On May 6, the U.S. Court of Appeals for the Second Circuit agreed with the CFPB in holding that a single-story unit in a multi-story condominium is a “lot,” as that term is used in the Interstate Land Sales Full Disclosure Act. Berlin v. Renaissance Rental Partners, No. 12-2213, slip op. (2d Cir. May 6, 2013). The CFPB and HUD, the predecessor regulator under the ILSFDA, had previously issued regulations stating that a property could only qualify as a “lot” if it involved the “exclusive use of … land.” The Second Circuit determined that the definition of the term “land” was ambiguous and deferred to the agencies’ interpretation, which equated “land” with “realty.” The case is notable primarily because the dissenting opinion reflects an increasingly unfriendly attitude in the courts towards so-called Auer deference. That deference generally requires courts to defer to any plausible interpretation from an agency of its own regulations. In a 15-page dissent in Berlin, Chief Judge Dennis Jacobs questioned the utility of that deference doctrine in this case, arguing that the agency’s reading was “unnatural” and should not be given effect. Chief Judge Jacobs also disagreed with the majority’s emphasis on the fact that the HUD/CFPB position was consistent. Indeed, Chief Judge Jacobs felt that the CFPB’s “gravity-defying” “misunderstanding” was “not improved by consistency,” particularly given that the agencies’ interpretations rested on guidelines that were “semi-literate.” Interestingly, Chief Judge Jacobs twice cited to Justice Scalia’s recent dissent in Decker v. Northwest Environmental Defense Center, which questions the continuing basis for Auer. (A previous InfoByte discussed the opinions in Decker.) Because Auer may prove relevant in many administrative law cases—including those involving banking and financial regulators—this unfriendly attitude may prove significant for participants throughout the financial industry.
On May 1, the Supreme Court of the State of New York, Appellate Division, overturned a lower court’s order requiring a lender to modify a borrower’s loan agreement under the terms employed in the trial period as the penalty for failing to negotiate with the borrower in good faith during the required settlement conference. Wells Fargo Bank, N.A. v. Meyers, No. 34632/09, 2013 WL 1811781 (N.Y. Sup. Ct. App. Div. May 1, 2013). On appeal, the appellate court held that the HAMP trial agreement is not a proper agreement regarding the real property and cannot be enforced as an agreement. Moreover, the appellate court held that a court may not rewrite a contract that the parties freely entered into upon a finding that one of those parties failed to satisfy its obligation to negotiate in good faith during the settlement conference. Further, the court held that because the lender was not given notice that the trial court was considering such a remedy, the sanction violated the lender’s due process rights. The appellate court overturned the trial court’s order and remanded the case for further proceedings.
Southern District of New York Judge Dismisses False Claims Counts, Allows FIRREA Claims to Proceed in Major Mortgage Fraud Case
On May 8, the U.S. District Court for the Southern District of New York dismissed claims for damages and civil penalties under the False Claims Act (FCA) brought by the federal government against a mortgage lender alleged to have sold defective loans to Freddie Mac and Fannie Mae while representing that the loans complied with the enterprises’ requirements. U.S. v. Countrywide Fin. Corp., No. 12-1422, Order (S.D.N.Y. May 8, 2013). The government also claims that (i) the lender’s senior management ignored warnings about the supposedly high levels of fraud and defects, (ii) the lender attempted to conceal internal quality control reports indicating that the loans had high material defect rates, and misleadingly informed Fannie Mae and Freddie Mac that it had tightened its underwriting guidelines, and (iii) the lender resisted buying many of the loans back after the loans defaulted. Notably, the court did not dismiss the government’s claims under FIRREA, which has a longer statute of limitations and lower burden of proof than the FCA. The court expects to release a written opinion in the near future.
On May 7, the U.S. Court of Appeals for the Second Circuit granted two petitions seeking interlocutory appeal of key questions related to pending mortgage backed securities (MBS) cases. Retirement Board of the Policemen’s Annuity and Benefit Fund of the City of Chicago v. The Bank of New York Mellon, Nos. 13-00661, 00664 (2nd Cir. May 7, 2013). Taking the two appeals in tandem, the court will address (i) a group of pension funds’ question of whether a named plaintiff purchasing a certificate issued by one MBS trust has standing to represent a class which includes purchasers of certificates issued by trusts from which that plaintiff did not purchase, where the action is against a common trustee and involves repurchase rights for purportedly defective loans issued by a common originator, and (ii) an MBS trustee’s question as to whether certificates evidencing beneficial ownership interests in trusts holding multiple mortgage loans are subject to the Trust Indenture Act.
