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Second Circuit Reinstates MBS Class Action, Loosens Requirements for Pleading Damages
On September 6, the U.S. Court of Appeals for the Second Circuit held that a plaintiff has class standing to assert the claims of purchasers of securities backed by mortgages originated by the same lenders that originated the mortgages backing the named plaintiff’s securities, even when the securities were purchased from different trusts. NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., No 11-2762, 2012 WL 3854431 (2nd Cir. Sep. 6, 2012). In this case, the plaintiff, an institutional purchaser of certain mortgage-backed securities, filed suit on behalf of a putative class alleging that the offering documents contained material misstatements regarding the mortgage loan originators’ underwriting guidelines, the property appraisals of the loans, and the risks associated with the certificates. The district court dismissed the case, holding the named plaintiff lacked standing to bring claims on behalf of proposed class members that purchased securities from trusts other than the trusts from which the plaintiff bought securities. The district court also held that the plaintiff failed to allege a cognizable loss because the plaintiff knew the certificates might not be liquid and therefore could not allege injury based on a hypothetical price. On appeal, after acknowledging that putative class members purchased certificates issued through seventeen separate offerings backed by separate pools of loans, the court held that the named plaintiff raises a “sufficiently similar set of concerns” to allow it to seek to represent proposed class members who purchased securities backed by loans made by common originators. In overturning the district court with regard to the plaintiff’s ability to plead a cognizable injury, the court reasoned that while it may be difficult to value illiquid assets, “the value of a security is not unascertainable simply because it trades in an illiquid market.” The court reversed in favor of the plaintiff and remanded the case for further proceedings.
Ninth Circuit Holds Omission of Annual Fee in Credit Card Advertisements, Online Application Not Misleading
On August 31, the U.S. Court of Appeals for the Ninth Circuit upheld a district court’s dismissal of a putative class action alleging that a credit card issuer and a retailer violated California law when they failed to explicitly state the card’s annual fee in advertisements. Davis v. HSBC Bank Nevada, N.A., No. 10-56488, 2012 WL 3804370 (9th Cir. Aug. 31, 2012). The cardholder applied for a credit card that offered rewards for purchases, to be used at the retailer’s stores. Neither the advertisement for the card nor the application website mentioned that the card required an annual fee. The fee was disclosed only in the “Terms and Conditions” that the cardholder acknowledged having read and accepted prior to opening the credit account. On appeal, the cardholder argued that the omission of the annual fee in the advertisements, combined with the promise of rewards, constituted false advertising because it implied that no offsetting charges would erode the rewards. The court held that the advertisement was unlikely to deceive a reasonable consumer, even though it is possible that some people could misunderstand the terms. The court also rejected the cardholder’s argument that the issuer and retailer fraudulently concealed the fee. In doing so the court drew a distinction from its earlier decision in Barrer v. Chase Bank, N.A., 566 F.3d 883 (9th Cir. 2009), in which it held that a provision granting the issuer the right to alter the cardholder’s APR was buried in fine print and therefore violated TILA’s “clear and conspicuous” requirement. The court explained that its decision in Barrer had no bearing on the cardholder’s instant common law claims. Finally, the court rejected the cardholder’s claim that the online application and advertisements violated the state’s Unfair Competition Law because the online application is protected by a federal safe harbor and the advertisements were not deceptive.
Lender Settles TILA, UDAP Claims Over HELOC Reductions
On August 31, a lender preliminarily settled with a class of borrowers who claimed that the bank suspended or reduced borrower home equity lines of credit (HELOCs) in violation of the Truth in Lending Act and California’s Unfair Competition Law. In Re Citibank HELOC Reduction Litig., No. 09-350 (N.D. Cal. Aug. 31, 2012). The borrowers claimed that the bank improperly utilized computerized automated valuation models (AVMs) as the basis for suspending or decreasing customer HELOCs because of the decline in the value of the underlying property. The complaint also charged that customers were injured because (i) the annual fee to maintain the HELOC was not adjusted to account for the decreased limit, and (ii) the borrowers’ credit ratings were damaged as a result of the reduced credit limit. The named plaintiff also alleged injury because he was forced to obtain a replacement home equity line, which resulted in payment of an early termination fee on the old HELOC and additional costs related to the new HELOC. Under the agreement, class members will have a right to request reinstatement of their HELOC accounts, the bank will expand the information contained in credit-line reduction notices based on collateral deterioration, and customers who incurred an early closure release fee when closing the account subsequent to the suspension or reduction may make a claim for the cash payment of $120.
