Eleventh Circuit Holds Custodian Bank Has No Duty To Police Securities Transactions By Customer’s Investment Advisor

On April 14, the U.S. Court of Appeals for the Eleventh Circuit held that a custodian bank had no duty under New York or Florida law to identify or alert a customer to fraudulent transactions directed by the customer’s investment advisor. Lamm v. State Street Bank & Trust, No. 12-15061, 2014 WL 1410172 (11th Cir. Apr. 14, 2014). A bank customer sued his bank for breach of contract, breach of fiduciary duty, negligence, and several other common law claims, alleging the bank had a duty to notify him that the securities held by the bank were worthless. The court determined that, although the bank held the assets and could execute certain administrative transactions without prior authorization, transactions beyond these administrative roles were carried out at the direction of the customer’s investment advisor. Accordingly the bank had no responsibility for supervising investments and assumed no liability for losses except those it caused through negligence or willful misconduct. The court held that the customer’s breach of contract and negligence claims failed because (i) the custody agreement provided the bank no decisionmaking role in investments; (ii) the bank had contractual authority to rely on the investment advisor’s instructions; and (iii) the customer failed to demonstrate that the bank had a duty to ensure the investment instruments were valid or to verify their market value. The court further held with regard to the customer’s other claims that (i) the fact that certain securities had facial defects does not raise a plausible inference that the bank knew of the investment advisor’s wrongdoing, and cannot support a claim for aiding and abetting fraud; (ii) the custody terms established an arm’s length agreement with limited obligations and did not establish special circumstances on which a fiduciary duty claim can be made; and (iii) the customer’s negligent misrepresentation claim failed because the customer did not establish that the bank intended to induce him to rely on its alleged representations as to the validity of his securities.

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FTC Settles Suit Against Tribe-Affiliated Lenders; Dispute Over CFPB Investigation Of Tribe-Affiliated Lenders Moves To Federal Court

On April 11, the FTC announced that a tribe-affiliated payday lending operation and its owner agreed to pay nearly $1 million to resolve allegations that they engaged in unfair and deceptive acts or practices and violated the Credit Practices Rule in the collection of payday loans. The FTC alleged that the lenders illegally tried to garnish borrowers’ wages and sought to force borrowers to travel to South Dakota to appear before a tribal court, and that the loan contracts issued by the lenders illegally stated that they are subject solely to the jurisdiction of the Cheyenne River Sioux Tribe. The announced settlement payment includes a $550,000 civil penalty and a court order to disgorge $417,740. The companies and their owner also are prohibited from further unfair and deceptive practices and are barred from suing any consumer in the course of collecting a debt, except for bringing a counter suit to defend against a suit brought by a consumer.

Also on April 11, in a separate matter related to federal authority over tribe-affiliated lending, a group of tribe-affiliated lenders responded in opposition to a recent CFPB petition to enforce civil investigative demands (CIDs) the Bureau issued to the lenders. In September 2013, the CFPB denied the lenders’ joint petition to set aside the CIDs, rejecting the lenders’ primary argument that the CFPB lacks authority over businesses chartered under the sovereign authority of federally recognized Indian Tribes. The lenders subsequently refused to respond to the CIDs, which the CFPB now asks the court to enforce. The CFPB argues that the lenders fall within the CFPB’s investigative authority under the terms of the Consumer Financial Protection Act, which the CFPB argues is a law of general applicability, including with regard to Indian Tribes and their property interests. The lenders continue to assert that they are sovereign entities operating beyond the CFPB’s reach.

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Florida District Court Holds Property Buyer’s Emails With Online Auction Company Are Not An Enforceable Contract

On April 7, the U.S. District Court for the Middle District of Florida dismissed a property buyer’s breach of contract and specific performance claims based on emails from an online auction company, holding that the emails alone did not create an enforceable real estate sales contract. Rouse v. Nationstar Mortg., LLC, No. 14-497, 2014 WL 1365420 (M.D. Fla. Apr. 7, 2014). The buyer, who won an online auction to purchase a property, sued the seller after the seller determined it did not wish to proceed with the sale. The buyer alleged breach of contract and sought specific performance, arguing that an email he received from the online auction company confirming his winning bid for the property and a subsequent email from the auction company indicating that the seller agreed to the terms of the purchase agreement memorialize all of the essential terms of the sale. The court held that even if the auction company’s emails satisfy the writing requirement of the statute of frauds as proper electronically signed documents, the confirmation email specifically stated that the seller’s acceptance of the bid and the purchase of the property was contingent not only on the seller’s approval of the purchase, but also on the execution of the purchase agreement by the winning bidder. Because the purchaser offered no evidence that he executed the purchase agreement, the court dismissed without prejudice the buyer’s breach of contract and specific performance claims. The court dismissed with prejudice the buyer’s equitable estoppel claim, but declined to dismiss the buyer’s unjust enrichment claim to recoup costs associated with repairs the buyer made to the property between the time of the auction and the seller’s decision not to proceed with the sale. The court held that the latter claim is dependent upon the seller’s actual knowledge of the repairs, which cannot be determined at this stage.

