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  • 2nd Circuit reverses itself, finding no standing to sue for recording delays

    Courts

    On November 17, the U.S. Court of Appeals for the Second Circuit reversed its earlier determination that class members had standing to sue a national bank for allegedly violating New York’s mortgage-satisfaction-recording statutes, which require lenders to record borrowers’ repayments within 30 days. As previously covered by InfoBytes, the plaintiffs filed a class action suit alleging the bank’s recordation delay harmed their financial reputations, impaired their credit, and limited their borrowing capacity. While the bank did not dispute that the discharge was untimely filed, it argued that class members lacked Article III standing because they did not suffer actual damages and failed to plead a concrete harm under the U.S. Supreme Court’s decision in Spokeo Inc. v. Robins. At the time, the majority determined, among other things, that “state legislatures may create legally protected interests whose violation supports Article III standing, subject to certain federal limitations.” The alleged state law violations in this matter, the majority wrote, constituted “a concrete and particularized harm to the plaintiffs in the form of both reputational injury and limitations in borrowing capacity” during the recordation delay period. The majority further concluded that the bank’s alleged failure to report the plaintiffs’ mortgage discharge “posed a real risk of material harm” because the public record reflected an outstanding debt of over $50,000, which could “reasonably be inferred to have substantially restricted” the plaintiffs’ borrowing capacity.

    In withdrawing its earlier opinion, the 2nd Circuit found that the Supreme Court’s June decision in TransUnion v. Ramirez (which clarified what constitutes a concrete injury for the purposes of Article III standing in order to recover statutory damages, and was covered by InfoBytes here) “bears directly on our analysis.” The parties filed supplemental briefs addressing the potential impacts of the TransUnion ruling on the 2nd Circuit’s previous decision. The bank argued that while “New York State Legislature may have implicitly recognized that delayed recording can create [certain] harms,” the plaintiffs cannot allege that they suffered these harms. Class members challenged that “the harms that the Legislature aimed to preclude need not have come to fruition for a plaintiff to have suffered a material risk of real harm sufficient to seek the statutory remedy afforded by the Legislature.” Citing the Supreme Court’s conclusion of “no concrete harm; no standing,” the appellate court concluded, among other things, that class members failed to allege that delayed recording caused a cloud on the property’s title, forced them to pay duplicate filing fees, or resulted in reputational harm. Moreover, while publishing false information can be actionable, the appellate court pointed out that the class “may have suffered a nebulous risk of future harm during the period of delayed recordation—i.e., a risk that someone (a creditor, in all likelihood) might access the record and act upon it—but that risk, which was not alleged to have materialized, cannot not form the basis of Article III standing.” The appellate court further stated that in any event class members may recover a statutory penalty in state court for reporting the bank’s delay in recording the mortgage satisfaction.

    Courts Appellate Second Circuit Mortgages Spokeo Consumer Finance U.S. Supreme Court Class Action

  • 2nd Circuit: Turkish bank not immune from sanctions

    Courts

    On October 22, the U.S. Court of Appeals for the Second Circuit upheld a district court’s ruling against a Turkish state-owned commercial bank (defendant) denying its bid for immunity based on its characterization of an “instrumentality” of a foreign service, which is not entitled to immunity from criminal prosecution at common law. The U.S. government alleged that the bank converted Iranian oil money into gold and hid the transactions as purchases of goods to avoid conflicting sanctions against Iran. The district court denied the defendant’s motion to dismiss and partially concluded that the defendant was not immune from prosecution because the Foreign Sovereign Immunities Act (FSIA) confers immunity on foreign services only in civil proceedings. Furthermore, the district court concluded that, “even assuming arguendo that FSIA did confer immunity to foreign sovereigns in criminal proceedings, [the defendant’s] conduct would fall within FSIA’s commercial activity exception.” Additionally, the district court rejected the defendant’s “contention that it was entitled to immunity from prosecution under the common law, noting that [the defendant] failed to cite any support for its claim on this basis.” The district court found that the defendant’s characterization of its activities as sovereign in nature “conflates the act with its purpose,” finding that the lender's alleged money laundering was the type of activity regularly carried out by private businesses. The fact that the defendant is majority-owned by the Turkish Government is irrelevant under FSIA even if it is related to Turkey’s foreign policy because “literally any bank can violate sanctions.”

