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9th Circuit: Incomplete loan modification application bars plaintiff's CA Homeowner Bill of Rights claims
On May 11, the U.S. Court of Appeals for the Ninth Circuit affirmed dismissal of a plaintiff’s allegations that a lender violated RESPA and the California Homeowner Bill of Rights (HBOR), breached its contract, and breached the implied covenant of good faith and fair dealing. The court also dismissed the plaintiff’s request for promissory estoppel. In affirming the district court, the appellate court determined that the plaintiff’s HBOR claims failed, specifically because the plaintiff insufficiently showed that she incurred actual damages because of a RESPA violation. The appellate court also agreed that the plaintiff’s HBOR claims failed because she did not submit a complete application. Under HBOR, mortgage servicers are prohibited from reporting a notice of default if a lender’s “complete application for a first lien loan modification” is pending. The appellate court concluded that the plaintiff failed to sufficiently show that she had submitted a complete loan modification application, and did not demonstrate that she took follow-up action in response to a letter stating her loan modification application was incomplete, meaning her claim failed.
With respect to the plaintiff’s remaining claims, the 9th Circuit held, among other things, that the lender’s “alleged promise to consider plaintiff’s loan modification application upon dismissal of her lawsuit was neither sufficiently definite to create a contract nor sufficiently ‘clear and unambiguous to support a promissory estoppel.’” Moreover, the plaintiff’s claim for breach of the covenant of good faith and fair dealing also failed because she could not prove breach of contract. Specifically, she did not state a claim for breach of the deed of trust because, as the plaintiff herself noted, “she failed to perform under the deed of trust when she did not make loan payments, and performance under the contract is a necessary element of a breach of contract claim.”
The dissenting judge disagreed with the majority in two key respects. First, the judge argued the majority wrongfully rejected the plaintiff’s HBOR claim because the complaint contended that the lender “would send out such boilerplate letters so that it did not have to comply with the requirement that it cease foreclosure activities once an application is complete,” and that “a lender’s bad faith conduct does not render a borrower’s application incomplete.” Regarding the plaintiff’s good faith and fair dealing claim, the judge argued that the plaintiff plausibly alleged that she submitted a complete application to the lender. According to the complaint, the plaintiff submitted the necessary documents and was allegedly informed by the lender’s lawyer that “her application was ‘in review, which meant that plaintiff’s application was complete.’”
CFPB, FTC weigh in on consumer reporting obligations under the FCRA
On May 5, the CFPB and FTC filed a joint amicus brief with the U.S. Court of Appeals for the Second Circuit, seeking the reversal of a district court’s decision which determined that a consumer reporting agency (CRA) was not liable under Section 1681e(b) of the FCRA for allegedly failing to investigate inaccurate information because the inaccuracy was “legal” and not “factual” in nature. The agencies countered that the FCRA, which requires credit reporting companies to follow reasonable procedures to assure maximum possible accuracy of the information included in consumer reports, “does not contain an exception for legal inaccuracies.”
The plaintiff noticed that the CRA reported that she owed a balloon payment on an auto lease that she was not obligated to pay under the terms of the lease. After the plaintiff confirmed she did not owe a balloon payment, she filed a putative class action against the CRA contending that it violated the FCRA by inaccurately reporting the debt. The CRA countered that it could not be held liable because “it is not obligated to resolve a legal challenge to the validity of the balloon payment obligation reported by” the furnisher “and that it reasonably relied on [the furnisher] to report accurate information.” Moreover, the CRA argued that even if it did violate the FCRA, the plaintiff was not entitled to damages because the violation was neither willful nor negligent. The district court sided with the CRA, drawing a distinction between factual and legal inaccuracies and holding that whether the plaintiff actually owed the balloon payment was a “legal dispute” requiring “a legal interpretation of the loan’s terms.” According to the district court, “CRAs cannot be held liable when the accuracy at issue requires a legal determination as to the validity of the debt the agency reported.” The court further concluded that since the plaintiff had not met the “threshold showing” of inaccuracy, the information in the consumer report “was accurate,” and therefore the CRA was “entitled to summary judgment because ‘reporting accurate information absolves a CRA of liability.’”