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N.D. Cal. Validates Forum Selection Clause In Website’s Hyperlinked Terms Of Use

On April 11, the U.S. District Court for the Northern District of California held that the forum selection clause within a website’s terms of use provisions, which an online customer had to accept in order to proceed with the transaction, is valid and supports a transfer of the case to another forum. Moretti v. Hertz Corp., No. 13-2972, 2014 WL 1410432 (N.D. Cal. Apr. 11, 2014). An online customer filed a putative class action in California state court against a car rental company and a travel website over a price disclosure dispute. The companies removed the action to federal court and sought to transfer the case to Delaware based on a forum selection clause included in the terms of use provisions on the travel website through which the car rental was arranged. In support of the motion to transfer, the travel website provided employee declarations establishing that the terms of use included a forum selection clause, and that the transaction could not have been completed unless the customer clicked a box to accept the terms of use. The court held that even though the terms of use were provided through a hyperlink on the site, in the absence of affirmative denial from the customer that he did not click to accept the terms of use, the customer had notice and consented to the terms and the forum selection clause contained therein. The court granted the defendants’ transfer motion and ordered the case transferred to the District Court of Delaware.

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New Jersey Federal Court First To Uphold FTC’s UDAP Authority To Enforce Data Security

On April 7, the U.S. District Court for the District of New Jersey denied a hotel company’s motion to dismiss the FTC’s claims that the company engaged in unfair and deceptive practices in violation of Section 5 of the FTC Act by failing to maintain reasonable and appropriate data security for customers’ personal information. FTC v. Wyndham Worldwide Corp., No. 13-1887, 2014 WL 1349019 (D.N.J. Apr. 7, 2014). The company moved to dismiss the FTC’s suit, arguing that the FTC (i) lacks statutory authority to enforce data security standards outside of its explicit data security authority under statutes such as the Gramm-Leach-Bliley Act (GLBA) and FCRA; (ii) violated fair notice principles by failing to first promulgate applicable regulations; and (iii) failed to sufficiently plead certain elements of the unfairness and deception claims. The court rejected each of these arguments. First, the court held that the FTC does not need specific authority under Section 5 to enforce data security standards. The court reasoned that the data-security legislation the followed the FTC Act, such as GLBA and FCRA, provide the FTC additional data security tools that complement, rather than preclude, the FTC’s general authority under Section 5. Second, the court held that, to bring a Section 5 data security claim, the FTC is not required to provide notice of reasonable standards by issuing a new regulation because regulations are not the only means of providing sufficient fair notice. According to the court, industry standards, past FTC enforcement actions, and FTC business guidance provided sufficient notice of what constitutes reasonable security measures. Third, the court held that the FTC properly pled its unfairness and deception claims under the FTC Act.

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FHFA, City Of Chicago Resolve Dispute Over Vacant Property Ordinance

On April 3, the U.S. District Court for the Northern District of Illinois approved an order of dismissal and memorandum of understanding jointly entered by the FHFA and the City of Chicago to end more than two years of litigation over a city ordinance that requires mortgagees to register vacant properties and pay a $500 registration fee per property. The ordinance also imposes maintenance and other obligations—whether the property has been foreclosed upon or not—with fines for noncompliance. In 2011, the FHFA sued the city, objecting that the ordinance would have improperly covered the activities of Fannie Mae, Freddie Mac, and their agents. In August 2013, the court held that Fannie Mae and Freddie Mac are exempt from the ordinance, and the FHFA subsequently sought to clarify the scope of the court’s order and asked the court for declaratory and monetary relief. The parties now have agreed to a memorandum of understanding pursuant to which the city will not enforce the ordinance against Fannie Mae, Freddie Mac, or their agents for as long as the GSEs remain under federal conservatorship. The FHFA agreed that Fannie Mae and Freddie Mac will voluntarily register their vacant properties with the city, and the FHFA agreed not to try to recover fees and penalties already paid to the city under the ordinance.

