BuckleySandler Secures Major Victory on Behalf of Mortgage Servicer in Putative Class Action Suit

On August 25, BuckleySandler secured a substantial victory in a putative class action in the Northern District of Illinois. McGann v. PNC, No. 11-c-6894 (N.D. Ill. Aug. 25, 2015). The suit alleged that a major mortgage servicer failed to convert Home Affordable Modification Program (HAMP) Trial Period Plans (TPPs) into permanent modifications. The Seventh Circuit Court of Appeals, with jurisdiction over the Northern District of Illinois, has allowed similar claims to survive dismissal. See Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012). And the Ninth Circuit has allowed such claims to go forward on a classwide basis. See Corvello v. Wells Fargo Bank, N.A., Nos. 11-16234, 11-16242, 2013 WL 4017279 (9th Cir. Aug. 8, 2013).

Despite this potentially adverse precedent relevant to the pleadings stage, BuckleySandler secured summary judgment in its client’s favor following extensive discovery by extracting key admissions from Plaintiff. These admissions established that the servicer “repeatedly told her either that her application was being reviewed or that it had been rejected but would be reinstated. A promise to review or even to reinstate an application is not a promise that the application will result in a permanent loan modification . . . she still had to meet HAMP’s requirements. That was clear from the TPP agreement itself.” Opinion at 9. The Court further held that even if these statements led Plaintiff to a subjective belief that the loan would be modified, Plaintiff could not show any actions she took in reliance, nor that any reliance would be reasonable. Opinion at 11.

Finally, the Court also held that the servicer did not engage in any unfair conduct under Illinois’ UDAAP statute, the Illinois Consumer Fraud and Deceptive Business Practices Act. The plaintiff in the matter was not a borrower on the note, but rather a non-borrower mortgagor, for whom HAMP was not available during the time in question. The Court agreed the servicer complied with HAMP guidelines in denying the permanent modification. Opinion at 16-17. And the Court went on to hold that the servicer was entitled to summary judgment for the additional reason that the evidence in discovery established that the cause of the plaintiff’s injuries was her non-qualification for HAMP, her inability to pay the mortgage, and the resulting foreclosure of the home, none of which was proximately caused by any wrongful conduct of the servicer. Opinion at 15-16.

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U.S. District Court Grants FBME Preliminary Injunction; Effective Date of FinCEN’s “Special Measure Five” Final Rule Delayed

On August 28, FinCEN issued a notice regarding the agency’s July 29 final rule imposing “special measure five” against FBME Bank Ltd. (“FBME”), which would prohibit financial institutions from opening or maintaining correspondent accounts or payable through accounts for or on behalf of FBME. Per FinCEN’s most recent notice, the originally scheduled effective date of August 28, 2015 has been postponed. On August 7, FBME filed suit in the United States Court for the District of Columbia and moved for a preliminary injunction, which the Court granted on August 27. The Court “ordered the parties to meet and confer as to an expedited briefing schedule on the merits of FBME’s Complaint and to file a joint proposed schedule, or separate schedules if mutual agreement cannot be reached.” The rule will not take effect until a final judgment is entered.

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Eighth Circuit Denies Consumers’ Appeal to Intervene in FTC Suit

On August 25, a three judge panel of the U.S. Court of Appeals for the Eighth Circuit affirmed a lower court’s decision to deny consumers’ motion to intervene in the FTC’s suit against BF Labs, Inc. d/b/a/ Butterfly Labs (“Butterfly”). Alexander v. Fed. Trade Comm’n, No. 14-3286 (8th Cir. Aug. 25, 2015). Butterfly marketed and sold bitcoin mining computers. In April 2014, two consumers filed a class action suit against Butterfly, alleging “deceptive and unconscionable business practices.” In September 2014, the FTC also filed suit against Butterfly, alleging “deceptive acts or practices.” The FTC sought preliminary injunctive relief, including staying all suits against Butterfly, which the district court granted. The consumers moved to intervene permissively and of right but the district court denied their motion; the consumers appealed the denial of their motion to intervene of right. In order to have standing to intervene, a party must establish injury, causation, and redressability. The Court of Appeals found the consumers failed to show injury because their alleged injury (risk of financial harm) is contingent on various factors, including the FTC winning its case and precluding their recovery. Even if the consumers had standing to intervene, the consumers must meet the requirements of Rule 24(a) of the Federal Rules of Civil Procedure; the intervenor must (i) have a recognized interest in the subject matter of the litigation that; (ii) might be impaired by the disposition of the case; and that (iii) will not be adequately protected by the existing parties. Any government entity, such as the FTC is presumed to be representing the interests of the public. Thus, the consumers had to meet a very high burden to show the FTC was not adequately protecting their interests in the case, which they did not.

