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Third Circuit Finds RESPA Claims in Captive Mortgage Reinsurance Case Untimely and Not Subject to Equitable Tolling
Last week, the U.S. Court of Appeals for the Third Circuit affirmed the district court’s ruling that the class action plaintiffs had not satisfied the elements of equitable tolling where they filed their lawsuit several years after the applicable statute of limitations had expired. Cunningham v. M&T Bank Corp., No. 15-1412 (3d Cir. Feb. 19, 2016). The Court noted that claims under RESPA have a one-year statute of limitations, running from the date of the occurrence of the violation, which begin “at the closing of the loan,” citing In re Cmty. Bank of N. Virginia, 622 F.3d 275, 301–02 (3d Cir. 2010). The Court outlined three elements to establish equitable tolling, “(1) that the defendant actively misled the plaintiff; (2) which prevented the plaintiff from recognizing the validity of her claim within the limitations period; and (3) where the plaintiff’s ignorance is not attributable to her lack of reasonable due diligence in attempting to uncover the relevant facts;” and emphasized that each of the plaintiffs were provided a disclosure before closing about the captive reinsurance arrangement, and that after closing the plaintiffs took no steps to investigate whether the bank’s captive reinsurance program might violate state or federal law.
Massachusetts-Based Technology Company and Two Chinese Subsidiaries Pay $28 Million to Settle Civil and Criminal FCPA Charges; SEC Uses First DPA With Individual
On February 16, the SEC and DOJ announced a settlement with a Massachusetts-based technology company for violations of the FCPA. The technology company and two Chinese subsidiaries agreed to pay $28 million to settle the parallel civil and criminal actions, with the technology company paying approximately $13.5 million in disgorgement and prejudgment interest to settle the SEC’s charges, and its two Chinese subsidiaries paying approximately $14.54 million in penalties in a Non-Prosecution Agreement with the DOJ.
The company admitted that its subsidiaries in Shanghai and Hong Kong provided non-business related travel and other improper payments to Chinese government officials to win business. Specifically, from 2006 to 2011, the two subsidiaries provided nearly $1.5 million to Chinese officials in improper travel, gifts, and entertainment. The Chinese officials were employed by state-owned entities that were customers of the technology company. The travel and entertainment expenses included overseas trips to visit the technology company’s facilities, including cooperate headquarters in Massachusetts, but the majority of the time on the trips was spent on recreational excursions unrelated to the purported business purpose. For example, the company paid for Chinese officials to visit New York, Las Vegas, San Diego, Los Angeles, and Honolulu, as well as guided tours, golfing, and other leisure activities during those trips. Employees of the company’s subsidiaries also provided gifts to the Chinese officials, including cell phones, iPods, gift cards, wine, and clothing. The payments were recorded in the company’s books and records as legitimate commissions or business expenses.
As part of the investigation, the SEC also entered into its first Deferred Prosecution Agreement (DAP) with an individual in an FCPA case. The SEC announced that it would wait three years to bring any FCPA charges against a former employee of one of the subsidiaries, Yu Kai Yuan, because of the cooperation he provided during the SEC’s investigation.
Amsterdam-Based Telecommunications Company Pays $795 Million to Settle FCPA Charges Both in US and Abroad
On February 18, an Amsterdam-based telecommunications company and its Uzbek subsidiary reached a global settlement with the SEC, DOJ, and Dutch regulators Openbarr Ministerie (OM) and the Fiscal Intelligence and Investigation Service (FIOD), in which the telecommunications company will pay more than $795 million to resolve FCPA violations in Uzbekistan. The Amsterdam-based telecommunications provider was charged with bribing an Uzbek government official related to the President of Uzbekistan in exchange for government-issued licenses. Between 2006 and 2012, the telecommunications company and its subsidiary made more than $114 million in bribe payments through an entity affiliated with the Uzbek official and disguised approximately half a million dollars as charitable donations made to charities affiliated with the Uzbek official.
