InfoBytes Blog

Seventh Circuit Compels Coverage Under D&O Policy Despite "Insured vs. Insured" Exclusion

On June 29, the U.S. Court of Appeals for the Seventh Circuit directed a D&O insurance provider to cover certain claims against defendants insured under the same policy as some plaintiffs despite an “insured vs. insured” exclusion from coverage under the insurance arrangement. Miller v. St. Paul Mercury Ins. Co., No. 10-3839 (7th Cir. June 29, 2012). The dispute began when five plaintiffs sued Strategic Capital Bancorp, Inc. (“SCBI”) for fraud and other state law claims flowing from SCBI’s alleged material misstatements relating to the company’s financial condition. Three of the plaintiffs were directors or officers covered under SCBI’s policy; the other two plaintiffs were not insureds under the policy. When SCBI notified its insurance carrier and requested indemnity and defense coverage under the insurance agreement, the carrier refused, citing the policy’s “insured vs. insured” provision. All parties to that initial lawsuit then filed a new action against the carrier in an effort to force it to provide coverage. The Seventh Circuit reversed the district court’s dismissal of those claims brought by the two non-insured plaintiffs. In a lawsuit involving both insured and non-insured plaintiffs, the court ruled, the insurance carrier must “provide indemnity for losses on claims by non-insured plaintiffs but not for losses on claims by insured plaintiffs.” The court reasoned that such a holding conforms to the parties’ expectations, minimizes the risk of arbitrary results, and discourages efforts to manipulate the result through strategic party joinder or case consolidation.

Directors & Officers

FDIC Reveals Banks' Living Wills

On July 3, the Federal Deposit Insurance Corporation (FDIC) posted the public sections of the initial resolution plans submitted by sixteen large bank holding companies.  The resolution plans were required by the Dodd-Frank Act.  The documents are meant to act as living wills that spell out how the banks could wind themselves down in the event of their failure.  Generally, the public portions of these plans contain an outline of the bank’s organization, assets and capital ratios, and describe in high-level detail the mechanisms that each would employ to wind up its operations in the event of failure.  The plans are subject to revisions following review by the FDIC and the Federal Reserve.

FDIC Bank Compliance Bank Resolution Living Wills

New York Federal Court Certifies Class in MBS Litigation

On June 29, the U.S. District Court for the Southern District of New York granted the plaintiffs’ motion to certify a class in a putative class action concerning the sale of mortgage backed securities (MBS) by an investment bank. Tsereteli v. Residential Asset Securitization Trust 2006-A8, No. 08 Civ. 10637, 2012 WL 2532172 (S.D.N.Y. June 29, 2012). In Tsereteli, the plaintiffs alleged that the sale of the MBS violated the Securities Act of 1933, because the offering documents falsely represented that the underlying mortgage loans were originated in accordance with the lender’s underwriting standards. According to the plaintiffs, the lender had in fact abandoned its underwriting standards and routinely made “loans to borrowers who were unable to meet their repayment obligations.” The bank, among other things, argued that Rule 23’s predominance requirement was not met because certain sophisticated investors were aware of the alleged misstatements when they purchased the securities. The court, however, found that “[g]eneral investment sophistication of certain class members does not show that any of the class members knew anything at all about [the lender’s] alleged deviation from its underwriting guidelines.”

RMBS

FHFA Announces REO Pilot Program Developments

On July 3, FHFA announced the selection of the winning bidders in its real estate owned (REO) pilot program, with the initial transactions expected to close in the third quarter of 2012. FHFA launched its REO pilot program in February 2012 and bids from qualified investors were sought during the second quarter of the year for roughly 2,500 single-family foreclosed properties held by Fannie Mae. According to FHFA, investors qualified for the bidding process after a rigorous evaluation, considering factors such as their financial strength, asset management experience, property management expertise, and experience in the geographic area of the available properties. In a February 27 press release announcing its REO pilot sales initiative, FHFA identified the locations of the available properties, including the Chicago and Los Angeles metro areas.

Fannie Mae REO FHFA

FTC Wins Judgment in Mortgage Modification Case

On July 2, the Federal Trade Commission (FTC) announced that it obtained a $2.6 million judgment against three defendants for failing to provide mortgage modification services after collecting upfront fees from borrowers. The FTC alleged that nine defendants associated with a law firm violated the FTC Act and Telemarketing Sales Rule by sending borrowers in default postcards promising loan modifications, collecting fees for the services, and assuring borrowers that they qualified for modifications prior to obtaining lender approval.  In addition, the FTC alleged that the defendants exaggerated the role an attorney would play in the modifications and pretended to be affiliated with a government agency. The $2.6 million judgment prohibits the three defendants from (i) telemarketing financial products or services, (ii) selling mortgage modification, foreclosure rescue, and debt-relief products or services, and (iii) collecting or attempting to collect from borrowers who had agreed to purchase a mortgage modification product or service. The court also approved settlements and entered a default judgment against the other defendants facing similar allegations.