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Third Circuit Affirms District Court’s Decision Asserting FTC’s Authority over Companies’ Data Security Practices

On August 24, the U.S. Court of Appeals for the Third Circuit affirmed the Federal Trade Commission’s authority to hold companies accountable for their data security practices under Section 5 of the FTC Act (15 U.S.C. § 45(a)), which declares unlawful “unfair or deceptive acts or practices in or affecting commerce.” FTC v. Wyndham Worldwide Corp., No. 14-3514 (3rd Cir. Aug. 24, 2015). The unanimous ruling found that deficient cybersecurity practices that fail to protect consumer data against hackers may be found to be “unfair” practices under the Act, subject to FTC enforcement. The FTC had sued Wyndham for allegedly deficient cybersecurity practices that enabled hackers to obtain payment card information from over 619,000 consumers. Wyndham argued that it lacked fair notice that the FTC had the authority to police data security practices under Section 5, but the Third Circuit disagreed, pointing out that the FTC has offered specific public guidance on data security over the years, and has filed multiple complaints and consent decrees raising unfairness claims based on inadequate cybersecurity that put companies on notice of its enforcement authority in this space.

 

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Former Bank Executive Sentenced to 30 Months in Prison for Role in TARP Fraud Scheme

On August 20, former bank executive Charles Antonucci was sentenced to 30 months in prison for his role in organizing a scheme involving self-dealing, bank bribery, embezzlement of bank funds, attempting to fraudulently obtain more than $11 million from the Troubled Asset Relief Program (TARP), and participating in a $37.5 million fraud scheme that left an Oklahoma insurance company in receivership. Antonucci pled guilty to the charges in 2010 pursuant to a cooperation agreement with the government. He was the first defendant convicted of fraud of TARP funds, which was a program established in 2008 to provide liquidity to troubled financial institutions during the financial crisis. The judge also ordered Antonucci to forfeit $11.2 million to the United States and to provide $54.6 million in restitution to the victims of his crimes, including, among others, the bank’s shareholders and the FDIC. Antonucci’s plea and sentencing was before U.S. District Judge Naomi Reice Buckwald of the Southern District of New York. The case was handled by the Southern District of New York’s Office of Complex Frauds and Asset Forfeiture Units, with investigative assistance from the Office of the Special Inspector General for TARP.

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United States District Court: Mortgagor Lacks Standing to Bring RESPA Claim

On August 11, the U.S. District Court for the District of New Hampshire rejected the addition of a potential RESPA claim to plaintiff’s complaint due to lack of standing, and the court dismissed the remaining counts for failure to state a claim. Sharp v. Deutsche Bank National Trust Company, As Trustee For Morgan Stanley ABS Capital Inc. Trust 2006-HE3, No. 14-cv-369 (D.N.H. Aug. 11, 2015). Although plaintiff and his father were both mortgagors on the mortgage document, the promissory note identified plaintiff’s father as the sole borrower for the loan. After plaintiff’s father died and plaintiff defaulted on the mortgage, plaintiff sought to enjoin the bank’s subsequent foreclosure proceedings. Plaintiff moved to amend his complaint to add a RESPA claim based on the bank’s allegedly inadequate responses to his requests for information pursuant to 12 C.F.R. § 1024.35 and 12 C.F.R. § 1024.36. The court determined that plaintiff lacked standing to assert his RESPA claim because the RESPA provisions at issue only applied to borrowers, not mortgagors like plaintiff. The court also rejected plaintiff’s argument that his status as the successor-in-interest to his father under 12 C.F.R. § 1024.38 established standing to bring the RESPA claim. The court confirmed that plaintiff was protected by 12 C.F.R. § 1024.38, but the court relied on the CFPB’s official interpretation of 12 C.F.R. § 1024.38 to determine that no private right of action existed to enforce the rule.  Read more…