    On appeal, the 2nd Circuit noted that it was unnecessary to resolve a question presented in the case—if foreign governments can assert immunity against criminal, as well as civil, charges—since money laundering would qualify as a commercial activity exception. The appellate court noted that, “[t]he gravamen of the Indictment is not that [the bank] is the Turkish Government’s repository for Iranian oil and natural gas proceeds in Turkey,” but that “it is [the bank’s] participation in money laundering and other fraudulent schemes designed to evade U.S. sanctions that is the ‘core action.’” And, “because those core acts constitute ‘an activity that could be, and in fact regularly is, performed by private-sector businesses,’ those acts are commercial, not sovereign, in nature.” The opinion also notes that “[e]ven assuming the FSIA applies in criminal cases—an issue that we need not, and do not, decide today—the commercial activity exception to FSIA would nevertheless apply to [the defendant’s] charged offense conduct.” The appellate court agreed with the district court, concluding that the bank must face criminal charges in the U.S. for allegedly assisting Iran evade economic sanctions by laundering approximately $20 billion in Iranian oil and gas revenues.

    Courts Appellate Second Circuit Financial Crimes Of Interest to Non-US Persons Anti-Money Laundering Iran Foreign Sovereign Immunities Act OFAC Sanctions

  • District Court: News reports cannot reverse dismissal of sanctions suit

    Financial Crimes

    On October 13, the U.S. District Court for the Southern District of New York denied a relator’s motion seeking indicative relief, ruling that post-ruling news reports were insufficient to reverse the dismissal of a qui tam suit accusing a UK-based bank and related entities (collectively, “defendants”) of violating U.S. sanctions against Iran. In 2020, the court dismissed the complaint after finding that the government “had articulated multiple valid purposes served by dismissal, and that relator had not carried its burden to show that a dismissal would be ‘fraudulent, arbitrary or capricious, or illegal.’” The relator’s appeal to the U.S. Court of Appeals for the Second Circuit is pending. At the district court, the relator moved for indicative relief based on the premise that if the court had jurisdiction, it would have vacated the dismissal based on disclosures in post-dismissal media reports.

    According to the opinion, the defendants entered into a deferred prosecution agreement (DPA) with the DOJ in 2012 following a multi-year, multi-agency investigation concerning allegations that defendants deceptively facilitated U.S. dollar transactions by Iranian clients between 2001 and 2007 in violation of U.S. sanctions and various New York and federal banking regulations. The defendants admitted to the violations and paid hundreds of millions of dollars in fines and penalties. The relator subsequently filed a qui tam action alleging the defendants misled the government in negotiating the DPA. A government investigation found no support for the allegations. In 2019, the DOJ entered a new DPA with defendants. The relator amended its complaint alleging improper conduct related to the 2019 DPA, which the court dismissed.

    The relator then filed the instant motion to reopen the case, arguing that news reports published in 2020 showed that the defendants engaged in transactions with sanctioned Iranian entities after 2007, which was contrary to the government’s representations when it moved to dismiss the case. The relator claimed that the government incorrectly asserted that it closely examined records before seeking dismissal and failed to honestly conclude that the allegations were meritless. In denying the relator’s motion, the court explained that the relator failed to show that the news reports would be admissible or were important enough to change the outcome of the earlier motion to dismiss. The court held that news reports are inadmissible and further concluded that none of the suspicious activity reports discussed in the news reports contradicted the government’s representations in its motion to dismiss.

