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  • District Court’s reversal of jury verdict in FDCPA case overturned

    Courts

    On December 12, the U.S. Court of Appeals for the Fifth Circuit reversed the district court’s ruling overturning a jury verdict in favor of the consumer for a debt collection company’s (company) violation of the FDCPA and the Texas Fair Debt Collection Practices Act (Texas Act). The consumer sued the company claiming that after she sent the company a letter disputing a debt, the company failed to report to the credit bureaus that the debt was “disputed.” At trial, the jury awarded the consumer $61,000 for the company’s alleged FDCPA and Texas Act violations. Afterwards, the district court granted the company’s post-trial motion for judgment as a matter of law, overturned the jury’s verdict, and dismissed the case, ruling that the consumer failed to provide evidence that the disputed debt was a consumer debt.

    On appeal, the 5th Circuit held that it is within the jury’s discretion to make credibility determinations and that it was permissible for the jury to credit the consumer’s testimony about the consumer nature of the debt—a determination which cannot be disturbed unless it is impossible that the testimony is true. In addition, the appellate court noted that the jury has discretion to draw inferences and that it reasonably inferred that the disputed debt was, in fact, a consumer debt, as the consumer claimed.

    Courts Appellate Fifth Circuit State Issues FDCPA Debt Collection Credit Ratings Credit Report Credit Scores

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  • Government says CFPB should have authority to continue enforcement actions even if declared unconstitutional

    Courts

    On November 6, the CFPB and the DOJ filed a brief with the U.S. Supreme Court arguing that the Bureau should still “have the authority to commence or continue enforcement proceedings” in the event that the Court declares the Bureau’s structure unconstitutional. The brief was filed in response to a petition for writ of certiorari by two Mississippi-based payday loan and check cashing companies (collectively, “petitioners”) urging the Court to grant certiorari before the U.S. Court of Appeals for the Fifth Circuit renders a decision on a challenge to the Bureau’s single-director structure. The petitioners are not only challenging the Bureau’s structure but also arguing that the asserted constitutional violation requires the dismissal of the underlying lawsuit brought by the Bureau.

    The government argues that dismissal of the underlying enforcement action is not the way to remedy a constitutional structure violation, at least in a situation where “an official fully accountable to the President determines that it should go forward.” The brief notes that, in this case, then-Acting Director Mulvaney, to whom the Bureau has argued the limitation to for-cause removal did not apply, had ratified the enforcement action against petitioners at issue. While the Bureau and the DOJ acknowledge that lower courts “have not yet addressed the particular issue here,” they make the case that “the few reasoned decisions that address related issues are in accord: A separation-of-powers problem with an agency does not compel invalidation of the agency’s actions if those actions are subsequently approved in compliance with separation-of-powers requirements.”

    In its brief, the Bureau and the DOJ also argue that questions presented to the Court do not warrant review of the case before the 5th Circuit has an opportunity to rule. The government emphasizes that the Court has already agreed to hear a different case, Seila Law LLC v. CFPB, to answer the question of whether an independent agency led by a single director violates the Constitution’s separation of powers under Article II (covered by InfoBytes here). In doing so the Court also directed the parties to that action to brief and argue whether 12 U.S.C. §5491(c)(3), which established removal of the Bureau’s single director only for cause, is severable from the rest of the Dodd-Frank Act, should it be found to be unconstitutional.

    Courts CFPB Single-Director Structure U.S. Supreme Court Fifth Circuit Appellate Seila Law

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  • Fifth Circuit affirms dismissal of reverse-false-claims action in benefits payment fraud matter

    Courts

    On October 7, the U.S. Court of Appeals for the Fifth Circuit affirmed the dismissal of a whistleblower’s reverse-false-claims action because it was barred by the False Claims Act’s (FCA) public-disclosure provision and the alleged scheme was not plead with sufficient detail. The relator, a former fraud investigator for the Department of Veterans Affairs Office of the Inspector General, alleged that the 15 financial institution defendants “avoided their regulatory obligation to return government-benefit payments they received for beneficiaries they knew to be deceased.” According to the relator, the defendants must have known of the beneficiary deaths because the Social Security Administration sends death notification entries to all receiving depository financial institutions. However, the district court determined that defendants provided documents showing the information had already been publicly disclosed and the relator was not the original source of the information (which would have been required to maintain a claim with respect to information that has already been publicly disclosed) because he obtained the information through his employment as a fraud investigator. As such, the court permanently dismissed the complaint on the grounds that the relator relied on public disclosures, and that the complaint failed to plead the allegations with sufficient detail.

    On appeal, the 5th Circuit agreed that the complaint could not survive the FCA’s public disclosure bar, explaining that the public-disclosure bar is met if the following elements apply: (i) the disclosure is public; (ii) the disclosure contains “‘substantially the same allegations’” as in the complaint; and (ii) the relator is not the “‘original source’” of the information. In addition, the appellate court agreed that the complaint lacked sufficient factual matter to satisfy federal rules of civil procedure, and concluded that further amendments would be futile because there are no claims left to amend.