In urging the appellate court to overturn the decision, the agencies argued that the exemption for legal inaccuracies created by the district court is unsupported by statutory text and is not workable in practice. This invited defense, the FTC warned in its press release, “invites [CRAs] and furnishers to skirt their legal obligations by arguing that inaccurate information is only legally, and not factually, inaccurate.” The FTC further cautioned that a CRA might begin manufacturing “some supposed legal interpretation to insulate itself from liability,” thus increasing the number of inaccurate credit reports.
Whether the plaintiff owed a balloon payment and how much she owed “are straightforward questions about the nature of her debt obligations,” the agencies stated, urging the appellate court to “clarify that any incorrect information in a consumer report, whether ‘legal’ or ‘factual’ in character, constitutes an inaccuracy that triggers reasonable-procedures liability under the FCRA.” The agencies also pressed the appellate court to “clarify that a CRA’s reliance on information provided by even a reputable furnisher does not categorically insulate the CRA from reasonable-procedures liability under the FCRA.”
The Bureau noted that it also filed an amicus brief on April 7 in an action in the U.S. Court of Appeals for the Eleventh Circuit involving the responsibility of furnishers to reasonably investigate the accuracy of furnished information after it is disputed by a consumer. In this case, a district court found that the plaintiff, who reported several fraudulent credit card accounts, did not identify any particular procedural deficiencies in the bank’s investigation of her indirect disputes and granted summary judgment in favor of the bank on the grounds that the “investigation duties FCRA imposes on furnishers [are] ‘procedural’ and ‘far afield’ from legal ‘questions of liability under state-law principles of negligence, apparent authority, and related inquiries.’ Moreover, the district court concluded that there was no genuine dispute as to whether the bank conducted a reasonable investigation as statutorily required. The Bureau noted in its press release, however, that the bank “had the same duty to reasonably investigate the disputed information, regardless of whether the underlying dispute could be characterized as “legal” or “factual.” In its brief, the Bureau urged the appellate court to, among other things, reverse the district court’s ruling and clarify that the “FCRA does not categorically exempt disputes presenting legal questions from the investigation furnishers must conduct.” Importing this exemption would run counter to the purposes of FCRA, would create an unworkable standard that would be difficult to implement, and could encourage furnishers to evade their statutory obligations any time they construe the disputes as “legal.” The brief also argued that each time a furnisher fails to reasonably investigate a dispute results in a new statutory violation, with its own statute of limitations.
1st Circuit: Bankruptcy Code “unequivocally strips tribes” of their sovereign immunity to sue
On May 6, the U.S. Court of Appeals for the First Circuit reversed a district court’s decision, ruling that American tribes are not exempt from federal law barring suits against debtors once they file for bankruptcy. The debtor (plaintiff) in 2019 took out a $1,100 payday loan from a creditor (appellee), who is a subsidiary of a tribe. He voluntarily filed a Chapter 13 bankruptcy petition, listing his debt to the appellee, which had increased to approximately $1,600, as a nonpriority unsecured claim. He also listed the appellee on the petition’s creditor matrix, and his attorney mailed the appellee a copy of the proposed Chapter 13 plan. When the plaintiff filed the petition, the Bankruptcy Code imposed an automatic stay enjoining “debt-collection efforts outside the umbrella of the bankruptcy case.” The appellee continued to attempt to contact the plaintiff regarding the debt, but the plaintiff had allegedly previously notified the appellee’s representatives that he had filed for bankruptcy. Two months after the plaintiff filed the petition, he claimed that his “mental and financial agony would never end,” and blamed his agony on the appellee’s “regular and incessant telephone calls, emails and voicemails.” To stop the appellee’s collection efforts, the plaintiff relocated to enforce the automatic stay against the appellee and its corporate parents and sought an order prohibiting future collection efforts, as well as damages, attorney's fees, and expenses. In response, the tribe and its affiliates asserted tribal sovereign immunity and moved to dismiss the enforcement proceeding. The bankruptcy court agreed with the tribe and granted the motions to dismiss.