    Financial Crimes Courts Of Interest to Non-US Persons OFAC OFAC Sanctions Iran Relator Qui Tam Action DOJ Appellate Second Circuit SARs

  • Supreme Court won’t hear challenge to CFPB ratification

    Courts

    On October 4, the U.S. Supreme Court declined to hear a petition filed by a New Jersey-based finance company accused by the CFPB and the New York attorney general of misleading first responders to the World Trade Center attack and NFL retirees about high-cost loans mischaracterized as assignments of future payment rights (see entry #20-1758). In 2020, the U.S. Court of Appeals for the Second Circuit vacated a 2018 district court order, which had previously dismissed the case on the grounds that the Bureau’s single-director structure was unconstitutional, and that, as such, the agency lacked authority to bring claims alleging deceptive and abusive conduct by the company (covered by InfoBytes here). At the time, the district court also rejected an attempt by then-acting Director Mulvaney to salvage the Bureau’s claims, concluding that the “ratification of the CFPB’s enforcement action against defendants failed to cure the constitutional deficiencies in the CFPB’s structure or otherwise render defendants’ arguments moot.” The 2nd Circuit remanded the case to the district court, determining that the Court’s ruling in Seila Law LLC v. CPFB (which held that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau, as covered by a Buckley Special Alert) superseded the 2018 ruling. The appellate court further noted that following Seila, former Director Kathy Kraninger ratified several prior regulatory actions (covered by InfoBytes here), including the enforcement action brought against the defendants, and as such, remanded the case to the district court to consider the validity of the ratification of the enforcement action.

    In its June petition for writ of certiorari, the company argued that the Bureau could not use ratification to avoid dismissal of the lawsuit. The company noted that while several courts, including the U.S. Court of Appeals for the Ninth Circuit (covered by InfoBytes here) have “appl[ied] ratification to cure the structural problem,” other courts have rejected the Bureau’s ratification efforts, finding them to be untimely (see a dismissal by the U.S. District Court for the District of Delaware, as covered by InfoBytes here). As such, the company had asked the Supreme Court to clarify this contradictory “hopeless muddle” by clarifying the appropriate remedy for structural constitutional violations and addressing whether ratification is still effective if it comes after the statute of limitations has expired.

    As is customary when denying a petition for certiorari, the Supreme Court did not explain its reasoning.

    Courts U.S. Supreme Court CFPB Single-Director Structure Enforcement Appellate Seila Law Second Circuit

  • 2nd Circuit: No contempt sanctions against Chinese banks in $1 billion counterfeit case

    Courts

    On August 30, the U.S. Court of Appeals for the Second Circuit held that a district court did not err in denying an investment firm’s motion to hold a group of Chinese banks in contempt for failure to implement certain asset restraints. According to the opinion, in 2015, an athletic apparel corporation and one of its subsidiaries won a more than $1 billion default judgment against hundreds of participants in several Chinese counterfeiting networks (counterfeiters). The judgment enjoined the counterfeiters “and all persons acting in concert or in participation with any of them . . . from transferring, withdrawing or disposing of any money or other assets into or out of [the counterfeiters’ accounts] regardless of whether such money or assets are held in the U.S. or abroad.” The investment firm (the corporation’s successor-in-interest) moved to hold the Chinese banks in contempt for failing to implement the asset restraints and asked the district court to impose a $150 million penalty, claiming, among other things, that the Chinese banks allowed the counterfeiters to transfer more than $32 million from their accounts after the Chinese banks were informed of the asset restraints. The investment firm further claimed that the Chinese banks also failed to produce documents during discovery. The district court denied the motion.

    In agreeing with the district court, the 2nd Circuit concluded that (i) until the contempt motion was filed, the corporation and the investment firm never sought to enforce the asset restraints against the Chinese banks; (ii) “there is a fair ground of doubt as to whether, in light of New York’s separate entity rule and principles of international comity, the orders could reach assets held at foreign bank branches”; (iii) “there is a fair ground of doubt as to whether the [b]anks’ activities amounted to ‘active concert or participation’ in Defendants’ violation of the asset restraints that could be enjoined under Federal 16 Rule of Civil Procedure 65(d)”; and (iv) the investment firm failed to provide clear and convincing evidence of a discovery violation.

