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On November 26, the Connecticut Supreme Court reversed a trial court’s ruling on a mortgage servicer’s motion to dismiss a Connecticut Unfair Trade Practices Act (CUTPA) action brought by a consumer. The trial court had ruled in favor of the servicer, stating, among other things, that ruling in the consumer’s favor might dissuade servicers from engaging in loan modifications for fear of negligence claims and additional liability. According to the Connecticut Supreme Court opinion, the consumer defaulted on his mortgage and his servicer instituted foreclosure proceedings, at which time the consumer requested a loan modification under the HAMP program. The complaint claims that over the next five years, the servicer mishandled the loan modification process, failed to respond to the consumer’s inquiries about the modification status, and repeatedly requested applications and additional documents from the consumer.
Based on the facts stated in the complaint, the consumer claims that when the servicer finally extended a HAMP modification (which capitalized accrued but unpaid interest, default fees, and the servicer’s attorney fees), the consumer filed a complaint against the servicer for violation of CUTPA, alleging that the servicer “committed unfair or deceptive acts in the conduct of trade or commerce by failing to exercise reasonable diligence in reviewing and processing the [consumer’s] loan modification applications.” Additionally, the consumer alleged negligence, claiming that the servicer “owed the [consumer] a duty of care arising out of the servicing standards imposed by RESPA, the 2011 federal consent order, the national mortgage settlement, and the Connecticut foreclosure mediation statutes.”
The Connecticut Supreme Court reversed the lower court’s ruling striking the consumer’s CUTPA claim on a motion to strike (similar to a federal motion to dismiss), stating that, “viewed in the light most favorable to sustaining the complaint’s legal sufficiency, we agree with the [consumer] and conclude that these allegations describe conduct that was not merely a technical violation of these provisions or negligent or incompetent, but involved a conscious, systematic departure from known, standard business norms” and that the allegations, if true, could show that the servicer “deliberately engage[d] in a pattern of conduct intended to prevent” the consumer from getting a loan modification. However, the court agreed with the lower court regarding the negligence claim, rejecting the consumer’s claim that the servicer had a common-law duty “to use reasonable care in the review and processing of” his loan modification application.
On December 6, the U.S. Court of Appeals for the Tenth Circuit affirmed a district court’s revised disgorgement order in SEC v. Kokesh. As previously covered by InfoBytes, in 2017, the U.S. Supreme Court handed down a unanimous ruling in Kokesh and rejected the SEC’s position that disgorgement is an equitable remedy and not a penalty. The Court’s decision limited the SEC’s disgorgement power to a five-year statute of limitations period applicable to penalties and fines under 28 U.S.C. § 2462. Following the Court’s ruling, in 2018, the 10th Circuit, on remand, directed the district court to enter an order for a lower disgorgement amount of $5 million (from nearly $35 million), holding that only a portion of the SEC’s claims were not time-barred by 28 U.S.C. § 2462. At the district court, the SEC also argued that prejudgment interest of more than $2.6 million should apply to the disgorgement penalty, as well as nearly $2.3 million in civil penalties, and the district court awarded such amounts, rejecting Kokesh’s argument that “the district court should reject any relief other than an order of disgorgement.” Kokesh again appealed, arguing, among other things, that “§ 2462 is jurisdictional and precludes this action in its entirety,” and that the permanent injunction and civil penalties were invalid.
On appeal, the 10th Circuit refused to address Kokesh’s jurisdictional argument, stating that, among other things, the appellate court had previously found that “each act of misappropriation should be considered separately” and that not all of the SEC’s claims were time-barred. The appellate court further concluded that because it had previously found that some alleged misappropriations happened within the five-year limit, the $5 million disgorgement calculation that the SEC requested was warranted. Moreover, the appellate court noted that Kokesh failed to show any reason that its 2018 decision was “clearly erroneous,” and during remand, “rather than. . .contesting timeliness or the SEC’s calculations, Kokesh conceded the district court should enter the disgorgement order and instead focused on the SEC’s new request for prejudgment interest.” Additionally, the appellate court refused to consider Kokesh’s challenges to the permanent injunction and the civil penalty ordered because they were first raised in Kokesh’s reply brief.
On December 5, the FTC and the Ohio attorney general announced that the U.S. District Court for the Western District of Texas issued a temporary restraining order (TRO) against a VoIP service provider and its foreign counterpart for facilitating (or consciously avoiding knowing of) a “phony” credit card interest rate reduction scheme committed by one of its client companies at the center of a joint FTC/Ohio AG action. As previously covered by InfoBytes, the original complaint alleged that a group of individuals and companies—working in concert and claiming they could reduce interest rates on credit cards—had violated the FTC Act, the Telemarketing Sales Rule, and various Ohio consumer protection laws. In addition to obtaining a TRO against the most recent alleged participants, the FTC and Ohio AG amended their July complaint to add the telecom companies as defendants alleging the companies “played a key role in robocalling consumers to promote a credit card interest reductions scheme.”