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SDNY Certifies Interlocutory Appeal In Lender-Placed Insurance Dispute

On April 3, the U.S. District Court for the Southern District of New York certified an interlocutory appeal of an order denying a motion to dismiss filed by a group of insurers facing class allegations of unlawful lender-placed insurance practices. Rothstein v. GMAC Mortgage, LLC, No. 12-3412, 2014 WL 1329132 (S.D.N.Y. Apr. 3, 2014). In declining to dismiss the case, the court held, among other things, that the filed rate doctrine did not bar borrowers’ claims because the doctrine applies only where the challenged rate is one imposed directly by an insurer, and does not apply to lender-placed insurance where a third-party—the lender or servicer—acquires the insurance at a filed rate and bills the borrower for the costs. On the insurers’ motion for interlocutory appeal, the court held that the issue of whether the filed rate doctrine applies is a question of law that could be dispositive and for which there is substantial ground for a difference of opinion, and that the potential to avoid protracted litigation warranted certification for appeal. BuckleySandler represents the insurers in this action.

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Ninth Circuit Holds National Bank Is Resident Only Where Headquartered

On March 27, the U.S. Court of Appeals for the Ninth Circuit reversed the district court’s remand for lack of diversity, holding that a national bank is a citizen only of the state where it is headquartered. Rouse v. Wachovia Mortg., FSB, No. 12-55278, 2014 WL 1243869 (9th Cir. Mar. 27, 2014). In this case, a federal district court in California remanded to state court a suit brought by two California mortgage borrowers alleging state law violations against a national bank, holding that a national bank is a citizen of both the state where its principle place of business is located and where the bank is headquartered—in this case California and South Dakota, respectively—and that because the borrowers are California citizens, the district court lacked jurisdiction. The Ninth Circuit disagreed, finding that the statutory scheme governing nationally chartered banks, which the court described as sparse and ambiguous, deemed national banks citizens of the state where their main offices are located. Unlike the district court, the Ninth Circuit found no congressional intention to provide for jurisdictional parity between nationally chartered and state-chartered banks. The Ninth Circuit thus reversed the district court, finding perfect diversity between the plaintiffs, citizens of California, and the defendant national bank, a citizen of South Dakota.

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Debt Settlement Firm Pleads Guilty In CFPB’s First Criminal Referral

On April 8 the U.S. Attorney for the Southern District of New York announced that a debt settlement company and its owner pled guilty to fraud charges, resolving the first criminal case referred to the DOJ by the CFPB. The DOJ alleged that from 2009 through May 2013, the company systematically exploited and defrauded over 1,200 customers with credit card debt by charging them for debt settlement services the company never provided. The DOJ claimed that the company (i) lied about and/or concealed its fees, and falsely assured customers that fees would be substantially less than those the company eventually charged; (ii) deceived customers by fraudulently and falsely promising that the company could significantly lower borrower debts when, for the majority of its customers, the company allegedly did little or no work and failed to achieve any reduction in debt; and (iii) sent prospective customers solicitation letters falsely suggesting that the agency was acting on behalf of or in connection with a federal governmental program. The company’s owner pled guilty to one count of conspiracy to commit mail and wire fraud, and one count of conspiracy to commit wire fraud, and faces a maximum sentence of 10 years in prison. The company pled guilty to one count of conspiracy to commit mail and wire fraud, and faces a fine of up to twice the gross pecuniary gain derived from the offense, and up to five years’ probation. The defendants also entered into a stipulation of settlement of a civil forfeiture action and consented to the entry of a permanent injunction barring them from providing, directly or indirectly, any debt relief or mortgage relief services in the future. The CFPB subsequently dismissed its parallel civil suit.