    Courts Sanctions Of Interest to Non-US Persons Contempt China Appellate Second Circuit

  • Former officials agree SEC usurped FinCEN’s BSA enforcement authority

    Courts

    On August 20, former FinCEN officials filed an amicus brief in support of a petition for certiorari filed by penny stock broker-dealer (petitioner) against the SEC claiming the agency usurped FinCEN’s Bank Secrecy Act (BSA) enforcement authority. The petition seeks to reverse a U.S. Court of Appeals for the Second Circuit decision, which upheld a $12 million penalty and concluded the SEC has the authority to bring an action under Section 17(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 17a-8 promulgated thereunder for failure to comply with the Suspicious Activity Report (SAR) provisions of the BSA. As previously covered by InfoBytes, the appellate court rejected the broker-dealer’s argument that the SEC is attempting to enforce the BSA, which only the U.S. Treasury Department has the authority to do. The appellate court noted that the SEC is enforcing the requirements of Rule 17a-8, which requires broker-dealers to adhere to the BSA in order to comply with requirements of the Exchange Act, which does not constitute the agency’s enforcement of the BSA. Moreover, the appellate court concluded that the SEC did not overstep its authority when promulgating Rule 17a-8, as SARs “serve to further the aims of the Exchange Act by protecting investors and helping to guard against market manipulation,” and that the broker-dealer did not meet its “‘heavy burden’ to show that Congress ‘clearly expressed [its] intention’ to preclude the SEC from examining for SAR compliance in conjunction with FinCEN and pursuant to authority delegated under the Exchange Act.”

    The former officials’ brief states that they “have no interest in the facts” of the petitioner’s dispute with the SEC, but rather “are concerned that the Second Circuit’s misunderstanding of FinCEN’s delegated enforcement authority will lead to confusion among the financial institutions that must comply with the BSA; create multiple, conflicting BSA regulatory regimes; decrease American influence over global financial regulators; and hamper U.S. law enforcement and national security efforts by diminishing the value of BSA data.” They further pointed out that the appellate court “erred in conflating delegated compliance examination efforts with the exercise of enforcement authority and let stand SEC and lower court decisions applying materially different legal standards with a lower level of judicial oversight and review than that established by Congress.” The former officials stressed that the appellate court’s decision fails “to appreciate the nature of the AML regime and therefore FinCEN’s unique expertise and central role,” adding that the decision “threatens to undermine the BSA statutory regime and harm U.S. efforts to fight money laundering and terrorist financing” and may affect other regulators and regulated entities.

    Courts U.S. Supreme Court Appellate Second Circuit SEC Financial Crimes Bank Secrecy Act SARs FinCEN Securities Exchange Act Of Interest to Non-US Persons

  • 2nd Circuit: Bankruptcy rule on post-petition mortgage fee notices does not authorize punitive sanctions

    Courts

    On August 2, the U.S. Court of Appeals for the Second Circuit vacated a sanctions order imposed on a mortgage servicer in three chapter 13 cases. According to the opinion, the servicer sent the debtors monthly mortgage statements listing fees that allegedly had not been properly disclosed in the three bankruptcy cases. The United States Bankruptcy Court for the District of Vermont then sanctioned the mortgage servicer $225,000 for violating court orders issued in two of the debtors’ cases, which had declared the debtors current on their mortgages and enjoined the servicer from challenging that fact in any other proceeding. The bankruptcy court also sanctioned the servicer $75,000 for violating Bankruptcy Rule of Procedure 3002.1, which requires creditors to provide formal notice to a debtor and trustee of new post-petition fees and charges and authorizes the bankruptcy court to impose sanctions for non-compliance.

    On appeal, the 2nd Circuit held that Rule 3002.1 “does not authorize punitive monetary sanctions,” and that the servicer “did not, as a matter of law, violate the court orders.” The appellate court added that “[a] broad authorization of punitive sanctions is a poor fit with Rule 3002.1’s tailored enforcement mechanism and limited purpose,” noting that the bankruptcy court in this case is “apparently the first and only one to impose punitive monetary sanctions under the rule.” While the bankruptcy court raised “serious concerns” about whether the servicer “is making a good faith effort to comply with Rule 3002.1,” the appellate court concluded that “[a] concern, even a serious concern, is not a finding.” Concluding that the $225,000 sanction was based on an improper finding of contempt, the appellate court vacated and reversed the order.

