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On October 12, the U.S. Court of Appeals for the Fifth Circuit affirmed a district court’s nearly $2.4 million disgorgement order in an SEC case involving alleged penny stock fraud, marking the first time an appellate court has been asked to decide the “awarded for victims” question that arose out of the U.S. Supreme Court’s decision in Liu v. SEC. As previously covered by InfoBytes, in 2020, the Court 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 the Exchange Act, 15 U.S.C. §78u(d)(5). The Court’s decision discussed three limits: (i) the “profits remedy” must return the defendant’s wrongful gains to those harmed by the defendant’s actions, as opposed to depositing them in the Treasury; (ii) disgorgement under the statute requires a factual determination of whether petitioners can, consistent with equitable principles, be found liable for profits as partners in wrongdoing or whether individual liability is required; and (iii) disgorgement must be limited to “net profits” and therefore “courts must deduct legitimate expenses before ordering disgorgement” under the statute.
In the current action, the SEC brought a case against three individuals accused of allegedly selling unregistered securities and misleading investors during their operation of a penny stock company. The district court found the individuals liable on several of the claims and granted summary judgment in favor of the SEC. The district court also ordered (and later amended) disgorgement of the proceeds that the individuals obtained in the alleged fraud. The individuals appealed, challenging both the summary judgment decision (on the premise that “‘numerous’ disputed fact issues exist”) and the amended disgorgement remedy. Upon review, the 5th Circuit determined that that the district court’s disgorgement order satisfied the requirements laid out by the Court in Liu. The appellate court stated that the individuals’ appeal failed “to identify any disputed issues; nor does it sufficiently challenge the court’s analysis finding them liable based on undisputed facts.” Moreover, the 5th Circuit explained that the district court did not impose joint-and several liability, but rather individually assessed disgorgement amounts for each defendant based on the gains they received from the securities fraud, adding that the SEC has identified the victims of the fraud and created a process for the return of the disgorged funds. According to the 5th Circuit, “[u]nder the district court’s supervision, any funds recovered will go to the SEC, acting as a de facto trustee. The SEC will then disburse those funds to victims but only after district court approval.” “The disgorgement thus is being ‘awarded for victims.’”
On September 29, the U.S. Court of Appeals for the Fifth Circuit held that the daily fees imposed on a consumer who failed to timely pay an overdraft were deposit-account service charges, not interest, and thus not subject to usury limits. The plaintiff allegedly overdrew her account and her bank paid the overdraft. The bank began charging a daily fee after the plaintiff did not repay the overdraft within five business days (called an “Extended Overdraft Charge”), which the plaintiff argued constituted interest on an extension of credit and was usurious in violation of the National Bank Act (NBA). In dismissing the plaintiff’s complaint for failure to state a claim, the district court reasoned that the bank does not make a loan to a customer when it covers the customer’s overdraft, and therefore the NBA’s limitations on interest charges do not apply. On appeal, the appellate court sided with the district court and deferred to the interpretation of the OCC that the fees at issue were not “interest” under the law. The court found the OCC’s interpretation to be reasonable and otherwise entitled to Auer deference, and on that basis affirmed.
On September 30, the U.S. District Court for the Western District of Texas denied a request made by two trade groups to stay the implementation of the payment provisions of the CFPB’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (2017 Rule) while they appeal an earlier decision allowing the provisions to take effect. As previously covered by InfoBytes, the court upheld the 2017 Rule’s payment provisions, finding that the Bureau’s ratification “was valid and cured the constitutional injury caused by the 2017 Rule’s approval by an improperly appointed official.” The court also concluded that the payment provisions, as a matter of law, “are consistent with the Bureau’s statutory authority and are not arbitrary and capricious,” and that the Bureau properly considered the costs and benefits of such payment provisions. The court’s order, however, granted the plaintiffs’ request to stay the compliance date, which had been set as August 19, 2019, until 286 days after final judgment.
