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5th Circuit remands nonjudicial foreclosure suit back to state court
On June 16, the U.S. Court of Appeals for the Fifth Circuit held that a plaintiff borrower’s requested damages in a foreclosure lawsuit did not exceed the federal jurisdictional threshold amount of $75,000, and sent the case back to Texas state court. The plaintiff sued the financial institution in state court after it sought a nonjudicial foreclosure on his house, asserting violations of the Texas Debt Collection Act, breach of the common-law duty of cooperation, fraud, and negligent misrepresentation. The suit was removed to the U.S. District Court for the Northern District of Texas, with the defendant arguing that the suit automatically stayed its nonjudicial foreclosure sale, thus putting the value of the house ($427,662) as the amount in dispute, instead of the plaintiff’s requested relief of $74,500. The plaintiff moved to remand the case to state court on the premise “that the amount in controversy could not exceed the stipulated maximum of $74,500.” The district court denied the plaintiff’s motion, ruling that it “had to measure the amount in controversy ‘by the value of the object of the litigation,’” and not by what the plaintiff’s complaint says the damages were not to exceed.
In reversing and remanding the case to state court, the 5th Circuit concluded that, because the defendant did not show that the automatic stay brought the house’s value into controversy, it “failed to establish by a preponderance of the evidence that the amount in controversy exceeded $75,000.” The appellate court agreed with the plaintiff’s assertion that the house was simply collateral and “thus irrelevant to the amount in controversy,” writing that “[i]t is well-settled that neither the collateral effect of a suit nor the collateral effect of a judgment may count toward the amount in controversy.” The 5th Circuit also determined that the plaintiff expressly stipulated in both his original state-court petition and in a declaration “that he is seeking total damages not to exceed $74,500,” and that this stipulation is legally binding.
5th Circuit says loan contract containing grace period should be enforced
On June 16, the U.S. Court of Appeals for the Fifth Circuit reversed a district court’s summary judgment ruling in favor of a defendant lender, holding that a deadline accompanied by a grace period in a loan modification trial plan should be enforced. The plaintiff defaulted on his loan and sought a loan modification. The defendant provided the plaintiff an opportunity to participate in a trial period plan, which required three monthly payments due by January 1, February 1, and March 1, 2019. The trial period plan (TPP) also specified that a payment would be considered timely provided it was made within the month in which it was due. According to the opinion, even though the plaintiff “effectively accepted the terms of the TPP when he made the first trial period payment” within the grace period, the defendant informed him “he was ‘ineligible’ for the loan modification because he failed to comply with the terms of the TPP” and posted his property for foreclosure. The plaintiff sued the defendant for breach of contract, but the district court granted summary judgment to the defendant, declining to “give force to the grace period provisions” and concluding that the plaintiff did not comply with the payment deadlines.
On appeal, the 5th Circuit held that it will enforce a grace period included in a valid, binding contract. “If a lender sets a deadline for payment, but allows the borrower to make that payment anytime ‘in the month in which it is due,’ then the borrower may make that payment anytime in the month in which it is due,” the appellate court wrote. “That’s exactly what [the defendant] offered the borrower here—a deadline accompanied by a grace period. Yet [the defendant] nevertheless contends that we should ignore the grace period.” The 5th Circuit also rejected the defendant’s argument that the trial period plan was not a valid binding contract, pointing out that the text of the TPP made it clear that the defendant intended to be bound by its terms upon the plaintiff’s performance. Deadlines and grace periods co-exist by design, the appellate court explained, noting that “[g]race periods facilitate contractual relationships by making clear which deadlines are aspirational and which are mission-critical.”
