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District Court rejects dismissal bid for California interest on escrow class action
On December 7, the U.S. District Court for the Northern District of California denied a bank’s motion to dismiss a putative class action alleging the bank violated the California Unfair Competition Law (UCL) by not paying interest to residential mortgagors on funds held in escrow accounts, as required by California law. The three plaintiffs filed the complaint against the bank after the March decision by the U.S. Court of Appeals for the 9th Circuit in Lusnak v. Bank of America, which held that a national bank must comply with a California law that requires mortgage lenders to pay interest on the funds held in a consumer’s escrow account. (Previously covered by InfoBytes here.) The plaintiffs argued that the 9th Circuit decision requires the bank to comply with the California law requiring interest on funds held in escrow.
In response, the bank filed a motion to dismiss, or in the alternative to stay the case, on the basis that the plaintiffs failed to provide the bank with notice and an opportunity to cure alleged misconduct prior to judicial action as required by the mortgage deed, and that the plaintiff’s claims were preempted by the Home Owners Loan Act (HOLA). The court rejected these arguments, finding that the plaintiff’s failure to comply with the ambiguous provisions in the mortgage deed do not foreclosure their claims, concluding “[t]o deprive Plaintiffs of recourse to their statutory rights based on an ambiguous contractual provision would also frustrate the consumer protection purposes of those statutes.” As to the HOLA argument, the court acknowledged that HOLA preempted the state interest law as to the originator of the mortgages, a now-defunct federal thrift, but disagreed with the bank’s assertion that the preemption attached throughout the life of the loan, including after the loan is transferred to a bank whose own lending is not covered by HOLA. Specifically, the court looked to the legislative intent of HOLA and noted it was unclear if Congress intended for preemption to attach through the life of the loan, but found a clear goal of consumer protection. Therefore, the court concluded that “[a]llowing preemption may run contrary to HOLA's purpose and could result in a gross miscarriage of justice” by depriving homeowners of state law protections.
Additionally, the court rejected as moot the alternative request to stay the case pending the Supreme Court’s resolution of Lusnak, because the Supreme Court denied the petition of writ in that case in November (covered by InfoBytes here).
9th Circuit upholds $1.3 billion judgment for payday scheme
On December 3, the U.S. Court of Appeals for the 9th Circuit upheld a $1.3 billion judgment against defendants-appellants responsible for operating an allegedly deceptive payday lending scheme. As previously covered by InfoBytes, in October 2016, the FTC announced that the U.S. District Court for the District of Nevada ordered a Kansas-based operation and its owner to pay nearly $1.3 billion for allegedly violating Section 5(a) of the FTC Act by making false and misleading representations about loan costs and payment. The owner appealed to the 9th Circuit, arguing that the loan notes were “technically correct” because the fine print located under the TILA disclosure box contained all the legally required information. The appeals court disagreed. In affirming the district court’s judgment, the appeals court determined the loan note was still deceptive even though the fine print contained the relevant information about the loan’s automatic renewal terms, stating “[appellants’] argument wrongly assumes that non-deceptive business practices can somehow cure the deceptive nature of the Loan Note.” Moreover, the appeals court rejected the argument about technical correctness, citing the FTC Act’s “consumer-friendly standard” (which does not require technical accuracy) and noting that “consumers acting reasonably under the circumstances—here, by looking to the terms of the Loan Note to understand their obligations—likely could be deceived by the representations made there.” Among other things, the appeals court also rejected the appellant owner’s challenge to the $1.3 billion judgment (based on an argument that the lower court overestimated his “wrongful gain” and that the FTC Act only allows the court to issue injunctions), concluding that the owner failed to provide evidence contradicting the wrongful gain calculation and that a district court may grant any ancillary relief under the FTC Act, including restitution.