The plaintiffs appealed to the U.S. Court of Appeals for the Fifth Circuit and asked the district court to stay the running of the 286-day stay pending appeal, such that compliance would not be required until 286 days after the appeal is resolved. The court rejected that request, stating that the plaintiffs “failed to make a sufficient showing to warrant a stay pending resolution of the appeal” and that “the equities do not support extending the stay of the compliance date beyond the court's 286-day stay from August 30, 2021.”
On August 16, the U.S. Court of Appeals for the Fifth Circuit affirmed a district court decision to require the plaintiff CEO of several petrochemical companies, who defaulted on a revolving line of credit that he guaranteed, to repay national lenders (defendants) an outstanding amount, rejecting the CEO’s argument that the agreements were fraudulently induced. The plaintiff allegedly withdrew a $90 million revolving line of credit from the defendants. His personal liability arose after his companies began breaching some of the loans’ financial covenants. To avoid acceleration, the CEO himself guaranteed the companies’ outstanding debt. Because his companies continued breaching their loan obligations and the defendants were “concerned about the borrowers’ cash burn, ‘collateral deterioration,’ and ‘poor accounting controls,’” the parties modified the total debt to $72 million. In addition, the defendants and the companies amended their credit agreement and the plaintiff “executed a personal guaranty of the debt his companies assumed.” At the defendants’ recommendation—or, as the CEO maintains—“the borrowers also brought on a chief restructuring officer (CRO) to help turn the companies around.” When the companies continued to default on the loan obligations, the CEO and the borrowers entered into two forbearance agreements with the defendants that imposed financial, operational, and reporting obligations on the borrowers. After the second agreement expired and the borrowers' defaults remained, the company sued the defendants for over $1.5 billion in damages for negligence, fraud, conversion, among other things, in which the defendants “counterclaimed and impleaded [the CEO] and the remaining borrowers and guarantors, alleging breach of contract and breach of guaranty.” According to the opinion, “[t]hose third-party defendants then counterclaimed against the lenders, asserting the same tort claims initially lodged by the company.” Furthermore, the CEO asserted the following four defenses: fraudulent inducement, duress, unclean hands, and equitable estoppel. The district court rejected each of the plaintiff’s arguments, ordering him to pay the defendants, plus interest and attorney fees, noting “that the underlying breach of guaranty was ‘not contested.’” The district court held that the waivers and releases the plaintiff signed as part of the two forbearance agreements “foreclosed any claim that he was fraudulently induced into signing the earlier Guaranty,” and determined that his allegations of intense business pressure fell short of establishing duress.
On appeal, the 5th Circuit agreed with the district court, affirming that the plaintiff failed to prove that he signed onto the agreements under duress. According to the 5th Circuit, “[t]he district court detected a glaring problem with this theory: the timeline of events refutes it,” and the plaintiff “learned of the purported fraud—the supposed scheme to replace him with the CRO—before he ratified the Guaranty.”
On July 21, the U.S. Court of Appeals for the Fifth Circuit reversed a lower court’s decision to grant summary judgement for a Houston-based insurer (defendant), finding that publication of material that violates a person’s right of privacy under the insurer’s policy can include making credit card information generally available. According to the opinion, a retail company (plaintiff) was sued by a branch of a national bank (bank) for alleged violations of an agreement that led to a $20 million data breach dispute. In response, the plaintiff filed a separate suit in Texas court against the defendant for breaching the insurance policy. The district court granted the defendant’s motion and dismissed all the claims. In doing so, “the district court held that the bank’s complaint did not allege a ‘publication’ of material that violated a person’s right to privacy because it asserted only that ‘[a] third party hacked into [the] credit card processing system and stole customers’ credit card information.’” Furthermore, the district court found that the complaint also did not allege a violation of a person’s right to privacy because the bank involves the payment processor’s contract claims, not the cardholders’ privacy claims.