5th Circuit rules against SEC’s use of ALJs
On May 18, the U.S. Court of Appeals for the Fifth Circuit held that the SEC’s in-house adjudication of a petitioners’ case violated their Seventh Amendment right to a jury trial and relied on unconstitutionally delegated legislative power. The appellate court further determined that SEC administrative law judges (ALJs) are unconstitutionally shielded from removal. In a 2-1 decision, the 5th Circuit vacated the SEC’s judgment against a hedge fund manager and his investment company arising from a case, which accused petitioners of fraud under the Securities Act, the Securities Exchange Act, and the Advisers Act in connection with two hedge funds that held roughly $24 million in assets. According to the SEC, the petitioners had, among other things, inflated the funds’ assets to increase the fees they collected from investors. Petitioners sued in federal court, arguing that the SEC’s proceedings “infringed on various constitutional rights,” but the federal courts refused to issue an injunction claiming they lacked jurisdiction and that petitioners had to continue with the agency’s proceedings. While petitioners’ sought review by the SEC, the U.S. Supreme Court issued a decision in Lucia v. SEC, which held that SEC ALJs are “inferior officers” subject to the Appointments Clause of the Constitution (covered by InfoBytes here). Following the decision, the SEC assigned petitioners’ proceeding to an ALJ who was properly appointed, “but petitioners chose to waive their right to a new hearing and continued under their original petition to the Commission.” The SEC eventually affirmed findings of liability against the petitioners, and ordered the petitioners to cease and desist from committing further violations and to pay a $300,000 civil penalty. The investment company was also ordered to pay nearly $685,000 in ill-gotten gains, while the hedge fund manager was barred from various securities industry activities.
In vacating the SEC’s judgment, the appellate court determined that the SEC had deprived petitioners of their right to a jury trial by bringing its action in an “administrative forum” instead of filing suit in federal court. While the SEC challenged “that the legal interests at issue in this case vindicate distinctly public rights” and therefore are “appropriately allowed” to be brought in agency proceedings without a jury, the appellate court countered that the SEC’s enforcement action was “akin to traditional actions at law to which the jury-trial right attaches.” Moreover, the 5th Circuit noted that while “the SEC agrees that Congress has given it exclusive authority and absolute discretion to decide whether to bring securities fraud enforcement actions within the agency instead of in an Article III court[,] Congress has said nothing at all indicating how the SEC should make that call in any given case.” As such, the 5th Circuit opined that this “total absence of guidance is impermissible under the Constitution.”
Additionally, the 5th Circuit raised concerns about the statutory removal restrictions for SEC ALJs who can only be removed for “good cause” by SEC commissioners (who are removable only for good cause by the president). “Simply put, if the President wanted an SEC ALJ to be removed, at least two layers of for-cause protection stand in the President’s way,” the appellate court concluded. “Thus, SEC ALJs are sufficiently insulated from removal that the President cannot take care that the laws are faithfully executed. The statutory removal restrictions are unconstitutional.”
The dissenting judge disagreed with all three of the majority’s constitutional conclusions, contending that the majority, among other things, misread the Supreme Court’s decisions as to what are and are not “public rights,” and that “Congress’s decision to give prosecutorial authority to the SEC to choose between an Article III court and an administrative proceeding for its enforcement actions does not violate the nondelegation doctrine.” The judge further stated that while the Supreme Court determined in Lucia that ALJs are “inferior officers” within the meaning of the Appointments Clause in Article II, it “expressly declined to decide whether multiple layers of statutory removal restrictions on SEC ALJs violate Article II.” Consequently, the judge concluded that he found “no constitutional violations or any other errors with the administrative proceedings below.”
5th Circuit reverses decision that a portion of a contract was indefinite and unenforceable
On May 18, the U.S. Court of Appeals for the 5th Circuit reversed a district court’s decision to dismiss a suit against a creditor that sold portfolios of delinquent and defaulted debt, ruling that the disputed portion of the contract between the two parties was enforceable.
According to the opinion, the defendant sold portfolios of delinquent accounts to the plaintiff. The plaintiff and the defendant entered a “forward flow” agreement, where the defendant agreed to continue to send the plaintiff accounts during a specific timeline. Under the agreement, the defendant agreed to deliver “additional accounts,” which would be the same quality as the other accounts that had been sold. The parties could not settle on an agreement regarding the pricing for accounts that were submitted under the forward flow agreement, and the defendant sued the plaintiff for breach of contract. A district court granted the defendant’s motion to dismiss, which the plaintiff appealed.
The appellate court found that the district court erred on its decision that the term “additional accounts” was indefinite and therefore unenforceable. The court stated that “[t]aken together, the plain meaning of the word ‘additional,’ the contract’s clear architecture, and various settled principles of interpretation reveal that ‘additional accounts’ refers to all qualifying accounts that accrue quarterly.” The appellate court also noted that it “cannot ignore that this argument was not presented to the district court,” and that it will not speculate on why [the defendant-appellee did not] reached for this low-hanging factual fruit.”
