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On November 21, the U.S. Court of Appeals for the Second Circuit vacated the dismissal of a relator’s qui tam action, concluding that allegedly fraudulent loan requests made to one or more of the Federal Reserve Banks (FRBs) qualify as claims within the meaning of the False Claims Act (FCA). In the case, two qui tam relators brought an action under the FCA against a national bank and its predecessors-in-interest (defendants), alleging the defendants presented false information to FRBs in connection with their applications for loans. However the district court dismissed the action, holding that allegations of false or fraudulent claims being presented to the FRBs cannot form the basis of an FCA action because the FRBs cannot be characterized as the federal government for purposes of the FCA. In addition, the district court agreed with the defendants’ argument that the bank’s loan requests did not create FCA liability for claims, because the relators did not, and could not, “allege that the [g]overnment either provided any portion of the money loaned to the defendants, or reimbursed FRBs for making the loans.” (Previously covered by InfoBytes here.)
On appeal, the 2nd Circuit concluded that although the FRBs are not a “part of any executive department or agency,” the FRBs still act as agents of the U.S. because the U.S. “created the FRBs to act on its behalf in extending emergency credit to banks; the FRBs extend such credit; and the FRBs do so in compliance with the strictures enacted by Congress and the regulations promulgated by the [Board of Governors of the Federal Reserve System], an independent agency within the executive branch.” The 2nd Circuit also held that the loan requests qualified as claims under the FCA because the money requested by the defendants is provided from the Federal Reserve System’s (Fed’s) emergency lending facilities and “is to be spent to advance a [g]overnment program or interest.” In supporting its conclusion, the appellate court stated that the U.S. “is the source of the purchasing power conferred on the banks when they borrow from the Fed’s emergency lending facilities.” The 2nd Circuit also referred to a U.S. Supreme Court holding in Rainwater v. United States, which stated that “the objective of Congress was broadly to protect the funds and property of the government from fraudulent claims, regardless of the particular form or function, of the government instrumentality upon which such claims were made.”
On November 8, the U.S. Court of Appeals for the Second Circuit denied petitions from three whistleblowers seeking awards following a $55 million settlement between the SEC and a global financial institution, which the SEC previously denied. According to the opinion, multiple individuals disclosed information to the SEC during an investigation into the financial institution’s financial statements. In 2015, the SEC reached a settlement with the institution, and nine whistleblower claimants filed applications to receive awards based on the information they provided. The SEC granted the applications for two claimants and denied the rest. The three individuals involved in this action were denied the awards because the SEC concluded that the individuals “did not provide ‘original information that led to a successful enforcement action,’” as required by the Securities and Exchange Act’s whistleblower provisions. Specifically, for the two named individuals, the SEC determined that it had already received the information they provided through an individual known as “Claimant 2,” who had previously submitted an expert report prepared by the two individuals to the SEC. The appellate court agreed with the determination made by the SEC, concluding that “their  submission did not significantly contribute to the success of the  action; Claimant 2ʹs submissions did.” The appellate court noted that the individual’s expert report did not qualify for Rule 21F‐4’s “original source exception,” which was designed to treat information submitted to another federal agency as though it had been submitted to the SEC directly.
As for the third, unnamed individual, the appellate court also denied the petition, concluding that the unnamed individual’s interpretation of the whistleblower program would “disincentivise whistleblowers from curating their submissions.” Specifically, the SEC asserted that the unnamed individual “‘appeared to be very disjointed and had difficulty articulating credible and coherent information concerning any potential violation of the federal securities laws’” and “‘brought with him to the meeting a wet brown paper bag containing what he claimed to be evidence.’” The SEC further noted that the documents were “jumbled and disorganized” and ultimately used similar information brought by a subsequent whistleblower. The appellate court noted that “[a] whistleblower might still be rewarded for being the first to bring incriminating information to the SECʹs attention, but only if that information is contained in a credible, and ultimately useful submission.”
On November 4, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s decision that a debt collector does not violate the FDCPA by sending notices to consumers that do not clarify that a debt is static. The plaintiff in that case alleged that the defendant violated the FDCPA’s prohibition on false, deceptive, or misleading representations in connection with the collection of a debt when it sent her a letter that contained a breakdown of interest and charges or fees accrued on the balance as separate line items, even though the amounts accrued explicitly reflect $0, along with the phrase “[a]s of the date of this letter, you owe $ [amount].” By implying that the amount owed might increase, the plaintiff argued that the least sophisticated consumer may erroneously think the debt is dynamic. The district court disagreed and granted the defendant’s motion for judgment on the pleadings.
