Tuesday, June 19, 2018

FYI: 9th Cir Rejects ID Theft Putative Class Action for Lack of Spokeo Standing

The U.S. Court of Appeals for the Ninth Circuit recently held the plaintiff did not allege Article III standing for her claim under the federal Fair Credit Reporting Act ("FCRA") where there were no specific factual allegations plausibly tying the inclusion of her debit card expiration date on her receipt to her alleged identity theft. 

 

Moreover, the Court held, leave to amend would be futile because this action against the National Park Service was barred by sovereign immunity. 

 

Accordingly, the Ninth Circuit affirmed the ruling of the district court dismissing the complaint. 

 

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

 

The plaintiff ("Plaintiff") filed a complaint on behalf of herself and a putative class alleging that when she purchased an entrance pass to Yellowstone National Park, the National Park Service ("Park Service") printed a receipt bearing her full debt card expiration date.  The receipt otherwise complied with FCRA and did not include more than the last five digits of her debit card number. 

 

Plaintiff claimed that the Park Service violated FCRA's prohibition that "no person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction."  15 U.S.C. § 1681c(g). 

 

Plaintiff further alleged that after the transaction, and because of the inclusion of the expiration date on her receipt, her debit card was used fraudulently and she suffered damages from her stolen identity.

The Park Service filed a motion to dismiss which was granted by the district court on the grounds that FCRA does not waive the U.S. government's sovereign immunity.  This appeal followed. 

 

On appeal, the Ninth Circuit analyzed both whether Plaintiff had Article III standing to bring her claim, and whether sovereign immunity applied. 

 

For Article III standing, Plaintiff was required to allege that she "(1) suffered an injury in fact, (2) that is fairly traceable to the alleged conduct of [the Park Service], and (3) that is likely to be redressed by a favorable judicial decision."

   

The Ninth Circuit stated that although Plaintiff alleged a sufficient injury of identity theft and fraudulent charges, there was a question of whether that was "fairly traceable" to the Park Service's issuance of the receipt.

 

At the pleading stage, Plaintiff did "not need to prove proximate causation," but she had the burden of "demonstrating that her injury-in-fact [was] . . . fairly traceable to" the Park Service's issuance of the receipt.

 

In the Complaint, Plaintiff alleged only that "[a]fter this debit card transaction Plaintiff['s] [] personal debit card was used fraudulently and she suffered damages from the stolen identity," and "[b]ased on information and belief, the fraudulent use of Plaintiff['s] [] debit card was caused in part by the inclusion of the expiration date of her debit card on the receipt of her purchase from Defendant National Park Service." 

 

The Ninth Circuit concluded that the latter allegation was a legal conclusion that was not entitled to the presumption of truth at the pleading stage, and the former allegation presented "no specific factual allegations plausibly tying the Park Service receipt to her identity theft." 

 

The Ninth Circuit noted that Plaintiff did not allege another copy of the receipt existed, that her copy was lost or stolen, or that anyone other than her lawyers ever viewed the receipt.

 

The Court therefore concluded that it was "left with an allegation of a 'bare procedural violation' of the FCRA and a generic allegation of later harm that is 'divorced from' that violation." 

 

Thus, the Ninth Circuit held that Plaintiff failed to allege standing.

 

The Court went on to explain that in a typical appeal it would consider whether amendment to the complaint could cure the defects in the standing allegations, but it did not reach the question here because it also held that Plaintiff's "suit [was] also barred by sovereign immunity," so any amendment would be futile.

 

In reaching this conclusion, the Ninth Circuit first noted that sovereign immunity shields the United States from suit "absent a consent to be sued that is 'unequivocally expressed' in the text of a relevant statute." 

FCRA defines a "person" as "any individual, partnership, corporation, trust, estate, cooperative, association, government or governmental subdivision or agency, or other entity." 

 

As the Park Service is an agency of the United States, "the sovereign immunity question boils down to whether the inclusion of 'governmental . . . agency' in the FCRA's definition of 'person' constitutes an unequivocal waiver of the federal government's immunity from money damages and subjects the United States to the various provisions directed at 'any person' who violates the law."

