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Financial Services Law Insights and Observations


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  • 9th Circuit: Law firm owner liable for restitution from mortgage relief scheme


    On July 16, the U.S. Court of Appeals for the 9th Circuit affirmed summary judgment in favor of the FTC in an action alleging two attorneys controlled or participated in a mortgage relief scheme, which falsely told consumers they could join “mass joinder” lawsuits that would save them from foreclosure and provide additional financial awards. In September 2017, the district court granted summary judgment against both defendants, concluding that the defendants knowingly deceived consumers when they falsely marketed that consumers could expect to receive $75,000 in damages or “a judicial determination that the mortgage lien alleged to exist against their particular property is null and void ab initio” if they agreed to join mass joinder lawsuits against their mortgagors. The operation resulted in over $18 million in revenue from the participating consumers.

    On appeal from one defendant, the 9th Circuit agreed with the district court, determining the FTC provided “sufficient undisputed facts to hold [the defendant] individually liable for injunctive relief at summary judgment.” Specifically, the appellate court agreed that the FTC sufficiently proved three separate legal entities, one of which the defendant was the co-owner and corporate officer, “operate[d] together as a common enterprise,” which violated the FTC Act and Mortgage Assistance Relief Services Rule with their mortgage relief operation. Moreover, the appellate court determined that the defendant was “at least recklessly indifferent to [the other entities’] misrepresentations,” based on his knowledge of previous schemes operated by the other owners and reliance on a non-lawyer’s assurance that the marketing materials had been “legally approved,” making him “jointly and severally liable for restitution for the corporation’s unjust gains in violation of the FTC Act.”

    Courts Ninth Circuit Appellate FTC Act Mortgages FTC

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  • 8th Circuit affirms reduction in TCPA statutory damages from $1.6 billion to $32 million


    On July 16, the U.S. Court of Appeals for the 8th Circuit affirmed a district court’s decision to reduce a $1.6 billion award in statutory damages for TCPA violations to $32.4 million after the court determined the original award violated the Fifth Amendment’s Due Process Clause. The named plaintiffs in the class action alleged that parties involved in the financing and marketing campaign of a film with religious and political themes violated the TCPA through the use of a telephone campaign in which approximately 3.2 million prerecorded robocalls were made in the course of a week. The plaintiffs—who received two of these messages on their answering machine—filed an appeal after the district court concluded that the original award was “‘obviously unreasonable and wholly disproportionate to the offense’” and reduced the statutory damages awarded by a jury from $500 per call to $10 per call.

    On appeal, the 8th Circuit addressed several issues, including (i) whether the plaintiffs alleged a concrete injury under the TCPA; (ii) whether the district court abused its discretion concerning instructions on direct liability against one of the defendants; and (iii) whether the court erred in finding the amount of statutory damages to be unconstitutional. The appellate court first reviewed whether the plaintiffs had alleged a sufficiently concrete injury under the TCPA. According to the opinion, “[t]he harm to be remedied by the TCPA was ‘the unwanted intrusion and nuisance of unsolicited telemarketing phone calls and fax advertisements. . . .The [plaintiffs’] harm . . . was the receipt of two telemarketing messages without prior consent. These harms bear a close relationship to the types of harms traditionally remedied by tort law, particularly the law of nuisance.” However, the appellate court stated that the district court was correct to reject the plaintiffs’ direct liability instructions against the defendant who helped finance the film, writing that the plaintiffs “improperly blurred the line between direct and agency liability” and that “to be held directly liable, the defendant must be the one who ‘initiates’ the call,” which the financing defendant did not do. Finally, the appellate court agreed with the district court that the $1.6 billion award violated the Due Process Clause, and highlighted evidence that the advertiser “plausibly believed it was not violating the TCPA” and “had prior consent to call the recipients about religious liberty,” which was a predominant theme of the film being promoted. Moreover, the court noted,”[t]he call campaign was conducted for only about a week,” and recipients could only hear the message about the film if they voluntarily opted in during the call. The court further reasoned that “the harm to the recipients was not severe—only about 7% of the calls made it to the third question, the one about the film. Under these facts, $1.6 billion is ‘so severe and oppressive as to be wholly disproportioned to the offense and obviously unreasonable.’”