On the appeal, the tribe argued that the Bankruptcy Code cannot abrogate tribal sovereign immunity because it never uses the word “tribe.” The appellate court noted that the argument “boils down to a magic-words requirement” that tribes must be mentioned in order to be covered by a law, but U.S. Supreme Court precedent “forbids us from adopting a magic-words test.” However, the appellate court further noted that Congress did not determine that tribes were subject to the Code, stating that “[e]ven if Congress need not use magic words to make clear that its abrogation provision applies to Indian tribes, it must at least use words that clearly and unequivocally refer to Indian tribes if it wishes to make that abrogation provision apply to them.” The appellate court ruled that Congress took away tribes' sovereign immunity as “domestic governments” covered by the Bankruptcy Code, stating that even though tribes are not explicitly named in the Code, “we have no doubt that Congress understood tribes to be domestic dependent nations,” and since those “are a form of domestic government, it follows that Congress understood tribes to be domestic governments.”
Florida Court of Appeal: Bank may seek attorney’s fees as a condition of loan reinstatement
On May 4, the Florida Court of Appeal, Fourth District, held that a borrower cannot sue a law firm for sending a letter seeking to collect attorney’s fees because the mortgage contract gave the bank the right to seek attorney’s fees from a prior foreclosure action as a condition of reinstating the loan. Previously, a trial court had awarded the borrower attorney’s fees following dismissal of a prior foreclosure action. The bank later brought a new foreclosure action against the borrower concerning the same property, and the law firm representing the bank sent the borrower a reinstatement letter requiring payment of attorney’s fees incurred by the bank in the prior foreclosure action in order to reinstate the loan. The trial court, citing a 2019 decision in U.S. Bank Trust, N.A. v. Leigh, granted summary judgment in favor of the law firm on the grounds that “the law firm was entitled to immunity under the litigation privilege because the Florida Consumer Collection Practices Act (FCCPA) claim was based on the reinstatement letter the law firm sent during the foreclosure proceedings” and because the borrower lacked standing.
On appeal, the Court of Appeal agreed with the law firm that it was entitled to collect attorney fees and costs and that the borrower lacked standing to bring his FCCPA claim. According to the Court of Appeal, a provision in the mortgage contact included language that “if the borrower defaulted and the lender accelerated the loan, the borrower would have the right to reinstate the loan if certain conditions were met.” Among these conditions was that the borrower would agree to “pay all expenses incurred in enforcing this Security Instrument, including, but not limited to, reasonable attorneys’ fees.” Applying the rationale of Leigh, the Court of Appeal found “that the law firm did not violate the FCCPA because it sought to recover a legitimate expense it was entitled to recover pursuant to a contract, that being the expense of attorney’s fees the lender incurred in the prior foreclosure action.”
Washington Court of Appeals affirms dismissal of suit accusing bank of collecting debt under a different name
On May 3, the Washington Court of Appeals, Division Three, affirmed the dismissal of an action accusing a defendant bank of violating the FDCPA by attempting to collect a debt in a name that differed from its own. The plaintiff obtained a credit card from the bank in 2006. Following a merger between the bank holding company (a separate legal entity at the time) and a card services company, the defendant bank merged with and under the charter of the card services company and notified credit card customers that the new issuer and administrator of their accounts would be the card services company. In 2014, the card services company merged into and under the charter of the national bank of the same name, who subsequently became issuer and administrator of the credit card portfolio and the named creditor of the plaintiff’s account. By 2012, the plaintiff had stopped making payments on his credit card and was sued by the card services company. While this action was pending, the 2014 merger occurred but the collection action was not updated to reflect this development. Eventually, the collection action was dismissed without prejudice, and the plaintiff sued the defendant in Washington state court, claiming the defendant violated the FDCPA because it continued its collection suit under the name of the card services company after the merger had taken place. The state court dismissed the case, and the plaintiff appealed. At issue was whether the national bank “falls under the FDCPA despite its status as a creditor because it used a name other than its own ‘which would indicate that a third person is collecting or attempting to collect’ the debt owed by” the plaintiff.