    Courts Whistleblower Appellate Fifth Circuit False Claims Act / FIRREA

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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

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  • 5th Circuit upholds $298 million fine in FCA/FIRREA mortgage fraud action

    Courts

    On August 8, the U.S. Court of Appeals for the 5th Circuit affirmed a district court ruling that ordered two mortgage companies and their owner to pay nearly $300 million in a suit brought under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). The suit accused the defendants of allegedly making false certifications, which reportedly led to mortgages ending in default. The jury agreed that the defendants defrauded the Federal Housing Agency’s mortgage insurance program when a state audit revealed unregistered company branches were used to originate loans in violation of agency guidelines, and the court determined that there was ample evidence to find that the false certifications were a proximate cause of losses from loan defaults. As a result, the government trebled the damages and civil penalties under the FCA from $93 million to roughly $298 million. The defendants appealed the decision, challenging, among other things, the sufficiency of evidence, methodologies presented by the government’s expert witnesses, and the judge’s decision to not order a new trial after dismissing a disruptive juror.

    On appeal, the 5th Circuit opined that there was sufficient evidence to support the jury’s findings, and rejected the defendants’ expert witness challenges, holding first that the defendants had waived any argument about the loan default sampling methodology used by one of the witnesses, because their argument that the witness “failed to control for obvious causes of default” never came up “during the extensive negotiations over the sampling methodology that would be used.” The appellate court also concluded that nothing in the record supported the defendants’ argument that the second witness “did not apply the HUD underwriting standards” in his re-underwriting methodology. The appellate court further noted that it has declined to adopt a rule used by other circuit courts that prohibits jurors from being dismissed “unless there is no possibility” that the juror’s failure to deliberate stems from their view of the evidence. Rather, the 5th Circuit held that the district court had grounds to dismiss the juror who “failed to follow instructions, exhibited a lack of candor during questioning, and had engaged in threatening behavior towards other jurors.” 

    Courts Fifth Circuit Appellate Mortgages Fraud False Claims Act / FIRREA HUD

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  • 5th Circuit says Congress, not courts, is responsible for changing rules for discharging student loans in bankruptcy

    Courts

    On July 30, the U.S. Court of Appeals for the 5th Circuit affirmed decisions by a bankruptcy court and a district court to dismiss a borrower’s student loan discharge request under the Bankruptcy Code, holding that Congress, not the courts, is responsible for changing the rules for discharging student loan debt in bankruptcy.

    The borrower, who became unable to make payments on her student loans and other debts, initiated an adversarial action against the Department of Education in bankruptcy court after receiving a general discharge of her debts, in an attempt to have two student loans discharged as well. While the borrower was able to prove that her monthly expenses exceed her income, the bankruptcy and district courts found that she failed the three-prong test for evaluating claims of “undue hardship” established by the 2nd Circuit in Brunner v. New York State Higher Education Services Corp. and adopted in the 5th Circuit in In re Gerhardt. Primarily, the courts stated that the borrower failed to (i) show that she was “completely incapable of employment now or in the future”; or (ii) prove that her present state of affairs was likely to persist through the bulk of the loan repayment period. The borrower appealed, arguing that the three-prong test “is inconsistent with the plain meaning of the term ‘undue hardship’” and urged the appellate court to adopt instead “a ‘totality of the circumstances’ test.”

    On appeal, the 5th Circuit agreed with the lower courts, stating that when Congress amended the bankruptcy law regarding the discharge of federal student loans, the intent was to limit it to cases of “undue hardship” in order to prevent the use of bankruptcy except in the most compelling circumstances. According to the appellate court, until an en banc panel or the Supreme Court reviews the standard, the panel finds no error in the lower courts’ decision. “Policy-based arguments do not change this interpretation; the role of this court is to interpret the laws passed by Congress, not to set bankruptcy policy,” the appellate court wrote. Moreover, reducing the test to a “totality of the circumstances” standard would create an “intolerable inconsistency” in decisions on loan discharges, and expand an area of bankruptcy law that Congress has sought to constrict.

    Courts Fifth Circuit Appellate Student Lending Bankruptcy

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  • FHFA now says agency structure is constitutional, under Calabria

    Courts

    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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  • 5th Circuit: District courts lack jurisdiction over claims arising from FDIC enforcement proceedings

    Courts

    On March 28, the U.S. Court of Appeals for the 5th Circuit held that federal district courts lacked subject matter jurisdiction over claims arising out of certain FDIC enforcement proceedings. According to the opinion, the FDIC brought two enforcement actions against the bank and its directors (plaintiffs), alleging violations of various banking laws and regulations, which resulted in civil money penalties and cease-and-desist orders. The plaintiffs petitioned the 5th Circuit for review. While the first appeal was pending, the plaintiffs filed a lawsuit in federal district court alleging the FDIC committed constitutional violations during the enforcement actions. Specifically, the plaintiffs alleged that the FDIC (i) targeted the bank due to the bank president’s age and denied it equal protection; and (ii) violated due process by preventing the plaintiffs from offering certain evidence and preventing the president’s ability to talk with his counsel at certain times. These allegations were raised and rejected during the FDIC’s second enforcement proceeding. The FDIC moved to dismiss the action for a lack of subject matter jurisdiction, asserting that the statutory review process precludes district court jurisdiction over actions arising from enforcement proceedings. The district court agreed and dismissed the action without prejudice, indicating that the bank could assert its claims in the district court on direct review of the agency’s final order. The bank appealed.

