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3rd Circuit confirms adversary proceeding required to discharge student debt in bankruptcy
On March 25, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s dismissal of an FDCPA and FCRA case against a student loan servicer and three credit reporting companies for attempting to collect a loan debt after it had been discharged in bankruptcy. After the discharge and completion of his bankruptcy case, the plaintiff filed suit, alleging the defendants violated the FDCPA and the FCRA by attempting to collect student loan debt that had been discharged. The district court granted the defendants’ motion to dismiss, ruling that the plaintiff failed to state a claim because under Section 523(a)(8) of the Bankruptcy Code, student loan debt is presumptively non-dischargeable and the plaintiff had not filed an adversary proceeding to determine otherwise.
On appeal, the plaintiff “argued that he was not required to file an adversary proceeding in Bankruptcy Court to determine the dischargeability of his student loan debt,” and that the Bankruptcy Court’s determination that the plaintiff was indigent rebuts “the presumption that his debt was nondischargeable by satisfying the exception in §523(a)(8) for undue hardship.” However, the appellate court held that “a finding of indigence is not the same as an undue hardship determination under §538(a)(8)” and that while the Bankruptcy Code does not require an adversary proceeding to discharge student loan debt, the procedures established in the Bankruptcy Rules do include such a requirement by providing that adversary proceedings include “a proceeding to determine the dischargeability of a debt” and are commenced by serving a summons and complaint on affected creditors. Accordingly, the appellate court affirmed dismissal.
District Court approves $90 million settlement in data tracking suit
On March 31, the U.S. District Court for the Northern District of California granted final approval to a $90 million class action settlement resolving claims that a social media platform unlawfully tracked consumers’ browsing data. According to the settlement agreement, the defendant obtained and collected data from approximately 124 million platform users in the U.S. who visited websites that displayed the defendant’s “Like” button between April 22, 2010 and September 26, 2011. According to the settlement, in addition to paying a $90 million settlement, the company must delete the data it had collected from users during the class period.
CFPB’s TSR claims against software company to proceed
On April 5, the U.S. District Court for the Central District of California denied a motion to dismiss claims brought by the CFPB alleging violations of the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act (CFPA). As previously covered by InfoBytes, the California-based software company and its owner (collectively, “defendants”) market and sell credit-repair business software and other tools to credit-repair businesses charging unlawful advance fees to consumers. According to the Bureau, the defendants provide substantial assistance to these businesses and purportedly encourage them to “charge unlawful advance fees” even though, under the TSR, companies that telemarket their services are prohibited from requesting or receiving fees from consumers until consumers are provided with a credit report showing that the promised results have been achieved.
The court was unpersuaded by the defendants’ argument that the Bureau exceeded its authority to pursue enforcement actions against them, claiming the credit-repair businesses that use defendants’ products and services are not “covered persons” under the CFPA, as the businesses “provide only retrospective credit-repair services and thus do not provide prospective consumer financial services under the CFPA.” The court held that the CFPA’s broad purpose and expansive language covers the services provided by the credit-repair businesses to improve or repair consumers’ credit and that such activity is considered “credit counseling” under the CFPA and is therefore a “consumer financial product or service.” The court further held that the credit-repair businesses were “covered persons” based on allegations that they provide consumers’ credit history to help with the approval of a mortgage or auto loan, recognizing that performing analysis relating to the credit history of consumers in connection with a decision regarding a consumer financial product or service is covered by the CFPA. The court also disagreed with the defendants’ argument that they are not “service providers” under the statute, in part, because the defendants “have the capacity to vet and monitor” the credit-repair businesses. The court also was not persuaded that the Credit Repair Organizations Act’s (CROA) provision allowing credit-repair businesses to charge monthly fees supersedes the TSR requirement that such a company cannot collect payment until the promised results have been achieved, holding that the requirements of each are not in conflict and noting that “if a credit repair agency does not qualify as a telemarketer, then it need not comply with the TSR—only the CROA is applicable,” and that nothing in the language of the CROA indicates that the defendants’ activities “may not simultaneously be regulated by the [TSR].”
