Friday, December 28, 2012

FYI: 9th Cir Holds NBA Preempted Unfairness Claim as to "High-Low" Deposit Account Posting Method, But Not Related Misrepresentation Claim, Arbitration Assertion Too Late

The U.S. Court of Appeals for the Ninth Circuit recently held that the National Bank Act ("NBA") preempted California's Unfair Competition Law ("UCL") with respect to the order in which a national bank posted payment  transactions and the bank's obligation to make affirmative disclosures to bank customers about its posting practices, ruling that the bank's method of posting was a federally authorized pricing decision related to the calculation of overdraft fees and the requirement to make particular disclosures fell squarely within the purview of federal banking regulation.  

 

The Court also ruled, however, that the NBA did not preempt a claim for misrepresentation under the UCL as to the actual posting method the bank used, reasoning that the UCL's prohibition on misleading statements was a state law of general applicability that did not conflict with the NBA, mandate the actual content of the statements, frustrate the purposes of the NBA, or impair the ability of national banks to discharge their duties.  

 

The Ninth Circuit further ruled that the Federal Arbitration Act did not require arbitration of the dispute over the bank's method of posting debit transactions, where the controlling arbitration agreement did not require disputes to be submitted to arbitration, the bank never demanded arbitration prior to the appeal, and ordering arbitration post-judgment and post-appeal would severely prejudice the plaintiffs and result in duplicative proceedings.

 

A copy of the opinion is available at: 

http://www.ca9.uscourts.gov/datastore/opinions/2012/12/26/10-16959.pdf.

 

A customer ("Depositor") with a checking account at a national bank ("Bank") sued on behalf of a class under California's Unfair Competition Law ("UCL"), alleging that Bank engaged in unfair business practices by posting debit-card transactions in a "high-to-low" order which supposedly enabled Bank to maximize the number of overdrafts charged to a checking account on small purchases.  In addition, Depositor claimed that Bank also engaged in fraudulent business practices by misleading its customers as to the actual posting method Bank used.

 

Rejecting Bank's arguments that the National Bank Act ("NBA") preempted the UCL and that Depositor lacked standing, the lower court certified the class and concluded among other things that Bank had acted in bad faith in both failing to disclose the effects of high-to-low posting and misleading its customers to believe that the posting order of debit purchases would mirror the order in which the purchases were made.  Thus ruling that Bank's actions were both unfair and fraudulent under the UCL, the lower court entered a permanent injunction requiring Bank to cease posting debit-card transactions in high-to-low order and further imposed various disclosure requirements.  The court also ordered Bank to pay over $200 million in restitution. 

 

Both parties appealed, but Bank also sought to compel arbitration under an arbitration clause in Bank's deposit agreement with its customers.   

 

The Ninth Circuit reversed in part and affirmed in part, ruling that:  (1) the NBA preempted the "unfair" business practices prong of the UCL with respect to the order in which a national bank posts transactions; (2) the NBA preempted the imposition of affirmative disclosure requirements and liability for failure to disclose; and (3) the NBA did not preempt Depositor's claim under the "fraudulent" prong of the UCL based on affirmative misrepresentations in Bank's marketing materials as to the order in which Bank would post debit-card transactions. 

 

The Court of Appeals also ruled that Bank could not compel arbitration in this case even after the U.S. Supreme Court's decision in AT&T Mobility LLC v. Concepcion. 

 

As you may recall, the NBA authorizes national banks to receive deposits and grants national banks "all such incidental powers as shall be necessary to carry on the business of banking," which "incidental powers" include the power to set account terms and the power to charge customers non-interest charges and fees, including overdraft fees.  See 12 U.S.C. § 24 (Seventh); 12 C.F.R. § 7.4002(a).  In addition, federal banking regulations specifically delegate to national banks the method of calculating fees.  12 C.F.R. § 7.4002(b)(2)(method of calculating non-interest charges and fees "are business decisions to be made by each [national] bank, in its discretion, according to sound banking judgment and safe and sound banking principles" that include such factors as cost to bank, deterrence of misuse by customers, competitive advantage, and maintenance of safety and soundness of bank). 

