FYI: Illinois State Court Dismisses Class Action Alleging Hunstein Violations

A state court judge in Cook County, Illinois recently dismissed a class action lawsuit alleging violations similar to those asserted in Hunstein v. Preferred Collection and Mgmt. Services with prejudice for failure to state a claim under the federal Fair Debt Collection Practices Act (FDCPA).

 

A copy of the opinion is attached.

 

The plaintiff filed a class action complaint in Illinois state court alleging that a debt collector violated the FDCPA by communicating her private information to a third party when it transmitted data about her debt to a third-party letter vendor. The defendant removed the complaint to federal court. After the federal court remanded the case to state court, the debt collector moved to dismiss the plaintiff's complaint arguing that the plaintiff lacked standing under Illinois law and failed to state a claim under the FDCPA.

 

As you may recall, the Eleventh Circuit recently ruled in Hunstein that plaintiffs lack standing under federal law to bring FDCPA claims alleging these types of violations in federal court, after vacating an earlier panel opinion holding the opposite. The Eleventh Circuit's ruling did not put an end to the issue, however, as it focused on the procedural particularities of federal standing without resolving whether the allegations constituted a substantive FDCPA violation.  This Illinois state court dismissal of nearly identical allegations with prejudice adds to the authority answering that question in the negative.

 

Initially, the Illinois state court rejected the debt collector's argument that the plaintiff lacked standing to bring her claim under Illinois law. The court acknowledged the plaintiff's stipulation that she did not experience any actual harm and only sought statutory damages. Nevertheless, the court found that the plaintiff's stipulation did not destroy her standing in Illinois state court, noting that Illinois courts have found standing in cases seeking statutory damages for other types of federal claims. The court also noted that standing in Illinois is an affirmative defense, meaning the debt collector had the burden to disprove standing as opposed to the plaintiff having the burden to prove it.

 

The court then moved to the substantive merits of the plaintiff's allegations. The debt collector raised three distinct arguments in support of its position that the plaintiff could not state a claim for an FDCPA violation based on the alleged facts. First, the debt collector argued that the transmission of data to the letter vendor did not qualify as a communication under the statute. Second, the debt collector argued that the transmission was not made in connection with collector of a debt, as the statute requires. Last, the debt collector argued that the statute, legislative history, and recent authority analyzing the use of letter vendors did not support the plaintiff's interpretation of the FDCPA. The court addressed each argument.

 

Concerning the debt collector's argument that the transmission of data to the vendor did not qualify as a communication, the court recited the FDCPA's definition of a communication as "conveying of information regarding a debt directly or indirectly to any person through any medium." 15 U.S.C. § 1692a(2). The debtor collector suggested that letter vendors are not persons but rather are mediums used to pass information, pointing out that modern mailing services are largely automated. The court found that the debt collector's position would improperly require it to consider additional facts outside of the plaintiff's complaint at the pleading stage. The court therefore rejected the debt collector's argument that its alleged conduct did not qualify as a communication.

 

The court next considered the debt collector's argument that it did not transmit information to the vendor in connection with the collection of a debt. Noting the Seventh Circuit's factors for determining whether a communication qualifies as actionable under the FDCPA, the court determined that the plaintiff's complaint did not meet any of those requirements. The debt collector did not and would not have had any reason to demand payment from the vendor. Nor did the plaintiff have any relationship with the vendor such that the communication could have induced either the vendor or the plaintiff to pay the debt. Further, the purpose and context of the communication showed the debt collector plainly did not transmit the information to the vendor to induce payment. Thus, the court found that the debt collector's alleged communication could not have been made in the collection of a debt.

 

Finally, the court found that communications between a debt collector and a vendor do not fall within the purpose and legislative history of the FDCPA and are not the type of abusive debt collection practices Congress intended the FDCPA to prevent. Accordingly, the court dismissed the plaintiff's complaint with prejudice.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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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FYI: 2nd Cir Holds CFPB Funding Structure Is Constitutionally Sound

A three-judge panel of the U.S. Court of Appeals for the Second Circuit handed down a decision on March 23, 2023 holding that the funding mechanism for the federal Consumer Financial Protection Bureau is constitutionally sound.

 

In doing so, it "respectfully decline[d] to follow the Fifth Circuit's decision" in Cmty. Fin. Servs. Ass'n of Am., Ltd. v. CFPB.

 

Last year, the Fifth Circuit ruled that the method used to fund the CFPB was prohibited by the U.S. Constitution's Appropriations Clause.

