Saturday, September 23, 2017

FYI: 9th Cir Holds Nevada Deficiency Limitation Preempted as to Transferees of FDIC

The U.S. Court of Appeals for the Ninth Circuit recently affirmed final judgments against corporate borrowers and guarantors in three separate cases, holding that:

 

(a)  the Nevada statute limiting the amount of the deficiency recoverable in a foreclosure action was preempted by federal law as applied to transferees of the Federal Deposit Insurance Corporation (FDIC);

(b)  the plaintiff bank had standing to enforce the loans it acquired from the FDIC;

(c)  the bank was not-issue precluded from showing that the subject loans had been transferred to it;

(d)  the bank did not breach the implied covenant of good faith and fair dealing by suing instead of giving the borrowers more time to restructure the loans because the alleged oral promise of more time lacked consideration and without a binding contract the implied covenant did not apply, the loan documents provided that any modification must be in writing, and defendants had entered into written agreements acknowledging that the bank reserved it right to enforce the loans.;

(e)  the bank was not estopped and did not waive its right to enforce the loans because the defendants at all times knew the loan documents could only be modified in writing and the written acknowledgments reserved the bank's right to enforce the loans;

(f)  the doctrine of laches did not bar the bank's right to foreclose on two of the loans because the bank sued within the statute of limitations and no exceptional circumstances were shown to justify application of laches;

(g)  the bank did not fail to mitigate its damages because it owed no duty to time its foreclosure proceedings so as to minimize any deficiency;

(h)  the trial court did not abuse its discretion by refusing to extend the deadline to amend the pleadings to allow the defendant to add four new defenses and a counterclaim based on the alleged work-out agreement because they showed neither good cause nor excusable neglect for seeking to amend after the pretrial deadline had already passed;

(i)  the defendant debtors were not entitled to a jury trial on the fair market value of the property in two of the cases; and

(j)  the bank did not violate the Nevada statute requiring notice to beneficiaries of the family trusts that guaranteed the debts.

 

A copy of the opinion is available at:  Link to Opinion

 

In 2004 and 2005, three limited liability companies received loans from a bank. The loans were guaranteed by the companies' principals in their capacity as trustees for family trusts. The borrowers failed to repay the loans.

 

The bank was succeeded by an Alabama bank of the same name, which in turn failed in 2009 and was placed in receivership by the FDIC.

 

The FDIC sold the failed bank's assets, including the subject loans, to a North Carolina bank. The sale was evidenced by a purchase and assumption agreement, a loss sharing agreement and an assignment.

 

The acquiring bank entered into negotiations with the borrowers about restructuring the loans and during this process the borrowers signed an acknowledgment providing that such negotiations were without prejudice to the lender's enforcement rights and specifically reserving the bank's right to enforce the loan documents.

 

In November of 2011, the acquiring bank sued to collect one of the loans, raising claims for breach of the promissory note, guaranty and breach of the covenant of good faith and fair dealing. The parties moved for summary judgment and the district court granted the acquiring bank's motion and entered judgment for 7.1 million dollars against the defendant debtors, from which they appealed.

 

In February of 2012, the properties securing the other two loans were sold at non-judicial sales and in March of 2012 the acquiring bank filed separate lawsuits against the borrowers and guarantors alleging breach of the promissory note, guaranty and breach of the covenant of good faith and fair dealing. The district courts granted summary judgment in the acquiring bank's favor in both actions, entering judgment for approximately $1.9 million dollars and $630,000 respectively against the defendant debtors, from which they appealed.

 

On appeal, the debtors argued that the acquiring bank lacked standing to enforce the loans when the complaints were filed. The Ninth Circuit rejected this argument, reasoning first that the purchase and assumption agreement, loss sharing agreement, assignment and deeds of trust securing two to loans sufficiently described and encompassed the subject loans and thus the acquiring bank had the right to enforce them.

 

Next, the Ninth Circuit rejected the debtors' argument that the acquiring bank was issue-precluded by a 2013 Nevada Supreme Court ruling that held that the same bank could not rely on the purchase and assumption agreement to prove that the loan involved in that case had been assigned.