5th Circuit finds company delay unfairly prejudiced plaintiff, reverses decision to compel arbitration
On November 28, the U.S. Court of Appeals for the 5th Circuit reversed a lower court decision to grant a technology analytics company’s motion to compel arbitration, finding that the company substantially invoked the judicial system prior to moving to compel arbitration, and the individual plaintiff was prejudiced by such actions. According to the opinion, in 2015, the plaintiff filed a complaint against the company alleging various violations of Illinois law relating to deceptive practices and unjust enrichment. In response, the company filed a motion to dismiss for failure to state a claim and, in the alternative, moved to transfer the case for forum non conveniens arguing that the plaintiff’s claims were subject to arbitration in Texas. After the case was transferred to Texas, the company filed a subsequent motion to dismiss and reply brief, both of which did not mention arbitration. In 2017, after receiving the plaintiff’s requests for production, the company filed with the district court its motion to compel arbitration. The district court granted the motion to compel, holding that while the company substantially invoked the judicial process, the plaintiff had only “suffered some prejudice” in the form of delay and delay alone is insufficient to deny arbitration.
On appeal, the 5th Circuit agreed that the company substantially invoked the judicial system, but determined the lower court erred when it found the plaintiff had not been prejudiced unfairly. As a result, the company waived its right to arbitrate. The 5th Circuit noted that after the case was transferred from Illinois to Texas, the company waited 13 months before moving to compel arbitration, in order to first obtain a dismissal from the district court. Acknowledging the damage to the plaintiff’s legal position and additional litigation expenses incurred because of this tactic, the appellate court stated, “[a] party cannot keep its right to demand arbitration in reserve indefinitely while it pursues a decision on the merits before the district court.”
3rd Circuit reverses district court’s collateral estoppel ruling preventing plaintiff from pursuing debt collection claims
On November 29, the U.S. Court of Appeals for the 3rd Circuit reversed a district court’s decision to grant summary judgment to a university and its debt collection firm (appellees) on the grounds that the issue had already been decided in state court, ordering the district court to reconsider the plaintiff/appellant’s discovery motions and whether it can “exercise supplemental jurisdiction” over the appellees’ alleged violation of Pennsylvania law.
The plaintiff/appellant, a former university student, provided the appellees with a new address in Philadelphia after being contacted about unpaid tuition. When the debt remained unpaid, the appellees filed suit against him in Philadelphia municipal court but sent notices to a New Jersey address on file in the university’s system. The plaintiff/appellant did not appear in court and a default judgment was entered against him. The plaintiff/appellant petitioned to reopen the default judgment, arguing that the appellees had intentionally served his old address to avoid the personal service requirement in Philadelphia County. The municipal court dismissed the default judgment, despite finding that the appellees had not engaged in any intentional misconduct. Following a trial on the merits, the Philadelphia municipal court judge again ruled against the plaintiff/appellant for the full amount. Subsequently, the plaintiff/appellant filed a lawsuit in federal court alleging violations of the FDCPA and Pennsylvania’s Unfair Trade Practices and Consumer Protection Law; however, the federal court barred the deceptive service of process claim, finding that the municipal court had already ruled that the debt collectors’ actions were unintentional.
On appeal, the 3rd Circuit found that the district court had erred in ruling that collateral estoppel prevented the plaintiff/appellant from pursuing claims against the appellees simply because the municipal court judge said that he did not think the notices were intentionally served to the old address so a default judgment could be obtained. “Although the [m]unicipal [c]ourt’s finding may meet the first four elements of collateral estoppel, its determination that [a]ppellees did not intentionally serve [the plaintiff/appellant] at the wrong address was not essential to its judgment at that hearing, i.e., vacating the default judgment. In fact, its finding was contrary to this ultimate judgment,” the appellate court concluded. The appellate court also reversed the grant of summary judgment to the appellees on the plaintiff/appellant’s remaining FDCPA claims and remanded them to the district court to determine whether there had been “false and deceptive service of process; misconduct in opposing the opening of default judgment; and misstatements of the case caption, case number and court in the [c]ollection [l]etter.”