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Eleventh Circuit Holds TCPA Consent To Receive Autodialed Calls Must Come From Current Cell Phone Subscriber

On March 28, the U.S. Court of Appeals for the Eleventh Circuit held that, under the Telephone Consumer Protection Act (TCPA), consent to receive autodialed calls on a cell phone number must be provided by the number’s current subscriber and not the intended recipient of the call. Osorio v. State Farm Bank, F.S.B., No. 13-10951, 2014 WL 1258023 (11th Cir. Mar. 28, 2014). The case arose when a credit card applicant (and eventual cardholder) provided her housemate’s cell phone number on the issuing bank’s credit card application. After the cardholder became delinquent on her credit card payments, and a collection agency hired by the bank made over 300 autodialed calls to the housemate’s cell phone, the housemate filed suit against the bank under the TCPA, arguing that he did not consent to receive autodialed calls from the bank. The Eleventh Circuit held that the cardholder had no authority to consent to the collection calls because only the subscriber—the housemate—could have given such consent, either directly or through an authorized agent. The court further held that the cardholder and the housemate, in the absence of any contractual restriction to the contrary, were free to orally revoke any consent previously given to call the number in connection with the credit card debt. Finally, the court rejected the bank’s argument that the TCPA prohibits autodialed calls only when the called party is charged for each specific call. The court reversed a district court ruling in favor of the bank and remanded for further proceedings.

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Minnesota Appeals Court Upholds State Regulation Of Online Payday Lender

On March 31, the Minnesota Court of Appeals held that the Minnesota state legislature may regulate the activities of online payday lenders that extend loans to individuals residing within the state’s borders, even if the lender’s operations are based in a different state. State of Minn. v. Integrity Advance, LLC, No. 62-CV-11-7168, 2014 WL 1272279 (Minn. Ct. App. Mar. 31, 2014). The state of Minnesota alleged that an online payday lender violated Minnesota law by charging high annual interest rates, automatically rolling-over loans for extended periods, and failing to obtain a state lending license. The lender argued that the dormant commerce clause of the U.S. Constitution, which prohibits states from discriminating against or unduly burdening interstate commerce, prevented the Minnesota legislature from regulating the lender because the lender received and accepted Minnesotans’ loan applications at its place of business in Delaware, where the loans were consummated. The court rejected the lender’s argument and held that the U.S. Constitution permits states to regulate commercial transactions that affect their citizens so long as the transactions are not “wholly extraterritorial” – that is, occurring entirely outside of the state’s borders. The court determined that the online lender’s loans were not “wholly extraterritorial” because the lender (i) accepted loan applications online from Minnesota residents that indicated the applicant resided and worked in Minnesota; (ii) contacted Minnesotans in their home state approximately 27,944 times for loan underwriting and other business purposes; and (iii) deposited loan funds directly into Minnesota borrowers’ bank accounts. The court also upheld the district court’s award of $7 million in civil and statutory damages against the lender, finding that the lower court did not abuse its discretion since the award amounted to only 21% of the statutorily-allowed amount.

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SCOTUS Denies Certiorari In Lien Stripping Case

On March 31, the U.S. Supreme Court denied a petition for a writ of certiorari in an Eleventh Circuit case that raises the issue of whether, under section 506(d) of the Bankruptcy Code, a chapter 7 debtor can “strip off” a junior-lien mortgage when the outstanding debt owed to a senior lienholder exceeds the current value of the collateral. Bank of America v. Sinkfield, 13-700, 2014 WL 1271326 (U.S. Mar. 31, 2014). Here, the debtor’s property was subject to two mortgage liens, with the outstanding amount of the first-priority mortgage exceeding the fair market value of the property. In the bankruptcy court, the debtor filed a motion to strip off the junior lien under section 506(d). Controlling Eleventh Circuit precedent allowed the junior-lien mortgage to be stripped off or voided because it was wholly unsupported by the collateral. The parties stipulated to the facts and the applicability of the precedent, but the holder of the junior lien disputed the correctness of the Eleventh Circuit precedent and reserved the right to appeal its continued viability. In its eventual petition to the Supreme Court, the holder of the junior lien argued that the Eleventh Circuit’s precedent is out of step with every other federal appeals court that has addressed the issue. The junior lien holder explained that, relying on a prior Supreme Court holding that section 506(d) does not permit a chapter 7 debtor to “strip down” a mortgage lien to the current value of the collateral, the Fourth, Sixth, and Seventh Circuits held that section 506(d) similarly does not permit a “strip off.” The Court declined to address the apparent circuit split.