 

In CFPB v. Law Offices of Crystal Moroney, P.C., the CFPB issued a Civil Investigative Demand to a law firm seeking certain documents. When the law firm refused to hand over the documents, the CFPB filed a lawsuit in federal district court to enforce it. The district court granted the request and the law firm appealed.

 

On appeal, the law firm made several arguments why the CID could not be enforced, one of which relied on the Fifth Circuit's recent ruling. The Second Circuit rejected them all and affirmed the trial court's order.

 

A copy of the opinion in CFPB v. Law Offs. of Crystal Moroney is available at:  Link to Opinion

 

FINDS "NO SUPPORT" FOR THE FIFTH CIRCUIT'S REASONING

 

The Fifth Circuit found that the means of funding the CFPB was outside the appropriations process, even though Congress had approved of the funding mechanism when it created the CFPB. As a result, the CFPB's budget was "insulat[ed] from annual or other time limited appropriations."

 

"We cannot find any support for the Fifth Circuit's conclusion in Supreme Court precedent . . . [or] in the Constitution's text,"  the Second Circuit panel wrote. Citing a 1990 Supreme Court decision, the Second Circuit concluded that a funding scheme that is "authorized by a statute" is all that is required under the Appropriations Clause. According to the Second Circuit, there is no question that Congress did just that in 2010 when it crafted the CFPB's funding scheme in section 1017 of the Dodd-Frank Act.

 

The Fifth Circuit's reasoning that annual or "time limited appropriations" are a necessary element missing from the Bureau's funding scheme fared no better. The text of the Constitution, the Second Circuit noted, only places time limitations on funds to "raise and support an army." Since no other funding has such a limitation, by negative implication the Fifth Circuit could not impose one.

 

A BATTLE OVER THE BREADTH OF AGENCY POWER

 

As much as this appears to be an argument over the CFPB, it is likely bigger than that. When the Supreme Court of the United States decided to take up the Fifth Circuit's decision, it looked like the stage was set for a battle between two philosophies.

 

One is concerned that administrative agencies wield excessive power and are not constitutionally sound because elected officials do not have sufficient control over them. The other believes agencies should not be easily swayed by politics, and so, need to be insulated from political winds. Because they are composed of professional civil servants, they carry out their functions within the bounds of formal and technical restraints.

 

The Second Circuit has provided an argument for the latter.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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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FYI: New York State DFS Tables Latest Version of Its Proposed Debt Collection Rule

The deadline for the New York State Department of Financial Services (DFS) to publish its proposed amendments to its debt collection rule was March 15, 2023. It didn't and so they have expired. While the latest version of the proposed amendments has expired, it is likely that the DFS will release an updated version in the coming months.

 

DFS is certainly aware that the New York City Department of Consumer and Worker Protection proposed to substantially overhaul its debt collection rule last year and did so well after DFS released its first proposal. The two rules don't always align, and stakeholders raised the issue with both agencies.

 

On top of that, New York state Sen. Kevin Thomas has introduced legislation to expand the scope of New York's Consumer Credit Fairness Act to cover all consumer debt, not just the "consumer credit transactions" to which it now applies. If the bill becomes law, it would have made irrelevant certain of  DFS' proposed amendments. 

 

We should expect the new DFS proposal to address the several comments it received. And it makes sense that the agency let the proposed rule amendments expire. By doing so it can digest DCWP's rule (if it publishes one) and incorporate the expansion of the NYCCFA, should Sen. Thomas' bill become law.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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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FYI: 5th Cir Holds Company That Suffered Data Breach Ultimately Liable for Assessments Imposed by Credit Card Issuers

The U.S. Court of Appeals for the Fifth Circuit recently held that a merchant had a contractual obligation to indemnify its payment processor after a data breach at the merchant compromised customer credit card data.

 

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

 

A major data breach compromised sensitive consumer information on thousands of credit cards at multiple businesses owned by a company that operates restaurants, hotels, and casinos throughout the United States. Many of those cards belonged to two specific credit card issuers.

 

In response, the two credit card corporations imposed over $20 million dollars in assessments on the payment processor responsible for securely processing card purchases at the company's properties. The payment processor then sued the company for indemnification, and the company impleaded the two credit card issuers.

 

The trial court dismissed the company's third-party complaints against the credit card corporations and granted summary judgment for the payment processor, finding that the company had a contractual obligation to indemnify the payment processor. The company timely appealed.