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District Court Invalidates NYC Ordinance Making Banks Service Under-Served Areas as Requirement to Receive Municipal Deposits

On August 7, the U.S. District Court for the Southern District of New York granted summary judgment for the New York Bankers Association (NYBA) in a case challenging the City of New York’s Local Law 38, entitled the Responsible Banking Act (RBA). New York Bankers Ass’n, Inc. v. City of New York, No. 15-CV- 4001, 2015 WL 4726880 (S.D.N.Y. Aug. 7, 2015). Passed in 2012, the RBA imposes various requirements on banks operating within New York City, including, as a prerequisite to receiving certain municipal deposits, requirements to document efforts to provide affordable housing, access to credit for small businesses, and other services. The court held that the RBA was preempted both by (i) federal law (including the National Bank Act, the Community Reinvestment Act, and OCC regulations) because, among other reasons, the RBA “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress”; and (ii) New York state law, because the New York Banking Law “evinces an intent to preempt the field of regulating state-chartered banks.” Thus, the RBA was “void in its entirety.”

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PetroChina Class Action Dismissed

On August 3, a federal district court in New York dismissed with prejudice a securities class action suit filed against Chinese oil and gas company PetroChina Co. Ltd. The suit alleged that statements in the company’s 2011 and 2012 financial statements claiming the company was in compliance with its internal rules and securities regulations were false or misleading. The plaintiffs filed the suit after the Chinese government announced that it was investigating four of the company’s top executives for corruption.

The court dismissed the complaint in its entirety, finding that the plaintiffs failed to allege any acts of bribery or corruption that predated the filing of the 2011 and 2012 financial statements. The court wrote: “[T]his Court is not requiring that Plaintiffs allege a detailed account of the particular illicit deals that PetroChina officials were allegedly engaged in. Plaintiffs are required, nonetheless, to establish—at a bare minimum—that the underlying fraud took place during the time period covered by the purportedly false public statements and that someone at PetroChina knew or had reason to know about it.”

Similar class action suits against Wal-Mart and Avon have also been dismissed in the past year.

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Florida Appellate Court Rules Non-Signing Spouse in Reverse Mortgage is Protected from Foreclosure

On July 15, a three-judge panel of the Florida Third District Court of Appeal issued its opinion in Smith v. Reverse Mortgage Solutions, Inc., 2015 WL 4257632. In 2008, Mr. Smith took out a reverse mortgage on his home where he lived with his wife; only Mr. Smith signed the promissory note, but both spouses signed the mortgage. Mr. Smith died in late 2009, and Reverse Mortgage Solutions filed a complaint for foreclosure, although Mrs. Smith was still alive. The mortgage allowed foreclosure if “a Borrower dies and the Property is not the principal residence of at least one surviving Borrower.” The lower court ruled in favor of Reverse Mortgage Solutions. On appeal, however, the court interpreted the documents de novo and found that Mrs. Smith was a “borrower” “based on the plain and unambiguous language of the mortgage,” and therefore was protected from foreclosure until she died. Although the court stated that this finding would be sufficient to decide the case, it also noted several other bases for its decision, including that (i) Mrs. Smith was identified as the “Borrower” on the signature page of the mortgage; (ii) Florida’s homestead provisions require the spouse’s signature on a mortgage of jointly held property to validly convey the interest in property; and (iii) federal law applicable to reverse mortgages contemplates the foreclosure of mortgaged property and expressly defines “homeowner” to include the spouse of the homeowner. The court remanded the case to the lower court to decide whether the other condition precedent preventing foreclosure, that the property was Mrs. Smith’s primary residence, had been met. A dissenting judge argued that neither the Florida homestead provisions nor HUD requirements should affect the interpretation of the loan note. Although he was prepared to affirm the lower court decision based on the unavailability of a trial transcript, he stated that if it was necessary to address the question of whether Mrs. Smith was a “borrower,” he would conclude that she was not because both the mortgage and the promissory note generally identified Mr. Smith as the only borrower.