 

With respect to disclosure requirements, "[a] national bank may exercise its deposit-taking powers without regard to state law limitations concerning . . . [d[isclosure requirements."  12 C.F.R. § 7.4007(b)(3).

 

Moreover, California's UCL allows individual plaintiffs to bring claims for unfair, unlawful, or fraudulent business practices and authorizes injunctive relief and restitution as remedies against persons or entities engaging in such acts.  Cal. Bus. & Prof. Code § 17200 et seq.  

 

Finally, payor banks operating in California may accept or pay items in any order, provided that they act in good faith in charging customers overdraft or returned-check fees.  See Cal. Com. Code § 4303, 1992 Amendment cmt. 7.

 

Analyzing each of Depositor's claims separately to determine whether they were preempted by the NBA, the Ninth Circuit examined whether the UCL "prevent[s] or significantly interfere[s] with [bank's] exercise of its powers.  See Barnett Bank of Marion Cnty., N.A. v. Nelson, 517 U.S. 25, 33 (1996).  In so doing, the Ninth Circuit noted in part that the ability to choose a method of posting transactions is  integrally related to the receipt of deposits and that the lower court's permanent injunction amounted to a complete prohibition on the high-to-low sequencing method of posting.  The Court further noted that federal banking regulations specifically delegate to national banks the method of calculating fees.  See Watters v. Wachovia Bank, N.A., 550 U.S. 1, 12 (2007)(ruling that choice of posting method falls within federal banking regulatory power that ordinarily preempts contrary state law). 

 

Thus, citing interpretive letters of the Office of the Comptroller of the Currency ("OCC") and observing that federal bank regulators consider high-to-low posting and associated overdraft fees to be authorized by Federal law and therefore within the power of a national bank, the Court of Appeals ruled that the district court's findings with respect to Bank's compliance with federal regulation were "inapposite to the issue of preemption."  See, e.g., Martinez v. Wells Fargo Home Mortg., Inc., 598 F.3d 549, 556 n.8 (9th Cir. 2010); Baptista v. JP Morgan ChaseBank, N.A., 640 F.3d 1194, 1197 (11th Cir. 2011).  Accordingly, the Court ultimately ruled that the lower court lacked the discretion to determine "what constitutes a legitimate pricing decision or to apply state law in a way that interferes with this enumerated and incidental power of national banks" and that the "good faith" requirement in California's Commercial Code applied through the UCL was similarly preempted.

 

Turning to the "fraudulent" prong of the UCL, the Ninth Circuit observed in part that federal regulations allow national banks to exercise their deposit-taking powers without regard to state-law limitations on disclosure requirements.  See 12 C.F.R. § 7.4007(b)(3).  Further observing that the lower court's imposition of liability on Bank for failure to sufficiently disclose its posting method was tantamount to state regulation of disclosure requirements, the Court stressed that the UCL does not impose disclosure requirements but simply prohibits misleading statements.   The Court thus distinguished between state disclosure requirements imposed on national banks, which the court ruled were preempted by the NBA, and state law governing misleading statements, which were not so preempted.

 

Accordingly, with regard to such statements in Bank's marketing materials as "[i]f you don't have enough money in your account to cover the withdrawal, your purchase won't be approved," the Court ruled that the UCL's prohibition on misleading statements was a law of general applicability that did not "conflict with federal law, frustrate the purposes of the [NBA], or impair the efficiency of national banks to discharge their duties."  As the Ninth Circuit explained, the UCL's prohibition of misleading statements did not significantly interfere with Bank's ability to offer checking account services, choose a posting method, or calculate fees.   Citing, among other things, an OCC advisory letter indicating that national banks may be subject to state laws prohibiting unfair or deceptive practices, the Court ruled that Depositor's claim under the UCL for misrepresentation was not preempted by the NBA.

