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Servicemember Files Writ of Certiorari, Petitions Supreme Court to Review SCRA Protections for Non-Judicial Foreclosures
On October 11, a servicemember filed a petition for a writ of certiorari, requesting that the U.S. Supreme Court review an opinion issued by the U.S. Court of Appeals for the Fourth Circuit concerning whether the Servicemembers Civil Relief Act (SCRA) can be applied to a mortgage loan obligation incurred during a borrower’s earlier, distinct period of military service. (See previous InfoBytes summary on Fourth Circuit opinion.)
Under the SCRA, servicemembers are afforded certain protections against non-judicial foreclosures of their home while in active military service. Section 3953 provides that a home mortgage “originated before the period of the servicemember’s military service and for which the servicemember is still obligated” cannot be foreclosed upon unless allowed by a court order. However, the appellate court affirmed the district court’s decision in favor of the bank, concluding that because the servicemember “incurred his mortgage obligation during his service in the Navy, the obligation was not subject to SCRA protection” even through the servicemember, after a discharge period, later re-enlisted with the Army.
The petition argues that the appellate court “misconstrued” and narrowly interpreted the SCRA’s definition of the term “period of military service” under section 3911 by treating the servicemember’s “separate and distinct periods of military service as a single period of service.”
On October 12, the U.S. Court of Appeals for the Seventh Circuit affirmed an Indiana District Court’s 2016 ruling, agreeing that an insurance company does not bear the responsibility for covering a bank’s $24 million class action settlement under a policy provision that excludes coverage for any case involving fees. In upholding the lower court’s decision, the three judge panel concluded that the insurance company had no duty to defend or indemnify the bank on the basis that the underlying overdraft fee claims fall under “Exclusion 3(n)” in the bank's professional liability insurance policy, which states that the insurance company “shall not be liable for [l]oss on account of any [c]laim . . . based upon, arising from, or in consequence of any fees or charges.” Class claims alleging that the bank manipulated its debit processing to “maximize overdraft revenue” by charging purportedly excessive fees to consumers who overdraw their checking and savings accounts triggered the exclusion. The panel also noted that an insurance company’s decision to include fee exclusions in banking liability policies is designed to prevent the “moral hazard” of allowing banks to “freely create other customer fee schemes” knowing they could easily secure coverage.
On October 10, the U.S. Court of Appeals for the Ninth Circuit handed down an opinion concerning alleged violations of certain California statutes by an Ohio-based mortgage servicer (plaintiff). The panel held that the plaintiff is likely to prevail in its bid for a court order blocking the enforcement of the state’s financial code by certain California district attorneys because the law violates the Dormant Commerce Clause—a legal doctrine that prohibits states from unduly burdening interstate commerce. The defendants allege that the plaintiff violated Section 12200 of the California Financial Code, which requires a prorater—a person who is compensated for receiving monies from debtors and distributing the funds to creditors—to obtain a California prorater license and be incorporated in the state before conducting business on an interstate basis. The panel determined that “[t]his form of discrimination between in-state and out-of-state economic interests is incompatible with a functioning national economy, and the prospect of each corporation being required to create a subsidiary in each state is precisely . . . [what] the Dormant Commerce Clause exists to prevent.” Consequently, the panel vacated the district court’s order denying a preliminary injunction, and remanded for further proceedings.
The panel also affirmed the district court’s ruling that the plaintiff was required to disclose in its mail solicitations to homeowners that it “lacked authorization from lenders,” and opined that the plaintiff would most likely not prevail in its effort to challenge allegations that it violated sections of the California Business and Professions Code on a First Amendment basis. The First Amendment, the panel reasoned, “does not generally protect corporations from being required to tell prospective customers the truth.”
Finally, in a portion of the opinion in which one of the circuit judges dissented, the panel reversed a district court’s order dismissing both cases under Younger v. Harris “because the cases had proceeded beyond the ‘embryonic stage’ in the district court before the corresponding state cases were filed.” Judge Montgomery—who otherwise joined the opinion with respect to the Dormant Commerce Clause and First Amendment questions—argued that the district court's dismissal under Younger should have been upheld because “[b]oth cases arrived in federal court…as a preemptive strike by [the plaintiff] to enjoin state district attorneys from enforcing state statutes in state court.”