The Court of Appeals disagreed and held that even a least sophisticated consumer would not be confused and think that the debt had been transferred to a third-party collection agency. “Instead, a least sophisticated consumer (and even average-level consumer) might be led to believe that nothing had changed and [the card services company] was still collecting its credit card debt in its own right,” the Court of Appeals wrote. “There is no reason to think a least sophisticated consumer would be led to believe that [the bank] had acquired [the card services company’s] debt and then contracted with [it] to collect the debt.”
5th Circuit: CFPB enforcement may proceed but funding questions remain
On May 2, the U.S. Court of Appeals for the Fifth Circuit issued an en banc decision vacating a district court’s interlocutory decision denying the plaintiff payday lenders’ motion for judgment on the pleadings, and holding that the CFPB can continue its enforcement action against a Mississippi-based payday lending company subject to further order of the district court. As previously covered by InfoBytes, the CFPB filed a complaint against two Mississippi-based payday loan and check cashing companies for allegedly violating the CFPA’s prohibition on unfair, deceptive, or abusive acts or practices. In March 2018, a district court denied the payday lenders’ motion for judgment on the pleadings, rejecting the argument that the structure of the Bureau is unconstitutional and that the agency’s claims violate due process. The 5th Circuit agreed to hear an interlocutory appeal on the constitutionality question. And, prior to the U.S. Supreme Court’s ruling in Seila Law LLC v. CFPB, a divided panel held that the CFPB’s single-director structure is constitutional, finding no constitutional defect with allowing the director of the Bureau to only be fired for cause (covered by InfoBytes here).
The 5th Circuit voted sua sponte to rehear the case en banc and issued an opinion in which the majority vacated the district court’s opinion as contrary to Seila Law. The majority did not, however, direct the district court to enter judgment against the Bureau because, though the Supreme Court had found that the director’s for-cause removal provision was unconstitutional, it was severable from the statute establishing the Bureau (covered by a Buckley Special Alert). The majority determined that the “time has arrived for the district court to proceed” and stated it “place[s] no limitation on the matters that that court may consider, including, without limitation, any other constitutional challenges.”
In dissent, several judges issued an opinion arguing that the case should be dismissed because the agency’s funding structure violates the Constitution’s separation of powers and “is doubly removed from congressional review.” The dissenting judges explained that the Bureau is not subject to the Congressional appropriations process for its budget, unlike most federal agencies, but rather receives its funding directly from the Federal Reserve Board. This budgetary process was intended to ensure full independence from Congress and prevent future congresses from using budget cuts to influence the Bureau’s agenda and priorities. The dissenting judges argued, however, that such a structure violates the Appropriations Clause of the Constitution. “The CFPB’s double insulation from Article I appropriations oversight mocks the Constitution’s separation of powers by enabling an executive agency to live on its own in a kingly fashion,” the dissent stated. “The Framers warned that such an accumulation of powers in a single branch of government would inevitably lead to tyranny. Accordingly, I would reject the CFPB’s novel funding mechanism as contravening the Constitution’s separation of powers. And because the CFPB funds the instant prosecution using unconstitutional self-funding, I would dismiss the lawsuit.”
