On April 3, the U.S. District Court for the Southern District of New York certified an interlocutory appeal of an order denying a motion to dismiss filed by a group of insurers facing class allegations of unlawful lender-placed insurance practices. Rothstein v. GMAC Mortgage, LLC, No. 12-3412, 2014 WL 1329132 (S.D.N.Y. Apr. 3, 2014). In declining to dismiss the case, the court held, among other things, that the filed rate doctrine did not bar borrowers’ claims because the doctrine applies only where the challenged rate is one imposed directly by an insurer, and does not apply to lender-placed insurance where a third-party—the lender or servicer—acquires the insurance at a filed rate and bills the borrower for the costs. On the insurers’ motion for interlocutory appeal, the court held that the issue of whether the filed rate doctrine applies is a question of law that could be dispositive and for which there is substantial ground for a difference of opinion, and that the potential to avoid protracted litigation warranted certification for appeal. BuckleySandler represents the insurers in this action.
On March 21, in a suit brought by borrowers who had paid overnight delivery fees at closing, the U.S. District Court for the Central District of California held that the overnight delivery services provided by certain delivery companies to a parent company of various escrow companies were “settlement services” under RESPA and concluded that borrowers had pleaded facts sufficient to establish that defendant parent company may have violated RESPA by accepting marketing fees from certain delivery companies in exchange for “referring”—via its escrow subsidiaries—overnight delivery business to those delivery companies. Henson v. Fidelity Nat’l Fin. Inc., No. 14-cv-01240, slip op. (C.D. Cal. Mar. 21, 2014). In this case, the defendant parent company’s allegedly required its escrow subsidiaries to use certain delivery companies in connection with loan closings. Defendant parent company, in turn, allegedly received a marketing fee from those delivery companies based on the volume of business it sent to the delivery companies through its escrow subsidiaries. On the parent company’s motion to dismiss, the court held that the overnight delivery service was a “settlement service” under RESPA given that Regulation X specifically lists a “delivery” as a settlement service if provided in connection with a real estate settlement. The court further held that a “referral” under RESPA need not be linked to particular transactions and thus that a RESPA violation could occur where a master agreement required subsidiaries to use certain delivery service providers in exchange for a marketing fee received by a parent company. However, the court agreed with the defendant that the borrowers failed to adequately plead either a split of an unearned fee or that defendant did not perform any service in exchange for the marketing fee it received. Thus the court denied, in part, and granted, in part, the defendant’s motion to dismiss.
On March 19, the U.S. Court of Appeals for the Seventh Circuit held that a retailer’s credit card upgrade program that replaced existing customers’ limited use store charge cards with unsolicited general use credit cards did not violate TILA, and affirmed the district court’s dismissal of a putative class action. Acosta v. Target Corp., No. 13-2706, 2014 WL 1045202 (7th Cir. Mar. 19, 2014). Under the upgrade program, the retailer automatically issued new general purpose cards to existing store card customers and closed the old account upon either the activation of the new account or rejection by the consumer of the new card. The class representatives claimed that the program constituted an offer to change the underlying account relationship and violated TILA’s prohibition on the mailing of unsolicited credit cards. The court held that the program fell within TILA’s exemption for substitute cards based on the common understanding of “substitution” and the Federal Reserve Board staff’s Regulation Z commentary. The court also rejected the cardholders’ argument that they were fraudulently induced to accept the new card. The court determined that the retailer disclosed the reasons for a change in the APR and did not raise the rate unless payments were missed, and sufficiently disclosed the potential for a change in credit limit. The court also held that the retailer’s omission of the fact that cardholders could take steps to retain their store card account was not fraudulent, and added that to hold otherwise would require the retailer “to disclose any condition that could theoretically be negotiated with the card issuer.” The court also affirmed the dismissal of the cardholders’ breach of contract and tortious interference claims.