    On appeal, the 5th Circuit noted that the language in the statute “virtually compels” it to concede that Congress intended to preclude district court jurisdiction over claims against the FDIC arising from enforcement proceedings. The appellate court then addressed whether the claims raised by the plaintiffs were the type of claims Congress intended to be reviewed within the statutory scheme. The appellate court determined that the Federal Deposit Insurance Act allows for “meaningful judicial review,” by authorizing review of challenges to a final agency order by a federal circuit court. Moreover, the court rejected the plaintiffs’ argument that its claims are “wholly collateral” to the administrative order because they did not challenge the merits of the order but rather, the claims “arise directly from alleged irregularities in the agency enforcement proceedings.” Lastly, the court found that the plaintiffs’ constitutional claims do not fall outside of the agency’s expertise. Based on the foregoing, the court found that the district court correctly dismissed the action.

    Courts Fifth Circuit FDIC Enforcement Federal Deposit Insurance Act Appellate

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  • CFPB does not request lift of compliance date stay for payment-related provisions of Payday Rule

    Courts

    On March 8, the CFPB and two payday loan trade groups filed a joint status report with the U.S. District Court for the Western District of Texas in the litigation over the Bureau’s final rule on payday loans, vehicle title loans, and certain other installment loans (Rule). As previously covered by InfoBytes, the two payday loan trade groups initiated the suit against the Bureau in April 2018, asking the court to set aside the Rule on the grounds that, among other reasons, the Bureau is unconstitutional and the rulemaking failed to comply with the Administrative Procedures Act. In June 2018 and November 2018, the court stayed the litigation and the compliance date of the Rule, after the Bureau’s announcement that it intended to issue a proposed rulemaking to reconsider parts of the Rule. In February 2019, the Bureau issued a proposal, which seeks to rescind certain provisions of the Rule related to the ability-to-repay underwriting standards and delay the compliance date of those affected provisions until August 2020. The proposal does not reconsider the payment-related provisions of the Rule, leaving the compliance date for those provisions at August 19, 2019. (Covered by InfoBytes here.)

    In the joint status report, both parties agree that the court’s stay of compliance date and stay of litigation should remain with regard to the underwriting provisions until the Bureau concludes the rulemaking process. As for the payment-related provisions, the payday loan trade groups request the court maintain both the litigation stay and compliance stay of payment provisions until the Bureau completes the underwriting rulemaking process, because the Bureau acknowledged in the proposals that it intends to examine issues related to the payment provisions and “and if the Bureau determines that further action is warranted, the Bureau will commence a separate rulemaking initiative,” which may ultimately moot the litigation. Moreover, the trade groups believe lifting the stays would lead to “piecemeal and potentially wasteful litigation.”

    The Bureau also does not seek a lift to the stay of the litigation or compliance date for the payment-related provisions, but for separate reasons. The Bureau argues that the stay of the litigation should be “more limited,” at least until the 5th Circuit issues a decision on the Bureau’s constitutionality in a pending action (covered by InfoBytes here). As for the compliance date stay for the payment-related provisions, the Bureau believes it is not an issue the court needs to decide at this time, but acknowledges that should it request the court lift the stay in the future, the trade groups and the Bureau would have an opportunity to address whether lifting the stay should be delayed to “allow companies to come into compliance with the payments provisions.”

    In response to the joint status report, on March 19, the court entered an order continuing the stay of the litigation and the compliance date for both the Rule’s underwriting provisions and its payment-related provisions.

    Courts CFPB Payday Rule Federal Issues Agency Rule-Making & Guidance Fifth Circuit Appellate

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  • Acting Director Otting says FHFA structure is unconstitutional, will not defend before 5th Circuit

    Courts

    On January 14, acting Director of the FHFA, Joseph Otting, filed a supplemental brief with the U.S. Court of Appeals for the 5th Circuit stating the agency will no longer defend the constitutionality of the FHFA’s structure in the upcoming en banc rehearing. 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, while the agency was still under the leadership of Mel Watt, it petitioned the court for an en banc rehearing, challenging the constitutionality holding. Now, according to the supplemental brief, the FHFA states it “will not defend the constitutionality of [the Housing Economic Recovery Act’s] for-cause removal provision and agrees with the analysis in [the relevant portion] of Treasury’s Supplemental Brief that the provision infringes on the President’s control of executive authority.” The en banc rehearing, which will address the constitutionality issue as well as the plaintiff’s other statutory claims in the case, is scheduled for January 23.

    Courts Fifth Circuit Appellate HERA FHFA Single-Director Structure

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