On April 21, the United States Court of Appeals for the Tenth Circuit upheld the dismissal of a bank shareholders’ suit against a bank holding company – and its officers and directors – for breach of fiduciary duty. Barnes v. Harris, No. 14-4002 WL 1786861 (10th Cir. Apr. 24, 2015) The shareholders had filed a derivative suit in 2012 against the officers and directors of the bank holding company after the bank failed in 2010 and was placed into FDIC receivership. The FDIC filed a motion to intervene in the suit, which was granted. Upon a bank’s failure, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) states the FDIC owns “all rights, titles, powers, and privileges of the [bank], and any stockholder … of such [bank] with respect to the [bank] and the assets of the [bank].” The applicability of FIRREA to a derivative suit against a failed bank’s holding company in this court was a question of first impression and the Tenth Circuit agreed with the Fourth, Seventh, and Eleventh Circuits who have all concluded FIRREA gives the FDIC sole ownership of shareholder derivative claims and state law must be used to determine if the claims are derivative. In this case, though the shareholders were alleging harm to the holding company, all of that harm was due to the failure of the bank, which was the holding company’s only asset. The claims were found to be derivative, with the exception of a poorly pleaded fraud complaint that belonged solely to the holding company, and the district court’s dismissal of all claims was affirmed.
U.S. Files Complaint Against Leading Non-Bank Mortgage Lender For Alleged Improper Underwriting Practices on FHA-Insured Loans After Lender Files Suit Against U.S. Alleging Arbitrary and Capricious Investigation Practices
On April 17, Quicken Loans filed a preemptive lawsuit against the DOJ and HUD in the Eastern District of Michigan against HUD, the HUD-IG, and DOJ, asserting that it “appears to be one of the targets (due to its large size) of a political agenda under which the DOJ is “investigating” and pressuring large, high-profile lenders into paying nine- and ten-figure sums and publicly ‘admitting’ wrongdoing, including conceding that the lenders had made ‘false claims’ and violated the False Claims Act.” Specifically, the complaint alleged that HUD, the HUD-IG, and DOJ retroactively changed the process for evaluating FHA loans, from an individual assessment of a loan’s compliance, taking into account a borrower’s individual situation, the unique nature of each property, and the specific underwriting guidelines in effect, to a sampling method which extrapolates any defects found in a small subset of loans across the entire loan population, contrary to HUD’s prior guidance and in violation of the Administrative Procedures Act. The complaint further alleged that the sampling method used by the government was flawed, and asked for declaratory and injunctive relief against the government’s use of sampling. Quicken also asked the court to rule that the FHA loans it made between 2007-2011 in fact were “originated properly in accordance with the applicable FHA guidelines and program requirements, and pose no undue risk to the FHA insurance fund,” asserting that “HUD reviewed a number of these loans and, except in a few rare instances, either concluded the loans met all FHA guidelines or that any issues were immaterial or had been cured.” Read more…
On April 15, retail company Target agreed to set aside up to $19 million to settle claims brought by MasterCard and its credit card issuers to cover operational costs and fraud-related losses resulting from a data breach incident in 2013. According to a press release issued by Target, the agreement is dependent upon, among other things, 90 percent of eligible Mastercard accounts accepting their alternative recovery offers, either directly or through their sponsoring issuers by May 20, 2015. Eligible issuers, mostly comprising of banks and credit unions, who accept the offer will be required to release any current or future claims towards Target with respect to the data breach. All eligible issuers will receive full details of the Settlement Agreement at a later time.
Northern District of California Denies Motion to Dismiss Claims of Negligent Oversight of Loan Origination Employee
On March 31, the Northern District of California denied a Michigan-based mortgage company’s motion to dismiss a Louisiana resident’s amended complaint alleging that the company was negligent in hiring and supervising a branch manager later indicted for wire and mail fraud. Theime v. Cobb, et al., No. 13-cv-03827, 2013 WL 1477718 (N.D. Cal. Mar. 31, 2015). According to the amended complaint, a California branch manager for the mortgage company separately originated and arranged residential bridge loans under a fictitious business name and solicited money from investors, including the plaintiff, to fund the loans. The Plaintiff alleged that the activities of selling second mortgage bridge loans took place in the Defendant’s California offices using some of Defendant’s resources and that the Defendant ultimately condoned the employee’s bridge loan activities. In denying the mortgage company’s motion to dismiss, the court relied on allegations that the company was aware of and encouraged the branch manager’s separate bridge loan activity and that the manager paid her staff to work in the company’s offices and commingled offices and services.
