On September 9, the U.S. District Court for the Southern District of New York dismissed an industry group’s challenge to a New York City ordinance that requires banks doing business with the city to report certain information about their banking and lending activities. New York Bankers Assoc. v. New York, No. 13-7212, 2014 WL 4435427 (S.D.N.Y. Sept. 9, 2014). In May 2012, the New York City Council approved, over the Mayor’s veto, an ordinance that establishes a Community Investment Advisory Board (CIAB) with authority to collect certain information from the city’s depository banks regarding each bank’s efforts to, among other things, (i) meet small business credit needs; (ii) conduct consumer outreach and other steps to provide mortgage assistance and foreclosure prevention; and (iii) offer financial products for low and moderate-income individuals throughout the city. The ordinance also directs the CIAB to (i) perform an assessment on whether such banks are meeting the credit, financial, and banking services needs throughout the city; and (ii) publish the assessment and the information collected from each such bank. The results of these evaluations may be considered in connection with a bank’s application for designation or redesignation as a depository bank. The court dismissed for lack of standing the industry group’s argument that the ordinance conflicts with and is preempted by federal and state laws that exclusively regulate federal and state chartered depository institutions by granting the CIAB regulatory powers that are not relevant to the quality and pricing of the services that banks provide to the city. The court explained that at the time the suit was filed, the group could not establish imminent harm, or that injuries were subject to substantial risk of occurrence, and as such were too speculative to support Article III standing. The court noted, however, that the group “brings serious substantive claims” and may have standing based events that have occurred since filing, or that may occur in the future.
On September 3, the U.S. District Court for the Northern District of Illinois declined to invalidate to the burden-shifting framework established by HUD in its 2013 disparate impact rule, but remanded to HUD for further consideration certain comments on the rule submitted by insurers. Property Casualty Insurers Assoc. of Am. V. Donovan, No. 13-8564, WL 4377570 (N.D. Ill. Sept. 3, 2014). An association of insurers challenged HUD’s rule, which authorized so-called “disparate impact” or “effects test” claims under the Fair Housing Act. The insurers filed suit to enjoin HUD from applying the rule to the homeowners’ insurance industry, arguing that HUD’s refusal to build safe harbors for homeowners’ insurance violates the McCarron-Ferguson Act and is arbitrary and capricious. The court agreed that HUD acted in an arbitrary and capricious manner because HUD did not give adequate consideration to comments from the insurance industry relating to the McCarran-Ferguson Act, the filed-rate doctrine, and the potential effect that the disparate impact rule could have on the nature of insurance. Therefore, the court remanded those issues back to HUD for further explanation. The court also addressed the burden-shifting approach established by HUD to determine liability under a disparate impact claim. Under the rule, once a practice has been shown by a plaintiff to have a disparate impact on a protected class, the defendant has the burden of showing that the challenged practice “is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the respondent . . . or defendant . . . . A legally sufficient justification must be supported by evidence and may not be hypothetical or speculative.” The court held that the final burden-shifting framework “reflects HUD’s reasonable accommodation of the competing interests at stake—i.e., the public’s interest in eliminating discriminatory housing practices and defendants’ (including insurer-defendants’) interest in avoiding costly or frivolous litigation based on unintentional discriminatory effects of their facially neutral practices[,]” and deferred to HUD’s interpretation of the Fair Housing Act pursuant to Chevron v. U.S.A. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).
On August 26, the U.S. District Court for the Eastern District of Texas held that the Bitcoin investments at issue are “investment contracts” and “securities” within the meaning of the Securities Act of 1933 and the Exchange Act of 1934. S.E.C. v. Shavers, et al., No. 4:13-CV-416, (E.D. Tex. Aug. 26, 2014). The Court found that the Bitcoin investments in the case satisfy the “investment of money” prong established by the Supreme Court in S.E.C. v. W.J. Howey & Co., 328 U.S. 293, 298-99 (1946), because Bitcoin has a measure of value, can be used as a form of payment, and is used as a method of exchange. The essence of an investment contract, the court reasoned, was the contribution of an exchange of value, rather than “money” in the narrow sense of legal tender only. The SEC alleged that the Defendants made a number of solicitations aimed at enticing lenders to invest in Bitcoin-related investment opportunities. The Court granted the Defendants’ motion to reconsider its prior decision on subject-matter jurisdiction, but denied the Defendants’ motion to dismiss for lack of subject-matter jurisdiction.