    Courts Privacy/Cyber Risk & Data Security Robocalls Eighth Circuit Appellate TCPA Class Action

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  • 7th Circuit affirms dismissal of ADA claim against credit union on standing grounds


    On July 15, the U.S. Court of Appeals for the 7th Circuit affirmed a district court’s decision to dismiss a plaintiff’s claim that a credit union’s website accessibility barriers violated his rights under the Americans with Disabilities Act (ADA) because the plaintiff is not a member of the credit union, nor can he become one. As previously covered by InfoBytes, last year the district court granted the credit union’s motion to dismiss on standing grounds because the plaintiff—who tests software that reads text aloud for visually impaired users to access content on the internet—had no plausible reason to use the credit union’s website because the website was directed at members of the credit union for which he was ineligible. The court found that the plaintiff lacked standing because he failed to allege “concrete and particularized” injuries when he claimed he suffered dignitary and informational harm stemming from his inability to access information on the website, and cited to a recent 4th Circuit decision in Griffin v. Dep’t of Labor Fed. Credit Union, which held that “a plaintiff who is legally barred from using a credit union’s services cannot demonstrate an injury that is either concrete or particularized.”

    On appeal, the 7th Circuit agreed with the district court, finding that “Illinois law prevents [the plaintiff’s] dignitary harm from materializing into a concrete injury,” and that “indignation at violation of the law” is not concrete or particularized as is required to show standing. The appellate court also noted that the plaintiff’s informational harm claim failed as well because “[h]is alleged injury flows from the [c]redit [u]nion’s failure to support his software, not its refusal to disclose information about its services.”

    Courts Seventh Circuit Appellate Americans with Disabilities Act

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  • FHFA now says agency structure is constitutional, under Calabria


    On July 9, the FHFA sent a letter to the U.S. Court of Appeals for the 5th Circuit notifying the court that the agency has a new Director, Mark Calabria, and that the FHFA has reconsidered its position regarding the constitutionality of its structure, presently concluding the Housing Economic Recovery Act’s (HERA) for-cause removal provision is constitutional. As previously covered by InfoBytes, in July 2018, the 5th Circuit concluded that the FHFA’s single-director structure violates Article II of the Constitution because the director is too insulated from removal by the president. In August 2018, while the agency was still under the leadership of Mel Watt, it petitioned the court for an en banc rehearing, challenging the constitutionality holding. Subsequently, in January, then acting Director, Joseph Otting, filed a supplemental brief stating the agency will no longer defend the constitutionality of the FHFA’s structure. Now, under the leadership of Director Calabria, the agency asserts that it reconsidered the issue, and respectfully requests that the appellate court uphold the agency’s structure as constitutional.

    Courts Appellate Fifth Circuit FHFA HERA Single-Director Structure

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  • 3rd Circuit: Collection letter failed to properly identify creditor in violation of FDCPA


    On July 10, the U.S. Court of Appeals for the 3rd Circuit reversed the dismissal of a FDCPA action against a debt collector, holding that the collection letter failed to apprise the least sophisticated debtor of the creditor’s identity. The complaint alleges that the debt collector “failed to identify ‘the name of the creditor to whom the debt is owed’” as required by the FDCPA because the letter listed “at least four entities” that were connected in some way to the debt. The district court dismissed the complaint, concluding the debt collector sufficiently identified the creditor.

    On appeal, the 3rd Circuit concluded that the letter failed to notify the least sophisticated debtor of the creditor’s identity for three reasons: (i) the letter did not expressly state that the bank was  the creditor or the owner of the debt; (ii) the letter identified the bank as the “assignee of” three other financial entities and “assignee” is a legal term that does not assist a debtor in understanding the relationships between the parties; and (iii) the letter as a whole failed to sufficiently identify the bank as the creditor, as the reference to three other entities “‘overshadowed’ the creditor’s identity.” The appellate court concluded that the letter failed to properly disclose the creditor and therefore, violated the FDCPA, reversing the district court’s dismissal of the complaint.

    Courts Debt Collection Third Circuit Appellate FDCPA Least Sophisticated Consumer

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  • D.C. Circuit: Receipt containing complete credit card information constitutes concrete injury


    On July 2, the U.S. Court of Appeals for the D.C. Circuit reversed a district court’s ruling that a consumer lacked Article III standing to allege a violation of the Fair and Accurate Credit Transaction Act (FACTA) when a merchant included all 16 digits of her credit card account number, her full name, and the expiration date on a receipt, because the receipt was not thrown away. Under FACTA, merchants are prohibited from including on a receipt (i) more than the last five digits of a consumer’s credit card number; and (ii) a credit card’s expiration date. The consumer alleged that the merchant violated the restriction, but the district court ruled that the consumer lacked standing to sue because she failed to describe a concrete risk of “actual or imminent” injury to a protected interest as defined in the U.S. Supreme Court’s decision in Spokeo, Inc. v. Robins. According to the district court, because the consumer did not dispose of the receipt, and was the only person who ever saw the receipt, her risk of identity theft had not increased. Moreover, the district court stated that the burden of protecting the non-compliant receipt did not constitute a concrete injury.