 

The Court reasoned that the case cited by debtors did not involve the same loans and the Nevada Supreme Court's decision was not based on lack of standing, but instead on the acquiring bank's failure to "produce schedules to the [purchase and assumption agreement] listing assets excluded from the transfer. There was thus no evidence that the loan at issue there was not excluded from the [agreement] by one of those schedules." In the case at bar, by contrast, the acquiring bank "produced not only the [purchase and assumption agreement], but also the attendant schedules showing the loans at issue were not excluded from the terms of the [agreement]."

 

The Ninth Circuit then turned to analyze the debtors' argument that the acquiring bank "failed to prove each element of its deficiency action" because it did not prove the amount that it paid for the assignment of the subject loans and a Nevada statute limits the amount of the deficiency to the greater of the amount by which the amount paid for the loan "exceeds the fair market value of the property sold at the time of sale or the amount for which the property was actually sold…."

 

The Court rejected this argument, agreeing with the acquiring bank that the Nevada statute is unconstitutional and preempted by federal law. The Court relied upon a 2015 Nevada Supreme Court case which held that the statute at issue is preempted by [the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") "to the extent that it would limit recovery on loans transferred by the FDIC."  

 

The Ninth Circuit noted that "[i]t would be more difficult for the FDIC to dispose of the assets of failed banks if the transferee could not turn a profit on those assets." Thus, the Court adopted the Nevada Supreme Court's reasoning and held that the Nevada statute "is preempted by federal law as applied to transferees of the FDIC."

 

Next, the Court rejected the debtors' argument that the trial court erred in granting summary judgment because the acquiring bank breached the implied covenant of good faith and fair dealing by not honoring its oral promise to give the borrowers time to restructure the loans. It reasoned that the alleged work-out agreement was not an enforceable contract because it lacked consideration and, "[a]bsent a contract, there can be no implied covenant of good faith and fair dealing."

 

In addition, the Court noted that the loan documents provided that any modification must be in writing, such that the alleged oral modification was unenforceable.  Moreover, the Ninth Circuit noted, during the loan work-out negotiations, the debtors had entered into written agreements acknowledging that the acquiring bank reserved it right to enforce the loans.

 

The Ninth Circuit also rejected the debtors' argument that the acquiring bank was estopped or, alternatively, waived its right to enforce the loans, reasoning that even though "[e]stoppel can apply to a promise for which there was no consideration paid [and,] [i]n such a case, reliance is a substitute for consideration[,]" the third element of estoppel, "the party asserting estoppel must be ignorant of the true state of facts[,]" was missing.

 

The Court explained that the debtors at all times knew the loan documents could only be modified in writing and the written acknowledgments reserved the acquiring bank's right to enforce the loans. The waiver argument failed for the same reasons.

 

The Ninth Circuit next rejected the debtor's argument that laches barred the acquiring bank's right to foreclose on two of the loans because it waited to sue until the market value of the collateral had fallen, reasoning that "[e]specially strong circumstances must exist … to sustain a defense of laches when the statute of limitations has not run." No such circumstances were shown and the two lawsuits at issue were filed within the statute of limitations.

 

The debtors also argued that the acquiring bank failed to mitigate its damages because it "strung [them] along with promises of a work-out agreement, all the while intending to foreclose on the properties when the market bottomed out." The Court first noted that debtors cited no precedent showing that by doing this the acquiring bank "thereby breached a duty to them." The Court relied upon and found persuasive the Texas Supreme Court's holding in a 1990 case the "held that there is not duty for a secured creditor to time a foreclosure sale so as to minimize a deficiency."

 

The Ninth Circuit next rejected the debtors' argument that the trial court erred by refusing to allow them to amend their answer to "add four new defenses and a counterclaim based on the alleged work-out agreement" after the pretrial deadline had passed, reasoning that they did not show good cause or excusable neglect as required because "[t]he defenses and counterclaim they sought to add were based on the work-out agreement, which [they] knew about long before the deadline to amend had passed." The Court noted that this showed a lack of diligence, and the debtors could not show excusable neglect because they offered no explanation for the delay in seeking to amend.