 

The company first argued on appeal that the assessments on the payment processor were not valid liquidated damages under applicable state laws. All parties agreed that New York law governed the payment processor's contract with one of the credit card corporations and California law governed the contract with the other corporation. The premise of the company's argument was that liquidated damages must estimate damages only to the nonbreaching party, not to a third party.

 

The Fifth Circuit began by noting that California and New York law treat liquidated damages similarly. Both presume the validity of liquidated damages in commercial contracts unless the challenging party shows otherwise. See Cal. Civ. Code § 1671(b); JMD Holding Corp. v. Cong. Fin. Corp., 828 N.E.2d 604, 609 (N.Y. 2005). Under both states' laws, the key question is whether the amount of contractual damages is proportionate to the harm the parties could have reasonably foreseen would flow from a breach. See, e.g., Ridgley v. Topa Thrift & Loan Ass'n, 953 P.2d 484, 488 (Cal. 1998); Truck Rent-A-Ctr., Inc. v. Puritan Farms 2nd, Inc., 361 N.E.2d 1015, 1018 (N.Y. 1977).

 

Ultimately, the Fifth Circuit concluded that the company did not provide any relevant state authority barring parties in commercial contracts from tying liquidated damages to the anticipated harm to a third party. The company therefore did not rebut the assessments' presumptive validity. See Cal. Civ. Code § 1671(b); JMD Holding Corp., 828 N.E.2d at 609.

 

Additionally, the Fifth Circuit held that the company was mistaken that the assessments did not estimate the credit card corporations' own losses. The Court reasoned that the assessments reflected the credit card corporations' damages because the corporations were contractually obligated to pay any assessments they collected to intermediary card issuers. The company contended that the assessments could not be liabilities because the credit card corporations imposed and distributed assessments as a matter of discretion, not contractual obligation. But the Court disagreed and stated that the company conflated the credit card corporations' front-end discretion to impose assessments with their back-end obligation to distribute the assessments they collect.

 

Alternatively, the company argued that summary judgment for the payment processor was improper because genuine disputes remained over whether the company had a duty to indemnify.

 

The Merchant Agreement between the company and the payment processor, which was governed by Texas law, contained the following indemnification provision:

 

You [the company] understand that your failure to comply with the Payment Brand Rules, including the Security Guidelines, or the compromise of any Payment Instrument Information, may result in assessments, fines, and/or penalties by the [credit card corporations], and you agree to indemnify and reimburse us [the payment processor] immediately for any such assessment, fine, or penalty imposed on [the payment processor].

 

The company argued that this clause required the payment processor to prove that the company violated the Security Guidelines or that card data was compromised—it was not enough that the credit card corporations imposed assessments. The payment processor countered that the company's duty arose when the credit card corporations imposed assessments after making their own determination that the company violated the Security Guidelines.

 

The Fifth Circuit favored the payment processor's interpretation because it was within the text of the clause that the assessments were imposed "by the [credit card corporations]" as a "result" of the company's "failure to comply with the Payment Brand Rules." Furthermore, the Merchant Agreement incorporated the Payment Brand Rules, which gave the credit card corporations the right to determine whether someone violated them.

 

Thus, the Fifth Circuit held that summary judgment in favor of the payment processor was appropriate.

 

The company also argued that it should be allowed to pursue its third-party complaints to recoup its liability from the credit card corporations. The company brought six claims against each credit card corporation, four as the payment processor's equitable subrogee —- that is, standing in the payment processor's shoes and asserting its rights —- and two as "direct" claims "in its own right."

 

The company compared itself to an insurer, arguing that if it must indemnify the payment processor, then it should be able to recover the losses that the processor sustained by reason of the wrongful conduct of the credit card corporations. The wrongful conduct the company alleged for all its subrogated claims was the credit card issuers' levying of "illegal assessments" on the payment processor.

 

However, the Fifth Circuit determined that the company's analogy fell short for one overarching reason: the company paid its own debt, not the credit card issuers' debt. As the Court pointed out, equitable subrogation only exists to prevent an innocent party from having to bear a loss attributable to a wrongdoing third party. See Md. Cas. Co. v. W.R. Grace & Co., 218 F.3d 204, 211 (2d Cir. 2000). Therefore, the Court held that the company's subrogation claims were properly dismissed.