5th Circuit denies attorney’s fees in successful FDCPA action based on “outrageous facts”
On November 16, the U.S. Court of Appeals for the 5th Circuit affirmed a Texas district court’s denial of attorney’s fees in an FDCPA action, concluding the district court did not abuse its discretion in denying the fees based on the “outrageous facts” in the case. The decision results from a lawsuit filed by a consumer against a debt collector, alleging the company violated the FDCPA and the Texas Debt Collection Act (TDCA) by using the words “credit bureau” in its name despite having ceased to function as a consumer reporting agency, and therefore misrepresented itself as a credit bureau in an attempt to collect a debt. The district court adopted a magistrate judge’s recommendation and found the company violated the FDCPA, granted summary judgment in part for the plaintiff (while denying the TDCA claims), and awarded her statutory damages of $1,000. The plaintiff then filed a motion for $130,410 in attorney’ fees, based on her attorney’s hourly rate of $450. The magistrate judge denied the attorney’s fees, noting that although violation of the FDCPA ordinarily justifies awards of attorneys’ fees, the amount claimed was “excessive by orders of magnitude,” and the lawsuit appeared to have been “created by counsel for the purpose of generating, in counsel’s own words, an ‘incredibly high fee request.’” The district court adopted the magistrate judge’s order.
On appeal, the 5th Circuit noted that other circuits have held there can be narrow exceptions to the FDCPA’s attorneys’ fees mandate, including the presence of bad faith conduct on the part of the plaintiff. In determining the “extreme facts” of the case justify the district court’s denial of attorney’s fees, the appeals court noted the almost 290 hours claimed to be worked by the attorneys are not reflected in the pleadings filed, which were “replete with grammatical errors, formatting issues, and improper citations.” The poor craftsmanship of the filings, the court noted, did not justify the $450 hourly rate charged.
Supreme Court will not hear 9th Circuit interest on escrow preemption decision
On November 19, the U.S. Supreme Court declined to review the U.S. Court of Appeals for the 9th Circuit’s March decision, which held that a California law requiring banks to pay interest on mortgage escrow funds is not preempted by federal law. As previously covered by InfoBytes, a national bank petitioned for writ of certiorari in August, arguing the 9th Circuit’s decision—holding that the Dodd-Frank Act of 2011 codified the existing National Bank Act preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson—warranted further review “because it creates significant uncertainty about whether national banks must comply with similar laws in other states” and whether other state banking laws also apply to national banks. Additionally, the petition argued the uncertainty is exacerbated by the fact that the appellate court “disregarded and refused to enforce longstanding OCC regulations” and that the court interpreted the Barnett decision incorrectly.
9th Circuit denies petition for en banc rehearing of TCPA action against gym
On October 30, the U.S. Court of Appeals for the 9th Circuit denied a California gym’s petition for a rehearing en banc of the court’s September decision reviving a TCPA putative class action. As previously covered by InfoBytes, the appeals court vacated a district court order granting summary judgment in favor of the gym, concluding that there was a genuine issue of material fact as to whether the text system used by the gym—which stores numbers and dials them automatically to send the messages—qualified as an “autodialer” under the TCPA. Notably, in vacating the summary judgment order, the 9th Circuit performed its own review of the statutory definition of an autodialer in the TCPA, because the recent D.C. Circuit opinion in ACA International v. FCC (covered by a Buckley Sandler Special Alert) set aside the FCC’s definition. Through this review, the appeals court concluded that the TCPA defined an autodialer broadly as “equipment which has the capacity—(i) to store numbers to be called, or (ii) to produce numbers to be called, using a random or sequential number generator—and to dial such numbers automatically (even if the system must be turned on or triggered by a person).”