Data Breach Class Settlement Approved After Eleventh Circuit Held Identity Theft Following Breach Presents Cognizable Injury
Recently, the U.S. District Court for the Southern District of Florida approved a class settlement in a case in which the plaintiffs claimed financial harm from a health care company’s failure to protect their personal information. Resnick v. AvMed Inc., No. 10-24513 (S.D. Fla. Feb. 28, 2014). The settlement follows a September 2012 decision from the U.S. Court of Appeals for the Eleventh Circuit, in which the court reversed the district court’s dismissal of the case and held that because the complaint alleged financial injury, and because monetary loss is cognizable under Florida law, the plaintiffs alleged a cognizable injury. The court explained that the plaintiffs demonstrated “a sufficient nexus between the data breach and the identity theft beyond allegations of time and sequence” because the plaintiffs plead that they were careful in protecting their identities and had never been victims of identity theft. The settlement requires the company to pay $3 million, with each class member receiving up to $10 for each year they paid an insurance premium, up to a maximum of $30. The company also agreed to implement new data security measures.
On March 5, the U.S. District Court for the Eastern District of New York held that the named plaintiffs lack standing to bring claims in a multidistrict class action alleging illegal overdraft practices by a national bank. In re HSBC Bank, USA, N.A., Debit Card Overdraft Fee Litigation, No. 13-md-2451, 2014 WL 868827 (E.D.N.Y. Mar. 5, 2014). The three consolidated actions are similar to numerous actions filed against national banks across the country in which bank customers have alleged, generally, that banks manipulated debit card transactions to increase the number of overdraft fees charged to customers by re-ordering daily transactions from highest to lowest dollar amount, resulting in a higher number of individual overdraft transactions. On the bank’s motion to dismiss in this case, the court held that the named plaintiffs never lived or conducted business in 10 of the 12 states where the allegations arose and therefore lacked standing under the applicable state statutes giving rise to the claims. The court added that if the plaintiffs sought to add representatives from the other states, it would be difficult for the court to adjudicate the claims given the discrepancies between state laws. The court dismissed numerous claims under the laws of the two remaining states (California and New York), but allowed the plaintiffs breach of implied covenant and good faith and fair dealing claims under both New York and California law, and claims under California’s Unfair Competition Law and False Advertising Law, to proceed.
On February 26, the Supreme Court held that the Securities Litigation Uniform Standards Act of 1998 (Securities Litigation Act) does not preclude four state-law based class actions against firms and individuals who allegedly helped Allen Stanford conceal a multi-billion dollar Ponzi scheme because Stanford’s alleged misrepresentations were not material to the plaintiffs’ decisions to buy or sell a covered security and thus were not made “in connection with” the purchase or sale of a covered security. Chadbourne & Parke LLP v. Troice, No. 12-79, 2014 WL 714697 (2014). The Court explained that the Securities Litigation Act specifically forbids plaintiffs from bringing state-law based class actions if the plaintiffs allege “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.” In this case, the plaintiffs were investors who purchased uncovered securities (certificates of deposit in Stanford International Bank) with the expectation that Stanford would use the proceeds to purchase covered securities (securities traded on a national exchange). Stanford instead used the proceeds to finance his Ponzi scheme and invest in speculative real estate ventures. The Court, by a 7-2 margin, concluded that Stanford’s misrepresentations were not made “in connection with” the purchase or sale of a covered security because the misrepresentations did not lead anyone to buy, sell, or maintain positions in covered securities. Rather, Stanford’s misrepresentations induced the plaintiffs to take positions in uncovered securities (the certificates of deposit). The court reasoned that the “in connection with” phrase suggests a connection that matters, and a connection only matters “where the misrepresentation makes a significant difference to someone’s decision to purchase or to sell a covered security, not to purchase or sell an uncovered security.” Thus, the Court determined that the Securities Litigation Act’s prohibition on state law-based class actions did not apply to the plaintiffs in this case, and affirmed the Fifth Circuit’s order reversing the district court’s dismissal of the plaintiffs’ claims.