 

The Ninth Circuit determined that "[c]onstruing the FCRA as a whole – including the different contexts in which 'person' is used, and the inclusion of a clear waiver of sovereign immunity in an unrelated provision," the FCRA was "ambiguous as to whether Congress waived immunity for [Plaintiff's] suit." 

 

Moreover, because "[a]ny ambiguities in the statutory language are to be construed in favor of immunity," the Court held that Plaintiff's suit was properly dismissed. 

 

Accordingly, the Ninth Circuit affirmed the ruling of the district court dismissing the lawsuit.

 

 

 

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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Sunday, June 17, 2018

FYI: BCFP Consent Order With Lenders Uses UDAAP to Address FDCPA-Like Allegations

The Bureau of Consumer Financial Protection recently issued a consent order with a holding company and its affiliated operating entities engaged in consumer lending.

 

The consent order reflects the parties' settlement of an administrative enforcement action that focused on the lenders' debt collection and credit reporting practices that supposedly violated the Dodd-Frank Act's UDAAP provisions. More specifically, and among those practices declared to be UDAAPs, were in-person collection visits supposedly utilized by the lenders in public places that supposedly placed the consumers at risk of having their delinquency revealed to third parties.

 

Specifically, the Bureau alleged that the lenders discussed debts and demanded and took payments in public places, including at restaurants, grocery stores, and big-box retailers, where third parties could see or hear the exchange.

 

The lenders neither admitted nor denied the Bureaus' findings or conclusions, but as part of the settlement they are required, among other things, to pay a civil money penalty of $5 million and to refrain from making in-person visits for collection purposes.

 

This is the second consent order entered by the Bureau under Acting Director Mick Mulvaney.

 

The full consent order is available here:  Link to Consent Order

 

Debt Collection

 

The lenders were collecting their own debt, and their principal purpose is consumer lending and not debt collection, thus their collection activities were not governed by the federal Fair Debt Collection Practices Act (FDCPA). 

 

Instead, the Bureau used its authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act to find a that number of the lenders' collection activities were "unfair, deceptive, or abusive acts or practices" (UDAAP).

 

Among those practices declared to be UDAAPs were in-person collection visits utilized by the lenders. According to the Bureau, those in-person collection attempts were conducted in such a way that the consumers were at risk of having their delinquency revealed to third parties.

 

Specifically, the Bureau alleged that the lenders discussed debts and demanded and took payments in public places, including at restaurants, grocery stores, and big-box retailers, where third parties could see or hear the exchange.

 

The Bureau also alleged that the lenders' representatives threatened consumers with jail, shoved consumers or physically prevented them from leaving, visited consumers' places of employment despite knowing that the employer prohibited personal visits or that the visit could jeopardize the consumer's employment, made multiple visits in a manner that would reveal that the contact was for debt collection, visited the homes of consumers' neighbors, and directly told third parties about consumers' delinquency.

 

The Bureau also took issue with collection calls that the lenders made to consumers' places of employment, alleging that the lenders routinely called consumers at work in a manner that risked disclosing the consumers' delinquency to co-workers and employers.

 

In addition, the Bureau claimed that the lenders made calls to third parties who were listed as references in a consumer's loan application and to other third parties who had a relationship with the consumer.

 

According to the Bureau, the lenders would make these calls to places of employment and to third parties despite prior requests to stop calling.

 

Credit Reporting

 

With respect to credit reporting, the Bureau alleged that the lenders regularly furnished consumer information to the national credit reporting agencies even when they did not have written policies or procedures as required by Regulation V.

 

The Bureau also asserted that the lenders made furnishing errors that were systematic and pervasive, that the lenders were slow to update or correct information, and that they reported information that they knew to be inaccurate due to a failure to coordinate their furnishing system with their consumer dispute process.

 

Fine and Conduct Provisions

 

The consent order provides for a civil money penalty in the amount of $5 million. In addition, the order prohibits the lenders from (1) making in-person visits for collection purposes, (2) calling third parties after receiving an oral or written request to cease communication, (3) calling consumers' workplaces if the lenders know or should know that the calls are inconvenient to the consumer or prohibited by the employer, and (4) disclosing the existence of a consumer's delinquent debt to a third party without the consumer's written, voluntary, affirmative, specific, and (importantly) post-default permission.