5th Circuit: CFPB enforcement may proceed but funding questions remain
On May 2, the U.S. Court of Appeals for the Fifth Circuit issued an en banc decision vacating a district court’s interlocutory decision denying the plaintiff payday lenders’ motion for judgment on the pleadings, and holding that the CFPB can continue its enforcement action against a Mississippi-based payday lending company subject to further order of the district court. As previously covered by InfoBytes, the CFPB filed a complaint against two Mississippi-based payday loan and check cashing companies for allegedly violating the CFPA’s prohibition on unfair, deceptive, or abusive acts or practices. In March 2018, a district court denied the payday lenders’ motion for judgment on the pleadings, rejecting the argument that the structure of the Bureau is unconstitutional and that the agency’s claims violate due process. The 5th Circuit agreed to hear an interlocutory appeal on the constitutionality question. And, prior to the U.S. Supreme Court’s ruling in Seila Law LLC v. CFPB, a divided panel held that the CFPB’s single-director structure is constitutional, finding no constitutional defect with allowing the director of the Bureau to only be fired for cause (covered by InfoBytes here).
The 5th Circuit voted sua sponte to rehear the case en banc and issued an opinion in which the majority vacated the district court’s opinion as contrary to Seila Law. The majority did not, however, direct the district court to enter judgment against the Bureau because, though the Supreme Court had found that the director’s for-cause removal provision was unconstitutional, it was severable from the statute establishing the Bureau (covered by a Buckley Special Alert). The majority determined that the “time has arrived for the district court to proceed” and stated it “place[s] no limitation on the matters that that court may consider, including, without limitation, any other constitutional challenges.”
In dissent, several judges issued an opinion arguing that the case should be dismissed because the agency’s funding structure violates the Constitution’s separation of powers and “is doubly removed from congressional review.” The dissenting judges explained that the Bureau is not subject to the Congressional appropriations process for its budget, unlike most federal agencies, but rather receives its funding directly from the Federal Reserve Board. This budgetary process was intended to ensure full independence from Congress and prevent future congresses from using budget cuts to influence the Bureau’s agenda and priorities. The dissenting judges argued, however, that such a structure violates the Appropriations Clause of the Constitution. “The CFPB’s double insulation from Article I appropriations oversight mocks the Constitution’s separation of powers by enabling an executive agency to live on its own in a kingly fashion,” the dissent stated. “The Framers warned that such an accumulation of powers in a single branch of government would inevitably lead to tyranny. Accordingly, I would reject the CFPB’s novel funding mechanism as contravening the Constitution’s separation of powers. And because the CFPB funds the instant prosecution using unconstitutional self-funding, I would dismiss the lawsuit.”
5th Circuit remands shareholders’ net worth sweep claims to lower court
On March 4, a split U.S. Court of Appeals for the Fifth Circuit, on remand from the U.S. Supreme Court, sent a shareholders’ suit back to the district court for further proceedings consistent with the Supreme Court’s decision in Collins v. Yellen, in which the Supreme Court, relying on its decision in Seila Law LLC v. CFPB, held that FHFA’s leadership structure was unconstitutional because it only allowed the president to fire the FHFA director for cause. (Covered by InfoBytes here.) In Collins, the Supreme Court reviewed the 5th Circuit’s en banc decision stemming from a 2016 lawsuit brought by a group of Fannie Mae and Freddie Mac (GSEs) shareholders against the U.S. Treasury Department and FHFA, in which shareholders claimed that the Housing and Economic Recovery Act of 2008 (Recovery Act), which created the agency, violated the separation of powers principal because it only allowed the president to fire the FHFA director “for cause.” The shareholders also alleged that FHFA acted outside its statutory authority when it adopted a third amendment to the Senior Preferred Stock Purchase Agreements, which replaced a fixed-rate dividend formula with a variable one requiring the GSEs to pay quarterly dividends equal to their entire net worth minus a specified capital reserve amount to the Treasury Department (known as the “net worth sweep”). (Covered by InfoBytes here.) At the time, while the en banc appellate court reaffirmed its earlier decision that FHFA’s structure violated the Constitution’s separation of powers requirements, nine of the judges concluded that the appropriate 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.”