On May 7, the U.S. Attorney for the Southern District of New York announced mail and wire fraud charges against a debt settlement firm, its owner, and three of its employees. The government alleges the defendants lied to prospective customers about (i) fees associated with the company’s debt relief products, (ii) the company’s purported affiliation with the federal government and leading credit bureaus, and (iii) the results achieved for its customers. On the same day, the CFPB filed a civil complaint against the same debt relief provider and one other company in which the CFPB alleges the firms violated the FTC’s Telemarketing Sales Rule and the Dodd-Frank Act by charging consumers illegal advance fees for debt-settlement services. The CFPB is seeking to halt the operations, collect civil penalties, and obtain customer redress.
On April 29, the U.S. District Court for the Central District of California refused to certify a class seeking to challenge a mortgage servicer’s loan modification practices. Campusano v. BAC Home Loans Servicing, LP, No. 11-4609, slip op. (C.D. Cal. Apr. 29, 2013). The named borrowers allege that their mortgage servicer breached agreements to modify mortgage loans by failing to timely implement the terms of the modification agreements and claim that the servicer’s failures are pervasive and appropriate for class treatment. The court held that the class lacked commonality and typicality because the borrowers failed to demonstrate that their modification agreements were the only ones used by the servicer and that all such agreements contained identical provisions pertaining to effective dates and other material terms. The court also held that the borrowers failed to demonstrate that (i) differences in contract would be immaterial to the question of whether acceptance of a first payment binds the servicer to the agreement regardless of other contract deficiencies and (ii) the borrowers suffered harm as a result of the servicer’s quality control, validation, and repudiation procedures. The court denied the borrowers’ motion for class certification.
California Federal Court Holds Online Purchase Transactions for Shipped Merchandise Not Covered by Song-Beverly Credit Card Act
On April 30, the U.S. District Court for the Central District of California held that Section 1747.08 of the Song-Beverly Credit Card Act, which prohibits retailers from requiring personal information as a condition to completing credit card transactions, does not apply to online purchase transactions in which the merchandise is shipped or delivered to the customer. Ambers v. Buy.com, No. 13-196, slip op. (C.D. Cal. Apr. 30, 2013). The ruling extends a recent holding by the California Supreme Court in Apple Inc. v. Sup. Ct. Los Angeles, which held that the Song-Beverly provisions do not apply when the item purchased is downloaded via the Internet. In this case, the customer claimed on behalf of a putative class whose claims could total $500 million that Apple created a standard that applies the Song-Beverly protections whenever the retailer has “some mechanism” to verify the customer’s identity. The plaintiff argued that the retailer’s request as part of the purchase transaction for a phone number in addition to the shipping address violated the statutory privacy protection. The court reasoned that as explained in Apple, the state legislature intended to allow retailers to verify that a person making a card purchase is authorized to do so, and stated that the shipping address alone would not work as an anti-fraud mechanism because a person who buys merchandise online may direct shipments to addresses not related to the credit card billing address. As such, the court held that Song-Beverly privacy protection does not apply to online purchases where the merchandise is being shipped or delivered, and granted the retailer’s motion to dismiss.
On April 29, the U.S. Attorney for the Southern District of New York dropped its reverse false claims count in a pending False Claims Act case against a mortgage lender. U.S. v. Wells Fargo Bank, N.A., No. 12-7527. Although the government’s letter does not provide the reasoning behind its decision, during the recent oral argument on the lender’s motion to dismiss, the judge questioned the claim, noting that the obligation to pay at issue is conditional because it depends on an exercise of discretion by the government. The lender’s motion to dismiss remains pending.
Recently, the U.S. Court of Appeals for the Tenth Circuit affirmed in part and reversed in part a district court’s award of summary judgment to a mortgage servicer who provided a negative credit report after the borrower refinanced his home without notifying the closing agent that his servicing rights had been transferred. Llewellyn v. Allstate Home Loans, Inc., 711 F.3d 1173 (10th Cir. 2013). The district court granted summary judgment to the servicer and its foreclosure law firm after concluding that the borrower had failed to provide sufficient evidence of actual economic or emotional damages, or willfulness to support his FCRA claim. The Tenth Circuit affirmed the district court’s determination that the borrower had not provided evidence of economic damages or willfulness, but concluded that the evidence presented was sufficient to create a genuine issue of material fact about whether the borrower suffered emotional damages and reversed and remanded for further proceedings on that claim. In so doing, the court explained that borrowers can rely solely on their own testimony to establish emotional harm if they explain their injury in reasonable detail and do not rely on conclusory statements. The appellate court also affirmed the district court’s award of summary judgment in favor of the servicer on the borrower’s FDCPA claim, concluding that the servicer acquired the debt before it was in default, and thus did not qualify as a “debt collector” under the statute.