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BuckleySandler Secures Second Circuit Victory in Lender-Placed Insurance Rate Case

On July 22, BuckleySandler secured a substantial victory before the United States Court of Appeals for the Second Circuit. Representing a global insurance company in a nationwide lender-placed insurance (“LPI”) class action brought by mortgage borrowers, the Firm argued on interlocutory appeal that the Second Circuit should reverse the district court’s denial of its motion to dismiss on the basis of the “filed-rate” doctrine. Ordinarily, the filed-rate doctrine provides that rates approved by the applicable regulatory agency – including LPI rates – are per se reasonable and unassailable in judicial proceedings brought by ratepayers. The district court, however, held that the plaintiffs’ claims were not barred by the doctrine because, rather than directly billing the plaintiffs for the LPI premiums, the insurance company initially charged the premiums to the plaintiffs’ mortgage servicer who, in turn, charged the borrowers. The Second Circuit reversed the Southern District of New York’s decision, holding that the filed-rate doctrine applied notwithstanding the fact that the mortgage servicer served as an intermediary to pass on the LPI rates to borrowers. Because the plaintiffs’ claims ultimately rested on the premise that the LPI rates approved by the regulators were too high and included impermissible costs, the Second Circuit held that the claims were barred by the filed-rate doctrine.

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District Court Applies Supreme Court’s Inclusive Communities Decision in Rejecting Disparate Impact Claim

On July 17, the U.S. District Court for the Central District of California granted summary judgment for Wells Fargo in a Fair Housing Act (FHA) case brought by the City of Los Angeles. City of Los Angeles v. Wells Fargo & Co., No. 2:13-cv-09007-ODW (RZx) (C.D. Cal. July 17, 2015). The City alleged that the bank engaged in mortgage lending practices that had a disparate impact on minority borrowers. In rejecting the City’s claims, the court’s opinion heavily relied on the Supreme Court’s recent decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., which imposed limitations on the disparate impact theory of liability under the FHA, despite holding that the theory remains cognizable. 135 S. Ct. 2507 (2015). Citing Inclusive Communities, the district court warned that disparate impact claims may only seek to “remove policies that are artificial, arbitrary, and unnecessary barriers and not valid governmental and private priorities.” The court further held that the City failed to point to a specific defendant policy that caused the disparate impact and failed to show “robust causality” between any of defendant’s policies and the alleged statistical disparity, as Inclusive Communities requires. The court also rejected the notion that disparate impact claims could be used to impose new policies on lenders, and said that the City’s argument that lenders should adopt policies to avoid disproportionate lending was a “roundabout way of arguing for a racial quota,” which Inclusive Communities also warns against. Finally, the court was sharply critical of the City’s argument that Federal Housing Administration loans are harmful to minority borrowers, and that, in any event, any disparate impact from these loans would be a result of the federal government’s policies, not the defendant’s policies.

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Ninth Circuit Bars Qui Tam Relator’s Whistleblower Recovery in False Claims Act Suit Over Conviction

On July 16, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s dismissal of a qui tam relator from a False Claims Act suit, holding that the False Claims Act requires dismissal of a relator convicted of any conduct giving rise to the fraud at issue, however minor, and prevents the relator from collecting any share of a whistleblower award.  United States ex rel. Schroeder v. CH2M Hill, No. 13-35479 (9th Cir. July 16, 2015).  The relator submitted false time cards while working for a contractor who engaged in fraudulent billing practices.  The Ninth Circuit held that the False Claims Act permits reducing relator awards for planners and initiators of the subject fraud, but dismisses and does not permit collection by all “relators convicted of criminal conduct arising from the fraudulent conduct at issue in the qui tam suit,” even those that did not plan or initiate the fraud.  Congress’s hierarchy for relator awards, reasoned the court, “may satisfy other values, such as the deterrent effect of preventing criminally culpable individuals from gaining from their conduct, and the investigatory benefits of actions brought by planners and initiators who often have greater knowledge about co-conspirators and the scope of a fraudulent scheme.”  The court rejected the idea that the statute “contain[s] an exception for minor participants” who were nonetheless convicted of the subject criminal conduct.

