InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Court rejects dismissal bid in veteran pension case
On March 5, the U.S. District Court for the District of South Carolina affirmed the recommendation of a Magistrate Judge and denied the motion of a law firm, one of its partners, and others’ (collectively, “defendants”) to dismiss an action alleging that the defendants violated the Federal Anti-Assignment Act (FAAA) and the Racketeer Influenced and Corrupt Organization Act (RICO). These alleged violations were based on the advance purchase of future military pension and disability benefits in exchange for current lump sum payments. According to the report of the Magistrate Judge, five military veterans (collectively, “plaintiffs”) alleged that the defendants operated a coordinated scheme to generate leads from veterans seeking money, and connected veterans to brokers and purchasers in order for the veteran to sell future pension and disability payments for a lump sum wire transfer. The plaintiffs also alleged the operators required the veterans to execute an insurance policy or structured asset agreement to ensure the loan is fully repaid upon the veteran’s death. The Magistrate Judge recommended the motions be denied, concluding that the plaintiffs sufficiently pled the details of the alleged scheme and that the defendants violated the FAAA by inducing veterans to enter into contracts to sell their retirement or disability benefits in advance of the date they are due and payable. Moreover, the Magistrate Judge found that the plaintiffs sufficiently alleged the individual plaintiffs violated RICO by engaging in a criminal enterprise that “coordinated various corporations and websites to buy the plaintiffs’ and other veterans’ benefits and funnel the proceeds through [a defendant]’s account.” Upon review of the report, the district court found “no clear error” by the Magistrate Judge, agreed with the recommendations, and denied the motions to dismiss.
As previously covered by InfoBytes, one of the individual defendants was recently fined $1 in civil money penalties by the CFPB for allegedly violating the Consumer Financial Protection Act by operating a website that connected veterans with companies offering high-interest loans in exchange for the assignment of some or all of their military pension payments.
Court bans telemarketing grant scheme in Arizona
On March 5, the FTC announced the U.S. District Court for the District of Arizona entered three orders on February 26, settling the FTC’s case against the operators of a telemarketing grant scheme. As previously covered by InfoBytes, the FTC’s complaint alleged the operators charged consumers upfront fees ranging from $295 to $4,995 and promised to obtain $10,000 or more in government, corporate, or private grants that could help the consumers pay off personal expenses such as medical bills; however, “most, if not all,” of the consumers ultimately received nothing in return. The three stipulated orders (available here, here, and here) impose a suspended $3 million judgment, (based on the operators’ inability to pay) and: (i) require the operators to surrender significant assets; (ii) ban the operators from telemarketing or making misrepresentations or unsubstantiated claims about any product or services; and (iii) prohibit the operators from making false or misleading statements to financial entities, including misrepresenting businesses to payment processors and banks.
New Jersey appellate court affirms dismissal of lease fraud claims against auto financier
On March 1, the Superior Court of New Jersey Appellate Division affirmed a lower court’s order granting summary judgment to an auto finance company and dismissing with prejudice a plaintiff’s New Jersey Consumer Fraud Act (CFA) and Fair Credit Reporting Act (FCRA) claims. According to the opinion, the plaintiff entered into a lease agreement for a vehicle serviced by the defendant. The plaintiff, who incurred late charges on 35 of her 39 monthly payments of $300, returned the vehicle before the end of the lease and was required to pay a $495 vehicle return fee, along with wear and tear fees and late charges. The plaintiff subsequently entered into a new lease transaction, in which the dealership agreed to pay the defendant the outstanding payments on her old lease, but did not, according to the court, waive the vehicle return fee. The dealership paid the full balance to the defendant after the plaintiff received notification about an overdue lease payment, and the day after the dealership’s payment was applied, the plaintiff paid an additional $300—which was mistakenly applied to a $395 disposition fee, as opposed to the larger vehicle return fee. The plaintiff made a final payment of $655 to settle the balance of the disposition fee as well as wear and tear fees and late charges. A complaint was filed later by the plaintiff against the defendant alleging that it fraudulently procured an additional $300 lease payment and falsely reported that she was delinquent on payments.
Affirming the lower court, the appeals court concluded that the defendant’s representations regarding the outstanding $300 payment were accurate and, under the lease terms, the plaintiff remained responsible for the vehicle return and wear and tear fees. In addition, the appeals court held that the plaintiff’s FCRA claim failed because the record confirmed that within 30 days of being notified of a dispute with the plaintiff’s credit score, the defendant conducted an investigation and requested that the credit reporting agencies remove the “late marks.”