OCC Seeks Reconsideration of Order Requiring Disclosure of Non-Public Documents related to Bank’s AML/CTF Compliance
On April 24, the U.S. District Court for the Southern District of New York stayed an order that would have required a bank to disclose non-public supervisory information subject to the bank examination privilege. Wultz v. Bank of China, No. 11-1266 (S.D.N.Y. Apr. 24, 2013). The case was brought by the family of victims of a suicide bombing attack who claim that failures in the bank’s anti-money laundering and counter-terrorism financing compliance program aided and abetted international terrorism. On April 9, 2013, the court compelled the bank and the OCC to produce various investigative files and regulatory communications over their objection that the bank examination privilege protected such production. The court relied in part on a recent and unrelated Senate investigative report’s description of the OCC oversight process. The court reasoned that the OCC’s ideal supervision process, on which it based its claim of privilege, diverges from the actual process described in the Senate report, and that the actual process undermines assumptions on which other courts have relied about the likely effects of overriding the bank examination privilege. The court added that “the OCC’s supervisory mission might in some cases be helped as much as hindered by the intervention of private litigants.” In support of its motion to reconsider, the OCC argued that the court failed to properly weigh long-standing principles and that its decision “will be construed as an erosion of the bank examination privilege that ultimately will undermine the bank supervisory process.” The OCC also asserted that it never waived the privilege and appropriately and in good faith relied upon the procedures set forth under its Touhy regulation, which is designed to provide the OCC with the opportunity to review non-public OCC information in the possession of regulated entities prior to production. The OCC asked the court to vacate its prior order and order the plaintiffs to submit a Touhy request for all materials withheld on the groups of bank examination privilege. The court agreed to stay its prior order and established a briefing schedule on the motion for reconsideration, which will be completed by May 10, 2013.
On April 25, the DOJ and the National Labor Relations Board (NLRB) filed a petition seeking U.S. Supreme Court review of the D.C. Circuit Court’s January 25, 2013 decision invalidating the appointment of three NLRB members. Nat’l Labor Rel. Bd. v. Noel Canning, No. 12-1281 (cert. pet. filed, Apr. 25, 2013). The D.C. Circuit held that appointments to the NLRB made by President Obama in January 2012 during a purported Senate recess were unconstitutional. CFPB Director Richard Cordray was appointed in the same manner and on the same day as the NLRB members, and his appointment is the subject of a lawsuit currently pending in the U.S. District Court for the District of Columbia. The petition asks the Court to resolve two questions: (i) whether the President’s recess appointment power may be exercised during a recess that occurs within a session of the Senate, or is instead limited to recesses that occur between enumerated sessions, and (ii) whether the President’s recess appointment power may be exercised to fill vacancies that exist during a recess, or is instead limited to vacancies that first arose during that recess. If the Court accepts review of the case, it likely would be heard during the Court’s next session, which begins in October 2013.
On April 22, the U.S. Court of Appeals for the Ninth Circuit reversed a district court’s order approving a $45M class action settlement under FCRA on the grounds that the conditional nature of the incentive award rendered the class representatives and class counsel inadequate representatives of the absent class members. Radcliffe v. Experian Info. Solutions Inc., 11-56376, 2013 WL 1715422 (9th Cir. Apr. 22, 2013). The plaintiffs alleged that the three major credit reporting agencies issued consumer credit reports containing negative entries for debts that were already discharged through bankruptcy. The parties reached a settlement in February 2009, whereby a $45M common fund would provide an award not to exceed $5,000 to each named plaintiff, while plaintiffs suffering actual damages would receive awards ranging from $150.00 to $750.00 and the remaining class members would each recover roughly $26.00. The Ninth Circuit held that the “incentive awards” provided to the named plaintiffs “corrupt the settlement by undermining the adequacy of the class representatives and class counsel,” while the conditional nature of the awards “removed a critical check on the fairness of the class-action settlement, which rests on the unbiased judgment of class representatives similarly situated to absent class members.” The court further held that class counsel would have been disqualified under this agreement because they have a fiduciary responsibility to represent the interests of the class as a whole, and conditional incentive rewards would require class counsel to represent class members with conflicting interests. The court explained that the disparity between the awards given to the named plaintiffs and the rest of the class “further exacerbated the conflict of interest caused by the conditional incentive awards.” The court concluded that the representative plaintiffs ultimately were unable to fairly and adequately protect the interests of the class, reversed the district court’s approval of the settlement, and remanded the case for further proceedings.
