants were entitled to judgment as a matter of law.
2nd Circuit affirms acquittal of former transportation and energy industry executive
On August 12, the U.S. Court of Appeals for the Second Circuit upheld a lower court’s decision to partially acquit a former executive of a French multinational transportation and energy company after a federal jury found him guilty of seven counts related to the Foreign Corrupt Practices Act (FCPA) and four counts of money laundering. The former executive, a British national, was employed by the company’s U.K. subsidiary and involved in a bribery scheme to secure public contracts in Indonesia for the company’s U.S. subsidiary. The 2nd Circuit agreed that the government failed to prove that the former executive was covered by the FCPA as an agent of a domestic concern, but left the money laundering convictions intact.
In 2019, a jury in the U.S. District Court for the District of Connecticut found the defendant guilty of one count of conspiracy to violate the FCPA, six counts of substantive FCPA violations, and four counts of money laundering, for his involvement in a scheme to bribe Indonesian officials in exchange for granting his company’s U.S. subsidiary, a power generation equipment manufacturer, a power plant construction contract. After the guilty verdict, he filed a Rule 29(a) motion for a judgment of acquittal, arguing as to the FCPA counts that the government “failed to prove that he was an agent of [the subsidiary], the relevant domestic concern.” The 2nd Circuit had previously held that accomplice and co-conspirator liability was not available in the case, leaving agency liability. (Covered by InfoBytes here.)
As previously covered by InfoBytes, in 2020, the district court agreed that the evidence at trial did not establish that the subsidiary exercised “control over [the former executive’s] actions sufficient to demonstrate agency” and acquitted him of the FCPA-related counts after determining that the government failed to prove at trial that the defendant was an “agent” of a domestic concern.
On appeal, a divided three-judge panel affirmed the lower court’s decision, concluding that “[t]here was no explicit or implied agency or employee relationship between [the defendant and the company’s U.S. subsidiary] such that the elements of an agency relationship were proven beyond a reasonable doubt.” The majority held that lack of control held by the subsidiary over the defendant was fundamental in determining whether he was acting as an agent of the subsidiary. A principal’s accountability for the actions of an agent depends on its ability to select and control the agent and terminate the agency relationship, as well as an agent’s agreement to act on the principal’s behalf, the majority wrote. “[T]he fact that [the defendant] collaborated with and supported [the subsidiary and a co-defendant] does not mean he was under their control within the meaning of the FCPA,” the majority explained.
5th Circuit overturns decision in FDCPA suit
On August 15, the U.S. Court of Appeals for the Fifth Circuit overturned a district court’s grant of class certification in an FDCPA case, ruling that the plaintiff lacked standing. According to the opinion, the plaintiff incurred a debt after failing to pay her utility bills. The city hired a law firm who tried to collect the debt by sending the plaintiff a form letter demanding payment. Her debt had become delinquent four years and one day before the defendant sent its letter, which, under Texas law is “unenforceable.” The plaintiff filed suit against the law firm alleging that it had violated the FDCPA by making a misrepresentation in connection with an attempt to collect her debt. The plaintiff also sought to represent a class of Texas consumers who received the same form letter from the defendant regarding their time-barred debts. The district court rejected the defendant’s claim that the plaintiff lacked standing to bring suit, holding “that the violation of the plaintiff’s statutory rights under the FDCPA constituted a concrete injury-in-fact because those rights were substantive, not procedural.” The district court also “maintained that [the plaintiff’s] confusion qualified as a concrete injury-in-fact.”
On the appeal, the 5th Circuit reversed, finding that the plaintiff did not suffer a concrete injury and therefore lacked standing. The court held that the Supreme Court’s ruling in TransUnion v. Ramirez (covered by InfoBytes here) foreclosed the plaintiff’s theories that a violation of statutory rights under the FDCPA or accidentally paying a time-barred debt are concrete injuries. The appellate court noted that consulting with an attorney and not making a payment is not a concrete injury under Article III, stating that it is “not aware of any tort that makes a person liable for wasting another’s time.”
10th Circuit says materiality is determined through the perspective of the “reasonable consumer”
On August 8, the U.S. Court of Appeals for the Tenth Circuit upheld the dismissal of an FDCPA action, concluding that an alleged false or misleading communication must be material in order to be considered a violation of the statute, and that materiality is determined through the perspective of the “reasonable consumer.” The plaintiff, a student loan debtor, alleged that he received a letter attempting to collect on debt from the defendant. The defaulted debt in question had been sold to a federal student-loan guaranty agency (creditor), which contracted with the defendant to collect the debt. According to the plaintiff, the letter appeared as if it were sent by the creditor, primarily because the letter displayed the guaranty agency’s name and logo instead of the defendant’s own information. According to the plaintiff, the letter violated several sections of the FDCPA, which prohibit the use of false representations or deceptive means to collect a debt or obtain information concerning a consumer and require a debt collector to use their “true name.” The district court dismissed the action for failure to state a claim, ruling that the letter in question was not misleading and that the plaintiff failed to establish that the defendant used materially misleading, unfair, or unconscionable means to collect the debt.