On appeal, the 5th Circuit adopted a broad definition of “publication” because such term was undefined, and found that the contract dispute brought by the bank against the plaintiff “plainly alleges” that hackers published the credit card information of the plaintiff customers in several ways. First, the bank accused the plaintiff of publishing its customers’ credit cards to hackers. Then, the hackers allegedly published the information by using it to make fraudulent purchases. The appellate court then examined whether the defendant “has a duty to defend [the plaintiff] in the [u]nderlying [bank] [l]itigation.” The appellate court applied Texas’s “eight-corners rule,” which compares the “four corners of the [p]olicy to the four corners of the [bank’s] complaint.” In doing so, the appellate court found that the bank’s “alleged injuries arise from the violations of customers' rights to keep their credit card data private,” and “[u]nder the eight-corners rule, [the defendant] must defend [the plaintiff] in the underlying [bank’s] litigation.”
On June 1, the U.S. Court of Appeals for the Fifth Circuit determined that a “global payment services company” does not qualify as a bank under U.S. tax code, 26 U.S.C. § 581. According to the opinion, the company described its activities to the IRS in 2008 as “banking” while referring to its products as “financial services” despite making no meaningful changes to its business from prior years when it described itself as a “nondepository credit intermediation” business and its services as “money/wire transfers.” Because companies who claim bank status receive certain significant tax benefits, the company—which had invested billions of dollars in asset-backed securities, including mortgage-backed securities—deducted losses it incurred during the Great Recession against ordinary income. However, according to the opinion, nonbanks are only permitted “to deduct losses on securities to the extent they offset capital gains, which [the company] did not have during the relevant years.” The IRS disagreed with the company’s deductions, determined it was not a bank, and assessed tens of millions of dollars in tax deficiencies. The company unsuccessfully challenged the IRS in tax court, and, following a first appeal resulting in a remand, the tax court again concluded that the company was not a bank “because it neither accepts deposits nor makes loans.”
On appeal, the 5th Circuit affirmed the tax court’s decision, stating that it only needed to address the “deposit” requirement and holding that because customers do not deposit money with the company for safekeeping “the most basic feature of a bank is missing.” The appellate court explained that therefore, under the tax code, the company was not entitled to deduct from its taxes “large losses it incurred in writing off mortgage-backed securities during the Great Recession.”
On May 26, the U.S. Court of Appeals for the Fifth Circuit held that receiving a single unsolicited text message is enough to establish standing under the TCPA. The plaintiff alleged he received an unsolicited text message on his cell phone from the defendant after he had previously revoked consent and reached a settlement with the defendant to resolve a dispute over two other unsolicited text messages. The plaintiff filed a putative class action alleging that the defendant negligently, willfully, and/or knowingly sent text messages using an automatic telephone dialing system without first receiving consent, and that the unsolicited message was “a nuisance and invasion of privacy.” The district court dismissed the suit for lack of standing, ruling that a “single unwelcome text message will not always involve an intrusion into the privacy of the home in the same way that a voice call to a residential line necessarily does.”
On appeal, the 5th Circuit disagreed, concluding that the nuisance arising from the single text message was a sufficiently concrete injury and enough to establish standing. “In enacting the TCPA, Congress found that ‘unrestricted telemarketing can be an intrusive invasion of privacy’ and a ‘nuisance,’” the appellate court wrote, commenting that the TCPA “cannot be read to regulate unsolicited telemarketing only when it affects the home.” In addition, the appellate court found that the plaintiff separately alleged personal injuries that separated him from the public at large by arguing that the “aggravating and annoying” robodialed text message “interfered with [his] rights and interests in his cellular telephone.” In reversing the district court’s ruling, the 5th Circuit disregarded precedent set by the 11th Circuit in Salcedo v. Hanna (covered by InfoBytes here). Calling the other appellate court’s decision “mistaken,” the 5th Circuit contended the other appellate court took too narrow a view of the theory of harm by concluding that there must be some actual damage before an action can be maintained. Moreover, the 5th Circuit stated the 11th Circuit misunderstood the U.S. Supreme Court’s decision in Spokeo, Inc. v. Robins, writing “Salcedo’s focus on the substantiality of an alleged harm threatens to make this already difficult area of law even more unmanageable. We therefore reject it.”