On February 20, the U.S. District Court for Central District of California dismissed with prejudice a putative class action against several large mortgage servicers because the named borrowers failed to properly plead their allegations that the servicers stonewalled loan modification applications in order to continue earning servicing fees. Casault v. Federal National Mortgage Association, No. 11-10520, 2014 WL 689884 (C.D. Cal. Feb. 20, 2014). In their third amended complaint, the borrowers alleged three causes of action against the servicers: (i) fraud; (ii) violation of California’s Unfair Competition Law (UCL); and (iii) violation of the Rosenthal Act, California’s version of the FDCPA. The court granted the servicers’ motion to dismiss the fraud allegation because they failed to allege any causal connection between the scheme and the borrowers’ foreclosure. The borrowers alleged only that the foreclosures were the result of their inability to make their mortgage payments, even after receiving loan modifications. The court dismissed the UCL claim because the borrowers could not demonstrate a right to a loan modification—through contract, promissory estoppel, or some other theory—and, as a result, could not prove injury in fact. Finally, the court dismissed the borrowers’ claims under the Rosenthal Act because they failed to allege facts demonstrating that their loans defaulted prior to the debt being assigned to the servicers.
On January 14, the U.S. Supreme Court unanimously held that an action filed by a state attorney general seeking restitution on behalf of hundreds of the state’s citizens who are not themselves parties to the action is not a “mass action” within the meaning of the Class Action Fairness Act (CAFA), and that such a suit cannot be removed to or filed in federal court under that Act. Mississippi ex rel. Hood v. AU Optronics Corp., No. 12-1036, 2014 WL 113485 (Jan. 14, 2013). In this case, defendants in a civil suit brought by the Mississippi Attorney General on behalf of allegedly harmed state citizens sought to invoke CAFA’s provision allowing the removal of “mass actions,” those “in which monetary relief claims of 100 or more persons are proposed to be tried jointly on the ground that the plaintiffs’ claims involve common questions of law or fact.” The district court and Fifth Circuit looked to the “real parties in interest”—the more than 100 allegedly harmed state citizens—and determined that the case qualified as a mass action. The Court disagreed and held that under a plain reading of CAFA, “100 or more persons” refers to named plaintiffs, not unnamed parties in interest. The Court explained that (i) CAFA uses “persons” and “plaintiffs” the same way they are used in Federal Rule of Civil Procedure 20, i.e. as individuals who are proposing to join as “plaintiffs” in a single action; and (ii) “claims of 100 or more” unnamed individuals cannot be “proposed to be tried jointly on the ground that the. . . claims” of some completely different group of named plaintiffs “involve common questions of law or fact.” Further, the Court determined that (i) the CAFA provision that a “mass action” removed to federal court may not be transferred unless a majority of plaintiffs so request would be unworkable if “plaintiffs” included unnamed real parties in interest; and (ii) Congress did not intend that courts conduct an inquiry into the real parties in interest. The Court declined to reach the issue of whether other state attorney general cases could be deemed class actions under different facts. In the rulings below, both the district and appeals courts rejected defendants’ argument that the suit was a class action. The Court also did not reach the issue present in the underlying decisions of whether the suit fell within the “general public” exemption to CAFA mass actions.
On January 3, the U.S. District Court for the Northern District of California dismissed with prejudice a putative class action alleging a bank breached its Home Equity Conversion Mortgage Deed of Trust and HUD regulations by failing to provide a surviving heir notice and opportunity to purchase the property at 95 percent of its appraised value. Chandler v. Wells Fargo Bank, N.A., No. 11-3831, 2014 WL 31315 (N.D. Cal. Jan. 3, 2014). The court held that the plain language of the deed does not require such notice, in part because the relevant section of the deed that requires the lender to provide notice when the loan becomes due and payable and an option to purchase the property for 95 percent of its appraised value prior to foreclosure (i) specifically does not include as a triggering event the death of the borrower, and (ii) grants rights to the borrower, not the borrower’s heirs. The court also rejected the heir’s claims that HUD regulations required the same notice and opportunity to purchase. The court held that the HUD regulations were not incorporated into the deed, and, even if they were and could be read to allow an heir to take advantage of the 95 percent rule, the applicable HUD interpretation of those regulations at the time required full payment of the debt.