 

In addition, the debtors argued that the trial court erred in two of the cases by deciding to "determine the fair market value of the … properties itself rather than submitting the issue to a jury … [thereby violating] their Seventh Amendment right to a jury trial…."

 

The Ninth Circuit rejected this argument, reasoning that "[u]nder the Seventh Amendment, the right to a jury trial exists in 'Suits at common law.'" "Nevada law appears to contemplate that fair market value in deficiency actions will be determined by the court, not by a jury. … Thus while the nature of the action may be legal, the nature of the remedy calculated based on fair market value is equitable. As the nature of remedy is the more important consideration under the Seventh Amendment, [the debtors] were not entitled to a jury trial on the fair market value of the property."

 

Finally, the Court rejected the debtors' argument that the bank violated Nevada's statute requiring that the foreclosing mortgagee give notice to known trust beneficiaries at least 30 days before obtaining a judgment, because the statute expressly provides that the notice may be given within such time as the court may fix, and the trial court "in these cases determined that the notice requirement was met by the service of the complaint and by a letter of August 29, 2013."  Because "[j]udgment in the cases was not entered until approximately two years after this letter, well before the 30-day limit in the statute[,]" the Ninth Circuit held that the acquiring bank did not violate the statute.

 

Accordingly, the judgments of the trial court in all three actions were affirmed.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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Wednesday, September 20, 2017

FYI: 2nd Cir Remands False Claims Act Claim on Materiality of Bank's Representations

The U.S. Court of Appeals for the Second Circuit recently remanded a federal False Claims Act ("FCA") lawsuit based upon alleged misrepresentations made by a bank when it applied to borrow funds from the Federal Reserve System's discount window. 

 

The Second Circuit remanded the case to the trial court to determine whether the relators adequately alleged the materiality of the bank's alleged misrepresentations. 

 

In so doing, the Second Circuit held that the Supreme Court had abrogated both the express designation requirement for implied false certification claims, and the particularity requirement for express false certification claims, in its recent ruling in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016) ("Escobar").

 

A copy of this opinion is available at:  Link to Opinion

 

As you may recall, the FCA prohibits "knowingly present[ing], or caus[ing] to be presented, a false or fraudulent claim for payment or approval" to the United States government.  31 U.S.C. § 3729(a)(1)(A).

 

In 2011, the relators brought a qui tam action against the bank under the FCA.  The relators claimed that the bank falsely certified its compliance with banking laws in order to borrow money at favorable rates from the Federal Reserve System. 

 

According to the relators' complaint, two entities which had merged into the bank had perpetrated a massive fraud, including by using improper accounting practices to hide toxic assets off their balance sheet and by making inappropriate loans.  The bank later borrowed money from the Federal Reserve System's discount window.

 

The relators alleged that the bank had made several express false certifications pursuant to its lending agreement with the Federal Reserve.  In particular, the lending agreement required the bank to certify that it was "not in violation of any laws or regulations" when it borrowed from the discount window. 

 

Alternatively, the relators argued that the bank was liable for an implied false certification insofar as the Federal Reserve used and relied upon certain financial statements issued by the bank in determining the bank's eligibility to borrow from the discount window. 

 

Specifically, the Relators pointed to Regulation A, 12 C.F.R. pt. 201, which was promulgated under the Federal Reserve Act and the International Banking Act of 1978.  Regulation A mandates certain information which the Federal Reserve must collect to determine whether a given bank is eligible to receive a loan.  In practice, the Federal Reserve Banks rely on information that the banks are otherwise required to report to regulators.  The relators argued that the Federal Reserve had relied on "untrue" or "misleading" financial statements in determining whether the bank was eligible to receive the loan.

 

The trial court dismissed the relators' lawsuit and the Second Circuit initially affirmed.  The Second Circuit relied upon its prior ruling in Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001) ("Mikes") for two limitations placed upon false claims act allegations. 

