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Ninth Circuit Reinstates HAMP Class Action
On August 8, the U.S. Court of Appeals for the Ninth Circuit held that HAMP Trial Period Plans (TPPs) create a contractual obligation that the servicer offer a permanent modification to borrowers who complete the TPP. Corvello v. Wells Fargo Bank, N.A., Nos. 11-16234, 11-16242, 2013 WL 4017279 (9th Cir. Aug. 8, 2013). Borrowers seeking to represent putative classes in consolidated actions appealed a district court’s dismissal of their claims that a mortgage servicer breached its contracts when it failed to offer, without prior notice, permanent loan modifications to borrowers who complied with the terms of TPPs offered under HAMP. Citing the Seventh Circuit’s holding in Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012), the Ninth Circuit held that once the servicer determined that a borrower had complied with the TPP and the borrower’s representations remained accurate, then the servicer was required to offer a permanent modification. The Ninth Circuit, like the Seventh Circuit in Wigod, rejected the servicer’s argument that the TPP does not create a contractual obligation because under the TPP there can be no contract unless the servicer sends the borrower a signed modification agreement. The court did not address the merits of the borrowers’ claims, i.e., whether the borrowers actually complied with the terms of their TPPs, and the bank still can offer such a defense on remand. The court reversed the district court’s dismissal and remanded for further proceedings.
California Federal District Court Grants Class Certification in HAMP Litigation
On August 5, the U.S. District Court for the Northern District of California certified a class of borrowers who allege that a mortgage servicer wrongly rejected mortgage modification applications and improperly initiated foreclosure proceedings. Gaudin v. Saxon Mortg. Svcs., Inc., No. 11-1663, 2013 WL 4029043 (N.D. Cal. Aug. 5, 2013). The named plaintiff contends that a trial modification plan provided by her servicer constituted a binding contract that required the servicer to evaluate the borrower under the Home Affordable Modification Program and, if all conditions of the trial plan were satisfied, offer the borrower a permanent modification. According to the borrower, the servicer later, without cause, refused to offer a permanent modification and breached the contract, thereby violating California’s Rosenthal Act and Unfair Competition Law. On the borrower’s motion for class certification, the court held that the case presents significant common questions of law and fact concerning the nature and scope of the trial plan, and that the borrower’s alleged injury is similar to, if not precisely the same as, the potential class because the servicer’s issuance and countersigning of the trial plans constitute a single course of conduct. The court rejected the servicer’s argument that the borrower’s claims are subject to unique defenses because the servicer will argue that the borrower misrepresented her income, explaining that a defendant cannot defeat typicality if it intends to raise similar arguments in response to all class members.
Eighth Circuit Holds Informational Injury Sufficient to Establish Standing
On August 2, the U.S. Court of Appeals for the Eighth Circuit held that a bank customer had standing to bring a claim against two banks based only on an informational injury. Charvat v. Mut. First Fed. Credit Union, Charvat v. First Nat’l Bank of Wahoo, Nos. 12-2790, 12-2797, 2013 WL 3958300 (8th Cir. Aug. 2, 2013). The customer separately sued two financial institutions on behalf of putative classes claiming that the institutions failed to provide physical (as opposed to on-screen) notice of the transaction fees the institutions charged for use of their ATMs, as required at the time by the federal Electronic Fund Transfer Act (this requirement since has been repealed). The district court dismissed the case, holding that the customer failed to allege an injury in fact, only an injury in law. The customer appealed, and the U.S. Department of Justice filed an amicus brief in support, noting that the case could impact other federal statutes with private rights of action. The appeals court reversed the dismissal on the grounds that an informational injury based on a statutory violation is sufficient to confer standing, even absent economic or other injury. The court explained that once the customer alleged a violation of the EFTA notice provision – a violation of his own interest as opposed to the public’s nonconcrete interest – he had standing to claim damages. The court also rejected the institutions’ argument that the customer broke any causal link between them and the alleged injury when he nevertheless accepted the transaction fee, holding that if the notice requirement had been met, the customer would not have had to choose between accepting the fee and abandoning the transaction. The court reversed the district court’s dismissal and remanded for further proceedings.