Fourth Circuit Holds That Debtors Are Not Required To Dispute Debt In Writing To State A Claim Under FDCPA
On August 15, the U.S. Court of Appeals for the Fourth Circuit affirmed a district court’s denial of a debt collector’s motion for judgment as a matter of law because, under the FDCPA, debtors are not required to dispute debts in writing pursuant to Section 1692g in order to seek relief under Section 1692e. Russell v. Absolute Collection Services, No. 12-2357, 2014 WL 3973729 (4th Cir. Aug. 15, 2014). Within thirty days of receiving the initial debt collection letter, the debtor paid the entire amount due directly to her husband’s medical provider. However, the debt collector continued to make calls and send collection letters thereafter. During the calls, the debtor told the collector that the debt had been paid, but she never advised the collector in writing that she was disputing the debt, nor did she send proof of payment. The debt collector argued that Section 1692g debt validation procedures required the debtor to dispute the debt in writing. The court disagreed, stating that such an interpretation “would thwart the statute’s objective of curtailing abusive and deceptive collection practices and would contravene the FDCPA’s express command that debt collectors be liable for violations of ‘any provision’ of the statute.”
Nebraska Federal Court Refuses To Dismiss Suit Claiming Breach Of Contract, Violation of State Law for Unauthorized Credit Card Transactions Following Bank Data Breach
On August 20, the U.S. District Court for the District of Nebraska denied motions to dismiss filed by a Nebraska bank and two credit card processing companies in response to a purported class action filed by a merchant alleging that it suffered damages following a data breach at the defendants’ premises. Wines, Vines & Corks, LLC v. First Nat’l of Neb., Inc., No. 8:14CV82 (D. Neb. Aug. 20, 2014). According to the merchant’s complaint, the merchant maintained a credit card processing account with the defendants and, following the breach, had unauthorized credit card transactions processed and fees withdrawn from its account. The merchant alleged breach of contract, negligence, and violations of the Nebraska Consumer Protection Act and the Nebraska Uniform Deceptive Trade Practices Act based on the defendants’ failure to adequately secure and protect account information and refusal to refund the fees. In denying the motions to dismiss, the court determined that the merchant sufficiently pled the existence of a contract and resulting damages in support of its breach of contract claim, as well as a breach of the duty of due care in support of its negligence claim. Also, the court found that the merchant’s state law claims were adequately supported and determined that the defendants’ argument that the economic loss doctrine barred these claims was misplaced.
On August 21, the U.S. Court of Appeals for the Second Circuit held that forum selection clauses, requiring “all actions and proceedings” related to the transactions between the parties to be brought in court, supplant FINRA’s arbitration rule that would otherwise apply. Goldman, Sachs & Co. v. Golden Empire Schools Financing Authority, Nos. 13-797-CV, 13-2247-CV, 2014 WL 4099289 (2nd Cir. Aug. 21, 2014). Underwriters and broker-dealers of auction rate securities brought declaratory and injunctive relief actions against issuers, seeking to enjoin FINRA arbitration of their disputes involving the securities. The parties’ broker-dealer agreements contained forum selection clauses requiring “all actions and proceedings arising out” of the transactions to be brought in court. The district courts enjoined the arbitrations based on the forum selection clauses. The Second Circuit affirmed, holding that FINRA Rule 12220, which states that members must arbitrate a dispute if arbitration is requested by the customer, is superseded by the agreements containing a forums selection clause whose language is all-inclusive and mandatory. The Second Circuit’s decision accords with a similar ruling by the Ninth Circuit, but marks a split on the issue from the Fourth Circuit, which found that a nearly identical forum selection clause did not supersede the FINRA rule.
On August 19, the U.S. District Court for the Southern District of New York found that Bitcoin is “money” in a memorandum order denying a defendant’s motion to dismiss a federal money laundering charge. Faiella et al. v. United States, No. 14-cr-243 (JSR), 2014 WL 4100897 (S.D.N.Y. Aug. 19, 2014). The defendant is a former Bitcoin exchange owner who was charged in 2013 with unlawfully operating an unlicensed money transmitting business. In his motion before the court, the defendant argued that the charge should be dismissed because Bitcoin is not “money” within the meaning of the statute. The court disagreed, relying upon the dictionary definition of “money” to conclude that Bitcoin “clearly qualifies as ‘money’” as it “can be easily purchased in exchange for ordinary currency, acts as a denominator of value, and is used to conduct financial transactions.” The court additionally relied on Congress’ intent that anti-money laundering statutes keep pace with evolving threats, and also cited an opinion from a similar case in the U.S. District Court for the Eastern District of Texas that concluded Bitcoin can be used as money. SEC v. Shavers, No. 4:13-CV-416, 2013 WL 4028182, at *2 (E.D. Tex. Aug. 6, 2013).