District Court refuses to enforce choice-of-law provision, allows individual state data privacy claims to proceed
On March 30, the U.S. District Court for the Northern District of Illinois denied a global tech company’s bid to dismiss class action Illinois Biometric Information Privacy Act (BIPA) claims. Plaintiffs (Illinois residents) sued the company alleging it violated BIPA by applying image recognition technology to photos uploaded to subscribers’ account without receiving informed written consent. Plaintiffs also claimed the company failed to establish a file retention schedule and deletion guidelines as required by state law. The company argued that the terms of use agreed to by the subscribers contain a choice-of-law provision stating that the laws of Washington State govern the conditions of use and any disputes. The court disagreed, stating that Washington’s biometric protection statute does not provide for a private cause of action and is therefore contrary to Illinois’ fundamental public policy. “The fact that BIPA creates a private cause of action underscores the importance Illinois places on an individual’s right to control their biometric information,” the court said. “Applying Washington law would rob plaintiffs of control over their individual biometric information, instead leaving it to Washington’s attorney general to bring suit.” The court also held that Illinois has a greater material interest in the dispute than Washington. The court allowed the plaintiffs’ claims regarding consent to proceed in federal court but remanded the other claims to the Cook County Circuit Court.
CFPB’s UDAAP claims to proceed against mortgage lender
On March 31, the U.S. District Court for the District of Columbia mostly denied motions to dismiss filed by a mortgage lender and four executives (collectively, “defendants”) sued by the CFPB for allegedly engaging in unlawful mortgage lending practices. As previously covered by InfoBytes, the Bureau filed a complaint last year against the defendants alleging violations of several federal laws, including TILA and the CFPA. According to the Bureau, (i) unlicensed employees allegedly offered and negotiated mortgage terms; (ii) company policy regularly required consumers to submit documents for verification before receiving a loan estimate; (iii) employees denied consumers credit without issuing an adverse action notice; and (iv) defendants regularly made misrepresentations about, among other things, the availability and cost savings of FHA streamlined refinance loans.
The mortgage lender had argued in its motion to dismiss that neither TILA nor the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) required the lender to ensure that its individual employees were licensed under state law. In denying the motions to dismiss, the court disagreed with the lender’s position stating that in order for a mortgage originator to comply with TILA, it must also comply with Bureau requirements set out in Regulation Z, including a requirement that “obligates loan originator organizations to ensure that individual loan originators working for them are licensed or registered as required by state and federal laws.”
The court also concluded that the individual defendants must face claims for allegedly engaging in unfair or deceptive practices. The Bureau contended that the company’s chief compliance officer had warned the individual defendants that certain unlicensed employees were engaging in activities requiring licensure, and that the company’s owners approved the business model that permitted the underlying practices. According to the court, an individual “engages” in a UDAAP violation if the individual “participated directly in the practices or acts or had authority to control them” and “‘had or should have had knowledge or awareness’ of the misconduct.” The court rejected defendants’ arguments that it was improper to adopt this standard, and stated that “the fact that a separate theory of liability exists for substantially assisting a corporate defendant’s UDAAP violations has no bearing on how courts evaluate whether an individual defendant himself engaged in a UDAAP violation.”
While the court allowed the count to continue to the extent that it was based on allegations of unlicensed employees performing duties that would require licensure, it found that the complaint did not support an inference that the individual defendants knew that the employees were engaging in activities to make it appear that they were licensed. The court provided the Bureau an opportunity to replead the count to provide a stronger basis for such an inference.
District Court rejects borrower’s RESPA, TILA mortgage servicing claims
On March 15, the U.S. District Court for the Southern District of Ohio granted a defendant mortgage loan servicer’s motion for summary judgment in an action claiming violations of federal law based on alleged defects in the servicing of the plaintiff’s loan. According to the court, after settling similar claims against his two prior loan servicers, the plaintiff sued the companies that own and service his mortgage loan (collectively, defendants) disputing the precise amount of his delinquency and claiming the defendants failed to properly apply his mortgage payments or to respond to his notice of error (NOE). The plaintiff contended, among other things, that the defendants’ response to the NOE, misapplication of payments, and inaccurate periodic mortgage statements breached the terms of the mortgage agreement and violated RESPA, FDCPA, and TILA. In granting summary judgment, the court agreed with the defendants, finding that plaintiff’s breach of contract claim was foreclosed by a prior settlement agreement with his former servicer. The court also found that the servicer’s response to plaintiff’s NOE did not violate RESPA because it “fully addressed both ‘errors’ that the plaintiff presented,” and the perceived errors “amounted to confusion about basic arithmetic.” The court emphasized that “[n]othing in RESPA or Regulation X gives borrowers authority to dictate the parameters of a lender’s investigation,” and concluded that the servicer’s investigation and response was sufficient since the servicer provided the documents used to conclude that there was no misapplication of funds and “[e]ven a cursory investigation would have revealed that the specific errors alleged in the NOE did not occur.”