 

The lenders are also required to implement and maintain reasonable written policies and procedures relating to information they furnish to CRAs, to take specific steps to correct inaccurate or incomplete information furnished to CRAs, and to assist consumers who were affected by the lenders' inaccurate or incomplete information.

 

Takeaways

 

Although it appears that the pace of enforcement actions has slowed since the departure of former director Richard Cordray, this consent order serves as a reminder that the Bureau continues to investigate and punish what it views to be egregious and systemic violations of consumer protection laws.

 

Also noteworthy is that the Bureau under Acting Director Mulvaney continues to use its UDAAP authority to apply the FDCPA's conduct provisions to creditors collecting their own debt.

 

In fact, the consent order neatly aligns with two Compliance Bulletins issued by the Bureau.  The first bulletin, issued in 2013, explained that creditors can commit UDAAPs if they engage in conduct similar to that prohibited by the FDCPA, providing specific examples.  The second bulletin, issued in 2015, warned creditors and debt collectors of the risks of engaging in in-person collection, including heightened risk of third-party disclosure, negative employment consequences, and harassment.

 

A 2015 consent order required another lender to refund payments received within 90 days of an in-person visit, a requirement that is absent from this recent consent order.

 

However, perhaps the biggest difference between this order and consent orders entered during former Director Cordray's tenure is not in the order itself, but in the Bureau's accompanying press release. For years, businesses and trade associations complained that the Bureau's press releases tended toward hyperbole, exaggerating and mischaracterizing the underlying facts of the investigation and order. By contrast, the June 13 press release is a relatively short, plain-language summary of the consent order itself.

 

Finally, while the FDCPA doesn't directly apply to creditor collections, except in specific circumstances, the majority of states have adopted their own debt collection practices acts.  Many use definitions that include creditor collections and impose restrictions comparable to those that apply to third-party debt collectors.  Some states' trade practices acts similarly restrict creditor collection practices.

 

Accordingly, any business plan and compliance management system should include a thorough analysis of the applicability of theses state laws.

 

 

 

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   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

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Wednesday, June 13, 2018

FYI: SCOTUS Holds American Pipe Tolling Does Not Apply to Subsequent Class Claims

The Supreme Court of the United States recently reversed a ruling of the U.S. Court of Appeal for the Ninth Circuit, and clarified that American Pipe & Constr. Co. v. Utah, 414 U. S. 538 (1974), does not toll a subsequent class action after the statute of limitations expires.

 

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

 

As you may recall, American Pipe first stated the tolling rule that timely filing a class action "tolls the applicable statute of limitations for all persons encompassed by the class complaint."  Thus, under American Pipe, where a court declines to certify a class, individual members of the failed class could timely intervene in the pending case to assert their own claims.  The Court clarified this ruling in Crown, Cork & Seal Co. v. Parker, 462 U. S. 345 (1983), to state that a member of a failed class may also bring their own suit instead of intervening in the existing case.

 

This appeal involved a third class action brought by purchasers of the defendant's stock alleging violations of the Securities Exchange Act of 1934, 48 Stat. 881, as amended, 15 U..S.C. § 78a, et seq (Securities Exchange Act, or SEA). The complaint contained materially identical allegations to the two prior complaints. 

 

Specifically, the complaint once again alleged that the defendant's allegedly fraudulent and misleading business practices caused the defendant's stock price to fall when several reports shined a light on the misconduct.  The SEA has a two-year statute of limitations that runs from the discovery of the facts that give rise to the violation and a five-year statute of repose.  Here, the two-year limitation period began to run on February 3, 2011, and the five-year repose period started on November 12, 2009.

 

On February 11, 2011, a shareholder filed the first putative class action complaint.  Plaintiff's counsel gave notice of the complaint in two "widely circulated national business-oriented publication[s]," as required by the SEA.  The notice invited any putative class member to file a motion to serve as the lead plaintiff.  The District Court ultimately denied class certification finding that the plaintiffs did not establish, as required to prove classwide reliance, that defendant's stock "traded on an efficient market."  Plaintiff's counsel informed the shareholders that the District Court denied certification and advised them that:  "You must act yourself to protect your rights. You may protect your rights by joining in the current Action as a plaintiff or by filing your own action against [defendant]."  The first putative class action settled in September 2012 and the District Court dismissed the suit.