On August 19, the U.S. Court of Appeals for the Tenth Circuit reissued its original opinion affirming a district court’s holding that FIRREA’s NCUA extender statute circumvents the three-year repose period found in Section 13 of the Securities Act. Nat’l Credit Union Admin. Board v. Nomura Home Equity Loan Inc., Nos. 12-3295, 12-3298, 2014 WL 4069137 (10th Cir. Aug. 19, 2014). Extender statutes define the time period for government regulators to bring actions on behalf of failed financial organizations. The NCUA sued a number of RMBS issuers for violations of federal securities laws on behalf of two credit unions that the NCUA had placed into conservatorship. The defendant RMBS issuers countered that the suit was untimely under the applicable three-year statute of limitations in the Securities Act. The court originally held in 2013 that the NCUA’s claim was timely pursuant to the relevant extender statute, but its opinion had been vacated and remanded for further consideration in light of the Supreme Court’s recent decision in a similar case under a federal environmental statute. The court distinguished its case by first determining that the relevant statute was “fundamentally different” from the one in the Supreme Court’s case because the extender statute “plainly establishes a universal time frame for all actions brought by [the] NCUA.” The court rejected the argument that placed a distinction between statutes of limitations and statutes of repose by noting that extender statutes “displace all preexisting limits on the time to bring suit, whatever they are called.” The court then found that the extender statute’s surrounding language, statutory context, and statutory purpose supported its original decision that the NCUA’s suit was timely. Accordingly, the court reinstated its original opinion.
On August 14, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s holding that the Dodd-Frank Act’s antiretaliation provision does not apply extraterritorially. Liu Meng-Lin v. Siemens AG, No. 13-4385, 2014 WL 3953672 (2nd Cir. Aug. 14, 2014). A foreign worker was allegedly fired by his foreign employer for internally reporting violations of U.S. anti-corruption rules, which he claimed violated the antiretaliation provision of the Dodd-Frank Act. This provision prohibits an employer from firing or otherwise discriminating against any employee who makes a disclosure that is required or protected under Sarbanes-Oxley or any other law, rule, or regulation subject to the SEC’s jurisdiction. The court first determined that the facts alleged in the complaint revealed “essentially no contact with the United States” and rejected an argument that the foreign company voluntarily subjected itself to U.S. securities laws by listing its securities on the New York Stock Exchange. The court also held that, given the longstanding presumption against extraterritoriality and the absence of any “explicit statutory evidence that Congress meant for the provision to apply extraterritorially,” the cited provision does not apply to purely foreign-based claims.
On August 15, the U.S. District Court for the Central District of California held that a bank responded too slowly to a government levy on a customer’s account and was therefore responsible for funds subsequently removed by the customer. The IRS notified the bank of a jeopardy levy on the account of a customer who received an improper tax refund and refused to return those funds to the government. Before the bank acted on the notice, the customer removed the funds from his account and the IRS was unable to recover them. The government then turned to the bank for relief, asserting that under the Internal Revenue Code, any person who fails or refuses to surrender any property subject to a levy is liable to the government. The court held that although the statute does not require the bank to immediately surrender the property, the bank was required, upon receiving notice, “to preserve that property or run the risk of paying the depositor’s tax bill.” The court explained that once the levy was served on the bank, the bank was in the best position to protect the property, and that even if the bank acted reasonably—i.e., without any undue delay—it could still be liable for the levied property.
On August 12, Manhattan District Attorney (DA) Cyrus Vance, Jr. announced the indictment of twelve payday lending companies and related individuals for allegedly engaging in criminal usury by making high interest payday loans to Manhattan residents. According to the DA’s press release, between 2001 and 2013, one of the indicted individuals allegedly created multiple companies, including establishing one as a website and offshore corporation, to accept and process online applications for payday loans. The DA also indicted the payday lending business’ chief operating officer and legal counsel. The DA charged the defendants with 38 counts of felony first degree criminal usury and one count of conspiracy in the fourth degree. The defendants are also accused of continuing to extend such loans to New York residents for years, even after, according to the DA, they had been repeatedly warned by New York State officials of the loans’ illegality.
