Recently, the U.S. Court of Appeals for the Third Circuit upheld a lower court’s decision to dismiss a class action lawsuit against a large financial institution for allegedly violating Section 8 of RESPA. Riddle v. Bank of America Corp., No. 13-4543 (3rd Cir. Oct. 15, 2014).The complaint, originally filed in 2012, alleged that, between 2005 and 2007, the defendant profited hundreds of millions of dollars from illegal referrals from private insurance companies. The plaintiffs failed to prove that the defendant engaged in fraudulent concealment that the plaintiffs relied upon. As a result, the Third Circuit dismissed the plaintiffs’ claim, citing the expiration of the one-year statute of limitations. The court noted, “the clock has run on the plaintiffs’ RESPA claims, and despite ample opportunity, they are unable to create a triable fact that they are entitled to equitable tolling.”
On October 21, a federal judge dismissed the claims brought by the State AG that the GSEs violated state law by putting limits on the sale of pre- and post-foreclosure homes. Commonwealth v. Fed. Hous. Fin. Agency, No. 14-12878-RGS, 2014 BL 295733 (D. Mass. Oct. 21, 2014). In this case, the State argued that the GSEs violated a state law by refusing to sell homes in foreclosure to nonprofit organizations who intended to restructure the loan and sell or rent the property back to the original homeowner at a lower price. The 2012 state law forbids banks and lenders from refusing to consider offers from legitimate buyback programs solely because the property will be resold to the former homeowner. The judge dismissed the lawsuit agreeing with the FHFA, conservator of the GSEs, that the Housing and Economic Recovery Act of 2008 (HERA) allows the FHFA to enforce restrictions under its conservatorship mandate authorized by Congress. Further, the judge noted that “Congress, by enacting HERA’s Anti-Injunction Clause, expressly removed such conservatorship decisions from the courts’ oversight.” The State is expected to appeal the decision.
Third Circuit Reverses Lower Court Decision, Rules Envelope Revealing Consumer’s Account Number Violates the FDCPA
Recently, the U.S. Court of Appeals for the Third Circuit reversed a lower court’s holding that the disclosure of a consumer’s account is not a “benign” disclosure and, therefore, violates the FDCPA. Douglass v. Convergent Outsourcing, No. 13-3588, 2014 WL 4235570 (3d Cir. Aug. 28, 2014). In this case, a debt collector sent a consumer a dunning letter in a window envelope, and the consumer’s account number was visible through the window. The consumer brought a claim under § 1692f(8) of the FDCPA, which bars debt collectors from using any language or symbol other than the collector’s address on any envelope sent to the consumer. The debt collector contended that the claim must fail because the account number was “benign language” that was not prohibited by § 1692f(8) of the FDCPA. The Third Circuit held that even if “benign language” was exempt from § 1692f(8)’s prohibition (a question that the court declined to decide), the consumer’s account number was not benign. In particular, the court noted that the disclosure of the account number threatened the consumer’s privacy because it was a “core piece of information pertaining to the status as a debtor and the debt collection effort.”
On October 2, the Eleventh Circuit affirmed a district court’s decision refusing to compel arbitration sought by a servicer in a dispute with a borrower over the terms of a loan agreement. Inetianbor v. Cashcall, Inc. No. 13-13822 (11th Cir. 2014). In Inetianbor, the plaintiff and the servicer had a dispute as to whether the borrower had satisfied his obligations under the terms of the loan agreement. When the borrower refused to pay amounts the servicer believed it was due, the servicer reported the purported default to the various credit agencies. The borrower sued the servicer who subsequently moved to compel arbitration under the terms of the loan agreement. The loan agreement’s forum selection clause required any dispute be resolved in arbitration by the Cheyenne River Sioux Tribal Nation (the “Tribe”). The Tribe, however, declined to arbitrate the dispute. The district court allowed the suit to proceed in federal court on the grounds that the arbitral forum was not available to hear the dispute. On appeal, the Eleventh Circuit affirmed the district court’s refusal to compel arbitration. The Eleventh Circuit held that the forum selection clause was integral to the loan’s arbitration provision. Because the arbitral forum was unavailable to hear the dispute, arbitration was not an option under the terms of the agreement and the district court was correct in refusing to compel arbitration.