On October 3, a three-judge panel of a Texas Court of Appeals reversed and remanded, while affirming in part, a trial court’s decision concerning an alleged breach of contract over a $230 million sale agreement. On appeal were three issues, including a challenge to the grounds on which the trial court granted summary judgement under the Uniform Electronic Transactions Act (UETA). The trial court concluded that the “parties did not agree to conduct business electronically and that the alleged contract did not contain a valid electronic signature.” But the panel reversed the decision, holding that an agreement between parties to conduct transactions by electronic means “need not be explicit” under UETA, and finding that the parties’ email negotiations constituted “at least some evidence that the parties agreed to conduct some of their transactions electronically.” and The panel also cited their earlier decision in Khoury v. Tomlinson, that was previously discussed in InfoBytes, to address the question of whether the emails between the two parties were signed electronically. Khoury ruled that an email satisfied the writing requirement because it was an electronic record, and that the header, which included a “from” field constituted as a signature because that field served the same “authenticating function” as a signature block. Consequently, because there was “at least some evidence that the relevant emails were signed as defined in UETA,” the trial court in this matter erred in granting summary judgment.
Further, because the panel found that there still remain questions regarding whether the parties actually formed an agreement concerning the sale of assets, the panel stated they were unable to determine “as a matter of law, under the particular facts of this case, whether such a contract is illusory.” Thus, the trial court erred in granting summary judgment on these grounds as well.
The remainder of the trial court’s judgments were affirmed, and the case was remanded for further proceedings consistent with the opinion.
On September 28, the U.S. Court of Appeals for the Second Circuit affirmed a New York District Court’s 2015 ruling, which requires a major international bank to pay $806 million for selling allegedly faulty mortgage-backed bonds to Fannie Mae and Freddie Mac. In the original suit brought by the Federal Housing Finance Agency (FHFA), FHFA alleged that the bank overstated the reliability of the loans for sale. In upholding the lower court’s decision, the Second Circuit concluded that the marketing prospectus used to sell the mortgage securities to Fannie and Freddie between 2005 and 2007 contained “untrue statements of material fact.” Specifically, the prospectus falsely stated that the loans were compiled with the underwriting standards described therein, including standards related to assessing the creditworthiness of the borrowers and appraising the value of properties.
On September 29, the U.S. Chamber of Commerce (Chamber) and other financial industry groups joined together to file a lawsuit in a Texas District Court against the CFPB over the constitutionality and legality of the Bureau’s arbitration rule (rule). The complaint alleges four reasons why the rule is invalid and should be set aside:
- the rule is a product of the unconstitutional structure of the CFPB – as covered in a previous InfoBytes, a similar argument is being heard in the U.S. Court of Appeals for the D.C. Circuit in the case brought by PHH;
- the CFPB failed to follow procedures in the Administrative Procedures Act (APA) in adopting the conclusions of a flawed arbitration study. Specifically, the complaint alleges that the study improperly limited public participation, applied flawed methodologies, misunderstood relevant data, and did not address key considerations;
- the rule is a model of arbitrary and capricious agency action because it fails to take into account important aspects of the problem it is attempting to address and runs counter to the record before the Bureau; and
- the rule is a violation of the Dodd Frank Act because it fails to advance the public interest or consumer welfare.
Currently, the rule is also under scrutiny by Congress. As previously discussed in InfoBytes, the House passed a disapproval resolution, under the Congressional Review Act, to repeal the rule. A similar measure is set for discussion in the Senate.
Buckley Sandler will follow up with a more detailed summary of the lawsuit.
On September 22, a three-judge panel of the U.S. Court of Appeals for the Eleventh Circuit reversed and remanded, while affirming in part, a lower court’s decision concerning whether a voicemail left by a debt collector constitutes a “communication” and how “meaningful disclosure” should be interpreted under the Fair Debt Collection Practices Act (FDCPA). The panel answered the first issue by noting that the FDCPA’s definition of “communication” includes “the conveying of information regarding a debt [either] directly or indirectly to any person through any medium.” Therefore, the panel opined, under the statutory language, the only requirement for the voicemail to qualify as a communication was that it convey to the consumer that the call concerned a debt—which it did. Accordingly, the appellate court reversed the district court’s dismissal of the claim under section 1692e of the FDCPA and remanded for further proceedings consistent with their findings.
