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  • En banc 5th Circuit declares FHFA structure unconstitutional, allows net worth sweep claims to proceed

    Courts

    On September 6, the U.S. Court of Appeals for the 5th Circuit reaffirmed, in an en banc rehearing, that the Federal Housing Finance Agency (FHFA) structure violates constitutional separation of powers requirements and allowed “net worth sweep” claims brought by a group of Fannie Mae and Freddie Mac (government-sponsored entities or GSEs) shareholders to proceed. As previously covered by InfoBytes, GSE shareholders brought an action against the U.S. Department of Treasury and FHFA arguing that (i) the FHFA acted outside its statutory authority when it adopted a dividend agreement that requires the GSEs to pay quarterly dividends equal to their entire net worth to the Treasury Department (known as “net worth sweep”); and (ii) the structure of the FHFA is unconstitutional because it violates separation of powers principles. The district court dismissed the shareholder’s statutory claims and granted summary judgment in favor of the Treasury Department and the FHFA on the separation of powers claim. On appeal, the 5th Circuit agreed with the lower court on the first claim, concluding that the net worth sweep payments were acceptable under the FHFA’s statutory authority and that the FHFA was lawfully established by Congress through the Housing and Economic Recovery Act of 2008 (HERA), which places restraints on judicial review. However, the appellate court reversed the lower court’s decision on the separation of powers claim, concluding that Congress went too far in insulating the FHFA’s single director from removal by the president for anything other than cause, ruling that the agency’s structure violates Article II of the Constitution. 

    After an en banc rehearing, the appellate court issued two separate majority opinions. Both opinions concluded that (i) the GSE shareholders plausibly alleged that the net worth sweep exceed the powers of the FHFA when acting as a conservator under HERA; and (ii) the FHFA’s structure—which provides the director with “for cause” removal protection—violates the Constitution’s separation of powers requirements. However, the opinions differed on the appropriate remedy, with nine judges concluding that the remedy should be severance of the for-cause provision, not prospective relief invalidating the net worth sweep, stating that “the Shareholders’ ongoing injury, if indeed there is one, is remedied by a declaration that the “for cause” restriction is declared removed. We go no further.”

    Various dissenting opinions were issued, including one signed by seven judges concluding that the FHFA acted within its statutory powers under HERA when it adopted the net worth sweep, stating “the FHFA’s ‘powers are many and mostly discretionary.’” In another dissenting opinion, four judges argued that the majority opinions wrongly concluded that the FHFA’s structure is unconstitutional, arguing that there are “only reasons for caution and skepticism, and none for action” in the constitutional claim. “Neither the Constitution’s text, nor the Supreme Court’s constructions thereof, nor the adversary process in this litigation has given us much ground on which to declare the FHFA’s design unconstitutional,” the judges argued.

    Given the similarities of the FHFA’s single director structure with that of the CFPB, this case warrants close attention as it has the potential to create a vehicle for consideration by the Supreme Court of the constitutionality of single director agencies.

    Courts Appellate Fifth Circuit En Banc FHFA Fannie Mae Freddie Mac GSE Single-Director Structure HERA Congress

  • 6th Circuit: FCRA claims require consumer to notify consumer reporting agency of dispute

    Courts

    On August 29, the U.S. Court of Appeals for the 6th Circuit affirmed a district court’s ruling that a bank was not obligated under the Fair Credit Reporting Act (FCRA) to investigate a credit reporting error because the consumers failed to ever notify a consumer reporting agency. According to the opinion, after plaintiffs paid off their line of credit, the bank (defendant) continued reporting the plaintiff as delinquent on the account. After plaintiffs contacted the bank regarding the reporting error, the bank employee ensured plaintiffs that the defendant submitted amendments to the credit reporting bureaus to correct the situation. However, the plaintiffs claimed the error was not corrected until almost a year later. Plaintiffs also alleged that they did not contact the credit reporting bureau in reliance on the bank employee’s statements. The district court granted summary judgment in favor of the bank, concluding that the FCRA requires that notification of a credit dispute be provided to a consumer reporting agency as a prerequisite for a claim that a furnisher failed to investigate the dispute. Since the plaintiffs failed to trigger the defendant’s FCRA obligations because they never filed a dispute with a consumer reporting agency, the defendant’s responsibility to investigate was never activated.