On October 2, the U.S. Supreme Court granted certiorari in Texas Department of Housing and Community Affairs, et al. v. The Inclusive Communities Project, Inc., No. 13-1371, a case in which the Fifth Circuit became the first federal Circuit Court of Appeals to apply the Department of Housing and Urban Development’s (HUD) “effects test” rule (see The Inclusive Communities Project, Inc., v. Texas Department of Housing and Community Affairs, et al., Nos. 12-11211, 13-10306 (747 F.3d 275, March 24, 2014)), which authorizes so-called “disparate impact” or “effects test” claims under the Fair Housing Act (FHA). In granting cert., the Supreme Court accepted one of the two questions presented by the petitioners, which was, “Are disparate-impact claims cognizable under the [FHA]?” It did not accept the second question: “If disparate-impact claims are cognizable under the [FHA], what are the standards and burdens of proof that should apply?” The Supreme Court’s partial grant of the petition represents the third recent matter in which the Court has taken up the issue of whether disparate impact claims may be brought under the FHA. The first opportunity ended in February, 2012 when petitioners in Magner, et al. v Gallagher, et al., No. 10-1032, stipulated to dismissal due to concerns that “a victory could substantially undermine important civil rights enforcement throughout the nation.” The Court’s second opportunity, Township of Mount Holly, New Jersey, et al., v. Mt. Holly Gardens Citizens in Action, Inc., et al., No. 11-1507, was dismissed in November 2013, just prior to oral argument after a settlement was reached by the parties.
Nevada Supreme Court Holds Foreclosure Of A Homeowners Association’s Assessment Lien Extinguishes A First Mortgage
On September 18, the Nevada Supreme Court decided that a homeowners association may foreclose its assessment lien non-judicially and that the foreclosure extinguishes a first mortgage. SFR Investments Pool v. US Bank (130 Nev. Adv. Opinion 75, September 18, 2014). The lender argued that, because the “superlien” law gives an HOA lien priority over a first mortgage to the extent of nine months of unpaid dues, only nine months of unpaid dues should have priority over a first mortgage, not the entire assessment lien. The Nevada Supreme Court acknowledged competing views of “payment priority” and “lien priority” proponents, but ultimately sided with the lien priority camp because of the language of the superlien statute and general principles of lien priority. The Court suggested that lenders may prevent losses associated with HOA superliens by paying off the liens or by establishing escrow accounts for HOA assessments to avoid using its own funds. The Nevada decision is consistent with an August 28 decision on the same issue by the D.C. Court of Appeals in Chase Plaza Condominium Association v. JP Morgan Chase Bank, No. 13-CV-623 & 13-CV-674 (D.C. Cir. 2014).
Second Circuit Denies Injunctive Relief to Tribe-Owned Online Lenders Seeking Protection From New York State Regulator
On October 1, the Second Circuit affirmed the denial of a preliminary injunction sought by Native American online lenders that would have prevented the New York State Department of Financial Services (“DFS”) from restricting their lending to New York residents. Otoe-Missouria Tribe v. New York State Dept. of Fin. Servs., No. 13-3769-cv (2d Cir. 2014). The lawsuit stems from the DFS’ efforts, led by Superintendent Benjamin Lawsky, to crack down on internet-based, short-term lending businesses. As part of this effort, the DFS is seeking to bar plaintiffs—two Native American tribes allegedly providing internet loans with triple-digit interest rates—from extending loans to New York residents that violate New York’s usury laws. Plaintiffs brought suit seeking to enjoin the DFS from interfering with the tribes’ online lending business, arguing that the state’s efforts to curb their online business violated the Indian Commerce Clause because it infringed on the tribes’ fundamental right to self-government. The court rejected this argument, finding that the state’s action was directed at activity that took place entirely off tribal land and involved New York residents who sought loans without leaving the state.
