Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
4th Circuit: Disgorgement calculation lacks necessary casual connection between profits and violations
On April 27, the U.S. Court of Appeals for the Fourth Circuit held that a district court’s disgorgement calculation for a banker found in contempt of a consent order rested on “an erroneous legal interpretation of the terms of the underlying consent order” and “lacked the necessary causal connection” between profits and a violation. As previously covered by InfoBytes, the banker settled RESPA and state law allegations with the CFPB and the Maryland Attorney General concerning his participation in a mortgage-kickback scheme. The 2015 final judgment order banned the defendant from participating in the mortgage industry for two years but did not prohibit him “from acting solely as a personnel or human-resources manager for a mortgage business operated by a FDIC-insured banking institution. . . .” In 2018, the banker was held in civil contempt for violating the final judgment order, and the district court ordered the disgorgement of over half-a-million dollars of his contemptuous earnings. The banker appealed the contempt finding and disgorgement.
On appeal, the 4th Circuit first held that the district court properly found the banker in violation of the consent order, determining among other things that, while the final judgment order did not broadly prohibit his participation in the mortgage industry, there was sufficient evidence that he “continued to communicate impermissibly with third-party businesses engaged in settlement services” and that he failed to follow various reporting requirements, such as uploading the consent order to a national registry and notifying regulators of a change in residence and business activity. However, the 4th Circuit found that the district court erred in its approach to calculating disgorgement because it assumed that “managing the business was improper and set out identifying [the banker’s] profits from his business because any such profit was contemptuous income.” (Emphasis in the original.) Holding that the district court’s view relied on an overbroad interpretation of the consent order and lacked the causal connection between the banker’s profits and a violation, the 4th Circuit vacated the disgorgement order and remanded the case to the district court to reassess the disgorgement calculation based on the banker’s more limited conduct that did not comply with the order.
On April 15, the U.S. Supreme Court announced it will hear oral arguments via telephone conference on May 6 in a case concerning an exemption to the TCPA that allows debt collectors to use an autodialer to contact individuals on their cell phones without obtaining prior consent to do so when collecting debts guaranteed by the federal government. As previously covered by InfoBytes, the U.S. Court of Appeals for the Fourth Circuit held that the government-debt exemption contravenes the First Amendment’s Free Speech Clause, and found that the challenged exemption was a content-based restriction on free speech that did not hold up to strict scrutiny review. The petitioners—Attorney General William Barr and the FCC—ask the Court to review whether the government-debt exception to the TCPA’s automated-call restriction is a violation of the First Amendment, and if so, whether the proper remedy is to sever the exception from the remainder of the statute.
On March 13, the U.S. Court of Appeals for the Fourth Circuit affirmed the dismissal of a putative class action filed by two consumers (plaintiffs) against a real estate brokerage group (real estate defendant) and a title company (title defendant), (collectively defendants), alleging a kickback scheme in violation of RESPA. The plaintiffs bought a house in 2008 with the help of a real estate agent affiliated with the real estate defendant. The real estate agent told the plaintiffs that the title defendant would provide settlement services, after which the plaintiffs filed an acknowledgment that they understood they could use the title company of their choice for their closing, and that they were not first-time homebuyers. The plaintiffs indicated their approval to use the settlement company selected by the real estate agent. Five years later, the plaintiffs filed suit, claiming that the real estate agent’s referral to the title defendant violated RESPA. The consumers, as lead class members, alleged that a marketing agreement between the defendants provided for payments by the title defendant to the real estate defendant for settlement services referrals. The plaintiffs claimed that the illegal kickback arrangement denied class members of ‘“impartial and fair competition between settlement service[s] providers in violation of RESPA.’”
The district court granted the defendants’ motion for summary judgement, holding that the plaintiffs lacked Article III standing to file suit because they were not overcharged in the settlement of their real estate transaction and did not otherwise show an injury-in-fact. In addition, the court determined that the claim was time-barred under RESPA’s one-year statute of limitations.
On appeal, the 4th Circuit agreed with the district court that the plaintiffs lacked standing, noting that “a statutory violation is not necessarily synonymous with an intangible harm that constitutes injury-in-fact.” The appellate court pointed out that the plaintiffs did not claim to have been overcharged for settlement services, and indeed, the plaintiffs agreed that the settlement service fees were reasonable. The appellate court also rejected the plaintiffs’ assertion that they suffered a concrete injury due to the lack of competition between settlement service providers.