    Courts Mortgages Bankruptcy Appellate Second Circuit

  • 2nd Circuit says private student loans not explicitly exempt from bankruptcy discharge

    Courts

    On July 15, the U.S. Court of Appeals for the Second Circuit held that private student loans are not explicitly exempt from the discharge of debt granted to debtors in a Chapter 7 bankruptcy. According to the opinion, the plaintiff filed for Chapter 7, which led to an ambiguous discharge order as to how it applied to his roughly $12,000 direct-to-consumer student loans. After the plaintiff received the discharge in 2009, the student loan servicer started collection efforts. Because the plaintiff did not know whether the discharge applied to his student loans, he repaid the loans in full. In 2017, the plaintiff moved to reopen his bankruptcy case and filed an adversary proceeding against the student loan servicer and the servicer’s predecessor (collectively, “defendants”), seeking a determination that his student loans were in fact discharged during the original proceeding. The servicer moved for dismissal claiming the loans were exempt under 11 U.S.C. § 523(a)(8)(A)(ii), but the bankruptcy judge denied the motion, ruling that the bankruptcy code “does not sweep in all education-related debt.” The district court subsequently certified the bankruptcy court’s order for interlocutory appeal.

    On appeal, the 2nd Circuit reviewed whether the plaintiff’s private student loans could be discharged under bankruptcy. Under § 523(a)(8), the following types of student loans are exempt from discharge: (i) government or nonprofit institution student loans; (ii) obligations “to repay funds received as an educational benefit, scholarship, or stipend”; and (iii) qualified education loans. The defendants argued that the plaintiff’s loans fell into the “educational benefit” category, but the appellate court disagreed, concluding that § 523(a)(8) does not provide a blanket exception to the applicability of bankruptcy discharge to private student loans. In affirming the bankruptcy court’s ruling, the appellate court wrote, “if Congress had intended to except all educational loans from discharge under § 523(a)(8)(A)(ii), it would not have done so in such stilted terms.” The 2nd Circuit further added that “[i]nterpreting ‘educational benefit’ to cover all private student loans when the two terms listed in tandem describe ‘specific and quite limited kinds of payments that. . .do not usually require repayment,’. . .would improperly broaden § 523(a)(8)(A)(ii)’s scope.” 

    Courts Student Lending Student Loan Servicer Second Circuit Appellate Bankruptcy

  • 2nd Circuit: Willful FBAR violations capped at 50 percent of aggregate balance

    Courts

    On July 13, the U.S. Court of Appeals for the Second Circuit held 2-1 that, under 31 U.S.C. § 5321 as amended, the maximum penalty for failing to file a Foreign Bank and Financial Accounts Report (FBAR) is 50 percent of the aggregate balance in the accounts at the time of the failure. According to the opinion, after a now deceased individual willfully failed to file an FBAR in 2008 for two foreign bank accounts, the IRS assessed a “willful penalty” that amounted to 50 percent of the aggregate account balances (approximately $4.2 million). The individual passed away without paying the penalty, and the U.S. government filed a lawsuit against his estate’s co-executors (defendants). A 1987 regulation limited the penalties for willful violations to $100,000 per account, but a 2004 amendment to the statute increased the maximum penalty for willful violations, to the greater of $100,000 or 50 percent of the aggregate account balance at the time of the violation. The defendants argued that the 1987 $100,000 penalty cap should apply, but the district court granted summary judgment for the government, though it noted that, despite the 2004 amendment, Treasury did not amend the 1987 regulation’s “now-inconsistent FBAR penalty provision,” which remains codified in the Code of Federal Regulations.