Federal Court Declines to Enjoin AG Prosecution of Claims Subject to Class Settlement
On August 22, the U.S. District Court for the Middle District of Florida denied a major bank’s motion to enjoin prosecution by two state attorneys general of claims related to the bank’s credit card payment protection products. Spinelli v. Capital One Bank, USA, No. 08-cv-00132, 2012 WL 3609028 (M.D. Fla. Aug. 22, 2012). In 2010 the bank entered a global class action settlement to release certain claims regarding payment protection, including those by all natural persons who have or had credit card accounts with the bank and who were charged for payment protection during a defined time period. After the Attorneys General of Hawaii and Mississippi (the state AGs) filed cases earlier this year regarding the same products, the bank petitioned the court that approved the class settlement to enjoin the state AGs, as well as any other person or entity with knowledge of the class settlement, from prosecuting similar claims against the bank. The bank argued that the state AG actions were brought on behalf of citizens who were bank customers released as part of the class settlement. The court held that a state’s sovereign interests cannot be compromised by a private settlement, the AGs were not bound by the class settlement, and an injunction would violate due process. The court also held that it no longer retained jurisdiction over the matter and that the courts hearing the state AG claims must decide whether the claims can properly proceed.
Federal Court Ruling on Placement of ATM Fee Notice Favors Consumers
On July 25, the U.S. District Court for the District of Minnesota granted summary judgment to a consumer alleging that the placement of an ATM fee notice on the inside of a “hooded ATM” was not “prominent and conspicuous” as required under the Electronic Fund Transfer Act (EFTA). Brown v. Wells Fargo & Co., No. 11-1362 2012 WL 3030294 (D. Minn. Jul. 25, 2012). The consumer, on behalf of a putative class, alleged that the ATM fee disclosure was placed on the inside of the hood protecting the screen, and not in a more conspicuous position. The consumer did not contest that the disclosure was provided electronically on the screen, as also required by the EFTA, and that he was aware before completing the transaction that he would be charged a fee. Because the EFTA does not define “prominent and conspicuous,” the court looked to other consumer protection statutes to determine that the disclosure must be displayed such that a reasonable person ought to have noticed. In this case, the court held that a reasonable person would not conclude that the notice was prominent and conspicuous because (i) the disclaimer was not in capital letters, (ii) the type and background of the notice were in a coordinating, not contrasting color, (iii) the notice was placed inside the hood as opposed to on top of the machine, and (iv) the notice generally did not stand out relative to other information on or near the ATM. While the court granted the consumer’s motion for summary judgment on the EFTA claims, the court disposed of his claim for unjust enrichment, and refused to certify the class, holding that the consumer failed to meet the requirements of either Rule 23(a) or (b). As we have reported in recent weeks, the U.S. Congress is considering legislation that would eliminate the physical fee disclosure requirement, and instead require that ATM operators only provide an on-screen notice.
Major Settlement Reached in Consolidated Interchange Fee Litigation
On July 13, the parties to the long-running consolidated class action litigation against the two major payment network providers and 17 banks filed a proposed settlement to resolve allegations that the defendants unlawfully conspired to fix the fees that merchants are charged each time a customer uses a card for a purchase, so-called “swipe” or “interchange” fees. Class Settlement Agreement, In re Payment Card Interchange Fee & Merchant Discount Antitrust Litigation, No. 05-MD-1720 (E.D.N.Y. Jul. 13, 2012). In total, the settlement is valued at $7.25 billion. Of that total amount, roughly $6 billion would be paid to a class of millions of merchants and certain individual merchants. Another $1.2 billion of the total amount would be used to provide merchants with a temporary reduction in interchange fees. Further, the agreement allows merchants, for the first time, to apply a surcharge to customer transactions processed over the payment networks.
Seventh Circuit Dismisses FACTA Truncation Class Action
On April 18, the U.S. Court of Appeals for the Seventh Circuit dismissed a class action seeking damages against Shell under the Fair and Accurate Credit Transactions Act (FACTA) for displaying four digits of customers’ credit card numbers on receipts printed at Shell gas stations. Van Straaten v. Shell Oil Products Co. LLC, No. 11-8031, 2012 WL 1340111 (7th. Cir. Apr. 18, 2012). FACTA requires that such receipts truncate card numbers to display no more than the last five digits of the card number. Shell’s practice was to print the last four digits of what it calls the “primary account number,” which is the number appearing before the last five digits of the sequence of numbers appearing on the front of the credit card. The plaintiffs did not allege that Shell’s practice created a risk of identity theft, but that Shell violated FACTA by printing the wrong four numbers. Writing for a three-judge panel, Chief Judge Frank Easterbrook indicated that FACTA does not define the term “card number,” but the panel did not have to define the term, “because we can’t see why anyone should care how the term is defined.” He added that ”[a] precise definition does not matter as long as the receipt contains too few digits to allow identity theft.” As to FACTA’s authorization of $100 to $1,000 for each willful violation, Judge Easterbrook noted that “[a]n award of $100 to everyone who has used a Shell Card at a Shell station would exceed $1 billion, despite the absence of a penny’s worth of injury.” Because Shell now prints no such digits on its receipts, “the substantive question in this litigation will not recur for Shell or anyone else; it need never be answered.”