 

As to Bank's attempt to compel arbitration of Depositor's claims, the Ninth Circuit  noted that:  (1) the customer account agreement contained a permissive arbitration clause allowing but not mandating either party to submit a dispute to binding class arbitration; (2) the penalty for failure to consent to arbitration upon demand is bearing the costs involved in compelling arbitration; (3) Bank never demanded arbitration, raised it as a defense, or even mentioned it until after the U.S. Supreme Court had issued its decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), after the conclusion of the trial and the lower court had issued its judgment.  Observing that Bank could have sought a stay pending the outcome of Concepcion, the Court relied on a prior opinion pointing out the prejudice that would result if the court ordered arbitration.  See Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691, 694 (9th Cir. 1986)(setting forth requirements for waiver of arbitration rights, including prejudice to the party opposing arbitration). 

 

Thus, in light of the advanced stage of the litigation, the amount of discovery, trial preparation, briefing, and number of motions, the Ninth Circuit concluded that ordering arbitration at such a late juncture would severely prejudice Depositor and class members, essentially negate the effort expended in this case, and would frustrate the purposes of the Federal Arbitration Act to ensure that arbitration agreements are enforced according to their terms so as to facilitate streamlined proceedings.   

 

Finally, the Court also rejected Bank's challenge to standing and class certification, ruling that Depositor had proven actual reliance on the misleading statements in Bank's marketing materials and that class members likely relied on them as well. 

 

Accordingly, the Ninth Circuit vacated both the injunction on high-to-low posting and the restitution order, but affirmed the lower's court's finding of liability based on violations of the "fraudulent" prong of the UCL.  The Court also remanded for a determination of appropriate relief on the misrepresentation claim.

 

 

 

Ralph T. Wutscher
McGinnis 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@mtwllp.com

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Monday, December 24, 2012

FYI: 3rd Cir Upholds Dismissal of FCRA Allegations Against Asset Verification Company

The U.S. Court of Appeals for the Third Circuit recently rejected a borrower's allegations of violations of the federal Fair Credit Reporting Act ("FCRA") against an asset verification company, holding that a furnisher of information concerning a borrower's real property could reasonably interpret its activities as outside the scope of FCRA, due to the ambiguity of the statutory definitions of "consumer reporting agency" and "consumer report."
 
A copy of the opinion is available at
 
A financial services company ("Southwest") was hired by a consumer lender (the "lender") to provide information concerning a borrower (the "borrower") in connection with the borrower's application for credit insurance.  All of the information collected by Southwest was publicly available, and included, for example, the amounts of the borrower's outstanding mortgages and judgments against property owned by the borrower.  Southwest's report did not include the borrower's social security number, mortgage payment history, or outstanding account balances of credit card accounts. 
 
Southwest's report included two inaccuracies:  it reflected a judgment lien that was in fact a debt owed by the borrower's husband, and it indicated that the borrower's property taxes were delinquent, when in fact the borrower was paying the same in installments, per an agreement with the City.
 
The lender informed the borrower that it would not approve her application for credit without proof that she had paid her taxes.  However, the lender apparently changed its mind, and subsequently provided the borrower with the requested insurance. 
 
The borrower sued Southwest, alleged that it failed to comply with the federal Fair Credit Reporting Act ("FCRA") and claiming damages for both willful and negligent violations of that statute.  Southwest moved for summary judgment, arguing that its reports are not subject to the FCRA because they concern property, not consumers, and that in any event it was not liable because it did not willfully violate the FCRA. The lower court granted Southwest's motion, and the borrower appealed. 
 
As you may recall, the FCRA requires that consumer reporting agencies adopt reasonable procedures to ensure that information provided is kept confidential and is accurate, relevant and properly utilized.  15 U.S.C. Sec. 1681(b).  Those who willfully fail to comply with that requirement are liable for actual as well as punitive damages.  Id. at Sec. 1681n(a). 
 