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S.D. Fla. Court Holds TILA Assignee Liability Limited To Violations Apparent At Time Of Assignment

On March 10, the U.S. District Court for the Southern District of Florida held that a mortgage assignee “may only be held liable for violations that are apparent on the face of disclosure documents that exist at the time of the assignment.” Alaimo v. HSBC Mortg. Servs., Inc., No. 13-62437-CIV, 2014 WL 930787 (S.D. Fla. Mar. 10, 2014). In this case, a borrower sued his current servicer alleging that the servicer violated Section 1641 of TILA by failing to disclose, upon the borrower’s request, the identity of the owner and master servicer of the loan, as well as the total outstanding balance that would be required to satisfy the mortgage loan in full as of a specified date. The court determined that TILA’s plain language demonstrates that “Congress intended assignees to be responsible only for violations within documents that existed prior to assignment.” While acknowledging the potential policy implication of its decision that could allow assignees to avoid liability for certain TILA violations, the court declined to go beyond congressional intent. The court rejected the borrower’s argument that TILA’s requirement that an assignee provide written notice to the borrower upon acquiring the loan includes an exception to the prerequisites for a suit against an assignee. The court dismissed the borrower’s suit.

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C.D. Cal. Court Holds Overnight Delivery Companies Covered By RESPA

On March 21, in a suit brought by borrowers who had paid overnight delivery fees at closing, the U.S. District Court for the Central District of California held that the overnight delivery services provided by certain delivery companies to a parent company of various escrow companies were “settlement services” under RESPA and concluded that borrowers had pleaded facts sufficient to establish that defendant parent company may have violated RESPA by accepting marketing fees from certain delivery companies in exchange for “referring”—via its escrow subsidiaries—overnight delivery business to those delivery companies. Henson v. Fidelity Nat’l Fin. Inc., No. 14-cv-01240, slip op. (C.D. Cal. Mar. 21, 2014). In this case, the defendant parent company’s allegedly required its escrow subsidiaries to use certain delivery companies in connection with loan closings. Defendant parent company, in turn, allegedly received a marketing fee from those delivery companies based on the volume of business it sent to the delivery companies through its escrow subsidiaries. On the parent company’s motion to dismiss, the court held that the overnight delivery service was a “settlement service” under RESPA given that Regulation X specifically lists a “delivery” as a settlement service if provided in connection with a real estate settlement. The court further held that a “referral” under RESPA need not be linked to particular transactions and thus that a RESPA violation could occur where a master agreement required subsidiaries to use certain delivery service providers in exchange for a marketing fee received by a parent company. However, the court agreed with the defendant that the borrowers failed to adequately plead either a split of an unearned fee or that defendant did not perform any service in exchange for the marketing fee it received. Thus the court denied, in part, and granted, in part, the defendant’s motion to dismiss.

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D.C. Circuit Rejects Merchant Challenge To Higher Cap On Debit Card Transaction Fees

On March 21, the U.S. Court of Appeals for the D.C. Circuit held that the Federal Reserve Board’s final rule imposing a 21-cent per transaction limit on debit card interchange fees (up from a 12-cent per transaction limit in its proposed rule) was based on a reasonable construction of a “poorly drafted” provision of the Dodd-Frank Act and that the Board acted reasonably in issuing a final rule requiring debit card issuers to process debit card transactions on at least two unaffiliated networks. NACS v. Bd. of Governors of the Fed. Reserve Sys., No. 13-5270, 2014 WL 1099633 (D.C. Cir. Mar. 21, 2014). The action was brought by a group of merchants challenging the increase to the interchange fee cap and implementation of anti-exclusivity rule for processing debit transactions that was less restrictive than other options. In support of their challenge, the merchants argued that in setting the cap at 21 cents the Board ignored Dodd-Frank’s command against consideration of “other costs incurred by an issuer which are not specific to a particular electronic debit transaction.” The court held, in a decision that hinged on discerning statutory intent from the omission of a comma, that when setting the fee cap the Board could consider both the incremental costs associated with the authorization, clearance, and settlement of debit card transactions (ACS costs) and other, additional, non-ACS costs associated with a particular transaction (such as software and equipment). The court further concluded that the Board could consider all ACS costs, network processing fees, and fraud losses. The court, however, remanded the question of whether the Board could also consider transaction-monitoring costs when setting the fee cap, given that monitoring costs are already accounted for in another portion of the statute. Finally, the court rejected the merchants’ argument that the Board’s final rule should have required the card issuers to allow their cards to be processed on at least two unaffiliated networks per method of authentication (i.e., PIN authentication or signature authentication) holding that the statute goes no further than preventing card issuers or networks from requiring the exclusive use of a particular network.

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