    On appeal, the 6th Circuit agreed with the district court that direct notification to the furnisher of the inaccurate credit report does not meet the FCRA’s prerequisite. Additionally, the plaintiffs’ state common law claims for breach of the duty of good faith and fair dealing and tortious interference with contractual relationships were preempted by the FCRA, and their fraudulent misrepresentation claim was forfeited on appeal.

    Courts Appellate Sixth Circuit FCRA Credit Report Credit Furnishing Consumer Reporting Agency

  • 11th Circuit: Payday lenders’ agreements unenforceable under Georgia policy

    Courts

    On August 28, the U.S. Court of Appeals for the 11th Circuit held that a district court did not err when it denied a group of lenders’ motion to dismiss class action claims alleging that their loan agreements violated Georgia’s Payday Lending Act (PLA), the Georgia Industrial Loan Act (GILA), and state usury laws. According to the opinion, the plaintiffs entered into agreements for loans generally amounting to less than $3,000 that were to be repaid from recoveries received by the plaintiffs in their individual personal injury lawsuits. The defendants moved to dismiss the complaint and strike the class allegations, arguing that the loan agreements’ forum-selection clause required the borrowers to bring their lawsuit in Illinois, and that the class action waiver provision in the agreements prevented the plaintiffs from being able to file any class action against them. The plaintiffs maintained, however, that these provisions in the loan agreements were unenforceable because they violated Georgia public policy, and the district court agreed.

    On appeal, the 11th Circuit affirmed the district court because it also concluded that the loan agreements’ forum-selection and class action waiver provisions were unenforceable as against Georgia public policy. Regarding the forum-selection clause, the appellate court held that the PLA “establish[es] a clear public policy against out-of-state lenders using forum selection clauses to avoid litigation in Georgia courts.” Regarding the class action waiver, the appellate court noted that both the PLA and the GILA specifically authorize class action suits; that the district court did not consider whether the waivers were procedurally or substantively unconscionable did not matter because the fact that the waivers violate public policy is an independent and sufficient basis to hold them unenforceable. The defendants also noted that the statutes did not prohibit class action waivers or create a statutory right to pursue class actions, but a contractual provision “need not literally conflict with Georgia law to contravene public policy.” (Citing Langford v. Royal Indemnity Co.) Instead, the appellate court agreed with the district court that “enforcement of the class action waivers in this context would eliminate a remedy contemplated by the Georgia legislature and undermine the purpose of the PLA and the GILA.”

    Courts Appellate Eleventh Circuit Payday Lending State Issues Usury

  • 3rd Circuit affirms dismissal of NFL season ticket class action

    Courts

    On August 29, the U.S. Court of Appeals for the 3rd Circuit affirmed the dismissal of a putative class action alleging that an NFL team’s season ticket sales practices had violated the implied covenant of good faith and fair dealing and the New Jersey Consumer Fraud Act (CFA). As previously covered by InfoBytes, the case was centered on the plaintiff’s purchase of a personal seat license (PSL) that “both allows and obligates” him to buy season tickets for particular seats at the team’s home games. The team later began selling seats in the same seating section without requiring PSLs, which the plaintiff alleged made his PSL “valueless” and “‘unsellable’ because defendants are currently giving away for free what cost him $8,000.” The district court dismissed the plaintiff’s claims with prejudice because the plaintiff had received the “reasonably expected fruits under the contract.” 

    On appeal, the 3rd Circuit agreed with the district court that the plaintiff had “received the fruits of his contract” because “[n]othing in the complaint suggests [the plaintiff] has lost the exclusive right to purchase season tickets for these seats” and the fact that the team “might now sell adjacent seats to members of the general public does not implicate [the plaintiff’s] rights and certainly does not strip him of the benefit for which he bargained.” Regarding the value of his PSA, the appellate court noted that when purchasing the PSL, the plaintiff represented that he was not acquiring it as an investment and had no expectation of profit. Finally, with regard to the CFA claim, the appellate court held that “simply changing the terms on which defendants sell other seats in the stadium is not misleading.”