The FCRA defines "consumer reporting agency" as "any person which...regularly engages...in the practice of assembling  or evaluating consumer credit information...for the purpose of furnishing consumer reports to third parties..."  Id. at Sec. 1681a(f).  A "consumer report" is defined as any information "bearing on a consumer's credit worthiness...in establishing the consumer's eligibility for [credit]." 
 
After examining the statutory language described above, the Third Circuit next considered the Supreme Court's "landmark decision" in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007) ("Safeco").  The Third Circuit stated that Safeco "established a safe harbor against liability for willfulness.  A company cannot be said to have willfully violated FCRA if the company acted on a reasonable interpretation of FCRA's Coverage."  Further, the Third Circuit noted that under Safeco, even where "a court disagrees with a party's reading of the FCRA, it may not impose liability for a reckless, and therefore willful, violation of [the FCRA] unless that party's reading is 'objectively unreasonable.'" 
 
With that standard in place, the Third Circuit considered the parties' arguments. 
 
First, the borrower contended that because Southwest did not read or interpret the FCRA prior to preparing its report, it was not entitled to Safeco's "reasonable interpretation" defense.  The Third Circuit disagreed, finding that although Safeco requires that the company's reading of the FCRA is objectively reasonable, it does not require that the defendant actually has "made such an interpretation at any point in time."  Accordingly, it held that "Southwest does not lose the potential protection of the 'reasonable interpretation' defense, even if it never actually interpreted FCRA prior to the commencement of this lawsuit." 
 
Next, the borrower argued that even if Southwest were entitled to Safeco's safe harbor, the lower court erred in finding that no reasonable jury could have found that Southwest acted recklessly and therefore willfully. 
 
The Third Circuit against disagreed, holding that the FCRA's "unbounded" definitions of "consumer reporting agency" and "consumer report" rendered these terms ambiguous.  The Third Circuit also held that Southwest's reading of the FCRA "has some foundation in the statutory text, and was therefore not ambiguously unreasonable."  Specifically, the Third Circuit noted that because the definition of a "credit reporting agency" involves the collection of "consumer credit information," Southwest could reasonably interpret its collection of information concerning real property as not falling within that definition, because such information concerns property rather than consumers. 
 
Accordingly, the Third Circuit held that the borrower "has not stated a claim for a willful violation of FCRA," and therefore affirmed the judgment of the lower court. 
 


Ralph T. Wutscher
McGinnis 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@mtwllp.com
 

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FYI: 2nd Cir Rules No Private Right of Action Under FCRA for Alleged Mistaken Credit Reporting, Borrower Waited Too Long to Amend to Assert 1681s-2(b) Claim

The U.S. Court of Appeals for the Second Circuit recently held that a borrower had no private right of action under section 1681s-2(a) of the federal Fair Credit Reporting Act for reporting supposedly inaccurate information to credit reporting agencies. 
 
The Court of Appeals also ruled that, in light of undue delay in seeking to amend the complaint and prejudice to defendant lender, the lower court properly denied the borrower leave to amend to include an allegation that the dispute had been submitted to a credit reporting agency and triggered a duty to investigate and verify the accuracy of the reported information.    
 
A copy of the opinion is attached. 
 
Plaintiff, a real estate developer ("Borrower") purchased land in Florida with a loan secured by a mortgage on the property.  The Note required Borrower to make interest-only payments for the first three years followed by a "balloon" payment for the balance of the loan.  Borrower failed to make the balloon payment when due.
 
Based on discussions with defendant lender ("Bank"), Borrower continued making the monthly interest payments, but never made the balloon payment.  Bank accepted and credited Borrower's account with those payments, but nevertheless notified credit reporting agencies that Borrower was late on his payments due to the outstanding balloon payment.
 
