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4th Circuit holds lenders sufficiently proved tribal immunity
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.”
4th Circuit overrules own precedent, holds undersecured homestead mortgage claims can be bifurcated
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.”
4th Circuit upholds certification of TCPA class action against satellite provider
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.
4th Circuit: RESPA time-bar annulled by fraudulent concealment
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.”
4th Circuit: TCPA debt collection exemption is unconstitutional
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.”
District Court reduces jury’s $3 million award in FCRA action to $490,000
On March 21, the U.S. District Court for the Northern District of Alabama reduced a consumer’s punitive damages award from $3 million to $490,000 in an action against a credit reporting agency for the alleged misreporting of credit information. According to the opinion, after the consumer had a debt dismissed by small claims court, he requested that the credit reporting agencies remove the trade line from his credit report. When one credit reporting agency refused to initiate a dispute investigation because it suspected fraud, the consumer filed a complaint alleging violations of the FCRA. In May 2018, a jury awarded the consumer $5,000 in compensatory damages and $3 million in punitive damages. The credit reporting agency moved to have the court enter judgment as a matter of law and/or have the judgment amended or altered. The court reviewed the award, noting that the punitive to compensatory damages ratio of 600 to 1 “suspiciously cocked” the “court’s eyebrows.” The court emphasized that a single-digit multiplier would not be sufficient to deter the credit reporting agency from future wrongdoing and instead, applied the 98 to 1 ratio used by the U.S. Court of Appeals for the 4th Circuit, bringing the punitive damages down to $490,000. In addition, the court applied the “one satisfaction” rule, concluding the credit reporting agency did not have to pay the compensatory damages, as the consumer already received settlement proceeds that exceed the jury award from other defendants, and “the injuries the [consumer] described are indivisible between [the credit reporting agency] and the settling defendants.”
4th Circuit: No waiver of sovereign immunity for lawsuits under the FCRA
On March 6, the U.S. Court of Appeals for the 4th Circuit held that Congress did not waive sovereign immunity for lawsuits under the FCRA, affirming the lower court’s dismissal of a consumer action. According to the opinion, a consumer filed a lawsuit against the U.S. Department of Education (the Department), a student loan company, and the three major credit reporting agencies, alleging numerous claims, including violations of the FCRA for failing to properly investigate disputes that federal student loans were fraudulently opened in his name. The Department filed a motion to dismiss to the FCRA claims against it arguing the court lacked subject matter jurisdiction based upon a claim of sovereign immunity. The lower court agreed, holding Congress had not affirmatively waived sovereign immunity for suits under the FCRA.
On appeal, the 4th Circuit agreed with the lower court. The appellate court noted that, although the FCRA includes a “government or governmental subdivision or agency” as part of the definition of “person” in the statute, there is a “longstanding interpretive presumption that ‘person’ does not include the sovereign,” and that waivers of sovereign immunity need to be “unambiguous and unequivocal.” The appellate court noted that Congress waived immunity in other sections of the FCRA, which were not at issue in this case and, had Congress waived immunity for enforcement purposes under the FCRA, it would raise a new host of “befuddling” and “bizarre” issues, such as the prospect of the government bringing criminal charges against itself. Therefore, the appellate court concluded that the federal government may be a “person” under the substantive provisions, but that without a clear waiver from Congress, the federal government is still immune from lawsuits under the FCRA’s enforcement provisions.
4th Circuit holds TILA and EFTA taxpayer payment agreement claims can proceed
On February 6, a three-judge panel for the U.S. Court of Appeals for the 4th Circuit affirmed a district court’s denial of a motion to dismiss a proposed class action suit against two tax payment financing companies, finding that (i) the plaintiff had standing under EFTA because he alleged that he suffered an injury in fact; and (ii) a taxpayer payment agreement (agreement) between the plaintiff and the financing companies qualifies as a consumer credit transaction subject to both TILA and EFTA. According to the decision, the plaintiff entered into an agreement to finance the payment of residential property taxes as allowed under state law. The plaintiff subsequently challenged the agreement on several grounds, including that it violated TILA, EFTA, and the Virginia Consumer Protection Act because many of the agreement’s terms had incorrect amounts, there was no itemized list of closing costs, and the agreement did not include “certain allegedly required financial disclosures.” Following the plaintiff’s initiation of a proposed class action, the defendants moved to dismiss for failure to state a claim, arguing, among other things, that the agreement is not a consumer credit transaction and therefore not subject to TILA or EFTA.