On January 10, the U.S. Supreme Court announced it had granted a petition for a writ of certiorari filed by the U.S. government in Barr v. American Association of Political Consultants Inc.—a Telephone Consumer Protection Act (TCPA) case concerning an exemption that allows debt collectors to use an autodialer to contact individuals on their cell phones without obtaining prior consent to do so when collecting debts guaranteed by the federal government. As previously covered by InfoBytes, the 4th Circuit agreed with the plaintiffs (a group of several political consultants) that the government-debt exemption contravenes the First Amendment’s Free Speech Clause, and found that the challenged exemption was a content-based restriction on free speech that did not hold up to strict scrutiny review. “Under the debt-collection exemption, the relationship between the federal government and the debtor is only relevant to the subject matter of the call. In other words, the debt-collection exemption applies to a phone call made to the debtor because the call is about the debt, not because of any relationship between the federal government and the debtor,” the appellate court opined. However, the panel sided with the FCC to sever the debt collection exemption from the automated call ban instead of rendering the entire ban unconstitutional, as requested by the plaintiffs. “First and foremost, the explicit directives of the Supreme Court and Congress strongly support a severance of the debt-collection exemption from the automated call ban,” the panel stated. “Furthermore, the ban can operate effectively in the absence of the debt-collection exemption, which is clearly an outlier among the statutory exemptions.” The petitioners—Attorney General William Barr and the FCC—now ask the Court to review whether the government-debt exception to the TCPA’s automated-call restriction is a violation of the First Amendment. Oral arguments are set for April 22.
On October 16, the U.S. Court of Appeals for the Fourth Circuit affirmed the dismissal of an action against a debt collector for allegedly violating the FDCPA and related state statutes when attempting to collect on unpaid debt. The plaintiffs alleged that the defendant’s attempts to collect unpaid homeowners association debt was a violation of the FDCPA’s prohibition on false, deceptive, or misleading representations or unfair or unconscionable means to collect on a debt. According to the opinion, during the process of collecting one plaintiff’s debt, the defendant requested writs of garnishment that sought post-judgment enforcement costs. The plaintiff argued that collecting costs greater than the costs actually assessed in the case violated the FDCPA because it falsely represented the amount due. The district court disagreed, ruling that the defendant abided by Maryland court rules and procedures which allow a judgment creditor to list the original amount of judgment plus any additional court costs, including a writ of garnishment. The district court then considered whether the plaintiff’s claim “that ‘continuing lien clauses,’ which state that the lien covered additional costs that may come due after the lien is recorded, violate the FDCPA.” Here, the district court ruled that the homeowners association’s governing documents authorize continuing liens to cover additional costs that may come due after the lien is recorded, and that the plaintiff was aware that a lien’s amount may change because he signed the documents. Moreover, the district court determined that Maryland law “‘does not expressly permit or prohibit’ continuing lien clauses,” and dismissed the remaining state law claims without prejudice.
On appeal, the 4th Circuit agreed with the district court that nothing the defendant did constituted a violation of the FDCPA, and concurred that a continuing lien clause does not constitute a violation of the FDCPA. Furthermore, the appellate court held that there is no requirement that the district court remand, as opposed to dismiss, the state law claims as argued in the plaintiffs’ appeal.
On July 3, the U.S. Court of Appeals for the 4th Circuit reversed the district court’s denial of two tribal lenders’ motion to dismiss a putative class action lawsuit brought by Virginia residents, concluding the lenders properly claimed tribal sovereign immunity. The complaint alleged that the tribal lenders violated Virginia’s usury laws by charging Virginia residents interest rates 50-times-higher than those permitted under Virginia law. The tribal lenders moved to dismiss the action in district court on the grounds that they are entitled to sovereign immunity as an arm of the tribe. The district court denied the motion, concluding the tribal lenders (i) bore the burden of proof of immunity; and (ii) failed to prove they were an “arm-of-the-tribe.”