The Supreme Court recently sharply narrowed the potential application of the Alien Tort Statute (ATS), which allows foreign plaintiffs to bring civil actions in U.S. district courts for torts committed in violation of the law of nations or a treaty of the United States. Kiobel v. Royal Dutch Petroleum Co., No. 10-1491, 2013 WL 1628935 (Apr. 17, 2013). Foreign plaintiffs traditionally have sought to use the ATS to hold firms liable for alleged human rights abuse committed by foreign governments. Here, a district court dismissed several claims brought by Nigerian nationals who alleged that several non-U.S. oil companies had aided and abetted the Nigerian government in committing human rights violations. On interlocutory appeal, the Second Circuit dismissed the entire complaint, reasoning that the law of nations does not recognize corporate liability. The Supreme Court unanimously affirmed on different grounds, focusing on when courts can recognize a cause of action under the ATS for violation of the law of nations occurring in a non-U.S. sovereign territory. The Court held that the presumption against extraterritorial jurisdiction applied to claims under the ATS, and nothing in the statute rebutted that presumption; even where claims touch and concern the territory of the United States, they must do so with sufficient force to displace the presumption against extraterritorial application, which requires more than mere corporate presence. The Court’s ruling further limits the risk that foreign plaintiffs might expand ATS claims into new industries, including by bringing claims against financial institutions for global financial crime such as fraud and money laundering, or for financing projects during which alleged human rights abuses are committed.
Minnesota Supreme Court Affirms that Foreclosing Parties Must Record Mortgage Assignments Prior to Initiating Foreclosure by Advertisement
On April 17, the Minnesota Supreme Court affirmed an intermediate appellate court ruling that held (i) a strict compliance standard applies to Minnesota’s foreclosure by advertisement process, and (ii) a foreclosure by advertisement is void where the foreclosing party fails to record all mortgage assignments prior to initiating the foreclosure process. Ruiz v. 1st Fidelity Loan Servicing, LLC, No. A11-1081, 2013 WL 1629192 (Minn. Apr. 17, 2013). The case arose after an assignment correcting the name of the assignee was recorded on the same day that the assignee (i) published the first notice of foreclosure sale, and (ii) recorded a notice of pendency of foreclosure. After the assignee foreclosed on the property, the mortgagor brought an action in Minnesota District Court seeking to void the foreclosure by arguing that foreclosing parties must comply strictly with Minnesota’s foreclosure by advertisement process. The district court granted summary judgment in the assignee’s favor, concluding, among other things, that a substantial-compliance standard, rather than a strict compliance standard, applies to Minnesota’s foreclosure by advertisement process. The Minnesota Court of Appeals reversed the district court on appeal, holding instead that a strict compliance standard applies to Minnesota’s foreclosure by advertisement process. On further appeal, the state supreme court analyzed the statutory language containing Minnesota’s foreclosure by advertisement process and determined that the plain language of the statute unambiguously requires all mortgage assignments to be recorded before a foreclosing party has a right to engage in the process of foreclosure by advertisement. As a result, the court determined that the assignee’s foreclosure was void and that the case should be remanded to the district court for further proceedings.
On April 15, the U.S. District Court for the Northern District of California dismissed a putative class action in which the named plaintiff brought a breach of contract claim and other common law and statutory claims after the issuer stopped providing the cardholder an interest free grace period on new charges because the cardholder transferred a balance from another card account as part of an interest free balance transfer offer and did not immediately pay off that transferred balance. Barton v. Capital One Bank (USA), N.A., No. 12-5412, slip op. (N.D. Cal. Apr. 16, 2013). Applying Virginia law, the court held that while some cardholders may have accepted the offer and transferred balances “without realizing that, because it would cause them to begin carrying a post-due balance each month, it would deprive them of the grace period they had previously enjoyed,” the agreement was clear that “carrying a post-due balance — whatever its source — terminated cardmembers’ rights to the 25-day grace period.” For the same reason, the court held the cardholder’s claim that the issuer violated the CARD Act’s requirement that a “creditor shall not change the terms governing the repayment of any outstanding balance” similarly failed. The court also held that the cardholder failed to allege any contractual discretion to support her claim of breach of good faith and dismissed her claim under California’s Unfair Competition Law.