 

Subsequently, on October 4, 2012, Plaintiff's counsel timely filed a new complaint with new plaintiffs and new evidence to prove an efficient market. However, the District Court once again denied certification, finding that plaintiffs failed to demonstrate typicality and adequacy, as required.  The second putative class action plaintiffs then settled their individual claims and voluntarily dismissed the suit.

 

A year and half after the statute of limitation expired, new counsel who had not appeared in the prior actions filed the instant third class action suit on June 30, 2014 with a lead plaintiff that had not sought lead plaintiff status in either of the first two class actions.  This time, the District Court found that the two prior cases did not toll the time file class claims, and dismissed the untimely case. 

 

Plaintiffs appealed to the Ninth Circuit.  The Ninth Circuit reversed, holding that:  "[P]ermitting future class action named plaintiffs, who were unnamed class members in previously uncertified classes, to avail themselves of American Pipe tolling, would advance the policy objectives that led the Supreme Court to permit tolling in the first place." 857 F. 3d, at 1004.

 

This appeal followed.

 

The Supreme Court noted that "American Pipe and Crown, Cork addressed only putative class members who wish to sue individually after a class certification denial."  These decisions did not even hint "that tolling extends to otherwise time-barred class claims." 

 

The Supreme Court then held that "American Pipe does not permit a plaintiff who waits out the statute of limitations to piggyback on an earlier, timely filed class action." This is because the "efficiency and economy of litigation" that support tolling individual claims, "do not support maintenance of untimely successive class actions; any additional class filings should be made early on, soon after the commencement of the first action seeking class certification."

 

The Supreme Court reasoned that it makes sense to delay individual claims until after a district court denies class certification because if the district court grants certification "the claims will proceed as a class and there would be no need for the assertion of any claim individually."  Further, the Court noted, if the district court denies certification, "only then would it be necessary to pursue claims individually."

 

However, the same efficiency does not hold true for class claims.  Instead, the Court held, efficiency favors competing class representatives assert their claims as soon as possible.  This way, "the district court can select the best plaintiff with knowledge of the full array of potential class representatives and class counsel."  Further, the Court reasoned, if the district court denies certification, then it can make this decision "at the outset of the case, litigated once for all would-be class representatives."

 

The Supreme Court found its holding consistent with Rule 23's preference to preclude "untimely successive class actions by instructing that class certification should be resolved early on." See Fed. Rule Civ. Proc. 23(c)(1)(A).  The 2003 amendment to Rule 23(c) allows district courts to account for multiple class representative filings to afford "best possible representation for the class."

 

The Supreme Court noted that the Private Securities Litigation Reform Act (PSLRA) also prefers grouping class-representative filings at the beginning of a case. The PSLRA requires notice of the class action "to draw all potential lead plaintiffs into the suit so that the district court will have the full roster of contenders before deciding which contender to appoint."

 

The Supreme Court also rejected applying any equitable tolling to this situation because it requires plaintiffs to "demonstrate that they have been diligent in pursuit of their claims." Any hopeful class representative that files suit after the statute of limitation expires cannot show the required diligence in pursuing their claims.

 

The Supreme Court was also concerned that extending American Pipe to toll successive class actions would allow new plaintiffs to endlessly extend the statute of limitations as a new named plaintiff could always filed a new class complaint to revive the litigation.  The Court held that American Pipe did not envision this result.  In contrast, the time to file an individual action after a class actual concludes "is finite, extended only by the time the class suit was pending."

 

The Respondents argued that Shady Grove Orthopedic Associates, P. A. v. Allstate Ins. Co., 559 U. S. 393 (2010), found that "a class action may be maintained," id., at 398, if the plaintiff satisfies the requirements of Rule 23(a) and (b), and "Rule 23 automatically applies in all civil actions and proceedings in the United States district courts."  The Supreme Court disagreed because Shady Grove merely "held that a federal diversity action could proceed under Rule 23 despite a state law prohibiting class treatment of suits seeking damages of the kind asserted in the Shady Grove complaint." 

 

The Supreme Court held that the opposite is true here.  The class action is untimely unless American Pipe's equitable-tolling exception to statutes of limitations saves it.  The Court held that Rule 23 does not revive class claims where individual claims are tolled.