On August 5, the U.S. District Court for the Southern District of Texas held that HUD’s decisions to immediately suspend a HUD mortgagee and its CEO were not “arbitrary and capricious” and did not violate due process. Allied Home Mortg. Corp. v. Donovan, No. H-11-3864, 2014 WL 3843561 (S.D. Tex. Aug. 5, 2014). In October 2011, a U.S. Attorney’s Office sued the mortgagee, its CEO, and related parties under the False Claims Act and FIRREA for allegedly making false statements and false claims to HUD in connection with FHA-insured mortgage loans. Shortly thereafter, based on information obtained by the U.S. Attorney’s Office, HUD immediately suspended the mortgagee’s HUD/FHA origination and underwriting approvals and suspended the CEO from participation in procurement and nonprocurement transactions as a participant or principal. The mortgagee plaintiffs argued that such suspensions were “arbitrary and capricious” (and thus violated the Administrative Procedure Act) given the age of the evidence against the CEO and the limited evidence directly attributable to the mortgagee. Specifically, the mortgagee plaintiffs argued that HUD failed to follow its own standards for issuing immediate suspensions because it did not have adequate evidence of any present or imminent threat to the financial interests of the public or HUD that would warrant an immediate suspension. The court, however, held that the evidence uncovered in the investigation was sufficient to support HUD’s action, and that HUD “drew rational inferences based on the severity, persistence, and length of the [alleged] misconduct.” The court also denied the mortgagee plaintiffs’ due process claim, reasoning that the initial suspensions were temporary and could have been administratively appealed. The court denied the mortgagee plaintiffs’ motion for summary judgment and dismissed the case with prejudice.
On August 12, the U.S. District Court for the Northern District of California dismissed for failure to state a claim a putative class action alleging that a digital wallet provider made unauthorized disclosures of user information to third-party mobile app developers. Svenson v. Google Inc., No. 13-cv-04080, 2014 WL 3962820 (N.D. Cal. Aug. 12, 2014). The named plaintiff claimed that when the digital wallet provider processed payments for apps purchased through an affiliated online store, it also provided certain customer/personally identifiable information to third-party app developers, including email address, account name, home city and state, zip code, and in some instances, telephone number. The plaintiff asserted theories of breach of contract and breach of the implied covenant of good faith and fair dealing, as well as violations of the Stored Communications Act and California’s Unfair Competition Law. The court held that the plaintiff’s breach of contract claim failed, reasoning in part that: (i) the plaintiff was not deprived of the “benefit of the bargain” given that the allegations involved free services and a $1.77 app; and (ii) there was no support for the theory that the economic value of the plaintiff’s information was diminished (because the plaintiff failed to allege that there was a market for the information). Similarly, the court held that the plaintiff’s Unfair Competition Law claims did not allege an economic injury, and that the breach of implied covenant claims were duplicative of the breach of contract claims. The court also dismissed the plaintiff’s Stored Communications Act claims.
On August 5, the U.S. Court of Appeals for the Eighth Circuit held that ECOA clearly provides that a person does not qualify as an applicant under the statute solely by virtue of executing a guaranty to secure the debt of another. Hawkins v. Comm. Bank of Raymmore, No. 13-3065, 2014 WL 3826820 (8th Cir. Aug. 5, 2014). In this case, two individuals executed personal guaranties to secure several loans made to a residential development company owned by their husbands. After the company defaulted on the loans, the bank accelerated the loans and demanded payment from the company and the two individual guarantors. The guarantors, in turn, sued the bank, seeking damages and an order declaring their guaranties void and unenforceable, alleging that the bank required them to execute the guaranties securing the company’s loans solely because they are married to their respective husbands—the owners of the company. The guarantors asserted that such a requirement constituted discrimination against them on the basis of their marital status, in violation of ECOA. The court held that “the plain language of ECOA unmistakably provides that a person is an applicant only if she requests credit,” and that “a person does not, by executing a guaranty, request credit.” In doing so the court rejected the Federal Reserve Board’s implementing regulation that interpreted the term applicant to include guarantors. The court’s holding also creates a split with the Sixth Circuit, which recently “came to the contrary conclusion, finding it to be ambiguous whether a guarantor qualifies as an applicant under the ECOA.”