    On appeal, the D.C. Circuit reversed, holding that printing a receipt containing all 16 digits of a consumer’s credit card number is an “egregious” enough violation of FACTA to confer standing. According to the panel, the harm inflicted on the consumer by the merchant’s mishandling of her receipt had a “close relationship” to the type of harm that gives rise to a “breach of confidence” claim. Moreover, the panel stated that it was irrelevant that the consumer had been able to protect herself by safeguarding the receipt because: (i) FACTA protects an interest in avoiding an increased risk of identity theft, which the panel considered to be sufficiently concrete; and (ii) under the facts presented, the violation of the truncation requirement created a “risk of real harm” to such concrete interest. The D.C. Circuit remanded the case for further proceedings consistent with its findings. Notwithstanding, the panel was clear that not every violation of FACTA’s truncation requirement creates a risk of identity theft.

    Notably, while the D.C. Circuit’s decision is in agreement with an 11th Circuit opinion issued in April (prior InfoBytes coverage here), it conflicts with other appellate decisions, including an opinion issued by the 3rd Circuit in March (covered by InfoBytes here), wherein the 3rd Circuit held that, without concrete evidence of harm, a consumer lacks standing under FACTA to sue a merchant for including too many digits of a credit card account number on a receipt. The D.C. Circuit noted, however, that the 3rd Circuit “recognized its analysis would be different if it were presented with the facts [the consumer] presents to us.”

    Courts D.C. Circuit Appellate Privacy/Cyber Risk & Data Security FACTA Spokeo

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  • 4th Circuit holds lenders sufficiently proved tribal immunity


    On July 3, the U.S. Court of Appeals for the 4th Circuit reversed the district court’s denial of two tribal lenders’ motion to dismiss a putative class action lawsuit brought by Virginia residents, concluding the lenders properly claimed tribal sovereign immunity. The complaint alleged that the tribal lenders violated Virginia’s usury laws by charging Virginia residents interest rates 50-times-higher than those permitted under Virginia law. The tribal lenders moved to dismiss the action in district court on the grounds that they are entitled to sovereign immunity as an arm of the tribe. The district court denied the motion, concluding the tribal lenders (i) bore the burden of proof of immunity; and (ii) failed to prove they were an “arm-of-the-tribe.”

    On appeal, the 4th Circuit agreed with the district court that the burden of proof in the arm-of-the-tribe analysis should be placed on the defendant, stating “[u]nlike the tribe itself, an entity should not be given a presumption of immunity until it has demonstrated that it is in fact an extension of the tribe.” However, the appellate court rejected the district court’s conclusion that the tribal lenders failed to meet their burden, noting that while the tribal lenders were funded and controlled by a non-tribal company, ten percent of the tribe’s general fund comes from one of the lenders, and a judgment against either lender “could in fact significantly impact the tribal treasury.” Ultimately, the appellate court concluded that the lenders had “promoted ‘the Tribe’s self-determination through revenue generation and the funding of diversified economic development” and a finding of no immunity, “would weaken the Tribe’s ability to govern itself according to its own laws, become self-sufficient, and develop economic opportunities for its members.”

    Courts Fourth Circuit Appellate Tribal Immunity Class Action Usury

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  • 7th Circuit: HEA does not preempt affirmative misrepresentation claims against student loan servicer


    On June 27, the U.S. Court of Appeals for the 7th Circuit vacated the dismissal of an action against a student loan servicer, concluding a borrower is not barred by the Higher Education Act from asserting state-law claims against a student loan servicer if the borrower reasonably and detrimentally relied on affirmative misrepresentations. The class action filed against a federal student loan servicer alleged that the servicer steered borrowers who were struggling to make payments into repayment plans that benefited the servicer to the detriment of borrowers, notwithstanding claims on the servicer’s website indicating that trained experts would assist each borrower choose among options beneficial to the borrower based on individual circumstances. In addition to violations of the Illinois Consumer Fraud and Deceptive Business Practices Act, the complaint alleged that the servicer’s conduct constituted constructive fraud and negligent misrepresentation under Illinois law. The district court dismissed the claims, holding that they were expressly preempted by Section 1098g of the Higher Education Act (HEA), which states “‘[l]oans made, insured, or guaranteed pursuant to a program authorized by title IV of the [HEA] of 1965 (20 U.S.C. 1070 et seq.) shall not be subject to any disclosure requirements of any State Law.’”