On November 27, the Superior Court of New Jersey, Appellate Division, affirmed an order requiring arbitration between a consumer and the buyer of the consumer’s debt (debt collector) in a lawsuit filed by the consumer claiming that the debt collector was not licensed to collect debts in New Jersey. According to the decision, the consumer had opened a credit card account with a bank, which included an arbitration agreement, then defaulted on the account. The debt collector then bought the debt and collected the consumer’s debt. The consumer subsequently sued the debt collector for its purported unlicensed collection of debts, but the trial court dismissed the complaint and compelled arbitration between the parties. The consumer appealed, arguing in part that the trial court erred by allowing an arbitrator to decide the validity of the assignment to the debt collector, and, therefore, the enforceability of the arbitration agreement. The appellate division court sided with the trial court that the arbitration clause “clearly and expressly stated claims relating to the ‘application, enforceability or interpretation of this Agreement, including this arbitration provision’ are subject to arbitration.” Moreover, the court concurred that the agreement did not violate the state’s plain language statute. However, the appellate division remanded the case to the trial court for issuance of an order to stay—rather than dismiss—the matter pending arbitration.
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 22, the CFPB announced a settlement with an employment background screening company resolving allegations that the company violated the FCRA. In the complaint, the Bureau asserts that the company failed to “employ reasonable procedures to assure maximum possible accuracy” in the consumer reports it prepared. Specifically, the Bureau claims that until October 2014, the company matched criminal records with applicants based on only two personal identifiers, which created a “heightened risk of false positives” in commonly named individuals. The company also had a practice of including “high-risk indicators,” sourced from a third party, in its consumer reports and did not follow procedures to verify the accuracy of the designations. Additionally, the Bureau asserts that the company failed to maintain procedures to ensure that adverse public record information was complete and up to date, resulting in reporting outdated adverse information in violation of the FCRA. Under the stipulated judgment, in addition to injunctive relief, the company will be required to pay $6 million in monetary relief to affected consumers and a $2.5 million civil money penalty.
On November 18, the U.S. District Court for the Southern District of New York denied an investment company’s request to use “sampling-related expert discovery” in its action against a trustee of five residential mortgage-backed securities (RMBS), concluding that the proposal was not proportional to the needs of the case. As previously covered by InfoBytes, the investment company filed suit against the trustee alleging the trustee “failed to fulfil certain contractual duties triggered by the discovery of breaches of ‘representations and warranties’” when the underlying mortgages allegedly were found not to be of the promised quality. The investment company also alleged that the trustee failed to exercise its rights to require the companies that sold the mortgages in question “to cure, substitute, or repurchase the breaching loans.” After being denied class certification by the court in February, the investment company preemptively moved for an order from the court allowing it to use sampling-related expert discovery—a process which “engage[s] experts to select samples of mortgage loans from each of the five trusts and to perform analyses on those samples of loans to extrapolate information about the quality of all of the loans in the trusts.”
The court denied the request, calling the proposed sampling a “blind corner.” The court noted that the “breach rate evidence” that would be discovered by the sampling “only provides substantial probative value for [the investment company’s] claims if [the investment company] can demonstrate that [the trustee] was under an obligation to conduct an investigation of the loans in each of the trusts,” which the investment company has failed to do. Because “the probative value of that discovery hinges upon a factual theory that [the investment company] has yet to demonstrate is viable,” the court could not justify allowing the parties to expend hundreds of thousands of dollars on the proposed sampling.
On November 15, the U.S. Court of Appeals for the Eleventh Circuit vacated the district court’s certification order of a class action alleging a national satellite TV company violated the TCPA by contacting individuals who had previously asked to not be contacted. According to the opinion, a consumer filed a class action against the company alleging that the company failed to maintain an “internal do-not-call list,” which allowed the company and its telemarketing service provider to contact him eighteen times after he repeatedly asked to not be contacted. The consumer sought certification “of all persons who received more than one telemarketing call from [the telemarketing service provider] on behalf of [the company] while it failed to maintain an internal do-not-call list.” The district court certified the class and the company appealed.
