Recently, the New York Court of Appeals, in answering questions , held that no private right of action exists for judgment debtors to seek money damages and injunctive relief against banks that allegedly violate New York’s Exempt Income Protection Act (EIPA) procedural requirements. In this case, two groups of judgment debtor plaintiffs alleged that their banks failed to provide them and other members of putative classes with exemption notices and claim forms as required by the EIPA, and asserted that the banks unlawfully froze their accounts and charged them various fees in violation of the statute. The federal district courts held that the EIPA, which provides a special exemption from satisfaction of money judgments for certain amounts and types of a debtor’s income, permits judgment debtors and creditors to bring claims against each other but provides no private right of action against the banks. On a consolidated appeal, the Second Circuit asked New York’s highest court to address the issue, given (i) there was no controlling precedent in New York that governs the cases and (ii) the questions presented involve important issues of New York state law and policy that are likely to recur. The New York Court of Appeals agreed with the federal district courts that a private right of action cannot be implied from the EIPA. As to whether judgment debtors can seek money damages and injunctive relief against banks that violate EIPA in special proceedings and, if so, whether those special proceedings are the exclusive mechanism for such relief or whether judgment debtors may also seek relief in a plenary action, the New York Court of Appeals held that the banks had no obligation under the common law to provide the notices and form, and therefore any right debtors have to enforce that obligation arises from the statute.
On November 27, the U.S. Court of Appeals for the Sixth Circuit held that HUD’s supplemental ten factor test for determining whether RESPA’s affiliated business arrangements safe harbor applies is not entitled to deference or persuasive weight, and determined that a real estate agency and its affiliated title servicers companies satisfied RESPA’s statutory affiliated business arrangements safe harbor provision. Carter v. Welles-Bowen Realty, Inc., No. 10-3922, 2013 WL 6183851 (6th Cir. Nov. 27, 2013). On behalf of a putative class, a group of homebuyers who used a real estate agency’s settlement services claimed that the agency and two title services companies violated RESPA’s referral fee prohibition. The agency and title companies asserted that they satisfied RESPA’s affiliated business arrangements safe harbor provision because (i) they disclosed the arrangement to the homebuyers, (ii) the homebuyers were free to reject the referral, and (iii) the companies only received a return from the referral through their ownership interest. The homebuyers countered that the companies must also demonstrate that they were bona fide providers of settlement services under HUD’s ten factor test for distinguishing sham business arrangements, which HUD established in a 1996 policy statement. A district court granted summary judgment in favor of the companies, finding that HUD’s ten factor test was void for unconstitutional vagueness. On appeal, the Sixth Circuit affirmed but on different grounds. The Sixth Circuit held that HUD’s policy statement is not entitled to Chevron or Skidmore deference because the statement provides only ambiguous guidelines HUD intends to consider rather than HUD’s interpretation of the statute. As a result, the companies’ compliance with the three conditions set out in the statute sufficed to obtain the exemption under the affiliated business safe harbor provision. The Sixth Circuit noted that “a statutory safe harbor is not very safe if a federal agency may add a new requirement to it through a policy statement.”
On November 15, the U.S. Supreme Court agreed to hear a challenge to the long-standing “fraud-on-the-market” theory, on which securities class actions often are based. Halliburton v. Erica P. John Fund Inc., No. 13-317, 2013 WL 4858670 (Nov. 15, 2013). Halliburton petitioned the Court after an appeals court relied on the theory to affirm class certification in a securities suit against the company, even after the appeals court acknowledged that no company misrepresentation affected its stock process. As explained in the petition, the theory at issue derives from the Court’s holding in Basic Inc. v. Levinson, 485 U.S. 224 (1988) that a putative class of investors should not be required to prove that they actually relied in common on a misrepresentation in order to obtain class certification and prevail on the merits. The petitioner argues that Basic instead allows putative class members to invoke a classwide presumption of reliance based on the concept that all investors relied on the misrepresentations when they purchased stock at a price distorted by those misrepresentations. Halliburton has asked the Court to determine (i) whether the Court should overrule or substantially modify the holding of Basic, to the extent that it recognizes a presumption of classwide reliance derived from the fraud-on-the-market theory; and (ii) whether, in a case where the plaintiff invokes the presumption of reliance to seek class certification, the defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.