    On appeal, the 7th Circuit disagreed, concluding the district court’s decision was “overly broad.” Specifically, the appellate court found that the statements made on the servicer’s website were “affirmative misrepresentations,” which would not be covered under the HEA. The appellate court distinguished the instant case from the 9th Circuit’s decision in Chae v. SLM Corp, noting the plaintiffs in Chae complained about alleged “failures to disclose key information in specific ways, such as loan terms and repayment requirements.” Here, however, the 7th Circuit panel determined that the preemption principles enunciated in the Chae opinion do not extend to claims about the servicer’s “affirmative misrepresentations in counseling, where [the servicer] could have avoided liability under state law by remaining silent (or telling the truth) on certain topics.”

    Courts Seventh Circuit Appellate Student Lending Student Loan Servicer Higher Education Act

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  • 9th Circuit denies rent-to-own company’s arbitration bid


    On June 28, the U.S. Court of Appeals for the 9th Circuit affirmed the denial of a rent-to-own company’s motion to compel arbitration in a putative class action alleging the company charged excessive prices. According to the opinion, three named plaintiffs filed suit against the company in 2017, alleging that the company structured its rent-to-own pricing in violation of California law, including the Karnette Rental-Purchase Act, the Unfair Competition Law, the Consumers Legal Remedies Act, and the state’s prohibitions against usurious loans. The plaintiffs sought public injunctive relief, as well as compensatory damages and restitution, among other things. The company moved to compel arbitration in accordance with the arbitration agreement executed in connection with the plaintiff’s rent-to-own air conditioner contract. The district court denied the motion to compel arbitration, concluding that the arbitration agreement violates the California Supreme Court decision in McGill v. Citibank, N.A (covered by a Buckley Special Alert here) because it constitutes a waiver of the plaintiff’s substantive right to seek public injunctive relief. Moreover, the court concluded that McGill was not preempted by the Federal Arbitration Act (FAA), and that the agreement’s severance clause allowed for the plaintiff’s Karnette Act, UCL, and CLRA claims to be severed from the arbitration.

    On appeal, the 9th Circuit agreed with the district court, rejecting the company’s arguments that McGill was preempted by the FAA. The appellate court found that McGill does not interfere with the bilateral nature of a typical arbitration, stating “[t]he McGill rule leaves undisturbed an agreement that both requires bilateral arbitration and permits public injunctive claims.” Moreover, the appellate court noted that the severance clause in the agreement, which precludes an arbitrator from awarding public injunctive relief, is triggered by the McGill rule, and disagreed with the company that the arbitrator would still adjudicate liability first, concluding that the clause provides “the entire claim be severed for judicial determination.”

    Courts Appellate Ninth Circuit Arbitration Federal Arbitration Act

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  • Split 9th Circuit reverses dismissal of class action alleging bank-assisted fraud


    On June 24, the U.S. Court of Appeals for the 9th Circuit reversed the dismissal of a non-customer class action against a California bank alleging the bank knowingly assisted a fraudulent scheme, in violation of California law. The class action asserts eight claims against the bank under California law, including aiding and abetting fraud and conspiracy to commit fraud, for allegedly “knowingly assist[ing] a $125 million fraudulent scheme” initiated by one of the bank’s clients. The district court dismissed the action, holding the consumers “had not pleaded sufficient facts giving rise to a plausible inference that [the bank] knew [its client] was misappropriating funds.”

    On appeal, the 9th Circuit disagreed, concluding the consumers plausibly alleged specific allegations concerning the bank’s actual knowledge of the client’s misappropriation and fraud. The appellate court noted that while generally banks owe no duty to non-customers under California law, an exception exists when a bank “‘knowingly makes itself a party to a fraud, [it] must make good the loss that results from the misappropriation.’” The appellate court concluded that several allegations made by the consumers were plausible based on the bank using “atypical banking procedures,” which included “repeatedly making advances at [the client]’s request without obtaining supporting documentation or verifying that [the client] used the advanced proceeds appropriately (despite indications to the contrary) and extending maturity dates on short-term loans year after year (even when [the client] was in default).”

    In dissent, a panel judge argued that the consumers made no specific allegations of the bank’s actual knowledge of the fraud, noting that the complaint is “vague and lengthy” and just “a series of common banking practices dressed up in ominous language.” Additionally, the judge noted that California courts traditionally only find actual knowledge in “‘extreme circumstances,’” and have previously “refused to hold banks liable in far more egregious cases than this.”

    Courts Appellate Ninth Circuit Fraud State Issues

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