In affirming this decision on appeal, the 2nd Circuit cited its own holding in Taylor v. Financial Recovery Services, Inc., in which it previously determined “that ‘a collection notice that fails to disclose that interest and fees are not currently accruing on a debt is not misleading within the meaning of [the FDCPA].” The appellate court was not persuaded by the plaintiff’s attempt to distinguish her case from Taylor, finding that the language in the plaintiff’s letter is “stock language. . .present in a number of collection notices, including those considered not misleading in Taylor.” The 2nd Circuit further noted that “requiring debt collectors to draw attention to the static nature of a debt could incentivize collectors to make debts dynamic instead of static.”
District Court allows NCUA to substitute plaintiff, denies dismissal of breach of contract claim in RMBS action
On October 15, the U.S. District Court for the Southern District of New York held that the NCUA may substitute a new plaintiff to represent the agency’s claims in a residential mortgage-backed securities (RMBS) action against an international bank serving as an RMBS trustee. In the same order, the court dismissed certain tort claims, but allowed claims for breach of contract to move forward against the trustee.
According to the opinion, NCUA brought the action on behalf of 97 trusts for which the international bank served as the trustee, even though NCUA only had direct interest in eight of the trusts. NCUA argued it had derivative standing to pursue the claims on behalf of the other 89 trusts “on the theory that it had a latent interest in the [the 89 trusts] after they wound down and as ‘an express third-party beneficiary under the [89 trusts] Indenture Agreements.’” The trustee moved to dismiss the action and after hearing oral arguments on the motion, the court stayed the case pending the outcome of NCUA’s appeal regarding derivative standing in similar action before the U.S. Court of Appeals for the Second Circuit. In August 2018, the 2nd Circuit held that NCUA lacked standing to bring the derivative claims because the trusts had granted the right, title, and interest to their assets, including the RMBS trusts, to the Indenture Trustee. (Previously covered by InfoBytes here.) Based on the appellate court decision in the similar action, NCUA moved to file a second amended complaint and substitute a newly appointed trustee as plaintiff for the claims made on behalf of the 89 trusts for which it did not have direct standing.
Despite the trustee’s objections, the district court granted NCUA’s request, concluding that NCUA’s claims were timely and allowing the NCUA’s “Extender Statute”—which gives the agency the ability to bring contract claims at “the longer of” “the 6-year period beginning on the date the claim accrues” or “the period applicable under State law”—to apply to the new substitute plaintiff. Additionally, the court denied the bank’s motion to dismiss NCUA’s breach of contract claim alleging the trustee had notice of the defects in the mortgage files held in the various trusts. The court concluded that NCUA sufficiently plead that the trustee “did indeed receive notice [of the defective mortgages] and should have thus acted,” under the Pooling and Servicing Agreements.
On August 9, the U.S. Court of Appeals for the 2nd Circuit affirmed the conviction of a Chinese real estate developer arising from the alleged bribery of United Nations officials. In affirming the conviction, the court held that the U.S. Supreme Court’s holding in McDonnell v. U.S.—that, in cases brought under the domestic federal anti-bribery statute, the government must show that the bribe was paid in exchange for an “official act”—does not apply to prosecutions under the Foreign Corrupt Practices Act (FCPA) or 18 U.S.C. § 666, a federal anti-corruption law related to federal funds.
In the most recent case, a federal jury convicted the developer of paying bribes and gratuities to United Nations officials in violation of the FCPA and 18 U.S.C. § 666. The developer appealed the conviction and argued, among other things, that the jury should have been instructed that the bribe must have be paid for an “official act,” in light of McDonnell. On appeal, the 2nd Circuit rejected the developer’s arguments, explaining that the FCPA and 18 U.S.C. § 666 target a broader set of bribery goals than the statute at issue in McDonnell. Specifically, the court noted that the FCPA and 18 U.S.C. § 666 prohibit giving anything of value in exchange for specific “quos” that do not include reference to an “official act.” Thus, based on the “textual differences among various bribery statutes,” the appellate court concluded that the “official act” standard does not apply to prosecutions under the FCPA or 18. U.S.C. § 666.