 

First, Mikes required that "implied false certification is appropriately applied only when the underlying statute or regulation upon which the plaintiff relies expressly states the provider must comply in order to be paid."  And second, Mikes also held that "[a]n expressly false claim is … a claim that falsely certifies compliance with a particular statute, regulation or contractual term, where compliance is a prerequisite to payment."

           

The Second Circuit found that the bank's certification that it was "not in violation of any laws or regulations" did not certify compliance with a particular statute and thus could not support a False Claims Act lawsuit.  The Second Circuit also found that the relators could not assert an implied false certification claim because Regulation A of the Federal Reserve Act did not apply to the banks themselves, instead it governed the Federal Reserve's authority to lend to banks.  12 C.F.R. pt. 201. 

 

The Supreme Court of the United States vacated and remanded the Second Circuit's opinion in light of its recent ruling in Escobar. 

 

As you may recall, Escobar set out a materiality standard for FCA claims that had not been applied to the relator's claims by the trial court:  "[A] misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government's payment decision in order to be actionable under the [FCA]."  Escobar, 136 S. Ct. at 2002. 

 

The Supreme Court explained that "proof of materiality can include, but is not necessarily limited to, evidence that the defendant knows that the Government consistently refuses to pay certain claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement.  Conversely, if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements were not material."  Id. at 2003-04.

 

Escobar directly abrogated Mikes's express designation requirement for implied false certification claims.  In addition, the Second Circuit also determined that Escobar also abrogated Mike's particularity requirement. 

 

The Second Circuit observed that Escobar had indicated that limitations on liability under the FCA must be grounded in the text of the FCA.  And, the Second Circuit found that there was no textual support in the FCA for Mikes's particularity requirement.

 

Accordingly, the Second Circuit remanded the case to the trial court to determine whether the relators adequately alleged the materiality of the bank's alleged misrepresentations.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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Invitation: Annual Consumer Financial Services Conference | CCFL | Nov 2-3, 2017 | Ft. Worth, TX

Please join us at the Annual Consumer Financial Services Conference (attached) organized by The Conference on Consumer Finance Law. 

 

The Conference will be hosted at the Texas A&M University School of Law in Fort Worth, Texas, on November 2-3, 2017.

 

WHEN:  Nov. 2-3, 2017

WHERE:  Texas A&M University School of Law  |  Ft. Worth, TX

CLE:  12.0 CLE Credits to Be Provided, including 1.0 hr of Ethics

PRICE:  $495 before Sept. 22, 2017

 

For more information, including as to registration, sponsorship, and hotel accommodations, please see:

https://www.ccflonline.org/conference/

 

Hope to see you there!

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   Michigan   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars

 

and

 

California Finance Law Developments 

 

Sunday, September 17, 2017

FYI: 9th Cir Holds Creditor in Fraudulent Transfer Action May Recover Amounts Above Collateralized Debt

The U.S. Court of Appeals for the Ninth Circuit recently held that, where husband and wife debtors fraudulently transferred assets, the creditor was entitled to the full sum the creditor would have recovered and was not limited to the amount of the collateralized debt. 

 

In so ruling, the Ninth Circuit reversed a bankruptcy court and trial court judgment in the creditor's favor that the debt was non-dischargeable due to the debtor's fraud, but improperly limiting the non-dischargeable debt to only the collateralized amount.

 

A copy of the opinion is available at:  Link to Opinion

 

A bank (Lending Bank) made a commercial loan to husband and wife borrowers. The husband borrower was the sole member and manager of a cash advance business, which purchased five insurance agencies with the $1.7 million loan from the Lending Bank,

 

The cash advance business executed a promissory note for the loan and gave the Lending Bank a blanket security interest in all of its assets, including intangibles, and the debtors personally guaranteed the note.  The Lending Bank in turn financed the loan under a credit and security agreement with another bank (Financing Bank) in which the Financing Bank was granted a security interest in the loan to the business.