On March 31, 2015, the Second Circuit in Truman Capital Advisors LP v. Nationstar Mortgage, LLC, No. 14-cv-3533 (2d Cir. Mar. 31, 2015), affirmed the dismissal of a lawsuit involving the auction sale of hundreds of non-performing residential mortgage loan notes. Truman Capital is an investment manager that was the winning bidder in an auction of non-performing mortgage notes that were being sold by Nationstar Mortgage, a mortgage servicing company. After the auction, the mortgage servicing company exercised its contractual right not to complete the sale of the notes for the high bid price. The investment manager then sued the mortgage servicing company in the Southern District of New York, alleging that the auction terms gave the winning bidder the right to purchase the notes. The mortgage servicer defended on the grounds that the auction terms permitted the seller to refuse to enter into a contract for the sale of the notes even after a high bidder was recognized. The district court and the Second Circuit agreed, holding that no obligation would be binding on the seller unless and until the seller executed a loan sale agreement, which never occurred. BuckleySandler LLP represented Nationstar in this matter.
On March 31, U.S. Court of Appeals in the 11th Circuit concluded that the district court properly dismissed plaintiff’s FDCPA complaint, using the concept of judicial estoppel. Ward v. AMS Servicing, LLC, 2015 WL 1432982 (11th Cir. Mar.31, 2015). In this case, the court addressed whether the Defendant was incorrect in charging the Plaintiff a monthly mortgage amount agreed to in a consent order, rather than the amount stipulated in the Note. In November 2013, the Plaintiff filed suit in the district court, alleging that Defendant violated the FDCPA by falsely representing the amount of her monthly mortgage payments. In June 2009, the Plaintiff and the original servicer of her loan entered into a loan modification for her home where she agreed that her monthly payment would be $1,182.89. Thereafter, the loan was sold with the Defendant acting as the new servicer. Subsequently, the Plaintiff fell behind on her loan and sought Chapter 13 bankruptcy protection. Read more…
On March 18, the U.S. District Court for the District of Columbia dismissed a lawsuit brought by a non-profit organization challenging the $13 billion global settlement agreement entered by the U.S. Department of Justice (DOJ) and a national financial services firm and banking institution arising out of the 2008 financial crisis. Better Markets, Inc. v. U.S. Dept. of Justice, No. CV 14-190 (BAH), 2015 WL 1246104 (D.D.C. Mar. 18, 2015). The plaintiff—an advocacy group founded to “promote the public interest in the financial markets”—alleged that the DOJ’s decision to enter into the 2013 settlement agreement with the firm was in violation of the Constitution, the Administrative Procedure Act, and FIRREA. The court dismissed the lawsuit on grounds that the advocacy group lacked standing, concluding that the group had failed to show “a cognizable harm, or that the relief it seeks will redress its alleged injuries.”
On March 23, the Federal Reserve and the Office of the Comptroller of the Currency – both non-parties in the suit – filed briefs requesting that a district court reject a motion to compel discovery of over 30,000 documents held by a large bank. Arguing that the documents contain confidential supervisory information, the regulators asserted the bank examination privilege – “a qualified privilege that protects communications between banks and their examiners in order to preserve absolute candor essential to the effective supervision of banks.” As for scope, the regulators argued that the privilege covers the documents because they provide agency opinion, not merely fact, and that any factual information was nonetheless “inextricably linked” with their opinions. Additionally, they contended that the privilege is not strictly limited to communications from the regulator to the bank – instead, it may also cover communications made from the bank to the regulator and communications within the bank. As for procedure, the regulators claimed that a plaintiff is required to request the disclosure of privileged documents through administrative processes before seeking judicial relief, a requirement they contend exists even where a defendant bank also holds copies of the documents. Finally, the regulators argued in the alternative that the lead plaintiff has not shown good cause to override the qualified privilege, as the interests of the government in protecting the supervisory information outweighs the interest of the plaintiffs in production.
On March 19, a district court granted preliminary approval in which a large retailer agreed to pay $10 million to settle a class-action action suit related to a 2013 data breach, which resulted in the compromise of at least 40 million credit cards and theft of personal information of up to 110 million people. Under the proposed settlement, the retailer will deposit the settlement amount into escrow to pay individual victims up to $10,000 in damages. In addition, the proposed settlement requires the retailer to (i) maintain a written information security program and (ii) appoint a Chief Information Security Officer. The proposed settlement is pending court approval.
On March 13, a federal credit union filed a class action suit against a national retailer and parent company, alleging their actions during a September 2014 data breach injured credit unions, banks, and other financial institutions. Greater Chautauqua FCU v. Kmart Corp and Sears Holdings Corp., No. 15-cv-2228, (N.D.Ill. Mar.13,2015) The complaint contends that financial institutions (i) were required to, among other things, refund fraudulent charges, respond to a higher volume of customer complaints, and increase fraud monitoring efforts, and (ii) lost revenue due to a decrease in card usage after the breach was disclosed. The complaint alleges that the retailer failed to maintain adequate data security under applicable payment card industry standards, particularly in the wake of well-publicized data breaches at other retailers by third parties using similar techniques and malicious software. Moreover, the retailer failed to detect or notify customers for a period of at least five weeks. The complaint was filed in US District Court for the Northern District of Illinois, and alleges damages in excess of $5,000,000 for violations of the Illinois Personal Information Protection Act, the Illinois Consumer Fraud and Deceptive Business Act, and New York General Business Law, as well as negligence, and negligent misrepresentation and/or omission.