On July 22, the U.S. Court of Appeals for the 2nd Circuit affirmed in part and vacated in part a district court’s dismissal of a consumer’s FDCPA claims concerning communications received from a creditor and a collection firm (defendants) related to his defaulted mortgage. The consumer alleged that the letter he received in November 2015 listed an inaccurate amount of debt in violation of FDCPA section 1692g (concerning “initial communications”), and that subsequent letters received were inconsistent because they listed varying amounts of debt. Additionally, the consumer contended that the defendants violated sections 1692e (“false, deceptive, or misleading representations”) and 1692f (“unfair or unconscionable means to collect or attempt to collect any debt”). The district court ruled that the consumer failed to plausibly state a claim or provide factual support for his allegations.
On review, the appellate court agreed that the consumer failed to state a claim under section 1692g, explaining that “the least sophisticated consumer” would not be misled by the various debt collection letters concerning the amount of the debt. The appellate court emphasized that the consumer ignored the creditor’s acceleration of the underlying mortgage loan—which accounted for the core differences in the communications about the outstanding debt—and rejected the consumer’s allegations that the letters were inaccurate and inconsistent. However, the 2nd Circuit disagreed with the district court, holding that the consumer’s claims under sections 1692e and 1692f survived the defendants’ motion to dismiss because the consumer plausibly alleged discrepancies between the collection letters and mortgage note concerning late fees and charges.
On May 13, the U.S. Court of Appeals for the 2nd Circuit held that the FDCPA’s statute of limitations period starts when the violation occurs, rather than when the plaintiff receives notice of the violation. According to the opinion, a law firm (defendant) seeking to collect a debt against a borrower sent a restraining notice to a national bank, which erroneously referenced the plaintiff’s social security number and address. The bank froze the plaintiff’s accounts on December 13, 2011. The bank lifted the freeze two days later after the plaintiff contacted the bank about the freeze. On December 14, 2012, the plaintiff filed a lawsuit against the debt collector, alleging FDCPA violations. The plaintiff claimed the action was filed within the one-year statute of limitations because he did not learn about the restraining notice until December 14, 2011. In 2016, the district court, however, held that the statute of limitation was triggered when the defendant mailed the restraining notice (December 6), and thus the complaint was time-barred. The plaintiff appealed, and the 2nd Circuit held that an FDCPA violation occurs when an individual is injured by unlawful conduct and not when the notice is mailed. On remand, the parties conducted limited discovery, which confirmed that the bank placed a freeze on the plaintiff’s accounts on December 13, which was also the date that the plaintiff learned about the freeze. The defendant then moved for summary judgment, arguing that the complaint is time barred given that it was filed one year and one day after the date of the account freeze. The district court agreed, and the plaintiff filed a second appeal.
On the second appeal, the 2nd Circuit affirmed the district court’s decision. The appellate court reminded the plaintiff that a violation of the FDCPA occurs when an individual is injured by unlawful conduct—which in this case was the date the accounts were frozen—and emphasized that the panel’s earlier holding was not intended to “expand the FDCPA’s statute of limitations by requiring that individuals also receive ‘notice of the FDCPA violation.’” Because the plaintiff’s suit was filed one year and one day after the bank froze his accounts, his claim was time-barred.
On April 30, the U.S. Court of Appeals for the 2nd Circuit held that the receipt of unsolicited text messages, absent any additional injury, is sufficient to demonstrate injury-in-fact in a TCPA class action. According to the opinion, consumers filed a class action lawsuit against a retail store for sending unsolicited text messages in violation of the TCPA. The district court approved a settlement between the parties and certified the class despite various objections, including one from a third-party defendant who argued the consumers lacked standing under the 2016 Supreme Court opinion Spokeo, Inc. v. Robins, because “they alleged only a bare statutory violation and statutory damages cannot substitute for concrete harm.”
On appeal, the appellate court first rejected the third-party defendant’s standing to appeal the district court’s decision because it had not been “‘formally strip[ped]’ of any claim or defense, it lacks standing to pursue its appeal” in the underlying class action. Notwithstanding the lack of standing by the third-party defendant, the appellate court then went on to address the jurisdictional standing issues raised against the consumers. The court reasoned that, even though the third party that raised the jurisdictional question had been dismissed, the court had an “independent obligation to satisfy [itself] of the jurisdiction” of the appellate and district court. The appellate court concluded that the consumers sufficiently alleged “nuisance and privacy invasion” by the unsolicited text messages, which “are the very harms with which Congress was concerned when enacting the TCPA.” Because the harms identified are “of the same character as harms remediable by traditional causes of action,” the appellate court held the consumers sufficiently demonstrated injury-in-fact as required by Article III.