 

The Supreme Court also swept aside the argument that its holding violates the Rules Enabling Act "by causing a plaintiff's attempted recourse to Rule 23 to abridge or modify a substantive right" because "[p]laintiffs have no substantive right to bring their claims outside the statute of limitations."

 

The Supreme Court rejected the notion that refusing to toll the limitation period for successive class suits will cause a "needless multiplicity" of protective class-action filings because no empirical evidence supports the argument.  Instead, the Second and Fifth Circuits both long ago declined to entertain out-of-time class actions and there is no evidence in the record that this caused "a disproportionate number of duplicative, protective class-action filings." See Korwek, 827 F. 2d 874 (CA2 1987); Salazar-Calderon, 765 F. 2d 1334 (CA5 1985).

 

The Court noted that American Pipe and Rule 23 promote efficiency and economy of litigation. The Supreme Court found that extending American Pipe to toll successive class actions does not serve these principals. In contrast, the Court held, declining to toll out-of-time class actions promotes efficiency and economy of litigation because it provides an incentive to putative class representatives to file suit well within the limitation period and to promptly seek certification.

 

Accordingly, the Supreme Court reversed the Ninth Circuit's ruling, and remanded the case for further proceedings consistent with its opinion.

 

 

 

 

 

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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Monday, June 11, 2018

FYI: PA Sup Ct Holds Borrower Not Entitled to Atty's Fees for Aff Def Under Act 6

The Supreme Court of Pennsylvania recently held that a borrower is not entitled to attorneys' fees under the Pennsylvania Loan Interest Law ("Act 6") relating to an affirmative defense raised in a mortgage foreclosure action that was subsequently discontinued without prejudice.

 

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

 

The borrower defaulted on his mortgage loan, and the mortgagee filed a foreclosure action. Thereafter, the borrower answered the foreclosure complaint and asserted as an affirmative defense an alleged violation of § 403(a) of Act 6, which, according the Court, is an "extensive program designed to avoid mortgage foreclosures" and requires in relevant part that:

 

Before any residential mortgage lender may accelerate the maturity of any residential mortgage obligation, commence any legal action including mortgage foreclosure to recover under such obligation, or take possession of any security of the residential mortgage debtor for such residential mortgage obligation, such person shall give the residential mortgage debtor notice of such intention at least thirty days in advance as provided in this section.

 

41 P.S. § 403(a). 

 

The mortgagee moved for summary judgment.  The trial court denied the mortgagee's motion for summary judgment based upon unresolved factual issues surrounding in part the borrower's affirmative defense under § 403(a) of Act 6. The mortgagee dismissed the foreclosure action without prejudice a week later.

 

The borrower then filed a motion for attorneys' fees pursuant to § 503(a) of Act 6, which provides:

 

If a borrower or debtor, including but not limited to a residential mortgage debtor, prevails in an action arising under this act, he shall recover the aggregate amount of costs and expenses determined by the court to have been reasonably incurred on his behalf in connection with the prosecution of such action, together with a reasonable amount for attorney's fee.

 

41 P.S. § 503(a).

 

The trial court denied the borrower's motion, holding that because the mortgagee dismissed the foreclosure complaint without prejudice to refile, the borrower was not a "prevailing party" under § 503(a) of Act 6.

 

The Superior Court affirmed, relying on its recent opinion in Generation Mortgage Co. v. Nguyen, 138 A.3d 646 (Pa. Super 2016) which had near identical facts, and held that a mortgage foreclosure action does not "arise under" § 403(a) of Act 6 for purposes of § 503(a)'s applicability and thus the borrower could not be a prevailing party thereunder and entitled to attorneys' fees.

 

On appeal, the Pennsylvania Supreme Court, disagreeing in part with the Superior Court's reasoning, identified that the issue to be resolved was "what constitutes 'an action under [Act 6].'"

 

The Supreme Court noted that the borrower's position was that the assertion of an affirmative defense was an "action" sufficient to permit attorneys' fees, while the mortgagee argued that an affirmative defense pursuant to § 403(a) raised in a foreclosure action was not an "action" arising under Act 6 as contemplated by § 503(a) for purposes of awarding attorneys' fees.