The terms of the settlement require the telecommunications company to pay $397.5 million to Dutch regulators, $230.1 million to the DOJ, and $167.5 million to the SEC; it must also retain an independent corporate monitor for three years. DOJ also filed a forfeiture proceeding, seeking more than $550 million held in Swiss bank accounts which it alleged were funds that the Amsterdam-based telecommunications company and two other telecommunications companies used to bribe and/or launder the bribe payments to the Uzbek official. This forfeiture complaint follows the DOJ’s earlier forfeiture complaint filed on June 29, 2015, seeking forfeiture of more than $300 million in funds held in Belgium, Luxembourg, and Ireland.
Large International Bank Discloses Involvement in "Sons and Daughters" Investigation
A large international bank on Monday became the latest bank to disclose requests for information from the SEC related to the long-running “Sons and Daughters” investigation into the hiring of “candidates referred by or related to government officials or employees of state-owned enterprises in Asia-Pacific.” The bank noted that it “is cooperating with the SEC’s investigation.” Prior coverage of other aspects of the “Sons and Daughters” investigation around the world is available here.
London-Based Global Building and Infrastructure Company Ordered to Pay £2.25 Million in First UK Section 7 Conviction
Following its December guilty plea in the UK, a London-based global building and infrastructure company on Friday was ordered by a UK court to pay £2.25 million (including a fine of £1.4 million) for violating Section 7 of the UK Bribery Act of 2010. This was the first-ever conviction and sentence for a company under Section 7, which in essence penalizes companies for failing to prevent bribes made on their behalf. The conduct at issue related to a three-year arrangement in the UAE to secure contracts related to large building contracts.
Spotlight Article: California Supreme Court Holds that Borrowers Have Standing to Challenge an Allegedly Void Assignment of the Note and Deed of Trust in an Action for Wrongful Foreclosure
Yesterday, the California Supreme Court held in Yvanova v. New Century Mortgage Corp, Case No. S218973 (Cal. Sup. Ct. February 18, 2016) that borrowers have standing to challenge an allegedly void assignment of a note and deed of trust in an action for wrongful foreclosure. In reaching this decision, the Court reversed the rule followed by the overwhelming majority of California courts that borrowers lacked such standing. The Court’s decision may have broad ramifications for lenders, investors, and servicers of California loans.The Court’s Holding
In Yvanova, the borrower challenged the validity of her foreclosure on the ground that her loan was assigned into a securitized trust after the trust closing date set forth in the applicable pooling and servicing agreement, allegedly rendering the assignment void. To date, California courts have rejected hundreds of similar claims. In Yvanova, the Court held that “a borrower who has suffered a nonjudicial foreclosure does not lack standing to sue for wrongful foreclosure based on an allegedly void assignment merely because he or she was in default on the loan and was not a party to the challenged assignment.” Slip. Op. at 2. The Court’s ruling thus breathes new life into this favorite theory of the foreclosure defense bar.
The Court’s Reasoning
The Court acknowledged that the majority of California courts have held that borrowers do not have standing to challenge an allegedly void assignment because they are neither parties to, nor intended beneficiaries of, the assignment. Rather than adopt the majority approach, the Court based much of its decision on Glaski v. Bank of America, 218 Cal.App.4th 1079 (2013), in which the Fifth District Court of Appeal, on substantially similar facts, held that the question of standing turned on whether the alleged defect in the assignment, if proven, would render the assignment void altogether or merely voidable. Slip. Op. at 12. The parties to a voidable assignment have the power to ratify the defective assignment; parties to a void assignment have no such power. Id., at 10. In the former case, the Court would deny standing because the borrower would be asserting interests belonging solely to the parties to the assignment: only they have the power to ratify the assignment. Id. In the latter case, involving an allegedly void assignment, there would be no power of ratification, and thus the borrower would not be “asserting the interests of parties to the assignment; she [would be] asserting her own interest in limiting foreclosure on her property to those with legal authority to order a foreclosure sale.” Id., at 21.
Potential Impact of the Court’s Decision
Although a borrower’s standing to challenge an allegedly void assignment now appears settled under California law, the full impact of the decision will likely take some time to discern. By recognizing standing to challenge allegedly void assignments, the Court has clearly invited a substantial amount of wrongful foreclosure litigation. The statute of limitations for wrongful foreclosure is at least three years and, possibly longer, if a borrower can invoke the discovery rule or equitable tolling. See Cal. Code of Civ. Proc. § 338(d). Given the large number of securitized loans that have been foreclosed upon in California within the last several years, the number of possible claimants is potentially very large.