On appeal, the 4th Circuit agreed with the district court that the burden of proof in the arm-of-the-tribe analysis should be placed on the defendant, stating “[u]nlike the tribe itself, an entity should not be given a presumption of immunity until it has demonstrated that it is in fact an extension of the tribe.” However, the appellate court rejected the district court’s conclusion that the tribal lenders failed to meet their burden, noting that while the tribal lenders were funded and controlled by a non-tribal company, ten percent of the tribe’s general fund comes from one of the lenders, and a judgment against either lender “could in fact significantly impact the tribal treasury.” Ultimately, the appellate court concluded that the lenders had “promoted ‘the Tribe’s self-determination through revenue generation and the funding of diversified economic development” and a finding of no immunity, “would weaken the Tribe’s ability to govern itself according to its own laws, become self-sufficient, and develop economic opportunities for its members.”
Recently, the U.S. Court of Appeals for the 4th Circuit overruled its own precedent, holding that the plain language of the Bankruptcy Code authorizes modification of undersecured homestead mortgage claims—not just the payment schedule for such claims—including through bifurcation and cram down. According to the opinion, a creditor initiated a foreclosure action against a mortgage debtor alleging that the debtor failed to repay approximately $136,000 due under the mortgage. The debtor filed Chapter 13 bankruptcy and valued the mortgaged property at $40,000 in his petition. The debtor proposed a bankruptcy plan that would bifurcate the creditor’s claim into a secured component commensurate with the value of the mortgaged property, and an unsecured component for the remainder. The bankruptcy court rejected the debtor’s proposal on the grounds that the 4th Circuit’s 1997 holding in Witt v. United Cos. Lending Corp (In re Wiit) barred any modification or bifurcation of the creditor’s claim, and thus entitled her to a secured claim in the full amount due under the mortgage, plus interest. The district court and a 4th Circuit panel affirmed.
Following an en banc rehearing, the 4th Circuit reversed, overruling its decision in Witt. The en banc appellate court concluded that the plain text of Section 1322(c)(2) authorizes modification of covered homestead mortgage payments and claims, and allows for the bifurcation of undersecured homestead mortgages into secured and unsecured components. The appellate court noted that its initial interpretation in Witt had been “universally” criticized by courts and commentators, including for running “contrary to accepted canons of statutory construction.” Therefore, the appellate court reversed the district court’s judgment relying on Witt and remanded the case.
In dissent, three circuit judges stated that the majority went too far in its interpretation of Section 1322, and that Section 1322(c)(2) allows debtors to repay their mortgages over the full duration of their plan. The dissent’s view was that the majority’s decision essentially overturns the Supreme Court’s holding in Nobelman v. American Savings Bank without “any clear desire by Congress to do so.” Moreover, the dissent argued that, while it agreed that “Congress meant for [Section] 1322(c)(2) to create an exception to Nobelman’s prohibition against modifying the timing of loan repayments,” Congress did not intend to “eviscerate Nobelman altogether.”
On May 30, the U.S. Court of Appeals for the 4th Circuit held that a lower court correctly certified a class of individuals who claimed a satellite provider (defendant) violated the TCPA when its authorized sales representative routinely placed telemarketing calls to numbers on the national Do-Not-Call registry. The plaintiff-appellee alleged that because his number was on the registry, the calls were not only annoying but illegal. He therefore filed a lawsuit against the defendant for violations of the TCPA, and in 2018, the court issued a final judgment upholding a jury’s verdict as to both liability and damages for a class of 18,066 members, tripling the damages to more than $61 million. The defendant appealed the verdict asserting that the class definition was too broad in that included uninjured consumers. Specifically, the defendant argued that the definition should be limited to telephone subscribers or the person who actually received the calls. The defendant further asserted on appeal that it was not responsible for the sales representative’s actions.
On appeal, the 4th Circuit affirmed the lower court’s judgment, stating that it saw “no basis for imposing such a limit,” on the class definition given that “[t]he text of the TCPA notes that it was intended to protect ‘consumers,’ not simply ‘subscribers.’” Concerning the defendant’s argument that it was not responsible for the violations, the appellate court noted that the sales representative’s “entire business model was to make calls like these on behalf of television service providers,” like the defendant, which the defendant knew were being placed on its behalf.