Third Circuit Reaffirms Class Plaintiff's Burden to Demonstrate Ascertainability, Numerosity
On August 2, the U.S. Court of Appeals for the Third Circuit held that a class plaintiff has the burden of showing that the class is ascertainable and numerous. Hayes v. Wal-Mart Stores, Inc., No. 12-2522, 2013 WL 3957757 (3rd Cir. Aug. 2, 2013). In this case the plaintiff seeks to represent a class of individuals who were sold warranties for items specifically excluded from the warranty coverage. The trial court granted class certification, holding in relevant part that the class was both ascertainable and sufficiently numerous, despite the fact that the defendant had no method for determining the class based on its recordkeeping system. In light of its own holding in Marcus v. BMW of North America, LLC, 687 F.3d 583 (3d Cir. 2012), which the appeals court issued after the trial court granted class certification, the court vacated the trial court’s decision. The appeals court explained that, as detailed in Marcus, the plaintiff must demonstrate a reliable and administratively feasible method to ascertain the class, and the nature or thoroughness of a defendant’s recordkeeping does not alter the plaintiff’s burden. Further, the court held that the plaintiff must provide evidence of numerosity, and that the trial court may not take a “wait-and-see approach” to numerosity based on a plaintiff’s promise. The court vacated the trial court order and remanded for further proceedings.
Virginia Federal District Court Dismisses Shareholder Derivative Action Related to Credit Card Issuer's Settlements with OCC, CFPB
On June 21, the U.S. District Court for the Eastern District of Virginia dismissed a shareholder derivative action against a national bank’s officers and directors that was based on the bank’s settlements with the CFPB and OCC over allegedly deceptive marketing of ancillary products. In re Capital One Derivative S’holder Litig., No. 1:12-cv-1100 (E.D. Va. June 21, 2013). The shareholders, relying on Delaware law, alleged that the officers and directors breached their fiduciary duty of loyalty, committed corporate waste, and were unjustly enriched by failing to prevent the allegedly deceptive sales practices at the bank’s third-party call centers which led to the consent orders. The court held that the shareholders did not adequately allege corporate waste because the bank’s settlement payments were not “transfers of assets with no corporate purpose” but instead achieved final resolution of the investigations. The unjust enrichment claim failed because the shareholders did not allege any facts indicating a relationship between the officers and directors’ compensation and the settlements with the agencies. With respect to the duty of loyalty claim, the shareholders alleged two theories: (i) that the officers and directors failed to implement controls that would have prevented the alleged misconduct, and (ii) that defendants ignored numerous “red flags” that should have alerted them to the alleged misconduct. First, the controls theory failed because the shareholders could not satisfy the demanding Caremark standard, which requires an utter failure to implement any controls. Second, most of the alleged red flags were either not actually red flags at all or there were no allegations that the individual officers and directors were aware of them. However, as to a small number of the alleged red flags, the court found the claims sufficiently plausible to allow the shareholders an opportunity to amend their complaint to add additional facts.
U.S. Supreme Court Holds FAA Permits Class Arbitration Waivers
On June 20, the U.S. Supreme Court held that the Federal Arbitration Act (FAA) does not permit courts to invalidate a class arbitration waiver “on the ground that the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery.” American Express Co. v. Italian Colors Restaurant, 570 U.S. ___ (2013). The Court reversed a Second Circuit decision that held that because the costs for the individual plaintiff to arbitrate its claims would be prohibitive, the class action waiver was unenforceable and arbitration could not proceed. The Court explained that the Second Circuit’s “effective vindication” doctrine is a judge-made exception to the FAA that “finds its origin in the desire to prevent ‘prospective waiver of a party’s right to pursue statutory remedies,’. . . [b]ut the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” The Court added that there is no congressional command to reject the waiver of class arbitration, and that congressional approval of Rule 23 does not establish an entitlement to class proceedings for the vindication of statutory rights.
Massachusetts Supreme Court Holds That Courts May Invalidate Certain Arbitration Agreements With Class Action Waivers
On June 12, the Massachusetts Supreme Judicial Court (SJC) held that courts may invalidate an arbitration agreement that includes a class action waiver where the plaintiff demonstrates that his or her claim effectively cannot be pursued in individual arbitration. Feeney v. Dell, Inc., No. SJC-11133, 2013 WL 2479603 (Mass. Jun. 12, 2013). In this case, the court determined that the plaintiffs could not effectively pursue their statutory claim under the individual claim arbitration process given the complexity of their claims and the small amounts of individual damages. The SJC therefore affirmed the trial court’s order invalidating the agreement. According to the SJC, the Supreme Court’s holding in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), left open the possibility that an arbitration agreement may be invalidated if the agreement effectively prevents the claimant from vindicating his or her statutory cause of action. Still, the SJC’s decision arguably conflicts with several decisions in the federal courts of appeal that question that the continuing vitality of the “vindication of rights” doctrine following Concepcion. The decision also addresses an issue currently before the Supreme Court in American Express Co. v. Italian Colors Restaurant, No. 12-133 (S. Ct. argument heard Feb. 27, 2013).