On November 4, the United States District Court for the Central District of California denied certification of a putative nationwide class that alleges a mortgage servicer and lender-placed insurance (LPI) companies violated California’s Unfair Competition Law (UCL), breached mortgage contracts, and unjustly enriched themselves by improperly charging and overcharging borrowers for lender-placed insurance. Gustafson v. BAC Home Loans Servicing LP, No. 11-00915, 2013 WL 5911252 (C.D. Cal. Nov. 4, 2013). The court held that the named borrowers could not assert a UCL claim nationwide because (i) the UCL claims fell within the mortgage contracts’ choice-of-law provisions, (ii) there are material differences among the states’ consumer protection laws, (iii) foreign states have an interest in regulating conduct that was carried out, in part, within their borders, and (iv) the last event necessary to make the insurers and servicer liable occurred where the insurance premiums were charged to borrowers in their home states. The court also held that the borrowers failed to meet the commonality and predominance requirements of Rule 23 for both their breach of contract and unjust enrichment claims, in part because laws regarding breach of contract, affirmative defenses, and unjust enrichment vary from state to state. Further, the court explained that the unjust enrichment claim required individualized fact determinations as to whether (i) borrowers who are charged for LPI may either not pay for it, or not pay the full rate, and (ii) individual class members’ circumstances could preclude or reduce recovery. BuckleySandler represents lender-placed insurers in this and other similar actions.
On November 4, the United States Court of Appeals of the Seventh Circuit affirmed a trial court’s dismissal of allegations that a lender and insurer fraudulently placed insurance on the borrower’s property after the borrower’s homeowner’s policy lapsed. Cohen v. Am. Sec. Ins. Co., No. 11-3422, 2013 WL 5890642 (7th Cir. Nov. 4, 2013). The court held that the borrower’s claim under the Illinois Consumer Fraud and Deceptive Business Practices Act failed because (i) the loan agreement and the lender’s disclosures, notices, and correspondence conclusively defeat any claim of fraud, false promise, concealment, or misrepresentation, (ii) the borrower did not allege an unfair business practice because “there is nothing oppressive or unscrupulous about giving a counterparty the choice to fulfill his contractual duties or be declared in default for failing to do so,” and (ii) “[the lender] was not subject to divided loyalties; rather, it was subject to an undivided loyalty to itself, and it made this clear from the start.” The court also held that the borrower failed to state a breach of contract claim because nothing in the loan agreement and related documents prohibited the lender and its insurance-agency affiliate from receiving a fee or commission for LPI. To the contrary, the court explained, the loan agreement and related notices and disclosures specifically warned the borrower of this possibility. The court also affirmed the dismissal of the borrower’s fraud, conversion, and unjust enrichment claims for failing to state a claim as a matter of law, but on different grounds than the district court. The district court had ruled in favor of the lender and insurer based on federal preemption and the filed rate doctrine. The Seventh Circuit chose not to address those bases for dismissal in its ruling.