The split Supreme Court had affirmed the 5th Circuit’s en banc decision regarding the FHFA’s structure, but left intact the net worth sweep and remanded the case to the appellate court to determine “what remedy, if any, the shareholders are entitled to receive on their constitutional claim.” Justice Samuel Alito, who wrote for the majority, stated that “[a]lthough the statute unconstitutionally limited the President’s authority to remove the confirmed Directors, there was no constitutional defect in the statutorily prescribed method of appointment to that office. As a result, there is no reason to regard any of the actions taken by the FHFA in relation to the third amendment as void.”
On remand, the en banc 5th Circuit majority ordered the district court to decide whether the shareholders suffered compensable harm from the unconstitutional removal provision, observing that the Supreme Court left open the possibility that the unconstitutional restriction on the President’s power to remove the FHFA director could have inflicted compensable harm. Noting that the Supreme Court had sketched “possible causes and consequences of such harm along with the Federal Defendants’ denial of any such harm,” the majority stressed that “it became clear” during oral argument that “the prudent course is to remand to the district court to fulfill the Supreme Court’s remand order.”
However, five of the appellate judges dissented from the majority decision on the grounds that nothing in the Supreme Court’s decision precluded the 5th Circuit from deciding the harm issue, pointing out that the appellate court could “easily do so in light of [its] previous conclusion that ‘the President, acting through the Secretary of the Treasury, could have stopped [the Net Worth Sweep] but did not.’” The dissenting judges noted that because the shareholders failed to point to sufficient facts to cast doubt on the 5th Circuit’s previous decision, the appellate court “should modify the district court’s judgment by granting declaratory relief in the Plaintiff’s favor, stating that the ‘for cause’ removal provision as to the Director of the FHFA is unconstitutional. In all other respects, we should affirm.”
Supreme Court blocks OSHA mandate
On January 13, a divided U.S. Supreme Court issued an order blocking a Department of Labor’s Occupational Safety and Health Administration (OSHA) rule mandating that employers with 100 or more employees require employees to be fully vaccinated or be subject to a weekly Covid-19 test at their own expense. However, in a separate order the Court allowed a separate rule issued by the Department of Health and Human Services requiring Covid-19 vaccinations for health care workers (unless exempt for medical or religious reasons) at Medicare- and Medicaid-certified providers and suppliers to take effect.
In November, the U.S. Court of Appeals for the Fifth Circuit issued a nationwide stay on the emergency temporary standard (ETS) that included the mandate to employers, describing enforcement of the ETS illegitimate and calling the OSHA rule “unlawful” and “likely unconstitutional.” (Covered by InfoBytes here.) However, last month, the 6th Circuit lifted the stay in a 2-1 ruling, stating that “[b]ased on [OSHA’s] language, structure and Congressional approval, OSHA has long asserted its authority to protect workers against infectious diseases.” (Covered by InfoBytes here.) The applicants, seeking emergency relief from the Court to reinstate the stay, argued that the rule exceeded OSHA’s statutory authority and is otherwise unlawful.
In agreeing that the applicants are likely to prevail, the Court majority granted the application for relief and stayed the OSHA rule pending disposition of the applicants’ petitions for review in the 6th Circuit, as well as disposition of any timely petitions for writs of certiorari. “Although Congress has indisputably given OSHA the power to regulate occupational dangers, it has not given that agency the power to regulate public health more broadly,” the majority wrote. Adding that the ETS is a “blunt instrument” that “draws no distinctions based on industry or risk of exposure to COVID-19,” the majority stated that the Occupational Safety and Health Act does not plainly authorize the rule.
The dissenting judges argued that the majority’s decision “stymies the Federal Government’s ability to counter the unparalleled threat that COVID–19 poses to our Nation’s workers. Acting outside of its competence and without legal basis, the Court displaces the judgments of the Government officials given the responsibility to respond to workplace health emergencies.”
With respect to the Department of Health and Human Services rule, the Government applied to stay injunctions issued by two district courts preventing the rule from taking effect. In granting the application and staying the injunctions, the majority of the Court found that one of the Department’s basic functions authorized by Congress “is to ensure that the healthcare providers who care for Medicare and Medicaid patients protect their patients’ health and safety,” concluding that “[h]ealthcare workers around the country are ordinarily required to be vaccinated for diseases” and that “addressing infection problems in Medicare and Medicaid facilities is what [the Secretary] does.”