4th Circuit will not revive investors’ data breach case
On April 21, the U.S. Court of Appeals for the Fourth Circuit affirmed a district court’s dismissal of a securities suit against a hotel corporation (defendant) alleging that they misled the plaintiffs regarding data vulnerabilities connected to a major breach of customers’ personal information. According to the opinion, two years after merging with another hospitality corporation, the defendant “learned that malware had impacted approximately 500 million guest records in the [hospitality corporation’s] guest reservation database.” An investor filed a putative class action against the defendant and nine of its officers and directors, alleging that its failure to disclose severe vulnerabilities in the hospitality corporation’s IT systems rendered 73 different public statements false or misleading in violation of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and SEC Rule 10b-5. The district court granted the defendant’s motion to dismiss with prejudice and concluded that the plaintiffs “‘failed to adequately allege a false or misleading statement or omission, a strong inference of scienter, and loss causation,’ which doomed the claim under Section 10(b) and Rule 10b-5 as well as the secondary liability claim [under Section 20(a) of the Exchange Act].” The investor appealed, dropping its challenge to 55 of the statements but maintaining its challenge to the other 18.
On appeal, the 4th Circuit agreed with the district court that the defendant’s statements about the importance of cybersecurity were not misleading with respect to the quality of its cybersecurity efforts. The appellate court found that “[t]he ‘basic problem’ with the complaint on this point is that ‘the facts it alleges do not contradict [the defendant’s] public disclosures,’” and that reiterating the “basic truth” that data integrity is important does not mislead investors or create a false impression. The appellate court also noted that the complaint “concedes that [the defendant] devoted resources and took steps to strengthen the security of hospitality corporation’s systems,” and that the company included “such sweeping caveats that no reasonable investor could have been misled by them.” The appellate court concluded that the defendant “certainly could have provided more information to the public about its experience with or vulnerability to cyberattacks, but the federal securities laws did not require it to do so.”
California Court of Appeal: Including extraneous language in FCRA disclosure may constitute willful violation
On April 19, the California Court of Appeal for the Fourth Appellate District reversed a trial court’s summary judgment order and held that the inclusion of extraneous language in an employer’s FCRA disclosures to job applicants may constitute willful violation of the FCRA. The plaintiff filed a putative class action against the defendant employer, contending that it willfully violated the FCRA by providing job applicants with a disclosure that included extraneous language unrelated to the topic of consumer reports. The plaintiff alleged that the disclosure violated the FCRA’s requirement for providing a standalone disclosure informing the applicant that the employer may obtain the applicant’s consumer report when making a hiring decision upon applicant’s consent. The defendant filed a motion for summary judgment arguing that no reasonable jury could find that the plaintiff’s FCRA violation was willful, because the erroneous disclosure form was the result of a drafting mistake that took place when the defendant modified a sample disclosure provided by a consumer reporting agency to ensure compliance with the FCRA. The trial court granted the defendant’s motion, finding that any non-compliance resulted from a drafting was an inadvertent error.
On appeal, the Court of Appeal reversed and remanded with instructions that the trial court deny the motion for summary judgment. The appellate court found that “a reasonable jury could find that [the employer] acted willfully because it violated an unambiguous provision of the FCRA.” The Court of Appeal noted that that there’s evidence that at least one of the defendant’s employees was aware that the extraneous language would be included in the disclosure form. In addition, the continuous use of the allegedly problematic disclosure form for nearly two years could signify recklessness. The Court of Appeal reasoned further that the defendant’s “continued and prolonged use” of the “problematic” disclosure form “suggest[ed] that it had no proactive monitoring system in place to ensure its disclosure was FCRA-complaint.”