    Courts Appellate Third Circuit Class Action State Issues Contracts

  • 11th Circuit: Unsolicited text message doesn't establish standing under TCPA

    Courts

    On August 28, the U.S. Court of Appeals for the 11th Circuit held that receiving one unsolicited text message is not enough of a concrete injury to establish standing under the TCPA. According to the opinion, a former client of an attorney received an unsolicited “multimedia text message” from the attorney offering a ten percent discount on services. The client filed a putative class action, alleging the attorney violated the TCPA arguing the text message caused him “‘to waste his time answering or otherwise addressing the message’” leaving his cell phone “‘unavailable for otherwise legitimate pursuits’” and resulted in “‘an invasion of [] privacy and right to enjoy the full utility’” of his cell phone. The attorney moved to dismiss the complaint for lack of standing and the district court denied the motion. However, the court allowed the attorney to pursue an interlocutory appeal.

    On appeal, the 11th Circuit looked to the Supreme Court decision in Spokeo, Inc. v. Robins— which held that a plaintiff must allege a concrete injury, not just a statutory violation, to establish standing—as well as the legislative history of the TCPA and determined there was “little support” for treating the client’s allegations as a concrete injury. Specifically, the panel noted that the allegations of “a brief, inconsequential annoyance are categorically distinct from those kinds of real but intangible harms” Congress set out to protect. Moreover, the “chirp, buzz, or blink of a cell phone” is annoying, but not a basis for invoking federal court jurisdiction. The panel also acknowledged that Congress, not a federal court, is “well positioned” to assess the new harms of technology. Because the client failed to allege a concrete harm by receiving the unsolicited text message, the panel reversed the district court decision.

    Courts Appellate Eleventh Circuit Spokeo Standing Class Action TCPA

  • 6th Circuit: Collection fee authorized under contractual agreement valid under FDCPA

    Courts

    On August 21, the U.S. Court of Appeals for the 6th Circuit affirmed a district court’s determination that a collection fee charged by a debt collector seeking to recover past due homeowner’s association fees was expressly authorized by a contractual agreement and did not violate the FDCPA. According to the opinion, after the plaintiffs fell behind on their homeownership association assessments and fees, the account was placed for collection with the defendant, who sought to collect both the past-due amount plus additional fees it charged the association for its collection services. The plaintiffs filed a lawsuit alleging that the debt collector violated the FDCPA by collecting the collection fees directly from the plaintiffs without authorization and attempting to collect an amount after agreeing to a settlement. The district court held a bench trial, which returned a verdict in favor of the defendant, finding that collecting the fees directly from the plaintiff was expressly authorized by the language in an agreement creating the debt (the Declaration). The plaintiffs appealed, arguing, among other things, that (i) the Declaration did not expressly authorize the collection of fees directly from them, and that moreover, because the association had not yet incurred the costs the additional fees should not have been collected until the original debt was paid; and (ii) the costs should have been limited to legal fees and costs.

    On appeal, the 6th Circuit agreed with the district court, citing a provision in the Declaration providing that “‘[e]ach such assessment, together, with interest, costs, and reasonable attorney’s fees’. . . ‘shall also be the personal obligation’ of the property owner.” Additionally, the 6th Circuit noted that if the defendant waited to collect the additional fees, it would create an impractical, never-ending cycle of collections. Moreover, the appellate court was not persuaded by the plaintiffs’ argument that the Declaration limited the authorization of costs, noting that “[b]ecause collection often occurs outside of litigation, it makes little sense to read the Declaration to silently limit ‘costs’ to ‘legal costs’ associated only with litigation.”