 

Agreeing with the mortgagee, the Pennsylvania Supreme Court held that, as used in Act 6, the term "action" was "a term of art with a precise and settled meaning, namely a judicial proceeding, i.e., a civil action in which the plaintiff seeks some form of relief".

 

In contrast, the Court also held, "an affirmative defense is not an action, but rather is the statement of new facts and arguments that, if true, will defeat plaintiff's action." Consistent with this reasoning, the Court further held that "no language in Act 6 states, or even suggests, that the assertion of an affirmative defense by a residential mortgage debtor in a civil proceeding instituted by another party (i.e., a creditor) constitutes an 'action' under Act 6."

 

As a result, the Court concluded that pleading a violation of section 403(a)'s notice requirement as an affirmative defense in a residential foreclosure action neither constitutes 'an action arising under [Act 6],' nor (as the borrower argued) transforms the foreclosure action into 'an action arising under [Act 6].' In the present case, the borrower asserted the violation of § 403(a) by affirmative defense and obtained no judicial determination that the mortgagee violated §403(a)'s notice requirement.

 

Thus, the Pennsylvania Supreme Court ruled, the borrower did not establish a basis for an entitlement to attorneys' fees under Act 6.  Accordingly, the rulings of the lower courts in favor of the mortgagee 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

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Indiana   |   Massachusetts   |   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.


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and

 

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and

 

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Saturday, June 9, 2018

FYI: 9th Cir Rejects FCRA Putative Class Action Relating to Short Sale Credit Reporting

In a putative class action alleging violations of the federal Fair Credit Reporting Act (FCRA), the U.S. Court of Appeals for the Ninth Circuit recently held that:

 

(1) the credit reporting agency's reporting of short sales was not inaccurate or misleading, even though it knew that a government sponsored enterprise misinterpreted its short sale code as a foreclosure, because FCRA does not make credit reporting agencies liable for the conduct of its subscribers;

 

(2) the credit reporting agency's consumer disclosures were clear and accurate, and 15 U.S.C. § 1681g did not require the credit reporting agency to disclose its proprietary codes that could confuse unsophisticated consumers; and

 

(3) the plaintiffs failed to establish a right to statutory damages because the credit reporting agency conduct was not objectively unreasonable.

 

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

 

The plaintiffs brought this action against a credit reporting agency ("Credit Reporting Agency") alleging violations of the federal Fair Credit Reporting Act, 15 U.S.C. § 1681, et seq. ("FCRA") based on the Credit Reporting Agency's reporting of short sales and its related consumer disclosures.

 

The Credit Reporting Agency delivered its credit reports in a proprietary computer-generated format that displays credit information "in segments and bits and bytes," but the Credit Reporting Agency provides technical manuals that enable its subscribers to read and understand the credit reports they receive.

 

As you may recall. a short sale is a derogatory credit event that furnishers report to the credit reporting agencies.  When the Credit Reporting Agency receives data reporting a short sale, it translates the data into its proprietary coding before it can export the data to subscribers.  The Credit Reporting Agency's technical manual coded short sales as follows:

 

(1)  Account type:  A mortgage-related account, such as a first mortgage or home equity line of credit.

(2)  "Account condition" and "payment status" code: 68, which corresponds to a Special Comment of "Account legally paid in full for less than the full balance."  The 68 automatically populates a 9 into the first position on the payment history grid to display the "Settled" status.

(3)  Payment history grid showing the final status ("Settled") in the first digit, followed by 24 months of payment history information.

(4)  Date in 25th month in the payment history grid corresponds to the date the furnisher reported the "Settled" status to the Credit Reporting Agency.

 

In other words, the Credit Reporting Agency reported account condition code 68 ("Account legally paid in full for less than the full balance") for short sales, which then automatically inserted the number 9 into the payment history grid (to display a "Settled" status).  However, a lead payment history code of 9 can represent multiple, derogatory, non-foreclosure statuses, including "Settled, Insurance Claim, Term Default, Government Claim, Paid by Dealer, BK Chapter 7, 11 or 12 Petitioned, or Discharged and BK Chapter 7, 11 or 12 Reaffirmation of Debt Rescinded."

 

Foreclosures are reported with a lead payment history code of 8 and an account condition and payment status code of 94 ("Creditor Grantor reclaimed collateral to settle defaulted mortgage").  According to the Credit Reporting Agency's technical manuals, it was impossible for its credit reports to reflect a foreclosure with a lead payment history code of 9.