However, the panel agreed with the lower court’s interpretation of “meaningful disclosure” under section 1692d of the FDCPA—which protects consumers from “harassment and abuse” by prohibiting debt collectors from “placing telephone calls without meaningful disclosure of the caller’s identity.” Specifically, the panel held that a debt collector need only provide the name of the company and the nature of its debt collection business on the call. The statute does not require disclosure of the individual employee’s name as this additional information would not be useful to a consumer. Consequently, the appellate court upheld the district court’s decision to dismiss the claim under section 1692d.
On September 26, a three-judge panel of the U.S. Court of Appeals for the Eleventh Circuit held that a customer is bound to a mandatory arbitration clause in his deposit account agreement with a national bank. In doing so, the appellate court reversed the Florida district court’s decision, which denied the national bank’s motion to compel arbitration. In 2010, the customer filed a putative class action over the charging of overdraft fees associated with a bank account he held jointly with his wife. The case concerns an account agreement signed by the customer when he transferred an existing account into the joint account in 2001. The appellate court reasoned that the customer “was on notice that signing the 2001 signature card represented the start of a new contractual relationship” and therefore, subject to the updated arbitration clause.
The CFPB’s new arbitration rule, which went into effect September 18, does not allow companies subject to the rule to use arbitration clauses to stop consumers from being part of a class action. However, as previously discussed in InfoBytes, the House passed a disapproval resolution under the Congressional Review Act to repeal the rule. A similar measure is expected to be considered by the Senate within the next week.
CFTC Files Anti-Fraud Enforcement Action Against New York-Based Corporation Concerning Bitcoin Investments
On September 21, the U.S. Commodity Futures Trading Commission (CFTC) filed a complaint in the U.S. District Court for the Southern District of New York against a New York-based corporation and its CEO (defendants) for allegedly engaging in fraudulent acts and practices in violation of the Commodity Exchange Act and CFTC Regulations by issuing false account statements in connection with Bitcoin investment solicitations. According to the complaint, the “Bitcoin Ponzi scheme” solicited more than $600,000 from approximately 80 customers to be placed in a pooled fund, executed by the defendants’ computer program called “Jigsaw,” which traded the virtual currency. The CFTC alleges that defendants’ strategy was fake and the “purported performance reports” were false in that they created the appearance of positive Bitcoin trading increases, but the gains were “illusory.” The CFTC further asserts that the “payouts of supposed profits to [pool participants] in actuality consisted of other customers’ misappropriated funds.” In addition, the CFTC alleges that defendants orchestrated a “fake computer ‘hack’” to conceal the scheme. The suit seeks, among other things, disgorgement of profits, civil monetary penalties, restitution, and a ban on commodities trading for the defendants.
On September 20, a federal judge in the U.S. District Court for the Eastern District of Pennsylvania issued a memorandum signing off on a settlement between a payday lender and a class of institutional investors, resolving allegations that the lender violated securities laws when it made “materially false and misleading statements” about its financial health and the nature of its U.K. lending practices. According to the plaintiffs, the lender’s misstatements artificially inflated the common stock during the class period (January 28, 2011 through February 3, 2014), so that when the lending practices were revealed, the stock prices declined. Further, the lender allegedly (i) “routinely lent to borrowers without conducting any affordability checks”; (ii) “permitted borrowers to roll over loans that [they] could not afford to repay, enriching [the lender] with fees”; and (iii) presented “loan loss reserves [that] were understated as a result of its poor lending practices, its failure to adequately monitor the quality of its loans, and its failure to properly account for loans that were rolled over.” In 2016, the court granted class certification and the parties reached a settlement after extensive discussions. The final settlement approved in the memorandum creates a settlement fund of $30 million, of which $7.5 million will go towards attorneys’ fees and costs. The court signed a judgment approving the class action settlement the same day.