It remains to be seen whether California’s trial courts will be receptive on the merits to wrongful foreclosure suits based on the now reinvigorated void-assignment theory. There are a number of key legal and factual questions that the California Supreme Court expressly left unanswered.
The California Supreme Court explicitly did not decide whether a transfer of a note and deed of trust into a securitized trust in violation of the trust instrument renders the assignment void or voidable under governing New York law. Importantly, the Court acknowledged a conflict between Glaski’s construction of New York law on this issue and a decision of the United States Court of Appeals for the Second Circuit in Rajamin v. Deutsche Bank Nat’.l Trust Co., 757 F.2d 79 (2d Cir. 2014). Slip. Op. at 27. In Glaski, the Court of Appeal found that the alleged violation of the trust instrument, if proven, would render the assignment void. Rajamin considered and expressly rejected Glaski’s construction of New York law. Nevertheless, the California Supreme Court, in Yvanova, left it to California’s lower courts to determine whether to follow Glaski or Rajamin. If the lower California courts follow Rajamin then the uptick in wrongful foreclosure cases will likely prove short-lived and muted. Also important will be how California courts resolve similar issues under Delaware law, which, like New York law, governs many securitization trusts. Given this split in appellate authority under New York law, certification of the question to the New York Court of Appeals may prove an efficient way to address the uncertainty created by Yvanova. See New York Court of Appeals Rule 500.27 (authorizing New York Court of Appeals to hear determinative questions of New York law in cases pending before federal courts or the highest court of another state).
The Court also left for future development whether borrowers bringing a wrongful foreclosure action can obtain an order setting aside a completed foreclosure based on the void-assignment theory and whether borrowers will be required to allege tender of the outstanding loan balance to state a cause of action for wrongful foreclosure. Slip. Op. at 9 n. 4. Numerous California decisions hold that tender is required to set aside a completed foreclosure. If the lower courts continue to enforce the tender requirement, then the impact of Yvanova may be lessened.
Another significant question that no doubt will arise is whether borrowers can bring pre-foreclosure actions to enjoin ongoing nonjudicial foreclosures based on void assignment allegations. The Court explicitly left undisturbed, as “not within the scope of review,” a lower court decision “disallowing the use of a lawsuit to preempt a nonjudicial foreclosure.” Id., at 16–17 (citing Jenkins, 216 Cal.App.4th at 513). However, a number of courts have carved out exceptions to the rule disallowing judicial preemption of ongoing nonjudicial foreclosure proceedings. It remains to be seen whether Yvanova will provide an impetus to broaden these exceptions.
Finally, under California’s Homeowner Bill of Rights, borrowers must be given notice that they are entitled to request “a copy of any assignment, if applicable, of the borrower’s mortgage or deed of trust required to demonstrate the right of the mortgage servicer to foreclose.” Cal. Civ. Code § 2923.55(B)(iii). Yvanova will likely inspire a substantial increase in such requests. And that may lead to an increased number of wrongful foreclosure claims.
What Happens Next
Apart from preparing to defend against the expected increase in volume of wrongful foreclosure litigation, servicers and investors may wish to consider steps to reduce their exposure to Yvanova and further unfavorable developments in the law. Depending on the volume of wrongful foreclosure litigation that Yvanova creates and whether California’s trial courts begin enjoining ongoing foreclosures based on this theory, lenders, investors, and servicers may need to consider revising their foreclosure processes to focus on possession of the note at the relevant time and thereby render irrelevant the validity of the assignment of the deed of trust. Further, lenders, investors and servicers may wish to explore the use of estoppel certificates obtained from borrowers in loan modification or other loss mitigation relief, where permissible, to establish authority to foreclose.
CFPB Issues Policy on No-Action Letters
On February 18, the CFPB finalized its policy on No-Action Letters, which was originally proposed in October 2014. The No-Action Policy is intended to create a process for companies to apply for a No-Action Letter (NAL) from the CFPB in “instances involving innovative financial products or services that promise substantial consumer benefit” where provisions of the statutes implemented or regulations issued by the CFPB are vague. According to CFPB Director Cordray, the new policy is “designed to improve access to consumer financial products and services that promise substantial consumer benefits.” Denial of applications will be made at the discretion of the CFPB staff, who will not be required to “provide specific reasons for declining to provide NALs.” According to the policy statement, the CFPB has “limited resources to devote to NALs” and anticipates receiving approximately “one to three actionable applications per year.”