Eastern District Court Of Texas Enjoins Bitcoin Investment Scheme And Orders Founder To Pay Civil Penalty
On September 18, the U.S. District Court for the Eastern District of Texas held that the defendant’s bitcoin investment program was a Ponzi scheme, and enjoined the founder and the investment program from violating Section 10(b) of the Securities Exchange Act of 1934 and Sections 5 and 17(a) of the Securities Act of 1933. S.E.C. v. Shavers, No. 4:13-CV-416 (E.D. Tex. Sep. 18, 2014). The court ruled that the founder knowingly and intentionally operated the bitcoin investment program as a sham and Ponzi scheme by repeatedly making misrepresentations, both to investors and potential investors alike, concerning: (i) the use of their bitcoins; (ii) how he planned to generate the promised returns; and (iii) the safety of the investments. The founder used new bitcoins received from investors to make payments on outstanding bitcoin investments, and diverted investors’ bitcoins for his own personal use. The court granted Plaintiff’s uncontested motion for summary judgment or, in the alternative, for default judgment, and, in addition to the injunctions, ordered Defendants jointly and severally liable for disgorgement of approximately $40 million in profits, and ordered each Defendant to pay civil penalties in the amount of $150,000.
Federal Appeals Court Upholds District Court Order Barring Telemarketers From Selling Mortgage And Debt Relief Programs
This month, the U.S. Court of Appeals for the Sixth Circuit issued a decision to uphold the District Court of Northern Ohio’s earlier ruling prohibiting the defendants from selling false mortgage assistance and debt relief programs through a telemarketing scheme. F.T.C. v. E.M.A. Nationwide, Inc., No. 1:12-CV-2394 (N.D. Ohio Aug. 27, 2013). Since at least mid-2010, the defendants were allegedly deceiving consumers by promising that the programs would “help them pay, reduce, or restructure their mortgage and other debts.” According to the FTC’s press release, in September 2012, the defendants were charged with violations of: (i) the FTC Act; (ii) the Commission’s Telemarketing Sales Rule; and (iii) the Mortgage Assistance Relief Services Rule. The court ordered the defendants to jointly pay restitution of more than $5.7 million to the consumers affected by the fraudulent practices.
On September 8, the Court of Chancery of the State of Delaware upheld a bylaw of a Delaware corporation that designated an exclusive forum other than Delaware for resolution of actions against the company and its directors. City of Providence v. First Citizens BancShares Inc., No. 9795-CB, 2014 WL 4409816 (Del. Ch. Sept. 8, 2014). The company adopted the forum selection bylaw on June 10, 2014, the same day it announced a merger agreement with a holding company incorporated and based in South Carolina. The clause states that any (i) derivative action or proceeding brought on behalf of the company, (ii) claim of breach of fiduciary duty brought against a director, officer, or other employee, (iii) action brought under the General Corporation Law of Delaware, and (iv) action brought under the internal affairs doctrine must be brought in the Eastern District of North Carolina (or, if that court does not have jurisdiction, any North Carolina state court with jurisdiction). The plaintiff challenged that provision as invalid under Delaware law and/or public policy. The court granted the defendants’ motion to dismiss, relying on analysis used in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del Ch. 2013) (upholding a forum selection clause requiring litigation relating to internal affairs of a company take place in Delaware). The court held that the forum selection clause was facially valid, explaining that the fact that the forum selected was outside of Delaware did not raise any concerns about the clause’s validity, noting that North Carolina was the “second most obviously reasonable forum” because the company is headquartered there. Further, the court noted that the clause stated it was enforceable “to the fullest extent permitted by law,” meaning that any claims that may only be asserted in Delaware were not precluded by the bylaw. The court also rejected the plaintiff’s argument that the company’s board breached its fiduciary duties in adopting the bylaw in question and determined that the plaintiff had failed to demonstrate that it would be “unreasonable, unjust, or inequitable” to enforce the forum selection clause.
This week, six financial services trade associations submitted an amicus brief in Jesinoski v. Countrywide Home Loans, Inc., No. 13-684, a case pending before the U.S. Supreme Court that may resolve a circuit split over whether a borrower seeking to rescind a home mortgage loan under TILA must file suit within three years of consummating the loan, or if written notice within the three years of consummating the loan is sufficient to preserve a borrower’s right of rescission. The brief, submitted in support of Respondents, argues that the latter interpretation would harm not only creditors, but also borrowers and courts, by clouding title to properties, increasing litigation costs, and diverting delinquent borrowers from other productive means to save their homes. The majority of the circuit courts that have addressed the issue have agreed that a borrower must file suit within the three-year rescission period. The trade association brief was filed by BuckleySandler attorneys Jeff Naimon, Kirk Jensen, Sasha Leonhardt, and Alexander Lutch.
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 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 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.”