    Courts Sixth Circuit Appellate FDCPA Fees Debt Collection

  • 11th Circuit reverses dismissal of EFTA action alleging inadequate overdraft notice, denies EFTA safe harbor defense

    Courts

    On August 27, the U.S. Court of Appeals for the 11th Circuit reversed the dismissal of a consumer’s action against her credit union, in which the consumer alleged the credit union used the wrong balance calculation method to impose overdraft fees. According to the opinion, the consumer filed suit against the credit union for using an “available balance” calculation method to impose overdraft fees on her account when the credit union allegedly agreed to use the “ledger balance” method at the time of account opening, in violation of the Electronic Fund Transfer Act (EFTA) and various state law contract claims. The district court dismissed the action, concluding that the agreements “unambiguously permitted [the credit union] to assess overdraft fees using the available balance calculation.”

    On appeal, the 11th Circuit disagreed with the district court’s interpretation of the agreements. The court noted that while the opt-in overdraft agreement used by the credit union is based on Regulation E’s (the EFTA’s implementing regulation) Model Form A-9, the model does not address which account balance calculation method is used to determine whether a transaction results in an overdraft. The language chosen by the credit union, according to the appellate court, is “ambiguous because it could describe either the available or the ledger balance calculation method for unsettled debits” and therefore, does not describe the calculation in a “clear and readily understandable way” as required by Regulation E. Because the language was ambiguous, the consumer did not have the opportunity to affirmatively consent to the overdraft service. Moreover, the appellate court concluded that the credit union was not protected under the EFTA’s safe harbor because it used the Model Form A-9 text. Specifically, the appellate court reasoned that the “safe-harbor provision insulates financial institutions from EFTA claims based on the means by which the institution has communicated its overdraft policy,” but does not provide a shield from allegations of inadequacy. Because the consumer argued that the credit union violated the EFTA due to its failure to prove enough information to allow for affirmative consent, the safe-harbor provision does not preclude liability.

    Courts Appellate Eleventh Circuit Regulation E Overdraft Consumer Finance Opt-In EFTA

  • 7th Circuit overturns precedent, rejects restitution under Section 13(b) of FTC Act

    Courts

    On August 21, the U.S. Court of Appeals for the 7th Circuit held that Section 13(b) of the FTC Act does not give the FTC power to order restitution, overruling that court’s 1989 decision in FTC v. Amy Travel Service, Inc. As previously covered by InfoBytes, in June 2018, the U.S. District Court for the Northern District of Illinois granted the FTC’s motion for summary judgment against a credit monitoring service and its sole owner in an action filed under Section 13(b) of the FTC Act. The court concluded that no reasonable jury would find that the defendants’ scheme of using false rental property ads to solicit consumer enrollment in credit monitoring services without their knowledge could occur without engaging in unfair or deceptive practices. The FTC argued that the defendants’ scheme, which used the promise of a free credit report to enroll the consumers into a monthly credit monitoring program, violated the FTC Act’s ban on deceptive practices. The court agreed, holding that the ad campaign was “rife with material misrepresentations that were likely to deceive a reasonable consumer.” Additionally the court agreed with the FTC that the defendants’ website was materially misrepresentative because it did not give “the net impression that consumers were enrolling in a monthly credit monitoring service” for $29.94 a month, as opposed to defendants’ claim that consumers were obtaining a free credit report. The court also found that the defendants’ websites failed to meet certain disclosure requirements imposed by the Restore Online Shopper Confidence Act. The court entered a permanent injunction and ordered the defendants to pay over $5 million in “equitable monetary relief” to the FTC.

    On appeal, the 7th Circuit affirmed the district court’s liability determination, and affirmed the issuance of the permanent injunction. However, the appellate court took issue with the restitution award ordered pursuant to Section 13(b) of the FTC Act. The appellate court noted that the FTC has long viewed Section 13(b) as authorizing awards of restitution, and even acknowledged that the 7th Circuit agreed with the FTC’s position in its decision in Amy Travel. However, subsequent to the Amy Travel decision, the Supreme Court, in Meghrig v. KFC W., Inc., clarified that “courts must consider whether an implied equitable remedy is compatible with a statute’s express remedial scheme.” Applying Meghrig, the 7th Circuit noted that “nothing in the text or structure of the [FTC Act] supports an implied right to restitution in section 13(b), which by its terms authorizes only injunctions.” The panel emphasized that the FTC Act has two other provisions that expressly authorize restitution if the FTC follows certain procedures, but the current reading of Section 13(b), based on Amy Travel, allows the FTC “to circumvent these elaborate enforcement provisions and seek restitution directly through an implied remedy.” Therefore, based on the Supreme Court precedent in Meghrig, the panel concluded that Section 13(b)’s grant of authority to order injunctive relief does not implicitly authorize an award of restitution, overturning its previous decision in Amy Travel and vacating the district court’s award of restitution.