Michigan Court of Appeals affirms dismissal of post-judgment interest case, says state court rule precludes class actions
On April 21, the Michigan Court of Appeals affirmed a trial court’s dismissal of a post-judgment interest putative class action after concluding that a court rule that precludes “‘actions’ based on claimed violations of statutes that permit[ ] recovery of statutory damages in lieu of actual damages” necessitated the dismissal of the plaintiff’s class action claim. According to the opinion, after the plaintiff defaulted on her $900 credit card debt, the debt was assigned to the defendant debt collector who calculated the plaintiff’s unpaid balance to be $6,241.20. The defendant sought judgment against the plaintiff in that amount, plus interest, fees, and costs, and obtained a default judgment against the plaintiff after she did not respond. The defendant consequently obtained several writs of garnishment, all of which indicated that post-judgment interest had been added to the debt. Several years later, the plaintiff filed a putative class action alleging the defendant violated the FDCPA and the Michigan Regulation of Collection Practices Act (RCPA) by overstating how much she owed “and by impermissibly inflating [defendant’s] costs and the amount of interest it charged.” The state trial court dismissed the plaintiff’s class action claims with prejudice on the basis that Michigan Court Rules (MCR) preclude her from recovering statutory damages under the RCPA because the RCPA does not explicitly permit class actions. The court also dismissed her individual claims for lack of subject-matter jurisdiction.
On appeal, the plaintiff argued that the trial court erred when it dismissed her class action claims under MCR because she also sought equitable relief and actual damages; however, the Michigan Court of Appeals pointed to a provision in the MCR that states “[a]n action for a penalty or minimum amount of recovery without regard to actual damages imposed or authorized by statute may not be maintained as a class action unless the statute specifically authorizes its recovery in a class action.” The Court of Appeals explained that the RCPA is implicated under this rule because (i) it permits the recovery of statutory damages; and (ii) does not contain a provision explicitly permitting class actions, and as such, “plaintiff’s class action claims must be dismissed irrespective of the fact that she also sought injunctive relief, declaratory relief, and actual damages.” The Court of Appeals further held that even if the plaintiff attempted to plead individual claims, the case would not be allowed to proceed because the actual damages in this case are not high enough to meet the jurisdictional minimum amount in Michigan.
9th Circuit affirms district court’s ruling in TCPA case
On April 5, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s decision denying a defendants’ motion to compel arbitration in a putative class action under the TCPA. The defendants were a digital marketing company and a debt-relief service company. According to the opinion, the plaintiffs visited the defendants’ websites, but allegedly did not see a notice in fine print stating, “I understand and agree to the Terms & Conditions which includes mandatory arbitration.” The underlined phrases “Terms & Conditions” and “Privacy Policy” were hyperlinks, but they appeared in the same gray font as the rest of the sentence. The marketing company and one of the defendants allegedly used the consumer’s contact information to conduct a telemarketing campaign on behalf of the debt relief companies by allegedly placing unsolicited telephone calls and text messaging consumers. The plaintiffs filed a putative class action, alleging that the calls and text messages were made without their consent, and therefore violated the TCPA. The defendants moved to compel arbitration, arguing that, by clicking on the “continue” buttons, the plaintiffs had agreed to the mandatory arbitration provision hyperlinked in the terms and conditions. The district court denied the defendants’ motion, concluding “that the content and design of the webpages did not conspicuously indicate to users that, by clicking on the ‘continue’ button, they were agreeing to [the service company’s] terms and conditions.”
On appeal, the 9th Circuit agreed with the district court, finding that the digital marketing company’s website did not contain a reasonably conspicuous notice of its terms and conditions. The 9th Circuit ruled that such notice must be expressly displayed in a font size and format where it can be deemed that a reasonable Internet visitor saw it and was aware of it. The appellate court noted that, on the websites at issue, “[t]he text disclosing the existence of the terms and conditions … is the antithesis of conspicuous,” and that “is printed in a tiny gray font considerably smaller than the font used in the surrounding website elements, and indeed in a font so small that it is barely legible to the naked eye. The comparatively larger font used in all of the surrounding text naturally directs the user's attention everywhere else.” The 9th Circuit also held that, “while it is permissible to disclose terms and conditions through a hyperlink, the fact that a hyperlink is present must be readily apparent. …[T]he design of the hyperlinks must put such a user on notice of their existence.”