In granting the defendants’ request for summary judgment regarding claims that the plaintiff received five inaccurate mortgage statements in violation of the FDCPA and TILA, the court concluded that the periodic statements contained all the fields required under Regulation Z, and explained that allegations contesting the accuracy of the information contained in the statements did not violate TILA because “12 C.F.R. § 1026.42(d) does nothing to regulate the accuracy of information presented in a periodic statement.” As to the plaintiff’s FDCPA claim, which was premised on allegations that plaintiff’s prior servicer misapplied funds which caused defendants to collect amount that plaintiff did not owe, the court found that that the disputed periodic statement was truthful and accurate and that the plaintiff released the defendants of any liability under the FDCPA in his settlement agreement with the prior servicer.
DOJ: Property owner’s LEP policies violate FHA
On April 1, the DOJ filed a statement of interest in a 2021 lawsuit alleging defendants violated the Fair Housing Act (FHA) by refusing to rent to applicants with limited English proficiency (LEP) unless someone who speaks and reads English resides in the apartment unit. The complaint, filed in the U.S. District Court for the Northern District of New York, also alleged that the defendants refused offers made by the applicants to bring their own interpreters to translate lease documents and assist with communications.
According to the plaintiff fair housing organization, “the defendants’ LEP exclusion policy imposes an unjustified disparate impact on the basis of national origin and race,” with the defendants’ restrictive language policy acting as “a pretext to discriminate against applicants based on” these protected classes. The defendants moved to dismiss the case, “arguing that their LEP exclusion policy cannot, as a matter of law, violate the FHA” and that HUD’s 2016 HUD Office of General Counsel Guidance on Fair Housing Act Protections for Persons with Limited English Proficiency (2016 HUD LEP Guidance), which explains how restrictive language policies may violate the FHA, is wrong and does not deserve deference by the court.
In its statement of interest, the DOJ agreed with the plaintiff that dismissal of the complaint would be inappropriate. In explaining how policies that screen on the basis of an applicant’s language ability may violate the FHA, the DOJ pointed out that some courts have held that language policies can have an unjustified disparate impact on the basis of national origin or race, while others “have recognized that language polices can serve as proxies or pretexts for intentional discrimination based on national origin or race.” As such the DOJ contended that the defendants’ claim that LEP status is not a protected class under the FHA “misses the point.” The DOJ also defended the 2016 HUD LEP Guidance as a reasonable interpretation of the FHA.
9th Circuit upholds dismissal of wrongful garnishment claims
On March 30, the U.S. Court of Appeals for the Ninth Circuit affirmed a lower court’s dismissal of claims based on the FDCPA and the Washington Consumer Protection Act (WCPA). According to the memorandum, the complaint alleged that the defendants violated the FDCPA and WCPA when they sought to garnish plaintiff’s wages based a state court judgment that was not yet final. The district court dismissed the FDCPA claim, holding that “at worst, Defendants violated a state court procedural rule—not substantive law—when they applied for the writ of garnishment based on the valid, albeit, not final judgment.” In affirming that dismissal, however, the appellate court noted that “[t]he issue is not whether [the defendant] and [the defendant’s attorney] violated state law but whether they violated the FDCPA.” The 9th Circuit clarified that “[t]he [plaintiff] might have argued that [the defendant] and [the defendant’s attorney] falsely represented the legal status of their debt by implicitly claiming in the garnishment application that the debt was subject to a final judgment. But they [did] not make this argument, so it is waived.” With respect to the WCPA claim, while the district court’s dismissal was based on a determination that the garnishment did not “occur[] in trade or commerce” as required under that statute, the 9th Circuit pointed out that if the garnishment was “a violation of the Washington Collection Agency Act (WCAA), [it] would have established an unfair or deceptive act in trade or commerce for purposes of the WCPA,” but upheld dismissal because the plaintiff had waived that argument as well.