 

Ten months later, the Lending Bank defaulted on the security agreement with the Financing Bank and filed for bankruptcy. The Financing Bank and the Lending Bank agreed to transfer the cash advance business's note and the personal guarantee to the Financing Bank.  The cash advance business formally acknowledged the assignment and agreed to pay the balance on the note to the Financing Bank.

 

Over the next several years the cash advance business repeatedly requested loan modifications and entered into several forbearance agreements with the Financing Bank. The cash advance business also executed an elaborate series of transfers and sales to place their assets beyond their creditors' reach.

 

The cash advance business transferred $123,200 of assets to a closely-held business of which the husband owned 100% of the shares. The husband and wife created a family trust, of which they were the beneficiaries. The closely-held business then transferred its total assets, valued at $385,000, to another company that the husband purchased from a friend for $200. The trust then purchased that company and the company agreed to pay its $385,000 in assets to the husband. The result left all of the businesses and the trust insolvent.

 

The cash advance business defaulted on the loan and the debtors defaulted on the guarantee.

 

The Financing Bank filed a lawsuit against the cash advance business and husband and wife. The husband and wife then filed for bankruptcy. The Financing Bank's lawsuit against the husband and wife was stayed but the lawsuit against the cash advance business proceeded and resulted in a judgment of $1.7million.  The Financing Bank could not collect, however, because the cash advance business was insolvent.

 

The Financing Bank then filed an adversary action against the husband and wife in bankruptcy court alleging that they had fraudulently transferred assets under the Washington Uniform Fraudulent Transfer Act, Wash. Rev. Code § 19.40.041 ("WUFTA"), and thus the debt was non-dischargeable under 11 U.S.C. §523(a). As you may recall, section 523(a) excepts from discharge debts obtained by actual fraud, which includes fraudulent conveyance. 11 U.S.C. § 523(a)(2)(A).

 

The bankruptcy court ruled in favor of the Financing Bank on the fraudulent transfer claim but limited the judgment to $123,200, which was the amount that was traceable to the Financing Bank's security interest in the cash advance business's assets.

 

The Financing Bank appealed and the trial court affirmed on different grounds, explaining that the Financing Bank could not maintain a fraudulent transfer claim on "non-collateral assets" because the Financing Bank could only recover assets that were the property of the debtors, meaning legally titled in the debtors' name.

 

Thus, the lower court held, the Financing Bank could not recover any assets from the family trust or the closely-held businesses involved in the fraudulent transfers, and, do to so under WUFTA, the Financing Bank would have had to obtain a ruling that those entities were the alter egos of the debtors, which it had failed to do.

 

The Financing Bank appealed.

 

On appeal, the Ninth Circuit reversed explaining that the purpose of WUFTA is "to provide relief for creditors whose collection on a debt is frustrated by the actions of a debtor to place the putatively satisfying assets beyond the reach of the creditor," which is also known as fraud.

 

The Court compared the facts of this case to others around the country under identical or similar fraud laws and concluded that, through the series of transfers, the husband "depleted the value of his assets to the detriment of his creditors" while he continued to receive payments from the trust even after he filed for bankruptcy, thereby preventing the Financing Bank from collecting the debt he owed. Thus, the Ninth Circuit agreed with the bankruptcy court's finding that the debtors had engaged in actual fraud.

 

The Ninth Circuit reversed on the issue of the amount the Financing Bank could recover because it was only the fraudulent transfers that prevented the Financing Bank from being able to collect.

 

Based on 11 U.S.C. §523(a)(2)(A), if the husband had not fraudulently transferred the assets from the closely-held company, the Financing Bank would have been able to recover against it because a non-dischargeability claim based on a fraudulent transfer scheme between closely-held companies intended to defeat collection of a debt is actual fraud. 

 

Thus, the Ninth Circuit held, the amount of the non-dischargeable debt was not merely the $123,200 in assets from the cash advance business, but included the $385,000 in fraudulently transferred assets.