U.S. Supreme Court Refuses to Vacate Arbitrator's Decision Allowing Class Arbitration
On June 10, the U.S. Supreme Court held that the Federal Arbitration Act (FAA) does not permit a court to vacate an arbitrator’s decision to allow class arbitration where the parties authorized the arbitrator to decide the issue. Oxford Health Plans LLC v. Sutter, No. 12-135, 569 U.S. ___ (2013). In this case, a health insurance company sought to overturn an arbitrator’s holding that the contract between the company and a doctor claiming the insurer failed to fully pay him and similarly situated doctors authorized class arbitration of the claims. The parties agreed that the arbitrator should decide the issue, but in seeking to overturn the decision, the insurer argued that the arbitrator exceeded his authority under the FAA. Citing the narrow standard of judicial review under the relevant FAA provision and the “heavy burden” a party bears under that provision, the Court held that the parties’ agreement to allow the arbitrator to decide the issue of class arbitration of the claims is sufficient to show that he did not exceed his powers. The insurer argued that the Court’s holding in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010) that an arbitration panel exceeded its powers when it ordered a party to submit to class arbitration should apply here. The Court rejected that argument, explaining that in Stolt-Nielsen the Court overturned the arbitral decision because it lacked any contractual basis for requiring class procedures, whereas in this case, the arbitrator construed the parties’ contract at their request.
California Federal District Court Reinstates Order in Overdraft Class Action
On May 14, the U.S. District Court for the Northern District of California reinstated a prior order enjoining a national bank from engaging in false or misleading representations relating to certain overdraft practices and requiring the bank to pay approximately $203 million in restitution. Gutierrez v. Wells Fargo Bank, N.A., No. 07-05923, 2013 WL 2048030 (C.D. Cal. May 14, 2013). After trial the district court enjoined the bank’s practice of ordering withdrawals from “high-to-low” and ordered the restitution for a class of bank customers who alleged that the bank’s ordering practice was designed to maximize the number of customer overdrafts and related fees and, as such, violated the California Unfair Competition Law (UCL). In December 2012, the U.S. Court of Appeals for the Ninth Circuit vacated the trial court’s order, holding that (i) the bank’s ordering practice is a pricing decision the bank can pursue under federal law, (ii) the National Bank Act preempts the unfair business practices prong of the UCL, and (iii) both the imposition of affirmative disclosure requirements and liability based on failure to disclose are preempted. The appeals court preserved the customers’ claim of affirmative misrepresentations under the fraud prong of the UCL. On remand, the district court held that even though, after the Ninth Circuit’s holding, liability cannot be predicated on the posting method, the result is the same because the harm from the bank’s affirmative misrepresentations is the same. The court explained that it is not penalizing the bank for a federally protected practice, but rather because it violated the fraud prong of the UCL by affirmatively misleading customers about the practice. Further, although the Ninth Circuit order prohibits injunctive relief that requires the bank to use a specific system of posting or make specific disclosures, the court enjoined the bank from making or disseminating any false or misleading representations relating to the posting order of debit card purchases, checks, and ACH transactions.
Federal District Court Denies Certification in Loan Modification Class Action
On April 29, the U.S. District Court for the Central District of California refused to certify a class seeking to challenge a mortgage servicer’s loan modification practices. Campusano v. BAC Home Loans Servicing, LP, No. 11-4609, slip op. (C.D. Cal. Apr. 29, 2013). The named borrowers allege that their mortgage servicer breached agreements to modify mortgage loans by failing to timely implement the terms of the modification agreements and claim that the servicer’s failures are pervasive and appropriate for class treatment. The court held that the class lacked commonality and typicality because the borrowers failed to demonstrate that their modification agreements were the only ones used by the servicer and that all such agreements contained identical provisions pertaining to effective dates and other material terms. The court also held that the borrowers failed to demonstrate that (i) differences in contract would be immaterial to the question of whether acceptance of a first payment binds the servicer to the agreement regardless of other contract deficiencies and (ii) the borrowers suffered harm as a result of the servicer’s quality control, validation, and repudiation procedures. The court denied the borrowers’ motion for class certification.