District Court cites 9th Circuit, holds Fannie Mae is not a CRA
On February 26, the U.S. District Court for the Northern District of California granted summary judgment in favor of Fannie Mae in an action brought by a consumer alleging that Fannie Mae violated the California Consumer Credit Reporting Agencies Act (CCCRA) and the Fair Credit Reporting Act (FCRA) by prohibiting lenders from providing consumers a copy of Fannie Mae’s Desktop Underwriter (DU) report. According to the opinion, two years after completing a short sale on his previous home, a consumer sought a mortgage with three lenders. One lender used Fannie Mae’s DU program to determine if the loan would be eligible for purchase by the agency, but the DU report listed his prior mortgage loan as a foreclosure rather than a short sale. The lender ultimately denied the application, rather than manually underwrite it. Upon reviewing Fannie Mae’s motion for summary judgment, the court noted that in order for the consumer to succeed on his CCRA and FCRA claims, he must establish Fannie Mae is a credit reporting agency. The court rejected the consumer’s attempts to distinguish his case from the recent 9th Circuit decision in Zabriskie v. Fed. Nat’l Mortg. Ass’n, which held that Fannie Mae was not a credit reporting agency under the FCRA. (Covered by InfoBytes here.) The court acknowledged that even though Fannie Mae may have problems with its foreclosure recommendations in the DU system, it does not undercut the conclusion that Fannie Mae operates the DU system to assist lenders in making purchasing decisions, does not “regularly engage[] in . . . the practice of assembling or evaluating” consumer information, and therefore, is not a credit reporting agency.
District Court finds telephone numbers did not overshadow debt validation notice
On February 28, the U.S. District Court for the District of New Jersey dismissed a putative class action alleging a debt collector violated the FDCPA by sending a collection letter, which allegedly failed to properly notify the plaintiff of his right to dispute the debt. According to the opinion, the collection agency sent a one-page collection letter notifying him that a dispute must be in writing. The letter also contained two telephone numbers and requested the consumer call with any questions or concerns. In his complaint, the consumer argued that the inclusion of the phone numbers and request for telephone contact, “overshadows or contradicts” the debt dispute notice required by law. The collection agency moved for judgment on the pleadings and dismissal, arguing that the consumer failed to state a legal claim under the FDCPA. The court agreed, stating that “nothing about the form of the letter overshadows or contradicts the information in the validation notice.” Specifically, the sentence that requested the consumer call the collection agency does not mention disputing the debt, and the only reference to disputing the debt is in the standard validation notice one paragraph below, which specifies it must be done in writing. Because the consumer’s FDCPA claims failed, the court entered judgment and dismissed the action.
Class settles data breach claims over compromised payment card data
On February 26, the U.S. District Court for the Middle District of Florida granted final approval and class certification, following a final approval hearing, to a settlement resolving class action allegations concerning a data breach involving an international fast-food chain. According to the amended motion for final approval, the data breach occurred in 2016 and involved third-party malware installation on certain franchises’ point of sale systems, which targeted and compromised customer payment card related data. The class ultimately asserted the following claims—breach of implied contract, negligence, and violations of several state consumer laws—and requested reimbursement for (i) costs associated with time spent addressing identity theft or fraud; (ii) losses caused by restricted access to funds; (iii) costs associated with credit reports and credit monitoring; (iv) bank and payment card fees; (v) unauthorized charges; and (vi) documented time spent dealing with the repercussions of the data breach. Under the terms of the settlement, the fast-food chain will pay up to $5,000 per eligible class member as reimbursement for documented out-of-pocket expenses, and up to $15 an hour for up to two hours of undocumented time spent dealing with the repercussions of the data breach. The court also approved $1.02 million in attorneys’ fees and approximately $139,000 in costs to class counsel.
CFPB petitions court to force law firm to comply with CID
On February 25, the CFPB petitioned the U.S. District Court for the Southern District of New York for an order requiring a debt collection law office to comply with a civil investigative demand (CID) issued by the Bureau in June 2017. The CID requested information from the debt collection firm as part of a Bureau investigation into whether debt collectors, furnishers, or other persons associated with the collection of debt and furnishing of information have engaged or are engaging in unfair, deceptive, or abusive acts or practices in violation of the CFPA, FDCPA, and FCRA. According to the petition, the firm partially responded but withheld several responses asserting that doing so would require the firm's principal to violate professional responsibility rules in the states of New York and New Jersey. Withheld information, the Bureau claims, includes telephone calls and written correspondence with indebted consumers, disputes with consumers over the firm's credit reporting activities to third party agencies, and service contracts with creditors on whose behalf the firm collects debt. The Bureau argued that the court should direct the law firm to comply with the CID because, aside from following all applicable procedural requirements for the issuance of a CID contained within the CFPA, it “has shown that the investigation is being conducted for a legitimate purpose, that the inquiries may be relevant to that purpose, that the information sought is not already within the Bureau's possession, and that the administrative steps required by the [CFPA] and its implementing regulations have been followed. . . .” The Bureau further requested an order that the firm show cause and explain why it should not be compelled to comply with the CID.