 

A government sponsored enterprise ("GSE") that purchased mortgage loans from certain lenders used a proprietary underwriting software.  Its rules required that a consumer a with a prior foreclosure must wait seven years before obtaining a new mortgage, but consumers with a prior short sale need wait only two years.

 

The GSE's underwriting software analyzed credit report data from the credit reporting agencies.  In doing so, the software relied on the GSE's payment code, which corresponded to the Credit Reporting Agency's lead payment history code.  Until 2013, the software "identified [mortgage accounts] as a foreclosure if there [was] a current status or [payment history code] of '8' (foreclosure) or '9' (collection or charge off)."

 

Thus, the GSE elected to treat code 9 the same as it treated code 8, even though it knew from the instructions the Credit Reporting Agency that code 9 did not represent a foreclosure, and that it was "necessarily capturing accounts that [were] not actually foreclosures."  The GSE's treatment of lead payment history code 8 and 9 imposed a seven year waiting period on consumers with a prior short sale, when the waiting period should have only been two years.

 

In 2010, consumers and the Credit Reporting Agency raised this issue with the GSE, but neither entity changed its coding.

 

Between 2012 and 2013, the plaintiffs disputed the Credit Reporting Agency's reporting of their prior short sales.  However, the plaintiffs were able to obtain new loans after their prior short sales because their lenders either understood that they had a prior short sale, not a foreclosure, or the lender did not use the GSE's underwriting software.  

 

In June 2013, the plaintiffs filed a putative class action against the Credit Reporting Agency asserting claims for:  (1) a reasonable procedures claim pursuant to 15 U.S.C. § 1681e; (2) a reasonable reinvestigation claim pursuant to 15 U.S.C. § 1681i; (3) a file disclosure claim pursuant to 15 U.S.C. § 1681g.  The plaintiffs requested damages pursuant to 15 U.S.C. § 1681n.

 

The case was stay pending the Supreme Court's resolution of Spokeo, Inc. v. Robins, 135 S. Ct. 1892 (2015).  After the stay was lifted, the Credit Reporting Agency moved for summary judgment.  The trial court granted summary judgment in favor of the Credit Reporting Agency.  

 

This appeal followed.

 

The Ninth Circuit began its analysis on the plaintiffs' reasonable procedures and reasonable reinvestigation claims.

 

As you may recall, FCRA's compliance procedures provide that: "[w]henever a consumer reporting agency prepares a consumer report it shall follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates."  15 U.S.C. § 1681e(b).

 

Liability under this reasonable procedure provision "is predicated on the reasonableness of the credit reporting agency's procedures in obtaining credit information."  Guimond v. Trans Union Credit Info. Co., 45 F.3d 1329, 1333 (9th Cir. 1995).  To bring a section 1681e claim, the "consumer must present evidence tending to show that a credit reporting agency prepared a report containing inaccurate information."  Id., 45 F.3d at 1333.

 

Additionally, a credit reporting agency must conduct a free and reasonable investigation within thirty days of a consumer informing the agency of disputed information.  15 U.S.C. § 1681i(a)(1)(A).  Consumers must show that "an actual inaccuracy exists" for a section 1681i claim.  Carvalho v. Equifax Info. Servs., LLC, 629 F.3d 876, 890 (9th Cir. 2010).

 

The plaintiffs argued that the Credit Reporting Agency's short sales code combination 9-68 was "patently incorrect" because it caused the GSE to treat short sales as a potential foreclosure.

 

However, the Ninth Circuit noted that the Credit Reporting Agency reported short sales with code combination of 9-68.  Account status code 68 automatically inserted 9 into the lead payment history spot, signifying that the account was "Settled" and "legally paid in full for less than the full balance."  This, according to the Ninth Circuit, was the very definition of a short sale.

 

Further, the Ninth Circuit explained that even if code combination 9-68 stood for other derogatory events, and thus could be misleading, that alone did not render the Credit Reporting Agency's reporting actionable.  The reporting must be "misleading is such a way and to such an extent that it can be expected to adversely affect credit decisions."  Gorman v. Wolpoff & Abramson, LLP, 584 F.3d 1147, 1163 (9th Cir. 2009).