On December 3, the U.S. Court of Appeals for the Second Circuit held that federal rules govern when determining whether a federal TCPA suit may proceed as a class action and reinstated a case dismissed based on New York state class action rules. Bank v. Independence Energy Group LLC, No. 13-1746, 2013 WL 6231563 (2nd Cir. Dec. 3, 2013). A federal district court dismissed, sua sponte, a TCPA class action complaint based on the application of New York state civil procedure, which prohibits class-action suits for statutory damages. On appeal, the Second Circuit agreed with the named plaintiff that, based on the U.S. Supreme Court’s holding last year in Mims v. Arrow Financial Services, LLC, 132 S. Ct. 140 (2012), Federal Rule of Civil Procedure 23 applies when deciding whether a federal TCPA suit can proceed as a class action. In Mims, the Court had held that TCPA Section 227(b)(3) permits private parties to bring an action in an appropriate state court, but does not require that private actions seeking redress under the TCPA be heard only by state courts. Here, the Second Circuit reasoned that Mims “suggests that in enacting the TCPA, Congress merely enabled states to decide whether and how to spend their resources on TCPA enforcement,” and that “Congress had a strong federal interest in uniform standards for TCPA claims in federal court.” Based on Mims, the Second Circuit rejected its prior interpretation of section 227(b)(3) as having “substantive content” and providing a delegation of authority to state courts to set the terms of TCPA claims. Accordingly, the court held that Federal Rule of Civil Procedure 23, not state law, governs when a federal TCPA suit may proceed as a class action.
On December 12, the CFPB published the preliminary results of its ongoing study of arbitration agreements in consumer finance contracts. Section 1028(a) of the Dodd-Frank Act directs the CFPB to study the use of pre-dispute arbitration contract provisions, and preconditions the CFPB’s exercise of rulemaking authority regarding arbitration agreements on a finding that the regulation is “in the public interest and for the protection of consumers.” The CFPB commenced its arbitration study in early 2012, and expanded its review this year with a proposal to survey credit card holders, and by exercising its authority under Dodd-Frank Act Section 1022 to order some companies to provide template consumer credit agreements, as Director Cordray indicated during a September House Financial Services hearing.
The CFPB reports the following preliminary results, among others:
- Larger banks are more likely to include arbitration clauses in their credit card contracts and checking account contracts than smaller banks and credit unions.
- Just over 50% of credit card loans outstanding are subject to arbitration clauses, while 8% of banks, covering 44% of insured deposits, include arbitration clauses in their checking account contracts.
- Arbitration clauses are prevalent across the general purpose reloadable (GPR) prepaid card market, with arbitration clauses appearing in the cardholder contracts for 81% of GPR prepaid cards studied by the CFPB.
- Class action waivers are ubiquitous, appearing in approximately 90% of arbitration provisions.
- A minuscule number of consumers exercise contract carve-outs permitting disputes to be pursued in small claims courts, while credit card issuers are “significantly more likely” to sue consumers in small claims court.
The CFPB did not consider specific policy options at this stage. However, the report outlines numerous additional steps the CFPB plans to take as part of its arbitration study, which may expand to include other financial product markets. For example, in response to stakeholder comments, the CFPB is revising a prior proposal to conduct a survey of consumers that addresses consumer awareness of arbitration clauses and consumer perceptions of and expectations about formal dispute resolution. The CFPB also intends to assess the possible impact of arbitration clauses on the price of consumer financial products. Finally, the CFPB is examining the interrelationship between public enforcement and private aggregate enforcement (i.e., class actions) by conducting an empirical analysis of the types of cases brought by public and private actors, and the relationship between any actions against the same defendants or challenging similar conduct. The report does not provide anticipated timelines for these or any of the other future steps the Bureau describes.
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.”
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 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.