North Carolina appellate court affirms district court’s decision in debt collection case
On March 15, the Court of Appeals of North Carolina affirmed a district court’s grant of summary judgment in favor of a debt buyer plaintiff and rejected the debtor defendant’s argument that the plaintiff failed to comply with a provision of North Carolina’s Consumer Economic Protection Act (CEPA). According to the order, the defendant appealed the district court’s grant of summary judgment to the plaintiff in its 2019 suit to renew a default judgment that was entered in 2010 against the defendant. The defendant argued that the default judgment “is void because it was procured by fraud and the clerk lacked jurisdiction to enter the default judgment for various reasons,” and “that Plaintiff’s interest rates on Defendant’s debt violate North Carolina law.” The appellate court noted that the CEPA “did not apply” because the statute requires that, “[p]rior to entry of a default judgment or summary judgment against a debtor in a complaint initiated by a debt buyer, the plaintiff shall file evidence with the court to establish the amount and nature of the debt.” The appellate court noted that although the plaintiff filed its original complaint against the defendant in August 2009, this CEPA provision did not take effect until October 1, 2009, and therefore only applies to “foreclosures initiated, debt collection activities undertaken, and actions filed on or after that date.” The defendant argued that the plaintiff was still required to comply with the CEPA provision because the plaintiff filed its motion for a default judgment in February 2010—after the effective date of the CEPA provision. But the appellate court determined that the plaintiff’s motion for a default judgment “was part of prosecuting its ‘action filed’ and was not a ‘debt collection activity’ within the meaning of the Act.”
District Court denies majority of MSJ requests in FTC action against online discount club
On March 28, the U.S. District Court for the Northern District of Georgia denied the majority of motions for summary judgment filed by the FTC and defendants in a 2017 action that charged the operators of a group of marketing entities and payment processors (collectively, “defendants”) with numerous violations of law for allegedly debiting more than $40 million from consumers’ bank accounts for membership in online discount clubs without their authorization. As previously covered by InfoBytes, the FTC’s 2017 complaint alleged that the online discount clubs claimed to offer services to consumers in need of payday, cash advance, or installment loans, but instead enrolled consumers in a coupon service that charged an initial application fee as well as automatically recurring monthly fees.
In reviewing the parties’ respective motions for summary judgment, the court first reviewed the FTC’s claims against the defendants allegedly responsible for launching the discount program (lead generator defendants) “as a way to salvage leads on loan-seeking consumers that the [lead generator defendants] were not able to sell to lenders or others.” The lead generator defendants allegedly used loan-seeking consumers’ banking information to enroll them in discount club memberships with automatically recurring monthly charges debited from the consumers’ bank accounts. While the lead generator defendants contended that the enrollments were authorized by the consumers themselves, the FTC claimed, among other things, that “loan-seeking consumers were redirected to the discount club webpage during the loan application process.” The court determined that because there exists a genuine issue of material fact as to whether the lead generator defendants’ loan application process, discount club webpages, and telemarketing practices were deceptive or if their practices violated the Restore Online Shoppers’ Confidence Act and the Telemarketing and Consumer Fraud and Abuse Prevention Act, the FTC is not entitled to judgment as a matter of law on its claim for injunctive relief or equitable monetary relief.
The court also concluded that the FTC failed to present evidence showing that another defendant—a now-defunct entity whose assets and business operations were sold to some of the defendants—is violating or is about to violate the law because the FTC’s action was filed more than three years after the defunct entity ceased all operations. As such, the court found that the statute of limitations applies and the defunct entity is entitled to judgment as a matter of law on the FTC’s claims. However, the court determined that there is evidence suggesting the possibility that two individual defendants involved in monitoring and advising the defendants in the alleged discount club scheme, may continue the scrutinized conduct.
With respect to the FTC’s claims against certain other individual defendants allegedly responsible for owning and managing some of the corporate defendants and their wholly-owned subsidiaries, the court considered defendants’ arguments “that they had a general lack of knowledge of (or authority to control) the alleged violative conduct” and “that the FTC does not have the right to seek equitable monetary relief” as a result. In denying the FTC’s motions for summary judgment against these individual defendants, the court found “that there are disputed issues of material fact as to these matters which should be decided by the trier of fact,” and that the FTC’s claim for equitable monetary relief required further analysis following the U.S. Supreme Court’s ruling in AMG Capital Management, LLC v. FTC, which held that the FTC does not have statutory authority to obtain equitable monetary relief under Section 13(b) of the FTC Act. (Covered by InfoBytes here.)
Finally, the court concluded that sufficient evidence showed that another individual (who served as an officer of a defendant identified as being responsible for processing the remotely created checks used to debit consumers’ accounts during the discount club scheme) “knowingly and actively participated in acts that were crucial to the success of the . . . alleged discount scheme.” However, because there exists a genuine issue of material fact as to whether the lead generator and named defendants’ loan application process, discount club webpages, and telemarketing practices were deceptive, the court ruled that the FTC is not entitled to judgment as a matter of law as to its claims against the individual’s estate. The court also found that the individual’s estate is not entitled to summary judgment on either of its arguments related to the FTC’s request for monetary relief.