On November 4, the U.S. District Court for the Southern District of New York held that credit card holders may pursue statutory damages for alleged violations of Regulation Z’s short-form credit card notice requirement, even though the short-form notice requirement is contained in a section of Regulation Z that is not enumerated under TILA’s statutory damages section. Zevon v. Dept. Stores Nat’l Bank, No. 12-7799, 2013 WL 5903024, (S.D.N.Y. Nov. 4, 2013). A credit card holder filed a putative class action alleging that the monthly short-form notice provided by the issuer was incomplete and omitted provisions required by Regulation Z’s model form provision. The court rejected the card issuer’s argument that because TILA only provides card holders with a cause of action for statutory damages for specifically enumerated statutory provisions, and because the short-form notice provision is not enumerated in the statute but is set only by Regulation Z, the card holder is not entitled to statutory damages. The court explained that following the card holder’s reasoning would immunize card issuers from statutory damages for even the most egregious short-from notice violations. Instead, the court held that because the allegedly violated Regulation Z provision was promulgated pursuant to an enumerated statutory provision—TILA’s long-form notice requirement—card holders are permitted to bring claims for statutory damages for short-form violations. The court rejected the card issuer’s motion to dismiss for these reasons, but granted its motion to limit statutory damages to $500,000, holding that the Dodd-Frank Act’s increase to a $1 million cap cannot be applied retroactively to violations that allegedly occurred prior to the Act’s passage.
On October 25, the United States District Court for the Northern District of California partially denied a bank’s motion for judgment on the pleadings seeking to dispose of class claims under California’s Unfair Competition Law (UCL) based on allegations that the bank reordered debit card transactions in order to maximize overdraft fees collected in connection with such transactions and misled customers regarding this practice in account agreements and monthly checking account statements. Hawthorne v. Umpqua Bank, No. 11-06700, 2013 WL 5781608 (N.D. Cal. Oct. 25, 2013). Departing from the conclusion reached by two other district courts, the court held that the bank’s debit cards constituted a “service” for purposes of the Consumer Legal Remedies Act (CRLA), which prohibits unfair methods of competition and unfair or deceptive acts and practices so long as the challenged conduct is part of a transaction involving the intended sale or lease of goods or services to a consumer. Two prior district courts had concluded that overdrafts and overdraft fees were not services sold or leased under the CLRA, but the Hawthorne court reached the opposite conclusion relying on the fact that (i) the CLRA is liberally construed and generally applicable to financial institutions and (ii) its determination that classifying debt cards as a service for consumers was consistent with the convenience benefits consumers receive from such cards. The court granted the bank’s motion for judgment on the pleadings with respect to a number of plaintiffs’ other claims, including violation of the unfair prong of the UCL, breach of the implied covenant good faith and fair dealing, breach of contract, and unjust enrichment.
On October 21, the U.S. District Court for the Eastern District of California held that email addresses are personal identification information (PII) under California’s Song-Beverly Credit Card Act. Capp v. Nordstrom, Inc., No. 13-660-MCE-AC, 2013 WL 5739102 (E.D. Cal. Oct. 21, 2013). In this case, a customer sued a retailer on behalf of a putative class after the retailer sought the customer’s email address in connection with a credit card transaction to provide the customer with an electronic receipt. The customer alleged that the retailer subsequently used the email address to send unsolicited marketing materials. Following the California Supreme Court’s ruling in Pineda v. Williams Sonoma, in which the court held that a ZIP code is part of a person’s address and constitutes PII, the court here predicted that the state supreme court also would hold that an email address constitutes PII. Citing the statute’s broad terms and its overarching objective to protect the personal privacy of consumers who make purchases with credit cards, the district court held that the alleged conduct directly implicated the purposes of the statute. The district court also rejected the retailer’s argument that, if email addresses constitute PII, then the customer’s claim would be preempted by the CAN-SPAM Act, which regulates unsolicited commercial electronic mail, i.e. “spam.” The court held that the Song-Beverly Act claims were not subject to the CAN-SPAM Act’s express preemption clause because the Song-Beverly Act applies only to email addresses and does not regulate the content or transmission of email messages.