Borrower then filed a complaint against Bank, asserting claims for willful noncompliance with the federal Fair Credit Reporting Act ("FCRA").  Specifically, Borrower alleged that Bank knowingly disclosed false credit information, failed to correct the false information, and failed to investigate Borrower's dispute that he filed directly with Bank, the furnisher of the information.  The complaint, however, did not allege that Borrower had submitted a dispute to a credit reporting agency about the accuracy of Bank's reporting. 
 
Borrower first submitted a dispute with a credit reporting agency about a month after filing his lawsuit, but failed to amend the complaint to allege that he did so.   In its answer, Bank argued that there was no private right of action under Section 1681s-2(a) of the FCRA and that the complaint failed to state a claim under Section 1681s-2(b) of the FCRA because it failed to allege that the dispute was submitted to a credit reporting agency.  The requirement to file a claim with a credit reporting agency was again brought to Borrower's attention during a deposition almost a year after the filing of the complaint. 
 
After the completion of discovery and waiting almost 18 months since the filing of the complaint, Bank moved for summary judgment.   During that 18-month period, Borrower never attempted to amend his complaint to include an allegation that he had submitted the dispute to a credit reporting agency. 
 
Nearly two years after the commencement of the action, the district court granted summary judgment in favor of Bank, concluding in part that there was no private right of action for violations of Section 1681s-2(a) and that the complaint failed to state a claim under section 1681s-2(b), and denied leave to amend to add a claim under Section 1681s-2(b).
 
Borrower appealed.  The Second Circuit affirmed.
 
As you may recall, the FCRA provides that "A person shall not furnish any information relating to a consumer to any consumer reporting agency if the person knows or has reasonable cause to believe that the information is inaccurate. . . . (B) A person shall not furnish information relating to a consumer to any consumer reporting agency if— (i)the person has been notified by the consumer, at the address specified by the person for such notices, that specific information is inaccurate; and (ii)the information is, in fact, inaccurate.  15 U.S.C. § 1681s-2(a) ("Section 1681s-2(a)"). 
 
The FCRA further provides that Section 1681s-2(a) "shall be enforced exclusively . . . by the Federal agencies and officials and the State officials identified in section 1681 . . . ."  15 U.S.C. § 1681s-2(d). 
 
Moreover, a furnisher of information generally has a duty to correct and update inaccurate information provided to credit reporting agencies if a dispute is filed with the credit reporting agency, but if a dispute is filed directly with the furnisher of information, the furnisher only has a duty to investigate in certain circumstances established by regulation.  See 15 U.S.C. §§ 1681i(a)(1)(A), 1681s-2(a)(8), 1681s-2(b); 16 C.F.R. § 660.4 (relating to direct disputes).
 
Finally, under the FCRA, in certain circumstances a consumer may file a lawsuit against a furnisher of information who "willfully fails to comply with any requirement imposed under" the FCRA and may recover actual or statutory damages, as well as punitive damages, costs, and attorney fees.  15 U.S.C. § 1681n(a).  See also 15 U.S.C. § 1681s-2(c)(1)(limitation on liability).
 
Noting that a furnisher of information must investigate and verify the accuracy of information furnished to a credit reporting agency after a dispute is filed with the agency in accordance with Section 1681s-2(b)(1), but that the complaint only alleged violations of Section 1681s-2(a), the Second Circuit pointed out that the FCRA exclusively "restricts enforcement of [section 1681s-2(a] to federal and state authorities."  The Court thus ruled that, because borrower only alleged violations of Section 1681s-2(a), Borrower had no private right of action for violations of that particular subsection.
 
Turning to Borrower's assertion that the lower court had improperly denied leave to amend his complaint to include an allegation that Borrower had submitted his dispute to a credit reporting agency, the Second Circuit ruled that, in light of Borrower's long delay and the resulting prejudice to Bank, the lower court had correctly denied Borrower leave to amend.
 
Accordingly, the Court of Appeals affirmed the rulings of the district court.
 


Ralph T. Wutscher
McGinnis 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@mtwllp.com
 

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