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DC Circuit Bars Retroactive Application of Dodd-Frank Act Provisions Permitting SEC to Bar Association with Municipal Advisors and Rating Organizations

On July 14, the U.S. Court of Appeals for the District of Columbia Circuit ruled that Dodd-Frank Act provisions authorizing the SEC to punish certain misconduct by barring association with municipal advisors and rating organizations may not be applied with respect to misconduct that took place prior to the effective date of the provisions. Koch et al. v. SEC, No. 14-1134 (D.C. Cir. Jul. 14, 2015). The Koch appeal arose from an SEC finding that the defendants had violated the securities laws by engaging in a market manipulation practice known as “marking the close,” and the SEC’s imposition of sanctions that, among others, prohibiting Koch from associating with municipal advisors and rating organizations. The DC Circuit upheld the finding of violations, but vacated the part of the order barring Koch from associating with municipal advisors and rating organizations on the basis the relevant Dodd-Frank provisions authorizing that sanction had not been enacted at the time of the misconduct. The court determined that applying those provisions was impermissibly retroactive, as there was no showing that Congress intended the provisions to apply retroactively and because it triggered additional legal consequences not existing at the time of the misconduct. The court did not disturb the other remedial orders in the case, including bars to association with other securities industries.

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DOJ Sentences Real Estate Developers to Prison for Involvement in Alleged Mortgage Fraud Scheme

On July 8, the DOJ announced the prison sentences of three real estate developers for their roles in an alleged mortgage fraud scheme that resulted in over $27 million dollars in losses. Convicted in November 2014 of wire fraud, bank fraud, and conspiracy, the three individuals “engaged in a scheme in which they facilitated payments to straw buyers as well as the submission of false loan applications on behalf of the straw buyers to secure mortgages to purchase units” in the condominium developments they controlled or managed. Post-sale, the individuals retained profits from the sales and control over the units. According to trial evidence, two of the individuals funneled some of the loan proceeds to shell companies to pay the buyers’ closing cash obligations and mortgage payments. Shell companies were also used to divert over $2 million in fraudulent funds to bank accounts in Switzerland and Liechtenstein. Because the defendants and their co-conspirators were eventually unable to make mortgage payments, dozens of condominium units entered into foreclosure, causing the FHA, Freddie Mac, Fannie Mae, and other private lenders a combined loss of $27.8 million. In addition to the varying prison sentences, U.S. District Judge Seitz ordered each defendant to forfeit over $35 million in fraudulent proceeds and to pay over $21 million in restitution.

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Court Holds That Evidence of Clickwrap Assent Not Always Sufficient When Evidence Disputing Assent is Presented

On June 29, in Jim Schumacher, LLC v. Spireon, Inc., Civ. Action No. 3:12-cv-00625-TWP-CCS, a Tennessee federal judge denied the motion for partial summary judgment as to the breach of contract claim because there was evidence that the plaintiff did not use the defendant’s portal or authorize an agent to use the defendant’s portal to manifest assent to the modified contract terms even though the defendant had digital evidence of such assent to the clickwrap agreement, thus creating a factual dispute. In 2005, the plaintiff became a reseller of the defendant’s vehicle location devices.  In 2009, the defendant modified its agreement, and placed the modified agreement on its customer portal website through which resellers manage purchases, sales, and customer data.  Visitors to the portal were required to click “I Accept” or “I Decline” before being permitted to access any other information on the portal.  The defendant produced digital evidence demonstrating that someone with the correct login and password accepted the 2009 agreement, and further digital evidence that someone with the correct login and password accepted an agreement in 2010 as well.  The plaintiff claims that he did not use the portal after the defendant placed the 2009 agreement on the portal, and thus could not have assented to the clickwrap agreement.  During this time, the plaintiff also did not authorize his representative to agree to the terms of the 2009 amendment, nor did he give any other users the ability to execute the agreement on his behalf.  The plaintiff filed a lawsuit alleging a breach of contract claim and a fraud claim based on the 2005 agreement.  Read more…

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