     

Accordingly, the lower court's judgment was reversed and the matter remanded.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   Michigan   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars

 

and

 

California Finance Law Developments 

 

Saturday, September 16, 2017

FYI: 11th Cir Reverses Limited Atty Fee Award Where Plaintiff Had No Actual Damages But Proved Statutory Violation

The U.S. Court of Appeals for the Eleventh Circuit recently affirmed a trial court's award of $2,500 in statutory damages to a plaintiff whose private information was improperly viewed by a Sheriff's Deputy who had a romantic relationship with the plaintiff's ex-husband in violation of the federal Driver's Privacy Protection Act (DPPA), holding that the statute did not provide for cumulative damages of $2,500 per violation.

 

In so ruling, the Court reversed the trial court's award of only 10% of the amount of attorney's fees requested by the plaintiff's counsel.

 

The trial court limited the attorney fee award because the plaintiff failed to prove any actual damages, therefore only recovering the statutory penalty, which the trial court likened to cases in which "a party 'recovers only nominal damages because of his failure to prove an essential element of his claim for monetary relief,' where 'the only reasonable fee is usually no fee at all.'" 

 

In reversing the trial court's limited fee award, the Eleventh Circuit held that a plaintiff need not prove actual damages to recover the other types of remedies provided by the statute at issue, including attorney's fees, and that the statutory penalty was a "liquidated damages" remedy rather than only "nominal damages."

 

A copy of opinion is available at:  Link to Opinion

 

The plaintiff and her husband divorced in 2010. The following year, the former husband married an Orange County Sheriff's Deputy with whom he had an affair while still married to the plaintiff.

 

Between January 2010 and November of 2011, the Sheriff's Deputy, "while sitting alone in her patrol car, … used her access to law enforcement databases … to search [plaintiff's] name."  After the divorce, plaintiff made a Freedom of Information Act (FOIA) request and "learned that [the Sheriff's Deputy] had been searching her name on drivers' license databases."

 

Plaintiff then filed an administrative complaint with the police department and during the investigation the Sheriff's Deputy admitted "that she did not have a legitimate business or law enforcement reason for accessing [plaintiff's] information." The deputy "was suspended for 60 hours without pay and placed on disciplinary probation for six months."

 

The plaintiff sued the Sheriff's Deputy for violating the DPPA and her civil rights under 42 U.S.C. § 1983, alleging that she suffered emotional distress.

 

The trial court granted plaintiff's motion for judgment as a matter of law on the issue of liability after a jury trial. The plaintiff waived her 42 U.S.C. § 1983 claim and agreed to pursue damages only under the DPPA.

 

At trial, the court provided the jury with a verdict form containing three interrogatories to determine damages. In response to the first interrogatory, the jury found that the Sheriff's Deputy violated the DPPA 101 times. In response to the second interrogatory, the jury found that the Deputy's actions did not cause the plaintiff to suffer any actual damages. The jury did not reach the third interrogatory, which asked what amount of compensable damages were attributable to the Deputy's conduct.

 

The plaintiff requested $252,500 in liquidated damages: $2,500 for each of the Deputy's]101 violations of the DPPA, as well as attorney's fees of $153,787 and costs of $4,227.44.  The trial court awarded only $2,500 in liquidated damages, $15,379 in attorney's fees, and $4,227.44 in costs.  The trial court reasoned that the case did "not implicate the purposes of the DPPA, [the deputy] did not use or disclose [plaintiff's] private information, and [plaintiff] did not suffer any actual damages." As to attorney's fees, the trial court reasoned that the reduction was justified because the plaintiff recovered none of the compensatory damages she sought and only 1% of her statutory damages, and therefore in the trial court's view only 10% of the requested attorney's fees was a reasonable amount. The plaintiff appealed.

 

On appeal, the Eleventh Circuit began by analyzing the text of the DPPA, 18 U.S.C. § 2724, which provides that "[a] person who knowingly obtains, discloses or uses personal information, from a motor vehicle record, for a purpose not permitted under this chapter shall be liable to the individual to whom the information pertains, who may bring a civil action in a United States district court." The statute further provides that "[t]he court may award … (1) actual damages, but not less than liquidated damages in the amount of $2,500; (2) punitive damages upon proof of willful or reckless disregard of the law; (3) reasonable attorneys' fees and other litigation costs reasonably incurred; and (4) such other preliminary and equitable relief as the court determines to be appropriate."