On April 26, the U.S. Court of Appeals for the 4th Circuit reversed a district court’s dismissal of five plaintiffs’ putative class actions alleging RESPA violations, concluding that the claims were not time-barred due to the fraudulent concealment tolling doctrine. According to the opinion, between 2009 and 2014, several banks and mortgage companies (collectively, “defendants”) referred plaintiffs to a title company to procure title insurance and obtain settlement services, which allegedly provided the defendants with “several forms of ‘unearned fees and kickbacks’ to induce those referrals” in violation of RESPA. The plaintiffs alleged the kickbacks came in the form of payments to advertising and marketing shell companies for the referrals, which would then make payments to brokers or loan officers of the defendants. The district court dismissed the class actions because the first of the five class actions was not filed until June 2016, which was well beyond the one-year statute of limitations under RESPA.
On appeal, the plaintiffs argued that they were entitled to relief under RESPA because the kickback scheme was allegedly “fraudulently concealed” by the defendants by using “sham” entities and not reporting the payments on the plaintiffs’ HUD-1 settlement statements. The 4th Circuit agreed, concluding that the district court erred in dismissing the plaintiffs’ claims. The appellate court noted that Congress did not intend to “allow individuals and entities that conceal their unlawful kickback schemes and other RESPA violations to reap the benefit of the statute of limitations as a defense.” Rejecting the defendants’ assertion that publicly-available information, including earlier court filings, should have “‘excited further inquiry’” by the plaintiffs to timely file the action, the appellate court emphasized that the fraudulent concealment doctrine requires only “reasonable diligence” and does not “necessarily hold individual borrowers to the diligence standard of combing court filings in potentially related cases, particularly when the borrower has no reason to be aware of the related cases.”
On April 24, the U.S. Court of Appeals for the 4th Circuit vacated a district court’s decision to grant summary judgment in favor of the FCC, concluding that an exemption under the TCPA that allows debt collectors to use an autodialer to contact individuals on their cell phones when collecting debts guaranteed by the federal government violates the First Amendment’s Free Speech Clause. According to the opinion, several political consultant groups (plaintiffs) argued that a statutory exemption enacted by Congress as a means of allowing automated calls to be placed to individuals’ cell phones “that relate to the collection of debts owed to or guaranteed by the federal government” is “facially unconstitutional under the Free Speech Clause” of the First Amendment. The plaintiffs argued that the debt-collection exemption to the automated call ban contravenes their free speech rights. Moreover, the plaintiffs claimed that “the free speech infirmity of the debt-collection exemption is not severable from the automated call ban and renders the entire ban unconstitutional.” The FCC, however, argued that the applicability of the exemption depended on the relationship between the government and the debtor and not on the content. The district court awarded summary judgment in favor of the FCC after applying a “strict scrutiny review,” ruling that the exemption does not violate the Free Speech Clause.
On appeal the 4th Circuit agreed with the plaintiffs that the exemption contravenes the Free Speech Clause, and found that the challenged exemption was a content-based restriction on free speech that did not hold up to strict scrutiny review. “Under the debt-collection exemption, the relationship between the federal government and the debtor is only relevant to the subject matter of the call. In other words, the debt-collection exemption applies to a phone call made to the debtor because the call is about the debt, not because of any relationship between the federal government and the debtor.” And because the exemption is a content-based restriction on speech, it must satisfy strict scrutiny review to be constitutional, which it fails to do, the 4th Circuit opined. “The exemption thus cannot be said to advance the purpose of privacy protection, in that it actually authorizes a broad swath of intrusive calls. . . [and] therefore erodes the privacy protections that the automated call ban was intended to further.” However, the appellate court sided with the FCC to sever the debt collection exemption from the automated call ban. “First and foremost, the explicit directives of the Supreme Court and Congress strongly support a severance of the debt-collection exemption from the automated call ban,” the panel stated. “Furthermore, the ban can operate effectively in the absence of the debt-collection exemption, which is clearly an outlier among the statutory exemptions.”
- Brandy A. Hood to discuss "Ongoing challenges of TRID compliance" at the Mortgage Bankers Association Live: Legal Issues and Regulatory Compliance Conference
- Daniel R. Alonso to discuss "Resisting temptation in a crisis: How to make sure ethics and compliance don't get diluted under financial strain" at a New York City Bar Association webcast
- Daniel P. Stipano to discuss "BSA for BSA seasoned officers" at an NAFCU webinar
- Jon David D. Langlois to discuss "LIBOR transition: Preparations for legal professionals" at a Mortgage Bankers Association webinar
- Garylene D. Javier to discuss "Navigating workplace culture in 2020" at the DC Bar Conference