    On appeal, the majority agreed with the district court, holding that the 2004 statute amended the penalty provisions: “Given that, [] Congress in 2004 raised the maximum penalty for such violations after being informed by the Secretary [of the Treasury] that perhaps as many as 800,000 persons required to file FBARs were noncompliant, a regulation purporting to nullify the statutory increase plainly does not ‘carry out’ Congress’s goal of encouraging compliance with the FBAR requirement.” The 2nd Circuit also rejected the defendants’ argument that the rule of lenity requires that any ambiguity be resolved in their favor, pointing out that “[t]here is no ambiguity or uncertainty as to what Congress intended in the 2004 Statute when it” increased the penalties. The dissenting judge stated that the majority’s decision “departs from basic administrative law and unjustifiably accommodates ‘the Treasury’s relaxed approach to amending its regulations.’”

    Courts FBAR Of Interest to Non-US Persons Appellate Second Circuit Department of Treasury

  • OCC supports national bank’s challenge to state law requiring interest payments on escrow accounts

    Courts

    On June 15, the OCC filed an amicus curiae brief in support of a defendant-appellant national bank in an appeal challenging a requirement under New York General Obligation Law § 5-601 that a defined interest rate be paid on mortgage escrow account balances. As previously covered by InfoBytes, the bank argued that the National Bank Act (NBA) preempts the state law, but the district court disagreed and issued a ruling in 2019 concluding that there is “clear evidence that Congress intended mortgage escrow accounts, even those administered by national banks, to be subject to some measure of consumer protection regulation.” The district court also determined that, with respect to the OCC’s 2004 real estate lending preemption regulation (2004 regulation), there is no evidence that “at this time, the agency gave any thought whatsoever to the specific question raised in this case, which is whether the NBA preempts escrow interest laws,” citing to and agreeing with the U.S. Court of Appeals for the Ninth Circuit’s decision in Lusnak v. Bank of America (which held that a national bank must comply with a California law that requires mortgage lenders to pay interest on mortgage escrow accounts, previously covered by InfoBytes here). The district court further applied the preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson, and found that the law does not “significantly interfere” with the bank’s power to administer mortgage escrow accounts, noting that it only “requires the [b]ank to pay interest on the comparatively small sums” deposited into the accounts and does not “bar the creation of mortgage escrow accounts, or subject them to state visitorial control, or otherwise limit the terms of their use.”

    In its amicus brief filed with the U.S. Court of Appeals for the Second Circuit, the OCC wrote that it “respectfully submits that the [appellate court] should reverse the decision of the [d]istrict [c]ourt and find that application of Section 5-601 to [the bank] is preempted by federal law,” adding that the 2019 ruling “upsets…settled legal principles” and “creates uncertainty regarding national banks’ authority to fully exercise real estate lending powers under the [NBA].” In addressing the district court’s application of Barnett, the OCC argued that the district court had incorrectly concluded that state laws cannot be preempted unless they “practical[ly] abrogat[e] or nullif[y] a national bank’s exercise of a federal banking power—a “stark contrast to the preemption standard set forth in Barnett and the OCC’s—as well as many other federal courts’—interpretation of that standard.” The OCC urged the appellate court to “conclude that a state law that requires a national bank to pay even a nominal rate of interest on a particular category of account impermissibly conflicts with a national bank’s power by disincentivizing the bank from continuing to offer the product. This is sufficient to trigger preemption under Barnett.”

    The OCC further stated, among other things, that the district court also incorrectly disregarded the agency’s 2004 regulation, which the OCC said “specifically authorizes national banks to exercise their powers to make real estate loans ‘without regard to state law limitations concerning…[e]scrow accounts, impound accounts, and similar accounts….’” The agency further cautioned that the district court’s determination that the OCC’s 2004 regulation was not entitled to any level of deference was done in error and warned that “[i]f the OCC’s regulation regarding escrow accounts is rendered ineffective, this result could cause disruption within the banking industry by upsetting long-settled law regarding the applicability of state laws to national bank powers.”

    Courts Appellate Second Circuit State Issues Escrow OCC National Bank Act Preemption Interest Mortgages Bank Regulatory

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