On March 9, the Supreme Court unanimously ruled that the Administrative Procedure Act (APA) does not require federal agencies to go through the formal rulemaking process when making changes to rules interpreting regulations, or “interpretive rules,” even if those changes are significant. This decision, Perez v. Mortgage Bankers Association, is of impactful significance to federal agencies and regulated entities alike because it overrules long-standing precedent—known as the D.C. Circuit’s Paralyzed Veterans doctrine—that required agencies to engage the public in the formal notice-and-comment period before issuing new interpretations of previously promulgated regulations. Here, the Court held that the Paralyzed Veterans doctrine is contrary to the APA’s rulemaking previsions and imposes unwarranted procedural obligations on federal agencies.
On March 2, the U.S. Court of Appeals for the Eleventh Circuit dismissed a homeowner’s claim that a title company violated RESPA fee-splitting bans during a refinanced mortgage closing by holding that if any real estate settlement service is rendered during a closing, fee charges for these services do not violate RESPA—regardless of whether such service is appropriate. A homeowner asserted that under state law, all real estate closing services are to be provided by a licensed attorney. Here, the title company performed all closing services and merely contracted with a law firm to provide an attorney to witness the closing, arguably not satisfying the law. The homeowner also claimed the title company unlawfully marked-up the recording fee and split it with the recording office. While holding that the homeowner satisfied standing requirements by alleging an unpaid refund as injury, the court declined to find that the title company violated RESPA. The court opined that even if it is illegal under state law to charge a settlement fee for services performed by a non-lawyer, services by both the title company and a law firm were performed nonetheless. Determining whether the fees were appropriate is not within the purview of the court or RESPA’s requirements. The marking-up of the recording fee also did not violate RESPA because both the title company and the recording office actually performed a service. The court subsequently dismissed the homeowner’s federal claims and remanded her state claims to the district court.
On February 5, the U.S. District Court for the Northern District of Illinois denied a credit reporting company’s motion to compel arbitration in a putative class action which alleged that the company sold credit scores to consumers that differed from the scores the company provided to lenders due to contrasting credit scoring models. The plaintiff alleged this practice violated provisions of the Fair Credit Reporting Act, Illinois Consumer Fraud and Deceptive Business Practices Act, and Missouri Merchandizing Practices Act, and that the credit reporting company was negligent in failing to inform consumers of the conflicting scores. The credit reporting company sought to compel arbitration on the basis of arbitration terms embedded in language in an online purchase agreement. Read more…
On March 2, the U.S. Supreme Court agreed to hear arguments to resolve claims as to whether spousal guarantors could assert ECOA as a defense against a bank’s collection efforts requiring them to guarantee their spouse’s loans. In the case at bar, two men borrowed more than $2 million to fund a real estate development company, and their wives guaranteed the loan. Subsequently, the husbands were unable to make payments and the bank declared default and ordered payment both from the company and the wives as guarantors. Later, the wives filed suit against the bank claiming the bank’s requirement that they guarantee the loans as a condition of the credit constituted discrimination on the basis of marital status. The lower court granted summary judgment in favor of the bank, and the Eighth Circuit affirmed, finding the wives were not “applicants” for credit under ECOA. Hawkins v. Community Bank of Raymore, 761 F.3d 937 (8th Cir. 2014) cert. granted, No. 14-520, 2015 WL 852422 (U.S. Mar. 2, 2015)
On March 2, an international bank agreed to pay $30 million to settle allegations that it changed the order in which customers’ debit transactions cleared in order to generate additional overdraft fees. According to the plaintiffs, the bank engaged in a practice known as “high-to-low” posting, whereby a bank orders transactions from the largest to the smallest dollar amount before posting them to the customer’s account. The bank also charged a $35 fee for each overdraft, regardless of the amount of the transaction. The plaintiffs allege that, when combined, these practices increased the number of overdraft fees paid by some customers because processing the largest charges first depleted their funds more quickly and increased the total number of transactions that failed to clear. The bank appropriately defended its practices, contending, among other things, that the claims were preempted by the National Bank Act and barred by the Uniform Commercial Code, and that the deposit agreement provided for discretion to order transactions. The settlement is scheduled to face a fairness hearing and final approval by the court.