Special Alert: Second Circuit Reverses SDNY Judgment; Rules Fraud Claim Based on Contractual Promise Cannot Support FIRREA Violation Without Proof of Fraudulent Intent at the Time of Contract Execution

On May 23, in an opinion delivered by Circuit Judge Richard Wesley, the Second Circuit Court of Appeals reversed the District Court for the Southern District of New York’s (SDNY) July 30, 2014 judgment ordering a bank and its lender subsidiary to pay penalties in excess of $1.2 billion for alleged violations of section 951 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), 12 U.S.C. § 1833a. U.S. v. Countrywide Home Loans, Inc., Nos. 15-469, 15-499 (2d Cir. May 23, 2016). In relevant part, FIRREA imposes civil penalties for violations of the federal mail and wire fraud statutes that affect a federally insured financial institution. The Government had alleged in the case that the lender subsidiary had defrauded Fannie Mae and Freddie Mac (collectively, the GSEs), by originating mortgage loans through its High Speed Swim Lane (HSSL) loan origination process that it allegedly knew to be of poor quality, and subsequently selling those loans to the GSEs despite representations in the contracts between the GSEs and lender subsidiary that the loans were of investment quality. At trial, the Government presented evidence that high-level employees of the lender subsidiary “knew of the pre-existing contractual representations, knew that the loans originated through HSSL were not consistent with those representations, and nonetheless sold HSSL Loans to the GSEs pursuant to those contracts.” The defendants argued on appeal that, under common-law principles of fraud the Government’s trial evidence proved, at most, a series of intentional breaches of contract which did not suffice as a matter of law to establish fraud.

The Second Circuit agreed with defendants and reversed the judgment of the district court. The court held that:

a contractual promise can only support a claim for fraud upon proof of fraudulent intent not to perform the promise at the time of contract execution. Absent such proof, a subsequent breach of that promise—even where willful and intentional—cannot in itself transform the promise into a fraud.

Thus, the Second Circuit concluded that under common law principles, which were incorporated into the mail and wire fraud statutes, “the proper time for identifying fraudulent intent is contemporaneous with the making of the promise, not when a victim relies on the promise or is injured by it.” The Second Circuit further held that “where allegedly fraudulent misrepresentations are promises made in a contract, a party claiming fraud must prove fraudulent intent at the time of contract execution; evidence of a subsequent, willful breach cannot sustain the claim.”

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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

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Supreme Court: Special Counsel Using State AG Letterhead Not in Violation of FDCPA

On May 16, the Supreme Court reversed the Sixth Circuit’s ruling that special counsel using Ohio AG letterhead to collect debts owed to the state is false or misleading in violation of the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. §1692. Sheriff v. Gillie, No. 15-338 (U.S. May 16, 2016). In a unanimous 8-0 opinion delivered by Justice Ginsburg, the Court opined that its “conclusion is bolstered by the character of the relationship between special counsel and the [AG].” Specifically, the Court determined that, because special counsel acts on behalf of the AG to provide legal services to state clients, a “debtor’s impression that a letter from special counsel is a letter from the [AG’s] Office is scarcely inaccurate.” The Court further opined that, being required by the AG’s office to send debt collection communications, special counsel “create no false impression in doing just what they have been instructed to do.” The Court rejects the Sixth Circuit’s argument that consumers may have concern regarding the letters’ authenticity: “[t]o the extent that consumers may be concerned that the letters are a ‘scam,’ the solution is for special counsel to say more, not less, about their role as agents of the [AG]. Special counsel’s use of the [AG’s] letterhead, furthermore, encourages consumers to use official channels to ensure the legitimacy of the letters, assuaging the very concern the Sixth Circuit identified.” The Court concludes by emphasizing the AG’s authority, as the top law enforcement official, to take punitive action against consumers who owe debts, commenting that §1692e of the FDCPA prohibits collectors from deceiving or misleading consumers, but “it does not protect consumers from fearing the actual consequences of their debts.” Read more…

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New York Court of Appeals Rules on Lien Priority in Consolidated Mortgages Case