On appeal, the 10th Circuit held that “a reasonable consumer would not be misled,” because the letter (i) identifies the creditor as “the holder of a defaulted federally insured student loan”; (ii) states that the letter “is an attempt, by a debt collector, to collect a debt”; and (iii) clarifies that the defendant “is assisting [the creditor] with administrative activities associated with this administrative wage garnishment.” Moreover, “[e]ven assuming a reasonable consumer would believe [the creditor] and not [the defendant] sent the letter, [the plaintiff] fails to demonstrate how that would frustrate the reasonable consumer’s ability to respond intelligently,” the appellate court wrote.
In its determination, the 10th Circuit also considered differences related to the “least sophisticated consumer” and a “reasonable consumer” in determining how materiality should be measured. According to the appellate court, even the courts that apply the least sophisticated consumer standard tend to agree that the consumer’s interpretation must be reasonable, thereby incorporating aspects of the reasonable consumer standard. The 10th Circuit pointed out that while many courts have referenced the “least sophisticated consumer” in their rulings, few actually use that perspective. “In applying the least sophisticated consumer standard, courts typically begin by noting the least sophisticated consumer is not an expert but then quickly explain he is not actually the least sophisticated consumer,” the 10th Circuit said, adding that “[i]n reality, the nebulous least sophisticated consumer standard is simply a misnomer. A few circuits, recognizing problems with the least sophisticated consumer standard, instead look to the ‘unsophisticated consumer.’” The appellate court concluded that, assuming “the reasonable consumer would read a communication in its entirety and make sense of a communication by assessing it as a whole and in its context,” no reasonable consumer would have been materially misled.
3rd Circuit adopts new “reasonable reader” standard for evaluating accuracy of credit reports
On August 8, the U.S. Court of Appeals for the Third Circuit issued an opinion in a matter consolidated on appeal concerning claims of alleged violations of the FCRA brought by several student loan borrowers. According to the opinion, each of the three borrowers defaulted on their student loan payments. The original lenders closed the accounts and transferred the loans to other lenders after the borrowers were more than 120 days late in their payments. The borrowers claimed that a “pay status” notation included in each of their credit reports, which read “Account 120 Days Past Due Date,” was inaccurate and could create the misleading impression that the borrowers were currently four months behind on payments when they did not owe a balance to the previous creditors. The consumer reporting agency (CRA) responsible for the credit reports at issue countered that the notations accurately reflected the historical status of the closed accounts. The borrowers appealed, arguing that the district court misapplied the “reasonable creditor” standard and that the credit reports did not meet the FCRA’s “maximum possible accuracy” requirement.
On appeal, the 3rd Circuit agreed with the CRA’s interpretation, holding that the credit reports “contain multiple conspicuous statements reflecting that the accounts are closed and Appellants have no financial obligations to their previous creditors.” As such, “[t]hese statements are not in conflict with the Pay Status notations, because a reasonable interpretation of the reports in their entirety is that the pay status of a closed account is historical information,” the appellate court wrote. However, while the 3rd Circuit affirmed previous rulings dismissing the cases issued by the U.S. District Court for the Eastern District of Pennsylvania, it concluded that the “reasonable creditor” standard that the district court applied did not accurately reflect how the FCRA contemplates a range of permissible users, such as employers, investors, and insurers, and not just creditors. To account for this, the 3rd Circuit adopted a new standard for evaluating whether credit reports are inaccurate or misleading when read in their entirety by a “reasonable reader,” and applied that test in its precedential opinion. “A court applying the reasonable reader standard to determine the accuracy of an entry in a report must make such a determination by reading the entry not in isolation, but rather by reading the report in its entirety,” the appellate court said.
CFPB gets $29.2 million judgment in mortgage relief suit
On August 1, the U.S District Court for the Western District of Wisconsin granted over $29.2 million to the CFPB, revising a $59 million judgment that was thrown out by the U.S. Court of Appeals for the Seventh Circuit last year. As previously covered by InfoBytes, in July 2021, the 7th Circuit vacated a 2019 restitution award in an action brought by the CFPB against two former mortgage-assistance relief companies and their principals (collectively, “defendants”) for violations of Regulation O. In 2014, the CFPB, FTC, and 15 state authorities took action against several foreclosure relief companies and associated individuals, including the defendants, alleging they made misrepresentations about their services, failed to make mandatory disclosures, and collected unlawful advance fees (covered by InfoBytes here). The district court’s 2019 order (covered by InfoBytes here) held one company and its principals jointly and severally liable for over $18 million in restitution, while another company and its principals were held 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.
According to the recent opinion and order, the district court concluded that it would be “appropriate” to characterize the redress as legal restitution because the “plaintiff’s claim is against defendants generally and not one, identifiable fund or asset,” calling it “valid and necessary” for consumers to be compensated for the advance fees they paid. Instead of ordering “complete restitution,” the district court noted it would require the defendants to “refund 50% of the moneys paid, which plaintiff shall return directly to the injured parties to the extent practical,” because the 7th Circuit “found that defendants' conduct was not the product of reckless disregard of the CFPA, but rather a failure to fit themselves under an exception for the delivery of legal services.”