FTC

West Virginia AG Reaches Settlement with Debt Collection Firm

On July 3, West Virginia Attorney General (AG) Darrell McGraw announced that his office had reached an agreement with a debt collection firm for allegedly engaging in “unlawful and threatening” debt collection practices and attempting to collect debts without being properly licensed. Under the terms of the settlement, the company will be required to pay $1.7 million in refunds and cancelled debts to 124 West Virginians. The AG’s Consumer Protection Division started investigating the company in January 2012 after receiving a complaint about its debt collection practices. According to the AG’s investigation, the debt collection firm engaged in a “pattern of abusive collection methods” which included threatening to arrest consumers for non-payment of debts.

State Attorney General Debt Collection

New York State Appeals Court Upholds Decision Dismissing Buyback Lawsuit

On June 28, the Appellate Division of the Supreme Court of New York, First Department unanimously confirmed the New York Supreme Court’s dismissal of a mortgage-buyback lawsuit brought by investors against a bank, holding that the investors’ action was barred by the “no-action” clause in the Pooling and Servicing Agreements (PSAs). Walnut Place LLC v. Countrywide Home Loans, Inc., No. 8046, 650497/11, 2012 slip op. 0521 (N.Y. App. Div. June 28, 2012). The Appellate Division found that the “no-action” clause—a clause limiting the right to sue—was not ambiguous and only allowed investors to sue under an “event of default” provision which was not applicable under the set of facts before the court. The case was brought by several entities collectively known as Walnut Place LLC, who had invested more than $1 billion in securities backed by the bank’s mortgages. The investors claimed that the bank made false representations about the characteristics and credit quality of loans underlying the securities in the PSAs.

RMBS

Supreme Court Dismisses Writ of Certiorari in RESPA Case

On June 28, the U.S. Supreme Court dismissed a writ of certiorari and permitted a plaintiff’s putative suit against a title insurance company under the Real Estate Settlement Procedures Act’s (RESPA) anti-kickback provisions to proceed. First Am. Fin. Corp. v. Edwards, No. 10-708, 2012 WL 2427807 (U.S. June 28, 2012). After purchasing title insurance at a rate approved by the Ohio Title Insurance Rating Bureau, plaintiff alleged that her title insurance company paid a “kickback” to receive referrals for title insurance. The plaintiff sued her title insurance company under RESPA’s anti-kickback provisions. The district court denied the defendant’s motion to dismiss, and the Ninth Circuit affirmed. The Supreme Court granted the writ of certiorari and heard oral arguments on November 28, 2011 but declined to issue an opinion, stating that the writ was “improvidently granted.”

U.S. Supreme Court RESPA

Mobile App Developer Agrees to Stop Collecting and Using Children's Data in Settlement

On June 27, the New Jersey Attorney General’s office announced a consent decree and injunction against 24x7digital LLC, a mobile app company, settling charges under the Children’s Online Privacy Protection Act (COPPA). The company created a series of apps for children in preschool through second grade that encouraged children to provide their first and last names and photos for personal profiles. Under the settlement, the company agreed to stop collecting, using, and disclosing children’s personal information without verifiable parental consent. The company also agreed to provide direct notice to parents of the types of information it collects and what it does with that information.

Privacy/Cyber Risk & Data Security

Massachusetts Federal Court Finds On-Demand Web Streaming Service Falls within the ADA's Scope

On June 19, the U.S. District Court for the District of Massachusetts ruled that Netflix’s “Watch Instantly” on-demand movie and television streaming service is a “place of public accommodation” subject to the Americans with Disabilities Act’s (ADA) bar on disability-based discrimination. Nat’l Ass’n of the Deaf v. Netflix, Inc., No. 11-30168 (D. Mass. June 19, 2012). Plaintiffs asserted that the streaming service provided inadequate closed-captioned content and sought declaratory and injunctive relief directing the company to provide closed-captioning for all “Watch Instantly” offerings. Netflix moved for judgment on the pleadings, arguing that the ADA did not apply to its on-demand service and that the Twenty-First Century Communications and Video Accessibility Act of 2010 (CVAA) precluded the plaintiffs’ interpretation of the ADA. The court disagreed, finding that the plaintiffs adequately pled their claim that the scope of the ADA applies to the company’s on-demand service. In addition, the court rejected the company’s argument that the CVAA precluded the plaintiffs’ ADA claim, concluding that the CVAA’s specific requirements related to captioning of streamed video did not present an irreconcilable conflict with the ADA.