FDIC Obtains Jury Verdict and Settlement in Separate Actions in California District Court Against Former Bank Officers and Prohibition Order Against Bank CEO

On December 7, the FDIC, as receiver of a failed bank, obtained a jury verdict in its favor in the U.S. District Court for the Central District of California against a group of former bank officers. FDIC v. Van Dellen, No. 10-CV-04915, Doc. 596 (C.D. Cal. Dec. 7, 2012). On December 12, the former chief executive officer of the same bank settled a separate FDIC civil action and consented to an order of prohibition from further participation in the banking industry. FDIC v. Perry, No. CV 11-5561 (C.D. Cal. Dec. 12, 2012); In re Perry, No. FDIC-12-642e. In the first case, the FDIC sued the group of former officers, alleging that, in pursuit of bonuses for high loan origination volumes, the officers approved homebuilder loans to unqualified borrowers. The jury found that the former officers breached their duty of care and acted negligently in approving 23 loans and awarded approximately $169 million in damages to the FDIC. In a separate action against the former CEO of the same bank, the FDIC alleged that the CEO was negligent in allowing the bank to generate mortgage loans in 2007 which the bank was then unable to sell, allegedly resulting in $600 million in losses to the bank. The CEO settled the FDIC’s claims for $12 million, $1 million of which is to be paid from personal funds and the remainder from insurance funds. In addition, the CEO consented to an FDIC order prohibiting him from further participation in the conduct of any financial institution or organization.

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California Federal District Court Holds Force-Placed Insurance Claims Not Preempted by National Bank Act

On December 11, the U.S. District Court for the Northern District of California refused to preempt under the National Bank Act claims that a mortgage lender breached its contract by force-placing a backdated flood insurance policy on the borrower’s property. Ellsworth v. U.S. Bank, No. C 12-02506, 2012 WL 6176905 (N.D. Cal. Dec. 11, 2012). The borrower brought a putative class action against his lender and flood insurer on behalf of himself and similarly situated borrowers, alleging that the lender and insurance company overcharged him for a temporary force-placed flood insurance policy that was backdated, and for which the lender received a kickback from the insurer. The lender and insurer moved to dismiss on the grounds that the borrower’s claims are preempted by the National Bank Act and barred by California’s filed rate doctrine and the voluntary payment doctrine, and that the borrower failed to state a claim. The court held that the borrower’s claims are not preempted by the National Bank Act because they are at their core about practices—the alleged kickbacks and backdating—rather than fees. Further, the court held that claims based on overcharging due to the alleged kickback scheme are not a challenge to the rates of the premiums, but rather the allegedly unlawful conduct, and therefore are not barred by the filed rate doctrine. The court also declined to dismiss based on the defendants’ attempts to apply the voluntary payment doctrine and arguments the borrower failed to state a claim, and denied defendants’ motions to dismiss.

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Fifth Circuit Holds Data on Personal Cell Phone Not Protected by Stored Communications Act

On December 12, the U.S. Court of Appeals for the Fifth Circuit held that the Stored Communications Act (SCA) does not apply to data stored in a personal cell phone and affirmed a district court’s grant of summary judgment to the defendants. Garcia v. City of Laredo, Texas, No. 11-41118, 2012 WL 6176479 (5th Cir. Dec. 12, 2012). In this case, after being terminated from her employment based on evidence downloaded by her employer from her cell phone, a former police dispatcher sued the City of Laredo for violating the SCA by accessing the contents of her cell phone without permission. The appeals court agreed with the district court that the cell phone data was not protected by the SCA. Consistent with decisions by the Eleventh Circuit and several district courts that the SCA does not apply to data stored on a personal computer, the court reasoned that an individual’s cell phone is analogous to an individual’s computer hard drive – it only enables, and does not provide an electronic communication service. Therefore, the court held, the contents of the device are outside the scope of the “facilities” covered by the SCA. The court affirmed summary judgment in favor of the City of Laredo.

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California Appeals Court Enjoins Nonjudicial Foreclosure for Lenders’ Failure to Comply with HUD Servicing Requirements

On December 13, the California Court of Appeal for the First Appellate District held that the HUD servicing requirements were incorporated by reference into the borrowers’ FHA deed of trust and served as conditions precedent to the acceleration of the debt or to foreclosure. Pfeifer v. Countrywide Home Loans, No. A133071, 2012 WL 6216039 (Cal. Ct. App. Dec. 13, 2012). In this case, after the lender declared the borrowers’ FHA-insured mortgage in default and commenced nonjudicial foreclosure proceedings, the borrowers filed suit against the lender seeking general and punitive damages, as well as to enjoin the foreclosure proceedings and to obtain declaratory relief, for failure prior to provide the 30-day advance debt validation notice required by the Fair Debt Collection Practices Act (FDCPA) or to conduct a face-to-face interview required by HUD’s servicing regulations prior to commencing foreclosure proceedings. On appeal, the court affirmed the lower court’s ruling that the borrowers did not have a claim for damages against the collection firm under the FDCPA, because that firm was not a debt collector under the statute. However, the court reversed the trial court’s judgment as to the borrowers’ request for injunctive relief based on their wrongful foreclosure claim and their request for declaratory relief. The court agreed with the borrowers that the deed of trust incorporates by reference the servicing requirements of HUD, including the face-to-face interview, and the lenders had to comply with the servicing terms prior to commencing a valid nonjudicial foreclosure. The court also held that tender was not required, because the borrowers were seeking to enjoin a pending foreclosure sale based on the lenders’ failure to comply with the HUD servicing requirements. Concurring with those courts that distinguish an offensive action from a defensive action, the court explained that the borrowers had no private right of action for failure to comply with the HUD regulations and could not seek damages based on their wrongful foreclosure action, but held that the HUD regulations may be used as an affirmative defense to a judicial foreclosure action instituted by the creditor.

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New York Consumer Privacy Bill Takes Effect

Last week, a New York law designed to protect consumers’ social security numbers took effect.  As previously reported, Assembly Bill 8992 prohibits private businesses from conditioning the provision of services on a consumer’s willingness to disclose his or her Social Security number upon request. The law provides several exceptions, including when the collection of the Social Security Number is (i) otherwise required by law, (ii) requested in connection with the opening of a deposit account or a credit transaction initiated by the consumer, or (iii) required for any business function allowed under the Gramm Leach Bliley Act.

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