On March 15, the CFPB and the New York Attorney General (NYAG) filed opening briefs in the U.S. Court of Appeals for the 2nd Circuit in their appeal of the Southern District of New York’s (i) June 2018 ruling that the CFPB’s organizational structure, as defined by Title X of the Dodd-Frank Act, is unconstitutional; and (ii) the September 2018 order dismissing the NYAG’s claims under the Consumer Financial Protection Act (CFPA). As previously covered by InfoBytes, the Bureau and the NYAG filed a lawsuit in February 2017, alleging that a New Jersey-based finance company and its affiliates (defendants) engaged in deceptive and abusive acts by misleading first responders to the World Trade Center attack and NFL retirees with high-cost loans by mischaracterizing loans as assignments of future payment rights, thereby causing the consumers to repay far more than they received. After the defendants moved to dismiss the actions, the district court allowed the NYAG’s claims to proceed under the CFPA, even though it had dismissed the Bureau’s claims, but then reversed course. Specifically, in September 2018, the court concluded that the remedy for Title X’s constitutional defect (referring to the Bureau’s single-director structure, with a for-cause removal provision) is to invalidate Title X in its entirety, which therefore invalidates the NYAG’s statutory basis for bringing claims under the CFPA. (Covered by InfoBytes here.)
In its opening brief to the 2nd Circuit, the Bureau argues that the district court erred when it held that the for-cause removal provision of the single-director structure is unconstitutional. According to the Bureau, the single director “does not undermine the President’s oversight. If anything, the Bureau’s single-director structure enhances the President’s ‘ability to execute the laws…’” because the President can still remove the director for cause, which allows the director to be held responsible for her conduct. In the alternative, the CFPB argued that should the court find the for-cause removal provision unconstitutional, the proper remedy is to sever the provision from Title X in accordance with the statute’s severability clause and not hold the entire CFPA invalid.
In a separate brief, the NYAG makes similar constitutional and severability arguments as the Bureau, but also argues that even if the entirety of Title X were to be held invalid, the state law claims should survive under the federal Anti-Assignment Act.
On March 12, the U.S. Court of Appeals for the 2nd Circuit affirmed dismissal of a consumer’s action against a debt collector, holding that the collection letter complied with the FDCPA. According to the opinion, the consumer filed a putative class action alleging the letter he received from the debt collection company violated Sections 1692e and 1692g of the FDCPA because it failed to inform him of details about his debt, such as what portion is principal and if there is interest. Additionally, the consumer alleged the letter conveyed the “mistaken impression ‘that the debt could be satisfied by remitting the listed amount as of the date of the letter, at any time after receipt of the letter.’” The lower court dismissed the action, noting that the letter stated the debt owed as of its date and stated that the amount may increase because of interest and fees, as required by the FDCPA.
On appeal, the 2nd Circuit agreed with the lower court. The appellate court rejected the consumer’s arguments that the letter failed under Section 1692g because it didn’t specify what portion of the debt is principal and if interest applied when it stated, “[a]s of the date of this letter, you owe $5918.69.” The appellate court found that the letter adequately informed the consumer of the total quantity of his debt and emphasized that nothing in Section 1692g requires the debt collector to explain the components of the debt or “precise rates by which it might later increase.” Moreover, the appellate court concluded that nothing about the debt collection letter “could be fairly characterized as ‘false, deceptive, or misleading’” under Section 1692e, as the letter explicitly stated the consumer’s balance may increase based on the day he remitted payment.
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- Daniel P. Stipano to discuss "A 20/20 view on 2020’s legislative and regulatory outlook" at the ACAMS Anti-Financial Crime and Public Policy Conference
- Kari K. Hall and Michelle L. Rogers to discuss "Overdrafts and regulatory trends" at the CLE Alabama Banking Law Update
- Kathryn L. Ryan to discuss "Industry open forum session on NMLS usage" at the NMLS Annual Conference & Training
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- Daniel P. Stipano to moderate "Washington update" at the 17th Puerto Rican Symposium of Anti Money Laundering 2020 conference
- Melissa Klimkiewicz to discuss "Private flood insurance updates" at the MBA's Servicing Solutions Conference & Expo 2020
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- Sasha Leonhardt to discuss "MLA & SCRA" on a NAFCU webinar
- Daniel P. Stipano to discuss "Pathway of the SARs: Tracking trajectories of suspicious activity reports from alerts to prosecution" at the ACAMS moneylaundering.com 25th Annual International AML & Financial Crime Conference
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