Washington Proposes Amendments to Money Transmitters Rules
Recently, the Washington Department of Financial Institutions (DFI) announced that on March 29, 2016 it will hold a hearing regarding proposed amendments to the 2015 Uniform Money Services Act. New sections to the proposal include requiring that money services licensees establish and maintain (i) an effective cybersecurity program; (ii) a written customer information security program; and (iii) a written privacy policy that complies with Regulation P of the Gramm-Leach-Bliley Act.
Fourth Circuit Reverses District Court's Decision; Rules Debt Collector's Arbitration Provisions Unenforceable
Recently, the U.S. Court of Appeals for the Fourth Circuit reversed a District Court’s decision that a debt collector’s arbitration provisions in loan agreements were enforceable. Hayes v. Delbert Services Corp., No. 15-1170 (4th Cir. Feb. 2, 2016). The defendant collected on loans that were transferred from an online payday lender owned by a member of the Cheyenne River Sioux Tribe. The loan agreements for the transferred loans provided that disputes between the borrower and the payday lender, or any assignee, would be resolved by binding arbitration “conducted by the Cheyenne River Tribal Nation by an authorized representative in accordance with its consumer dispute rules and the terms of this Agreement.” The loan agreement also provided that the agreement “IS MADE PURSUANT TO A TRANSACTION INVOLVING THE INDIAN COMMERCE CLAUSE OF THE CONSTITUTION OF THE UNITED STATES OF AMERICA, AND SHALL BE GOVERNED BY THE LAW OF THE CHEYENNE RIVER SIOUX TRIBE. The arbitrator will apply the laws of the Cheyenne River Sioux Tribal Nation and the terms of this Agreement.” The agreement went on to state that the arbitrator would not apply “any law other than the law of the Cheyenne River Sioux Tribe of Indians to this Agreement.”
The Fourth Circuit held that existing Supreme Court precedent makes it clear that the freedom to contract for arbitration does not extend to using an arbitration provision or choice of law clause to create a “substantive waiver of federally protected civil rights.” Essentially, the Fourth Circuit found the arbitration provisions in the loan agreement purported to create a prospective waiver of substantive rights under federal law, which rendered the arbitration provisions unenforceable. The Fourth Circuit observed that “a party… may not flatly and categorically renounce the authority of the federal statutes to which it is and must remain subject.” The Fourth Circuit also found that the arbitration provisions addressing governing law were not severable, because they went to the essence of the contract.
On February 16, the defendant filed a petition for rehearing arguing that the Fourth Circuit’s ruling (i) conflicts with past Supreme Court and Fourth Circuit decisions; and (ii) “will lead to the invalidation of countless arbitration agreements with foreign choice-of-law clauses on the ground that explicitly providing for the application of foreign law violates the prospective waiver doctrine.”
FTC Reports to CFPB on 2015 Activities to Combat Illegal Debt Collection Practices
On February 17, the FTC sent the CFPB a letter summarizing its 2015 efforts to stop allegedly illegal debt collection practices. According to the letter, in 2015, the FTC’s FDCPA activities included “aggressive law enforcement activities and public outreach to address new and troubling issues in debt collection,” such as (i) coordinating the first federal-state-local enforcement initiative, Operation Collection Protection, that targets deceptive and abusive debt collection practices; (ii) prosecuting various cases involving the use of purportedly unlawful text messages to collect debts; (iii) publishing a list of every company and individual that has been banned from engaging in debt collection activities because of the FTC’s work; and (iv) hosting three Debt Collection Dialogues “to promote a more robust exchange of information between the debt collection industry and the state and federal governmental agencies that regulate their conduct.” The letter highlights various actions against debt collectors taken jointly by the FTC and the CFPB, and the offices of the New York and Illinois Attorneys General. Under the FDCPA, the FTC shares enforcement responsibilities with the CFPB. The FTC’s recent letter is intended to assist the CFPB in preparing its annual report to Congress about its administration of the FDCPA, as required by Dodd-Frank.