New York Appellate Court Holds that Federal Law Does Not Preempt State Contract and Consumer Protection Laws in Gift Card Suit
On April 17, 2012, the Appellate Division of the New York Supreme Court held that federal laws and regulations do not preempt state contract and consumer protection laws, reversing an earlier trial court decision dismissing a lawsuit concerning gift card expiration dates and renewal fees. Sharabani v. Simon Property Group, Inc., No. 2010-07552, 2012 WL 1320067 (N.Y. App. Div. Apr. 17, 2012). The plaintiff filed an action based on New York state law to recover damages arising out of a gift card that required a reactivation fee for use after its expiration date. The defendant, a federally chartered thrift that managed the gift card program, and its co-defendant moved to dismiss the lawsuit on various grounds, including that all of the plaintiffs state law claims were preempted by federal law. The court held that although Office of Thrift Supervision (OTS) regulations permitted the issuance of gift cards with administrative fees, the OTS has explicitly stated that its regulations do not preempt state contract law, commercial law, tort law, or criminal law to the extent those laws are consistent with the OTSs intent to occupy the field of federal savings associations deposit-related regulations. Based on this regulatory guidance, the court determined that only the claim based on New Yorks abandoned property law was preempted by federal law because the OTS has specific regulations regarding abandoned accounts. The court affirmed dismissal of the abandoned property claim and remanded the remaining claims based on state contract and consumer protection laws to the trial court for evaluation under the remaining prongs of the defendants motion to dismiss.
Federal Appeals Court Holds Borrower Can Sue Servicer For Promised HAMP Modification
On March 7, the U.S. Court of Appeals for the Seventh Circuit held that a mortgage borrower could proceed with a class action suit against the servicer of her loan for its failure to offer a permanent loan modification under the federal Home Affordable Mortgage Program (HAMP). Wigod v. Wells Fargo Bank, N.A., No. 11-1423, 2012 WL 727646 (7th Cir. Mar. 7, 2012). In Wigod, the loan servicer and borrower entered into a Trial Period Plan (TPP) under HAMP; the servicer stated in the TPP that if the borrower complied with the TPP for four months, the servicer would offer the borrower a permanent HAMP modification. The borrower alleged that she complied with the TPP, but the servicer denied her a permanent HAMP modification. The borrower filed a class action on behalf of all similarly situated borrowers of the servicer who had entered into and complied with a TPP but were nevertheless denied a permanent modification. The District Court for the Northern District of Illinois granted the servicers motion for summary judgment, but the Seventh Circuit reversed on four of the seven counts. Judge Hamiltons opinion for the Circuit Court held thatwhile the borrower may not have been able to state a cause of action for a breach of HAMP directlythe borrower properly pled claims for breach of contract and promissory estoppel based on the servicers promise to offer a permanent modification in the TPP. The Circuit Court also held that the borrower sufficiently stated claims for fraudulent misrepresentation and for violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. Finally, the Circuit Court held that these state law claims were not preempted by federal law.
Ninth Circuit Holds Nevada AG Suit Against Bank Not Removable Under CAFA
On March 2, the U.S. Court of Appeals for the Ninth Circuit held that a parens patriae suit brought by Nevada’s Attorney General (AG) related to mortgage modification and foreclosure practices could not be removed from state court under the Class Action Fairness Act (CAFA). Nevada v. Bank of America Corp., No 12-15005, 2012 WL 688552 (9th Cir. Mar. 2, 2012). The AG alleges that Bank of America Corp. (BAC) violated state law by misleading Nevada consumers about the terms and operation of its home mortgage modification and foreclosure processes, and that it violated a consent judgment entered between the state and several of its subsidiaries. BAC removed the case to federal court under CAFA. The district court denied the state’s motion to remand, finding that (i) it had jurisdiction over the suit as a CAFA “class action,” but not as a “mass action,” and (ii) it had federal question jurisdiction because the allegations require interpretation of the federal HAMP program and the Fair Debt Collections Practices Act. On appeal, the Ninth Circuit consistent with its opinion in Washington v. Chimei Innolux Corp., 659 F.3d 842 (9th Cir. 2011), which was issued after the district court ruled on Nevada’s motion, held that a parens patriae suit does not qualify as a class action removable under CAFA, and does not otherwise satisfy CAFA’s “mass action” requirements. The court reasoned that Nevada is the real party in interest and therefore held that the case could not qualify as a mass action removable under CAFA. The Ninth Circuit also held that, because only state law causes of action are alleged and there is no overriding federal interest, the district court does not have federal question jurisdiction.