 

The Court characterized as "an issue of first impression in this Circuit" the plaintiff's argument that she was entitled to $2,500 per violation, pointing out that despite plaintiff's argument that the statutory language was clear, it found the language "far from clear." The Eleventh Circuit noted that the text of the DPPA does not explicitly require per violation awards, but it does not seem to rule them out either.

 

The Eleventh Circuit held, however, that the remedy part of the statute's use of the word "may" "does use plainly permissive language. … Not only does the use of the word "may" imply permissiveness, but we have expressly held so when interpreting this exact provision of the DPPA."  In a prior ruling, the Court held that "[t]he use of the word 'may' [in § 2724(b)] suggests that the award of any damages is permissive and discretionary."

 

Having found that an award of any damages was discretionary, the Court concluded that because the jury found that plaintiff did not suffer any actual damages, "[t]he district court properly used its discretion to fashion a damages award appropriate for this situation. A textual reading of § 2724 leads us to the conclusion that the district court's discretion is only limited in the sense that it must award at least $2,500 if any violation has been shown. For awards above that amount, we review for abuse of discretion."

 

The Eleventh Circuit buttressed its conclusion by noting that Congress included "cumulative damages in the criminal section of the DPPA, § 2723, … [and] '[i]t is well settled that where Congress includes particular language in one section of a statute but omits in in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion of exclusion.'" Thus, Congress could have, but presumably chose not to, "include language that permits cumulative damages in the civil section…."

 

The Court pointed out that while the deputy's "conduct here was unmistakably wrong and police officers should not be allowed to take advantage of their position of power to access private information, [since] the statute specifically provides for punitive damages to deter this conduct[,] … [r]eading 'per violation' into the statute's liquidated damages clause to mandate cumulative damages would enable unharmed plaintiffs to abuse this provision." Accordingly, the trial court's award of $2,500 in liquidated damages was affirmed.

 

Turning to the issue of attorney's fees and the trial court's award of compensation for only "48 hours of work" when the plaintiff asked for "481 hours of attorney time", the Court reasoned that "[t]he starting point for determining the amount of a reasonable fee is the number of hours reasonable expended on the litigation multiplied by a reasonable hourly rate. … This number is called the lodestar and 'there is a strong presumption' that the lodestar is the reasonable sum the attorneys deserve. … In determining whether the lodestar is reasonable, 'the district court is to consider the 12 factors enumerated in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974). … If the lodestar is reasonable, a downward adjustment 'is merited only if the prevailing party was partially successful in its efforts. … A district court must determine what counts as partial success on a case-by-case basis."

 

The Eleventh Circuit that the trial court mistakenly "did not start its analysis with the lodestar and erred in its approach to the Johnson factors[,]" giving too much weight to the "eighth … factor, the amount involved and the results obtained. While those are certainly relevant considerations, especially for determining an appropriate downward adjustment, under the circumstances of this case we find that the district court went too far by reducing the requested fees by 90%."

 

The Court disagreed with the trial court's reasoning that the case was similar "to one in which a party 'recovers only nominal damages because of his failure to prove an essential element of his claim for monetary relief,' where 'the only reasonable fee is usually no fee at all.'" 

 

The Eleventh Circuit held that a plaintiff "need not prove actual damages to recover the other types of remedies listed in § 2724,' which includes attorney's fees." It also distinguished between liquidated and actual damages. "Liquidated damages are '[a]n amount … stipulated as a reasonable estimation of actual damages.' … Liquidated damages are a pre-fixed amount, set here by Congress. Nominal damages are 'a judicial declaration that the plaintiff's right has been violated."  Because Congress set a fixed amount of liquidated damages, the Court concluded it "should defer to Congress's judgment."

 

Accordingly, the trial court's judgment was affirmed as to damages, and reversed as to attorney's fees, and the matter was remanded for recalculation of the fees.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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