On May 10, the New York Court of Appeals affirmed the lower court’s decision that consolidated mortgages qualify as the first mortgage of record under Real Property Law article 9-B (the Condominium Act) when the mortgages were consolidated years prior to unpaid common charges (or charges lien) being filed. Plotch v. Citibank, N.A., No. 57, slip op. at 3 (N.Y. May 10, 2016). In this case, the plaintiff purchased a condominium unit subject to “‘[t]he first Mortgage of record against the premises’” in a foreclosure action in 2010. Prior to the plaintiff’s purchase, the defendant had entered into a consolidation agreement with the unit’s previous owner, whereby the former owner’s two separate mortgages of $54,000 and $38,000 “were consolidated ‘into a single mortgage lien’ for $92,000, which the owner and [defendant] intended to be treated as a single mortgage.” Citing Societe General v. Charles & Co. Acquisition (157 Misc 2d 643 [Sup. Ct., NY County 1993]), the plaintiff contended that the initial mortgage of $54,000 is, pursuant to Real Property Law § 339-z, the first mortgage of record and, therefore, the defendant’s common charges lien against the unit for unpaid charges are unlawful. Read more…

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Supreme Court Holds “Arising Under” Standard Satisfies Jurisdictional Questions

In an 8-0 opinion delivered by Justice Kagan on May 16, the Supreme Court affirmed the Third Circuit’s ruling that the “jurisdictional test established by §27 [of the Exchange Act] is the same as [28 U.S.C.] §1331’s test for deciding if a case ‘arises under’ a federal law.” Merrill Lynch v. Manning, No. 14-1132 (U.S. May 16, 2016). In this case, the defendant, an investment bank, removed plaintiff’s case against the bank for its short sale practices to Federal District Court. The bank asserted that plaintiff’s claims, which referred explicitly to the SEC’s Regulation SHO in “describing the purposes of that rule and cataloguing past accusations against [the bank] for flouting its requirements,” were within federal jurisdiction on the following two grounds: (i) 28 U.S.C. §1331 grants district courts jurisdiction of “all civil actions arising under federal law”; and (ii) §27 of the Exchange Act “grants federal courts exclusive jurisdiction of ‘all suits in equity and actions at law brought to enforce liability or duty created by [the Exchange Act] or the rules or regulations thereunder.’” The plaintiff, in seeking remand of the case back to state court, argued that neither 28 U.S.C. §1331 nor §27 of the Exchange Act granted federal court the authority to adjudicate his claims which were brought under state law – specifically, the New Jersey Racketeer Influenced and Corrupt Organizations Act (RICO), New Jersey Criminal Code, and New Jersey Uniform Securities Law, as well as New Jersey common law of negligence, unjust enrichment, and interference with contractual relations. The Supreme Court’s opinion relies heavily on the natural reading of §27: “Like the Third Circuit, we read §27 as conferring exclusive federal jurisdiction of the same suits as ‘aris[e] under’ the Exchange Act pursuant to the general federal question statute.” The Court concluded that because the plaintiff’s claims were brought under state law and merely referenced Regulation SHO, the Federal District Court did not have jurisdiction and the case was remanded to state court.

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Special Alert: SCOTUS Vacates Ninth Circuit Decision in Case Alleging Procedural FCRA Violations

On May 16, the United States Supreme Court issued an opinion vacating the Ninth Circuit’s 2014 ruling that a plaintiff had standing under Article III of the Constitution to sue an alleged consumer reporting agency as defined by the Fair Credit Reporting Act (FCRA), for alleged procedural violations of the FCRA, 15 U.S.C § 1681 et seq. Spokeo v. Robins, No. 13-1339 (U.S. May 16, 2016). According to plaintiff Thomas Robins, the reporting agency violated his individualized (rather than collective) statutory rights by reporting inaccurate credit information regarding Robins’s wealth, job status, graduate degree, and marital status in willful noncompliance with certain FCRA requirements. In a 6-2 opinion delivered by Justice Alito, the Court ruled that Robins could not establish standing by alleging a bare procedural violation because Article III requires a concrete injury even in the context of statutory violation. Here, the Ninth Circuit erred in failing to consider separately both the “concrete and particularized” aspects of the injury-in-fact component of standing. The Court opined that the Ninth Circuit’s analysis was incomplete:

[T]he injury-in-fact requirement requires a plaintiff to allege an injury that is both “concrete and particularized.” Friends of the Earth, Inc. v. Laidlaw Environmental Services (TOC), Inc., 528 U.S. 167, 180-181 (2000) (emphasis added). The Ninth Circuit’s analysis focused on the second characteristic (particularity), but it overlooked the first (concreteness). We therefore…remand for the Ninth Circuit to consider both aspects of the injury-in-fact requirement.

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