In dissent, four justices argued that the efficacy or importance of Covid-19 vaccines was not at issue in assessing the injunctions, stating that the district court cases were about “whether [the Centers for Medicare and Medicaid Services] has the statutory authority to force healthcare workers, by coercing their employers, to undergo a medical procedure they do not want and cannot undo,” and arguing that “the Government has not made a strong showing that Congress gave CMS that broad authority.”
5th Circuit says bank and mortgage servicer did not engage in “dual tracking”
On December 15, the U.S. Court of Appeals for the Fifth Circuit affirmed summary judgment in favor of defendants in a mortgage foreclosure action. According to the opinion, after the plaintiff fell behind on his mortgage payments, the defendant bank’s mortgage servicer approved him for a trial loan modification plan that required timely reduced payments for a period of three months. The plaintiff stated that he complied with the trial plan but that the defendant bank nevertheless foreclosed on his property and sold the property to a third defendant. The plaintiff further claimed that he did not learn about the sale of his property until two months after it happened when the third defendant sought to evict him. The plaintiff sued the bank and mortgage servicer for violating RESPA and the Texas Debt Collection Act (TDCA), and sued the purchaser of the property “asserting claims to quiet title and for trespass to try title.” All defendants moved for summary judgment, which the district court granted based on evidence that refuted each allegation. The plaintiff appealed.
On appeal, the 5th Circuit first reviewed, among other claims, the plaintiff’s RESPA claim, which alleged the bank and mortgage servicer engaged in “dual tracking” by initiating foreclosure proceedings while the plaintiff’s trial modification plan was purportedly still active. According to the court, dual tracking occurs when “the lender actively pursues foreclosure while simultaneously considering the borrower for loss mitigation options.” The appellate court agreed with the district court’s conclusion that summary judgment was appropriate because the plaintiff did not submit his first payment by the deadline established under the trial modification plan, and thus “did not timely accept the Trial Modification Plan.” As such, the bank and mortgage servicer did not engage in “dual tracking” because there was no obligation to notify the plaintiff of any denial of a permanent loan modification or to provide an opportunity to appeal, and accordingly was not considering the plaintiff for loss mitigation options. The court also found deficiencies in the plaintiff’s Texas law and TDCA claims.
5th Circuit stays OSHA mandate
On November 12, the U.S. Court of Appeals for the Fifth Circuit issued a nationwide stay on the emergency temporary standard (ETS), which mandates that all employers with 100 or more employees require employees to be fully vaccinated or be subject to a weekly Covid-19 test. As previously covered by InfoBytes, the U.S. Department of Labor’s Occupational Safety and Health Administration (OSHA) published a rule in the Federal Register requiring employers to develop, implement, and enforce a mandatory Covid-19 vaccination policy, unless they adopt a policy requiring employees to choose between vaccination or regular testing for Covid-19 and wearing a face covering at work. The 5th Circuit stay, which was in response to a legal challenge filed by several states along with private entities and individuals, affirmed the court’s initial stay. According to the appellate opinion, OSHA’s enforcement of this ETS is illegitimate, calling it “unlawful” and “likely unconstitutional.” Furthermore, the 5th Circuit ordered OSHA to “take no steps to implement or enforce the Mandate until further court order.”
5th Circuit delays payday lending compliance until after resolution of appeal
On October 14, the U.S. Court of Appeals for the Fifth Circuit stayed 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) for 286 days after the resolution of the appeal. The appellate court’s order contrasts with an order issued last month by the U.S. District Court for the Western District of Texas, which denied a request by the two trade group appellants to stay the compliance date pending appeal (covered by InfoBytes here). The district court previously upheld the 2017 Rule’s payment provisions (covered by InfoBytes here), 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,” and that the payment provisions were not arbitrary and capricious. The district court’s order regarding the stay granted the plaintiffs’ request to stay the compliance date, which had been set as August 19, 2019, until 286 days after final judgment. The 5th Circuit’s order, however, grants the trade groups’ motion to extend the stay of the compliance date until 286 days after resolution of the appeal.