 

As the Ninth Circuit explained, the Credit Report Agency reported foreclosures with code 8-94, which meant "[c]reditor [g]rantor reclaimed [the] collateral to settle defaulted mortgage."  And, as the Ninth Circuit further explained, a foreclosure did not occur where a mortgage account is "legally paid in full for less than the full balance" like a short sale.  Thus, in the Ninth Circuit's view, the Credit Reporting Agency's code system accurately distinguished short sales and foreclosures.

 

The plaintiffs also argued that the Credit Reporting Agency's reports were misleading because it knew the GSE was misreading its technical manuals and failed to take remedial action.  However, the Ninth Circuit rejected this argument because FCRA did not make the Credit Reporting Agency liable for the misconduct of its subscribers.

 

Thus, because the Ninth Circuit determined that the plaintiffs failed to point to any inaccuracies on their credit reports, it did not have to consider whether the Credit Reporting Agency had reasonable procedures or conducted reasonable reinvestigations.

 

Next, the Ninth Circuit turned to the plaintiffs' arguments regarding the Credit Reporting Agency's consumer disclosures.

 

As you may recall, 15 U.S.C. § 1681g(a) provides, in relevant part, that "[e]very consumer reporting agency shall, upon request, clearly and accurately disclose to the consumer:  [a]ll information in the consumer's file at the time of the request."  "A consumer's file includes "all information on the consumer that is recorded and retained by a [credit reporting agency] that might be furnished, or has been furnished, in a consumer report on that consumer."  Cortez v. Trans Union, LLC, 617 F.3d 688, 711-12 (3d Cir. 2010).

 

First, the plaintiffs argued that Credit Reporting Agency's consumer disclosures violated section 1681g(a)(1), because it placed the designation "CLS" (Closed) in the lead spot on the payment history grid on each consumer disclosures, instead of one of the code 9 statuses.  The plaintiffs argued that because the status category on a consumer disclosure ("Paid in settlement") was a separate category from the lead digit in the payment history grid on a credit report, these categories served different purposes.

 

The Ninth Circuit disagreed.  It found that the Credit Reporting Agency complied with section 1681(g) because it provided the plaintiffs with all information in their files at the time of their requests in a form that was both clear and accurate.  Specifically, the Credit Reporting Agency's consumer disclosures conveyed the same information it reported to its subscribers.

 

Additionally, the Ninth Circuit determined that the Credit Reporting Agency was not required to report the actual code 9 in a consumer disclosure.  Requiring the Credit Reporting Agency to provide its proprietary code, in the Ninth Circuit's view, would contradict section 1681g(a)'s requirement that the disclose be "clear."  In order for a consumer to understand code 9, the Credit Reporting Agency would have to report account status code 68 and release its complicated technical manual, which would further confuse unsophisticated consumers.

 

Moreover, the Ninth Circuit was unpersuaded by the plaintiffs' argument that the Credit Reporting Agency violated section 1681g(a)(1), because "there was a material disconnect between the information displayed in [their] consumer reports and the information displayed in [their] consumer disclosures due to the presence of the catchall code 9."  As the Ninth Circuit explained, this was in essence the same argument based on an incomplete interpretation of the Credit Reporting Agency's coding system.  The Credit Reporting Agency's account status code 68 clarified the account's status and the specific derogatory event attached to it.

 

Thus, the Ninth Circuit held that the plaintiffs failed to identify what information the Credit Reporting Agency improperly excluded from its disclosures.

 

Additionally, the Ninth Circuit found that the plaintiffs failed to establish a right to statutory damages under 15 U.S.C. § 1681n, which required a showing that the Credit Reporting Agency willfully failed to comply with FCRA.  

 

The Ninth Circuit stated that even if the Credit Reporting Agency had violated section 1681g, it did not act in an objectively unreasonable manner by electing not to list code 9 in its consumer reports.  Further, the Ninth Circuit noted that the Consumer Financial Protection Bureau investigated the shorts sale-foreclosure problem and determined that the underlying issue was not due to inaccurate reporting by furnishers or credit reporting agencies.

 

Accordingly, the Ninth Circuit affirmed the trial court's grant of summary judgment in favor of the Credit Reporting Agency.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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