On October 22, the U.S. Court of Appeals for the Second Circuit overturned a district court’s denial of a motion to compel arbitration in a dispute over a deposit account rewards program and instructed the district court on how to assess whether the claims should be arbitrated. Hirsch v. Citibank, N.A., No. 13-1172, 2013 WL 5716397 (2nd Cir. Oct. 22, 2013). In this case, two individuals filed suit on behalf of a putative class of similarly situated bank customers, alleging that the bank attracted customers with promises of frequent flier miles rewards but failed to disclose that customers would be required to report part of the rewards to the IRS as income. The district court denied the bank’s motion to compel arbitration, holding that the agreement to arbitrate was not binding on the parties as the signature cards signed by the customers upon opening deposit accounts failed sufficiently to reference a document containing an arbitration provision. On appeal, the bank argued that the district court should not have relied solely on the incorporation by reference doctrine and that the court ignored the bank’s policy of providing at account opening a deposit account client manual including an arbitration provision. The Second Circuit found that the district court failed to conduct a complete analysis of incorporation by reference, and held that the district court must conduct a factual inquiry into whether the bank actually provided the client manual. The Second Circuit held that on remand the bank must sufficiently demonstrate that it had in place a corporate policy requiring provision of the client manual. Further, the court held that, because the client manual does not on its face state that it is an agreement governing the account, the bank must show that new customers are informed that the client manual governs the account and that it contains an arbitration clause.
On October 18, the United States District Court for the Southern District of New York dismissed a putative TILA class action alleging that a bank made improper interest rate disclosures on credit card bills and assessed incorrect late fees and interest. Schwartz v. HSBC Bank USA, N.A., No. 13-cv-00769, 2013 WL 5677059 (S.D.N.Y. Oct. 18, 2013). The card holder asserted that despite his timely payments the bank assessed him late fees and incorrectly disclosed the annual interest rate and balances on his monthly statements. The court first rejected the card holder’s disclosure claim, characterizing the alleged violations as “hypertechnical” disclosure defects that did not provide a basis for plaintiff to recover. The court held that, while the applicable TILA rule mandates the disclosure of the applicable rate, the balance to which the rate applied, and the nominal APR, the card holder did not properly allege how his statements lacked or misstated any of these required disclosures. The court also held that dismissal was warranted because the bank had refunded the alleged improper late fees before plaintiff commenced the lawsuit, and therefore plaintiff sustained no actual damages.
Recently, the U.S. Court of Appeals for the First Circuit affirmed a district court’s dismissal of a putative class action alleging that a lender improperly required borrowers of FHA-insured mortgages to buy and maintain higher flood insurance coverage than that indicated in their mortgage contracts. Kolbe v. BAC Home Loans Servicing, LP, No. 11-2030, 2013 WL 5394192 (1st Cir. Sept. 27, 2013). The ruling, from an equally divided en banc court, allows mortgage lenders to require borrowers to maintain flood insurance equal to the replacement value of their homes. The named borrower claimed that he was forced to increase his flood insurance coverage in breach of his mortgage contract with his original lender that set the required flood amount coverage. In an amicus brief filed by DOJ on behalf of HUD, the government argued that the FHA’s model mortgage form gives lenders discretion to require coverage for the replacement cost of the property in the event of a flood. The Court of Appeals agreed with the government’s interpretation of the language in the model mortgage contract and reasoned that to interpret the form otherwise would hinder federal housing policy by discouraging banks from offering FHA-insured mortgages or forcing banks to charge higher rates. Dissenting judges argued that the ruling allowed a federal agency to intervene and rewrite a contract to serve its own purposes, and that the ruling’s prediction that banks would not offer FHA mortgages or charge higher rates was speculative.
On October 4, the U.S. District Court for the Central District of California denied certification of a putative class of consumers that had alleged a major retailer’s policy of requiring online customers to provide their telephone numbers or addresses in connection with credit card purchase transactions violated the Song-Beverly Credit Card Act. Leebove v. Wal-Mart Stores, Inc., No. 13-1024, slip op. (C.D. Cal. Oct. 4, 2013). The court held that the commonality requirement for class certification was not satisfied. The court explained that the relevant provision of the Act prohibits collecting certain information from a “cardholder,” which includes only “natural persons,” and held that an individualized inquiry would need to be made regarding whether the card used by each class member was issued as a consumer or business card. The court further reasoned that individual inquiries would be required to determine whether each class member’s claim was barred under an exception that allows retailers to request certain otherwise prohibited personal information for use in shipping, delivering, servicing, or installing the purchased items.