    Courts Appellate Seventh Circuit FTC Act Enforcement Restitution FTC

  • 9th Circuit: TILA right of rescission does not apply for mortgages used to reacquire property

    Courts

    On August 14, the U.S. Court of Appeals for the 9th Circuit held that TILA’s right of rescission does not apply when a borrower obtains a mortgage to reacquire residential property after having no ownership rights. According to the opinion, in 2003, a borrower quitclaimed his interest in residential property to his then wife; in 2007, he obtained a mortgage loan and took title to the property in accordance with a divorce judgment. The borrower sought rescission of the mortgage loan and the district court dismissed the action as untimely. On appeal, the 9th Circuit vacated the district court’s judgment, holding the borrower gave proper notice within the three year limit under TILA. On remand, the district court granted summary judgment in favor of the mortgage company, concluding the transaction was a residential mortgage transaction, in which no statutory right of rescission exists under TILA.

    On appeal, the 9th Circuit affirmed summary judgment in favor of the mortgage company. The appellate court rejected the borrower’s arguments that (i) the mortgage documents showed he already owned an interest in the property before he took out the mortgage loan; and (ii) the mortgage was taken in accordance with a divorce judgment, not to finance the acquisition of the property. The appellate court concluded that under TILA, the mortgage loan was a “residential mortgage transaction,” the definition of which “includes both an initial acquisition and a reacquisition of a property.” The fact the mortgage company characterized the transaction as a refinance is not determinative, according to the panel, because the borrower did not acquire title to the property until the day after he signed the loan. Moreover, while the divorce judgment ordered the borrower to make a payment to his ex-wife in order to obtain title to the property, he obtained a residential mortgage loan “in order to carry out those conditions.”

    Courts Appellate Ninth Circuit TILA Mortgages

  • 3rd Circuit: Proof of written agreement needed for TILA claims

    Courts

    On August 20, the U.S. Court of Appeals for the 3rd Circuit concluded that a plaintiff failed to adequately allege the existence of a written agreement for his deductible payment plan and therefore, his surgery institute did not violate TILA’s disclosure requirements. According to the opinion, the day before his surgery, the surgery institute orally agreed to accept a partial deductible payment and agreed to permit the plaintiff to pay the remaining deductible requirements in monthly installments. The plaintiff received two emails, one confirming the initial payment and the other confirming the payment plan and listing the plaintiff’s credit card. The institute performed the surgery, but the plaintiff failed to make any further payments on the deductible. Instead, the plaintiff filed an action against the institute alleging it violated TILA by extending credit and failing to provide the required disclosures. The district court granted judgment on the pleadings for the institute, concluding that the plaintiff' failed to establish a written agreement for the extension of credit. The court also issued sanctions, in the form of attorneys’ fees, against the plaintiff’s counsel, reasoning the counsel could have reasonably discovered the lack of written agreement and lack of payment before initiating the action.

    On appeal, the 3rd Circuit affirmed in part and reversed in part in the district court’s judgment. The appellate court agreed with the district court that the plaintiff failed to establish the existence of a written agreement for credit with the institute, noting “the requirement of a written agreement [under TILA] is not satisfied by a ‘letter that merely confirms an oral agreement.’” But the appellate court noted that the district court erred in relying on an admission to that effect by plaintiff’s counsel during a telephone conference. Nonetheless, the error was “harmless” because the plaintiff failed to establish a written agreement was executed and signed, stating “[n]owhere does he allege that he signed a written agreement, and the [] email correspondence was merely ‘confirming’ the ‘previously discussed’ agreement." The appellate court then reversed the district court’s sanctions ruling, concluding it abused its discretion when it imposed them.

    Courts Appellate Third Circuit TILA Regulation Z Disclosures

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