7th Circuit: Courts, not arbiters, decide class arbitration questions
On October 22, the U.S. Court of Appeals for the 7th Circuit held that the availability of class or collective arbitration within an employment agreement is a threshold “question of arbitrability” that must be decided by a court. According to the opinion, an employee filed class and collection action claims against her employer for wage and hour violations. The district court compelled arbitration pursuant to an agreement between the employee and her employer but struck as unlawful a waiver clause that forbid class or collective arbitration of any claim. The case proceeded to arbitration and the arbitrator issued an award of over $10 million in damages to the employee and the other 174 claimants who had opted-in to the arbitration proceeding. The employer appealed the award, arguing that the waiver of collective arbitration provision was valid, rendering the collective arbitration in violation of the employment agreement.
On appeal, the 7th Circuit reversed and remanded the case to the district court, pointing to the Supreme Court’s recent decision in Epic Systems Corp. v. Lewis, which upheld the validity of similar provisions. (Epic held that “an arbitration agreement does not violate the National Labor Relations Act when it requires plaintiffs to pursue employment-related claims in single claimant arbitrations.”). The plaintiff also argued, however, that despite the presence of the waiver, the arbitration agreement still permitted collective arbitration. This left open the question of who interprets the agreement to determine whether collection arbitration applies—the arbitrator or the court. The 7th Circuit found for the latter, concluding that the availability of class or collective arbitration is a threshold question of arbitrability and therefore a district court, and not the arbitrator should decide its permissibility.
CFPB urges 9th Circuit to reverse district court’s order and impose higher penalty in tribal lending action
On October 19, the CFPB filed its opening brief before the U.S. Court of Appeals for the 9th Circuit in Consumer Financial Protection Bureau v. CashCall, Inc., an action brought by the CFPB to limit the reach of the so-called “tribal model” of online lending. In the original action, the court found that an online loan servicer that operated on tribal lands engaged in deceptive practices by collecting on loans that exceeded the usury limits in various states, and ordered it and its affiliates to pay a $10 million penalty, far short of the Bureau’s request. (Previously covered by InfoBtyes here and here.) The CFPB appealed, arguing that the district court erred by imposing a civil penalty that was “inappropriately low” and by refusing to order appropriate restitution. In its brief, the Bureau argued that the district court misapplied the law when finding that restitution was not “an appropriate remedy.” According to the Bureau, the district court believed it had discretionary power to deny restitution, based on the court’s view of the equities. But the district court had no such discretion, the Bureau asserted, claiming that if a plaintiff proves a violation and resulting harm, it is entitled to restitution under the CFPA. In addition, the Bureau argued that the district court should not have denied restitution on the grounds that the servicer had not acted in bad faith. The Bureau argued that allowing the servicer to earn $200 million in ill-gotten gains while paying a $10 million penalty leaves companies with “little incentive to follow the law.” The Bureau also argued that the loan servicer’s actions were reckless and warranted a higher civil penalty. The district court had concluded that the servicer did not act recklessly because its primary counsel opined that it could contract around state law. In response, the Bureau asserted that the servicer had “ample reason to know” its attempts to circumvent state usury laws posed an unjustifiably high risk that it was “collecting amounts consumers did not owe” after multiple lawyers warned the servicer that its attempts to avoid state law “likely” would not work.”
7th Circuit holds individual who denies owing a debt can qualify as a consumer under FDCPA
On October 18, the U.S. Court of Appeals for the 7th Circuit held that an individual is a “qualified consumer” under the FDCPA, even when he is alleged by debt collectors to owe debts that he claims he does not owe. According to the opinion, a credit card was fraudulently opened in the plaintiff appellant’s name and was charged off, after default, to a debt collector who filed suit in an attempt to collect the debt. After the small-claims collection case was dismissed, the plaintiff appellant sued the debt collector for alleged violations of the FDCPA and the Illinois Collection Agency Act. The district court dismissed the action, holding that, to be a “consumer” under FDCPA, the individual must “allege he actually owed a debt.” On appeal, the 7th Circuit reversed. It held that the plain language of FDCPA covers individuals “allegedly obligated to pay” a debt, which includes “obligations alleged by the debt collector as well.” As a result, individuals who are alleged by debt collectors to owe debts are consumers under the FDCPA, even if they deny having any connection to the debt or any obligation to pay it.