5th Circuit: Oral agreement to accept past-due mortgage payments is unenforceable under statute of frauds
On March 26, the U.S. Court of Appeals for the Fifth Circuit affirmed summary judgment for a national bank, upholding its foreclosure sale in a 2-1 opinion. According to the opinion, after the borrowers missed several payments the bank foreclosed on their property. The borrowers filed suit alleging, among other things, that the bank “violated the deed of trust and the Texas Property Code” by failing to send proper notices prior to the foreclosure of their home, and also violated the Texas Debt Collection Act (TDCA). The bank argued that it had properly served notice, and the district court agreed, granting summary judgment on the foreclosure-sale claims, concluding “that there was no genuine dispute over whether [the bank] properly sent notice in compliance with both the deed of trust and the Texas Property Code.” The district court also agreed with the bank that an oral agreement between the borrowers and a bank representative to accept a $14,000 payment “to bring the loan current” was “unenforceable under the statute of frauds because it modified the terms of the loan agreement.”
On appeal, the majority opinion considered, among other things, whether the statute of frauds barred consideration of the alleged oral agreement under the TDCA. The majority concluded that alleged oral agreement “cannot alone” sustain the borrowers’ claims under the TDCA. In order for the $14,000 to be considered “an actual, enforceable acceptance” as either part of the repayment plan or to bring the loan current, the agreement would have to be in writing under Texas law, the majority held. The dissenting judge argued, however, that the bank violated the TDCA by “misrepresenting, in a March 2017 phone call, that $14,000 would be automatically deducted from the [borrowers’] account to pay off the bulk of their past-due mortgage payments.” According to the dissent, “the phone call plausibly muddled the [borrowers’] understanding of whether they had a past-due mortgage debt, how much they owed, and whether they were in default,” thus creating a false sense of security about their mortgage—the kind of conduct the TDCA is intended to guard against.
On April 1, the U.S. Court of Appeals for the Fifth Circuit upheld a district court’s ruling in favor of defendant credit repair organizations (including a law firm), holding that plaintiff data furnishers failed to provide sufficient evidence supporting their claims of fraud and fraud by nondisclosure. The plaintiffs filed suit, alleging that the defendants were sending dispute letters that appeared to have come directly from the defendants’ debtor clients. Under the FCRA and the FDCPA, the plaintiffs are obligated to investigate disputed debts that come directly from debtors. Letters from law firms, the plaintiffs argued, do not trigger such requirements. According to the plaintiffs, the disputes they were receiving were costing them money to investigate, which they would not have spent if had they known the letters were coming from a law firm. A jury returned a verdict in favor of the plaintiffs on their claims of fraud and fraud by non-disclosure and awarded them roughly $2.5 million. The district court ultimately vacated the jury’s verdict, however, explaining that the evidence failed to show that the defendants made any false misrepresentations, material or otherwise, when they signed their clients’ names on letters mailed to the plaintiffs. The law firm defendant “had the legal right to sign its clients’ names on the correspondence it sent on their behalf to data furnishers who reported inaccurate information about the clients’ credit,” the district court wrote.
On appeal, the 5th Circuit determined, among other things, that the plaintiffs did “not provide any precedential support or explanation for their assertion that these facts demonstrate Defendants committed fraud and fraud by non-disclosure beyond the observation that the jury found for them on those claims.” Moreover, the appellate court disagreed with the plaintiffs’ argument that the engagement agreements that clients signed with the defendant law firm, which allowed it to send dispute letters on a client’s behalf, were fraudulent because the defendant law firm did not discuss the letters with the consumers first. According to the appellate court, the existence of any such discussion was immaterial because the engagement agreements allowed the defendant law firm to send letters on a client’s behalf. However, the appellate court noted that “[w]hile we do not hold today that there are no situations in which a third party may act fraudulently when it mails dispute letters (and leave for another day what those situations may be), we can safely say that this is not one of them.”