FTC files action against Puerto Rican defendants for negative option marketing
On February 28, the FTC announced it filed a complaint in the U.S. District Court for the District of Puerto Rico alleging a business owner and the companies he operates (defendants) violated the FTC Act and the Restore Online Shoppers’ Confidence Act (ROSCA) by allegedly offering deceptive online “free-trial” offers that mislead consumers into enrolling into negative option plans. According to the complaint, the defendants sold skin care products online between February 2016 and August 2017 and marketed a free trial for the products for the cost of around $4.99 in shipping. The complaint alleges consumers who ordered the free trial (i) were charged more than $90 and then subsequently enrolled into a monthly auto-ship program; (ii) were charged for additional products without their consent; and (iii) had a difficult time canceling their enrollment in the auto-ship plan. Moreover, the FTC argues that the defendants avoided detection by using shell companies to obtain merchant processing accounts and fake and real websites in order to avoid detection by credit card companies and law enforcement. The FTC is seeking monetary and injunctive relief against the defendants.
9th Circuit affirms $8 million California whistleblower claim
On February 26, the U.S. Court of Appeals for the 9th Circuit affirmed a former general counsel’s whistleblower retaliation claim, under California public policy, against a biopharmaceutical manufacturer and its CEO but vacated the jury’s Sarbanes-Oxley Act (SOX) and Dodd-Frank Act verdicts. According to the opinion, the general counsel sued the company and the CEO claiming whistleblower retaliation under SOX, the Dodd-Frank Act, and California wrongful termination case law, claiming the company fired him after he alleged the company may have violated the FCPA in China. The jury awarded the general counsel $11 million, including $2.96 million in lost wages, which was doubled under the Dodd-Frank Act’s whistleblower provision, and $5 million in punitive damages. The company appealed the verdict arguing the district court erred in the instructions to the jury when it stated that statutory provisions of the FCPA constitute “rules or regulations of the SEC for purposes of whether [the general counsel] engaged in protected activity under SOX.”
On appeal, the 9th Circuit concluded the district court’s instructional error was not harmless as to the SOX claim, finding that the statutory provisions of the FCPA are not “rules or regulations of the SEC under SOX” as instructed to the jury. While the error was not harmless, the appellate court rejected entering judgment in favor of the company and instead, remanded the case back for proper instruction. Additionally, the appellate court vacated the district court’s instructions for the jury to enter judgment in favor of the Dodd-Frank Act claim, citing to the Supreme Court decision in Digital Realty Trust Inc. v. Somers. The appellate court concluded that the whistleblower provision of the act does not apply to purely internal reports and entered judgment in favor of the company. As for the California public policy claim, the appellate court determined that the incorrect SOX jury instructions were harmless because his California claim did not depend on SOX and the jury “necessarily would have reached the same verdict under proper instruction.” The affirmation of the California claim and associated damages left the general counsel with an award of nearly $8 million.
3rd Circuit: Debt buyer qualifies as debt collector under FDCPA
On February 22, the U.S. Court of Appeals for the 3rd Circuit issued a precedential order affirming a district court’s ruling that an entity that purchases charged-off receivables and outsources the collection activity to a third party still qualifies as a debt collector and, therefore, may be bound by the dictates of the FDCPA. According to the opinion, a consumer filed a lawsuit against the debt-buying company alleging voicemail messages she received from the company’s contractor failed to identify the contractor as a collection agency. The consumer further alleged that a letter the contractor sent did not inform her how to exercise her validation rights, in violation of the FDCPA. The district court ruled that the defendant, which identifies itself as a creditor, meets the “principal purpose” definition of a debt collection under the FDCPA and therefore must comply with its provisions. On appeal, the defendant argued that debt collection and purchasing are “mutually exclusive,” and that the district court's ruling should be reversed under the U.S. Supreme Court’s decision in Henson v. Santander Consumer USA, which held that the FDCPA does not necessarily apply to a company collecting debts in default that it purchased for its own account. (See previous Buckley Special Alert on the decision here.)
However, the 3rd Circuit agreed with the district court’s decision, and rejected the defendant’s arguments that the Henson decision renders it a creditor rather than a debt collector. “The Supreme Court went out of its way in Henson to say that it was not opining on whether debt buyers could also qualify as debt collectors” under certain provisions of the FDCPA, and moreover, “[a]n entity qualifies under the definition if the ‘principal purpose’ of its ‘business’ is the ‘collection of any debts,’” the panel wrote. “As long as a business’s raison d’etre is obtaining payment on the debts that it acquires, it is a debt collector. Who actually obtains the payment or how they do so is of no moment,” the 3rd Circuit wrote.
The appellate court’s opinion, however, did not address the actual question of liability asserted against the defendant, but rather remanded the case for consideration as to whether the defendant is vicariously liable for claims related to the contractor’s actions.