Third Circuit Holds Securities Act Statute of Limitations Runs from Discovery, RMBS Claims Still Untimely
On September 17, the U.S. Court of Appeals for the Third Circuit held that the one-year statute of limitations in section 13 of the 1933 Securities Act establishes a discovery standard for evaluating timeliness, but held that claims brought by a putative class of investors in certain mortgage backed securities (MBS) still were untimely. Pension Trust Fund for Operating Engineers v. Mortg. Asset Securitization Transactions, Inc., No. 12-3454, 2013 WL 5184064 (3rd Cir. Sept. 17, 2013). The investors claimed that a mortgage securitizer made material omissions and misstatements in the offering and sale of certain MBS. On appeal, the court agreed with the investors that they need not plead compliance with the Section 13 statute of limitations and that the district court erred when it determined the claims to be untimely based on its holding that an inquiry standard applied to the statute of limitations. The court held that the discovery standard announced by the U.S. Supreme Court’s in Merck & Co. v. Reynolds, 130 S.Ct. 1784 (2010), in which the Court rejected the Third Circuit’s application of an inquiry standard under the Securities Exchange Act of 1934 and instead applied a discovery standard, also applies to the Securities Act. However, the court held that the investors, based on “storm warnings” they acknowledged existed more than a year before they filed their claims, could have conducted a reasonably diligent investigation earlier that would have yielded the same results as their later investigation that led to the filing of the action. The court concluded that the investors’ claims therefore were untimely and affirmed the district court’s dismissal.
On September 4, the U.S. District Court for the District of Massachusetts denied class certification of individual borrowers in a consolidated action against a national bank for allegedly mismanaging requests for HAMP modifications. In re Bank of Am. HAMP Contract Litig., No. 10-2193, 2013 WL 4759649 (D. Mass. Sept. 4, 2013). The named plaintiffs, who alleged breach of contract against the bank for issuing HAMP Trial Period Plans but then failing to provide a permanent modification or a timely written denial of eligibility, sought to certify 26 different classes, one from each state they represent. The court held that the plaintiffs failed to meet the predominance and superiority requirements of Rule 23(b) because their claims rely on numerous individual factual questions and “cannot sensibly be adjudicated on a classwide basis.” The court explained that individual questions predominate because borrowers’ claims require inquiry into each class members’ performance under the trial plans. Further, the court reasoned that class treatment would ignore those individual questions and deny the borrowers a fair trial on the merits of their claims, and determined that separate actions would more fairly and efficiently resolve the liability issues.
On August 12, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s denial of class certification to a putative class of borrowers who claimed that a bank’s policy that allegedly allowed individual brokers and loan officers to add points, fees, and credit costs to an otherwise risk-based financing rate disparately impacted minority applicants for residential mortgage loans. Rodriguez v. Nat’l City Bank, No. 11-8079, 2013 WL 4046385 (3rd Cir. Aug. 12, 2013). The district court denied class certification following the U.S. Supreme Court’s holding in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011) that a policy that allows local units discretion to act can only present a common question if the local units share a common mode of exercising that discretion. The district court did so sua sponte notwithstanding the parties’ joint motion to approve a class settlement. On appeal, the Third Circuit held that the trial court did not overstep its role in denying the class because the parties’ voluntary settlement did not eliminate or avoid the need for a rigorous judicial analysis to ensure that Rule 23 class certification requirements are satisfied. The Third Circuit further held that, in conducting that rigorous analysis, the district court correctly applied Dukes because “the exercise of broad discretion by an untold number of unique decision-makers in the making of thousands upon thousands of individual decisions undermines the attempt to claim, on the basis of statistics alone, that the decisions are bound together by a common discriminatory mode.” As such, the court held that the borrowers failed to meet their burden of demonstrating that the alleged conduct was common to all class members and affirmed the district court’s order denying class certification.