The district court, however, determined that the plaintiff had standing under the EFTA because he claimed he suffered an injury in fact—that the agreement was contingent on his agreeing to preauthorized electronic funds transfer payments—and that the agreement was subject to both TILA and EFTA. On appeal, the 4th Circuit agreed that the plaintiff satisfied the injury requirement “because he alleged that he was required to agree to [electronic funds transfer payment] authorization as a condition of the agreement and that the agreement contained terms requiring him to waive EFTA’s substantive rights regarding [electronic funds transfer payment] withdrawal.” Even if the court accepted the defendant’s assertion that there was no injury, it held that the plaintiff would still have standing to challenge the agreement because “there is a ‘realistic danger’ that [the plaintiff] will ‘sustain[] a direct injury’ as a result of the terms of the [agreement].” The court also found the agreement to be a credit transaction under the meaning of TILA and EFTA because under TILA, a consumer transaction is “one in which the party to whom credit is offered or extended is a natural person, and the money, property, or services which are the subject of the transaction are primarily for personal, family or household purposes.”
One judge concurred in part—regarding standing under EFTA—but dissented also, writing that the agreement does not qualify as a “credit transaction” under TILA because the Virginia code, and not a creditor, grants the taxpayer the right to defer payment of a local tax assessment by entering into an agreement with a third party like the defendant. “A[n] [agreement] is not a ‘credit transaction,’ within the meaning of TILA, because the preexisting obligation of the taxpayer is not severed by the third-party payor’s payment, and the third-party payor does not grant any right to the taxpayer that is not conferred already by statute,” the dissenting judge concluded. The judge further opined that protections for taxpayers who enter into an agreement should be resolved by the state, as the entity creating this form of tax payment.
4th Circuit affirms jury’s verdict clearing student loan servicer in FCA suit
On January 8, the U.S. Court of Appeals for the 4th Circuit affirmed a federal jury’s unanimous verdict clearing a Pennsylvania-based student loan servicing agency (defendant) accused of improper billing practices under the False Claims Act (FCA). As previously covered by InfoBytes, the plaintiff—a former Department of Education employee whistleblower—filed a qui tam suit in 2007, seeking treble damages and forfeitures under the FCA. The plaintiff alleged that multiple state-run student loan financing agencies overcharged the U.S. government through fraudulent claims to the Federal Family Education Loan Program in order to unlawfully obtain 9.5 percent special allowance interest payments. Over the course of several appeals, the case proceeded to trial against the student loan servicing agency after the 4th Circuit held that the entity was “an independent political subdivision, not an arm of the commonwealth,” and “therefore a ‘person’ subject to liability under the False Claims Act.” The plaintiff appealed the jury’s verdict, arguing the court erred by excluding evidence at trial and failed to give the jury several of his proposed instructions.
On appeal, the 4th Circuit disagreed with the plaintiff, finding that the court correctly excluded the state audit, which determined the student loan servicer “failed its mission” with lavish spending on unnecessary expenses. The appeal court noted the audit was irrelevant to the only issue in the case: “Did [the servicer] commit fraud and file a false claim?” The appeals court also rejected the plaintiff’s jury instruction arguments, concluding that the court’s instructions substantially covered the substance of the plaintiff’s proposal and “sufficiently explained that the jury had to consider whether [the servicer’s] claims were ‘false or fraudulent.’”
4th Circuit affirms sanctions for attorneys in payday lawsuit
On May 31, the U.S. Court of Appeals for the 4th Circuit affirmed sanctions against three attorneys for challenging the authenticity of a loan document for two years without revealing they had obtained a copy of the document from their client before filing the original complaint. The action results from a now closed case in which a consumer alleged he received loans at predatory interest rates (annual interest rate of about 139 percent) from a tribal lender and sought to impose liability on the non-lenders, including a credit union, which processed the debit transactions under the loan agreement. In response to a motion to dismiss, the attorneys for the consumer challenged the authenticity of the loan agreement provided by the credit union. After years of litigation, the credit union discovered the consumer had provided his attorneys with the loan agreement prior to the original complaint filing and moved for sanctions against the attorneys. The attorneys argued that they had no affirmative duty to disclose documents before the opening of discovery.
The lower court disagreed, determining that each attorney had “acted in bad faith and vexatiously and violated their duty of candor by hiding a relevant and potentially dispositive document from the Court in connection with a long-running dispute over arbitrability.” In February 2017, the lower court ordered two attorneys and their respective law firms jointly liable for $150,000 in attorneys’ fees and a third associate attorney jointly liable for $100,000. Upon appeal, the 4th Circuit held that the lower court did not abuse its discretion in awarding the compensatory sanctions, stating “without losing the forest for the trees, we conclude that the district court reasonably described sanctioned counsels’ conduct as evincing a multi-year crusade to suppress the truth to gain a tactical litigation advantage.”