On appeal, the 11th Circuit disagreed with the district court, concluding the court incorrectly determined that issues common to the class predominated over issues individual to each member. Specifically, the appellate court noted that the class consisted of unnamed class members who may not have asked the company to stop calling and therefore, would never have been on an internal do-not-call list, had one been properly maintained. Thus, these members were not injured by the company’s failure to comply and their injuries are then “not fairly traceable to [the company’s] alleged wrongful conduct,” resulting in a lack of Article III standing to sue. The appellate court emphasized that recertification is still possible, but the district court would need to determine which of the class members made the request to not be contacted. However, if “few made [the] request, or if it will be extraordinarily difficult to identify those who did, then the class would be overbroad” and individualized issues may “overwhelm issues common to the class.”
On November 15, the U.S. District Court for the Northern District of Georgia entered a stipulated final judgment and order to resolve allegations concerning one of the defendants cited in a 2015 action taken against an allegedly illegal debt collection operation. As previously covered by InfoBytes, the CFPB claimed that several individuals and the companies they formed attempted to collect debt that consumers did not owe or that the collectors were not authorized to collect. The complaint further alleged uses of harassing and deceptive techniques in violation of the CFPA and FDCPA, and named certain payment processors used by the collectors to process payments from consumers. While the claims against the payment processors were dismissed in 2017 (covered by InfoBytes here), the allegations against the outstanding defendants remained open. The November 15 stipulated final judgment and order is issued against one of the defendants who—as an officer and sole owner of the debt collection company that allegedly engaged in the prohibited conduct—was found liable in March for violations of the FDCPA, as well as deceptive and unfair practices and substantial assistance under CFPA.
Among other things, the defendant, who neither admitted nor denied the allegations except as stated in the order, is (i) banned from engaging in debt collection activities; (ii) permanently restrained and enjoined from making misrepresentations or engaging in unfair practices concerning consumer financial products or services; and (iii) prohibited from engaging in business ventures with the other defendants; using, disclosing or benefitting from certain consumer information; or allowing third parties to use merchant processing accounts owned or controlled by the defendant to collect consumer payments. The stipulated order requires the defendant to pay a $1 civil money penalty and more than $5.2 million in redress, although full payment of the judgment is suspended upon satisfaction of specified obligations and the defendant’s limited ability to pay.
On November 12, the U.S. Court of Appeals for the Eleventh Circuit issued an order reversing in part and affirming in part a district court’s dismissal of claims brought by a consumer who claimed a bank violated the Fair Credit Reporting Act (FCRA) and the FDCPA when it allegedly provided debt information using a “false name” to a credit reporting agency and requested the consumer’s credit report without a proper purpose. In 2016, the consumer filed a lawsuit asserting the bank (i) violated the FDCPA by using a name other than its true name in connection with the collection of debt; and (ii) violated the FCRA when it failed to investigate the accuracy of the information provide to the credit reporting agency, and requested his credit report without a permissible purpose. The district court dismissed the complaint for failure to state a claim.
On appeal, the 11th Circuit affirmed the dismissal of the FDCPA claim, concluding that, while the false-name exception stipulates that the FDCPA applies to a creditor that uses any name other than its own when collecting its own debts (which may indicate a third party was collecting or attempting to collect the debt), the exception does not apply in this instance because “even the least sophisticated consumer” would understand that the bank and the entity named in the consumer report were related. However, the appellate court held that the district court erred in dismissing the FCRA claims. According to the opinion, the consumer stated three plausible claims for relief, including that the bank failed to investigate the accuracy of the information it sent, as required when a dispute arises, and that it unlawfully obtained his credit report. The 11th Circuit noted that while it has never addressed the meaning of “false pretenses” under the FCRA, it now joins other courts in holding that “intentionally obtaining a credit report under the guise of a permissible purpose while intending to use the report for an impermissible purpose can constitute false pretenses.” Moreover, the appellate court noted that while the bank may have obtained the consumer’s credit report for proper purposes, or that it may have disclosed the true purpose to the credit reporting agency, “this fact question cannot be resolved on a motion to dismiss.”
- Andrew W. Schilling to moderate "Expectations of in-house counsel from their law firm partners" at the ACI's 7th Annual Advanced Forum on False Claims and Qui Tam
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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
- Kathryn L. Ryan to discuss "Regulating innovative consumer lending products" at the NMLS Annual Conference & Training
- Daniel P. Stipano to moderate "Washington update" at the 17th Puerto Rican Symposium of Anti Money Laundering 2020 conference
- APPROVED Checkpoint Webcast: CFL overview
- 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
- Daniel P. Stipano to discuss "Which bud’s for you? A deep-dive into evolving marijuana laws" at the ACAMS moneylaundering.com 25th Annual International AML & Financial Crime Conference