The U.S. Court of Appeals for the Fourth Circuit held that a tax payment agreement entered into pursuant to Virginia Code section 58.1-3018 was a consumer credit transaction subject to federal Truth in Lending Act ("TILA") and Electronic Funds Transfer Act ("EFTA").
The Court further ruled that the plaintiff had standing to assert his EFTA claim, because the claim was not merely for "a bare procedural violation," but instead alleged "a substantive violation of the rights conferred by EFTA."
Accordingly, the Fourth Circuit affirmed the trial court's denial of the Company's motion to dismiss the TILA and EFT claims.
A copy of the opinion is available at: Link to Opinion
The plaintiff ("Plaintiff") entered into a Tax Payment Agreement ("TPA") with the defendant company ("Company") pursuant to Virginia Code 58.1-3018, which governs "any agreement whereby a third party contracts with a taxpayer to pay to a county, city or town on behalf of that taxpayer the local taxes, charges, fees or other obligations due and owing to the county, city or town."
The terms of the agreement, including repayment periods, interest rates, and other fees, are prescribed by statute.
The Plaintiff owed $13,734.43 in residential property taxes to a city, and entered into a TPA with the Company to finance payment of the taxes.
The TPA set the interest rate at 10.95%, which was below the statutory maximum of 16%. Additionally, the TPA required the Plaintiff to repay the Company in monthly installments for 96 months, which is the maximum period allowed by the statute.
However, the Plaintiff claimed that many of the terms of the TPA included incorrect amounts, that the Company did not include an itemized list of closing costs in the documents, and that the TPA was missing certain allegedly required disclosures. He further claimed that the TPA required him to agree to pay the Company by preauthorized electronic fund transfers ("EFTs") and that the required authorization form did not contain a space to decline to do so.
Accordingly, the Plaintiff brought a proposed class action complaint against the Company in federal trial court alleging violations of the TILA and EFTA, and a Virginia statute.
The Company filed a motion to dismiss contending that the TPA was not subject to TILA or the EFTA because it was not a consumer credit transaction, and that the TPA was exempt from the Virginia statute. The trial court granted the motion to dismiss the Virginia statutory claim, but denied the motion to dismiss the TILA and EFTA claims.
The trial court then certified for interlocutory review of (1) its decision that the Plaintiff had standing to proceed on his EFTA claims, and (2) its determination that TPAs sanctioned by Virginia Code are subject to TILA and EFTA as consumer credit transactions.
In affirming the trial court, the Fourth Circuit held that (1) the Plaintiff "has standing to bring claims under EFTA because the harm that he alleges in a substantive statutory violation that subjects him to the very risks that EFTA . . . was designed to protect against," and (2) that "the TPA is subject to TILA and EFTA because the TPA is a consumer credit transaction."
With respect to the standing argument, the Fourth Circuit cited Spokeo, and noted that to meet the constitutional minimum requirements for standing to sue, a "plaintiff must have . . . suffered an injury in fact, . . . that is fairly traceable to the challenged conduct of the defendant, and . . . that is likely to be redressed by a favorable judicial opinion."
The Company argued that the Plaintiff did not meet the injury-in-fact requirement, which requires the plaintiff allege an injury that is "particularized," "concrete," and "actual or imminent, not conjectural or hypothetical." The Fourth Circuit disagreed.
First, the Fourth Circuit ruled that the Plaintiff's alleged injury was particularized because it stemmed from the TPA, which allegedly required him to consent to the EFT authorization when he entered into it and allegedly waived his right to cancel preauthorized EFTs as required by EFTA.
Second, the Fourth Circuit ruled that the Plaintiff alleged a sufficiently concrete injury, because it was not "a bare procedural violation," but instead "a substantive violation of the rights conferred by EFTA."
Third, the Fourth Circuit ruled that Plaintiff alleged an "actual or imminent" injury for the purposes of standing, because the Company required the Plaintiff to agree to preauthorized EFTs, so when the time came for the Plaintiff to pay the Company, he would either need to make an EFT payment or attempt to withdraw the EFT authorization in response.
The Fourth Circuit therefore affirmed the trial court's ruling that the Plaintiff had standing to proceed under EFTA.
With respect to the argument that the TPA was not a "consumer credit transaction," the Court "first consider[ed] whether the TPA is a credit transaction and, second, whether it is a consumer transaction."
As you may recall, TILA defines credit as "the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment."
Although credit has been defined to generally exclude tax liens and tax assessments in the official CFPB interpretation of TILA's implementing regulation ("Staff Commentary"), the Staff Commentary clarifies that "third-party financing of such obligations (for example, a bank loan obtained to pay off a tax lien) is credit for the purposes of the regulation."
Thus, the question before the Fourth Circuit was "whether the TPA is a credit transaction on the basis that it involves third-party financing of a tax obligation."
The Court determined that the TPA provided for third-party financing of a tax obligation for two reasons: (1) "it is clear from the terms of the TPA itself, which state that [the Company] will pay [the Plaintiff's] taxes in exchange for installment repayments, interest, and fees from [the Plaintiff]," and (2) because the TPA "creates third-party obligations between [the Company and Plaintiff]."
The Company argued that the TPA was not a credit transaction because it was different than a bank loan, but the Fourth Circuit determined that "[w]hile this may be true, it is also irrelevant," because "[w]hether an agreement is a credit transaction is not determined by how closely it resembles a bank loan," but rather "whether it provides for 'third-party financing' of a tax obligation."
The Company next argued that the TPA was not a "consumer transaction" because the imposition of the underlying obligation – i.e. the property taxes – is motivated by the public welfare rather than "personal, family, or household purposes."
The Fourth Circuit disagreed, noting that "the debt at issue here is not the tax that [Plaintiff] owes to the locality," but "[i]nstead it is one level removed – it is [Plaintiff's] obligation to [the Company], a third party, to repay [the Company's] financing of [Plaintiff's] tax obligation."
Thus, the Court held that "the TPA entered into pursuant to Virginia Code section 58.1-3018 at issue here is a consumer credit transaction subject to TILA and EFTA."
Accordingly, the Fourth Circuit affirmed the trial court's denial of the Company's motion to dismiss the TILA and EFTA claims.
Ralph T. Wutscher
Maurice Wutscher LLP
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