5th Circuit: Conveying information about a debt collector is different from conveying information about a debt
On February 26, the U.S. Court of Appeals for the Fifth Circuit affirmed a district court’s dismissal of a consumer’s FDCPA claims against a collection agency, concluding that “conveying information about a debt collector is not the same as conveying information about a debt.” According to the opinion, the collection agency (defendant) attempted to contact the plaintiff via telephone concerning an unpaid debt. When the plaintiff failed to answer the call, the defendant contacted the plaintiff’s sister and asked to speak to the plaintiff. During the call, a representative working for the defendant provided her own name and that of the collection agency, and provided her number so the plaintiff could return the call. The plaintiff filed suit, alleging the defendant violated FDCPA § 1692c(b) when the representative left a message with the plaintiff’s sister and asked her to have the plaintiff contact the defendant. Under § 1692c(b), a debt collector “‘may not communicate, in connection with the collection of any debt, with any person other than the consumer’ or certain other prescribed parties to the debt ‘without the prior consent of the consumer.’” An exception is provided under § 1692b for a debt collector who communicates with a third party to acquire location information about the consumer. The district court granted the defendant’s motion to dismiss, which the plaintiff appealed, arguing that the defendant’s conduct “went beyond the scope of a permissible call for the purposes of obtaining location information.”
On appeal, the 5th Circuit first reviewed whether the call violated Section 1692c(b). The appellate court noted that it was first called to address the “threshold issue” as to “whether the alleged conversation qualifies as a ‘communication’” as defined by the FDCPA. Under § 1692a(2), a “communication” refers to “the conveying of information regarding a debt directly or indirectly to any person through any medium.” In this instance, the appellate court wrote, there was nothing in the call between the defendant and the plaintiff’s sister that conveyed information regarding the existence of a debt. “[T]o indirectly convey information regarding a debt, a conversation or message would need to, at the very least, imply that a debt existed. Knowing the name of a debt collector does not imply the existence of a debt.” The 5th Circuit further concluded, among other things, that “[e]ven if the average consumer recognized the company’s name and identified it as a debt collector, receiving a phone call from a debt collector does not suggest any information about an underlying debt.” As such, the 5th Circuit determined the plaintiff failed to adequately plead facts suggesting a plausible violation of the FDCPA.
- Daniel R. Alonso to moderate an interactive roundtable at the Latin Lawyer and GIR Connect: Anti-Corruption & Investigations Conference
- APPROVED Checkpoint Webcast: You have license renewal questions, we have answers
- Jonice Gray Tucker to discuss “Fintech trends” at the BIHC Network Elevating Black Excellence Regional Summit
- Jeffrey P. Naimon to discuss "Truth in lending” at the American Bar Association National Institute on Consumer Financial Services Basics
- Daniel R. Alonso to discuss anti-money-laundering at FELABAN Spanish-language webinar “Perspective for banks: LAFT, FINCEN, OFAC, Cryptocurrency”
- Daniel R. Alonso to discuss "What’s new in BSA/AML compliance?" at the Institute of International Bankers Regulatory Compliance Seminar
- Jon David D. Langlois to discuss "Regulatory update: What you need to know under the new boss; It won’t be the same as the old boss" at the IMN Residential Mortgage Service Rights Forum (East)
- Benjamin B. Klubes to discuss “Creating a Fantastic Workplace Culture”
- John R. Coleman and Amanda R. Lawrence to discuss “Consumer financial services government enforcement actions – The CFPB and beyond” at the Government Investigations & Civil Litigation Institute Annual Meeting
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute
- Jonice Gray Tucker to discuss “Regulators always ring twice: Responding to a government request” at ALM Legalweek