 

The Fifth Circuit also concluded that the company's direct claims for unjust enrichment and deceptive business were properly dismissed because these claims were, as a practical matter, also subrogated claims. While the company styled these claims as "direct" and made "in [the company's] own right," the Court reasoned that they required litigating the payment processor's contractual relationships with the credit card corporations just as the subrogated claims did. Therefore, these claims failed for the same reason given above.

 

Accordingly, the Fifth Circuit affirmed the trial court's decision and remanded solely to allow the trial court to determine whether the payment processor should receive prejudgment interest.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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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FYI: Ill App Ct (1st Dist) Reverses Dismissal of Claims That Choice of Law Provisions in Mortgage Loan Docs Violated IMFL

The Illinois Court of Appeals, First Judicial District, recently reversed a trial court's order dismissing a quiet title lawsuit that alleged a lender's commercial loan agreement violated the Illinois Mortgage Foreclosure Law (IMFL) and was invalid and unenforceable.

 

In so ruling, the First District held that disputed issues of fact regarding the legal significance and enforceability of various choice of law and forum selection provisions in the loan documents, among other factual issues raised by the allegations in the complaint, were sufficient to survive a motion to dismiss.

 

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

 

An individual ("Plaintiff") entered into a loan agreement to finance a real estate rehabilitation project of a property located in Illinois ("Property"). The lender required that Plaintiff establish a limited liability company("LLC") in Utah, and that the LLC hold title to the Property. 

 

Plaintiff and the lender were joint owners of the LLC.  Plaintiff, as the president of the LLC, signed a promissory note as that promised to pay Lender the principle of $84,000.00. The lender also required Plaintiff to sign various documents such as a security agreement, loan agreement ("loan documents"), individually and as an officer of the LLC. 

 

Under the loan documents, plaintiff pledged his membership interest in the Utah LLC as collateral for the loan and personally guaranteed it.  In addition, the loan documents provided that the loan "shall be construed and governed under the laws of the State of Utah, and jurisdiction for any disputes relating to this Agreement or the Note shall be in Utah State Courts sitting in Salt Lake County, Utah."

 

After the closing of the loan, title to the Property was transferred to the LLC.  Under the terms of the promissory note, if Plaintiff did not complete the rehabilitation project within sixty (60) days, Plaintiff defaulted. Plaintiff did not complete the rehab project in 60 days. In order to prevent a foreclosure proceeding on Plaintiff's interests in the LLC, the lender required Plaintiff to make payments of $1,888.00 per month toward a total amount due of $135,000.00.

 

Plaintiff did not accept these terms and the lender proceeded to use the Utah legal system to take control of the LLC. Plaintiff subsequently filed a complaint against the lender and LLC ("Defendants") seeking to quiet title and alleging that the Defendants violated the Illinois Mortgage Foreclosure Law ("IMFL") by taking possession of the Property via the LLC without complying with the IMFL.

 

The Defendants filed a motion to dismiss, arguing that the LLC acquired title to the property, the purchase of the property was funded by the lender, and as part of the lending agreement Plaintiff permissibly pledged his membership interest in the LLC as collateral for the loan and personally guaranteed the loan. Defendants further argued that after maturation of the loan, the LLC defaulted and plaintiff did not comply with the terms of the personal guaranty. As a result, the Defendants argued that the lender acted lawfully when it auctioned and subsequently acquired the LLC's membership interest in Utah.

 

In response, Plaintiff argued the loan terms violated public policy and the IMFL , and that he did not enter into the loan documents with knowledge that its terms bypassed Illinois foreclosure law, and that the Defendants took advantage of Plaintiff.  The Defendants countered that the LLC did not make any payments after maturation of the loan and that under the UCC a debtor could pledge his membership interest in an LLC as collateral. Essentially, Defendants argued they were only enforcing their rights under the UCC and that Plaintiff's membership interest in the LLC did not implicate the IMFL.

 

The trial court granted the Defendants' motion to dismiss.  This appeal followed.

 

On appeal, Plaintiff argued that the loan documents, specifically the security agreement, violated public policy and the mortgage was invalid and violated the IMFL because the lender required Plaintiff to form the LLC to obtain the financing. Plaintiff also argued that the Utah was not a court of competent jurisdiction to determine issues concerning Illinois Property and mortgage, and that the Utah litigation was only related to a money judgment against the plaintiff. Defendants argued that the trial court's dismissal was proper because of the Utah forum selection clauses contained in the loan documents and the ruling of the Utah court in favor of the lender meant Plaintiff's claims were barred by res judicata.

 

During the appeal, the Appellate Court ordered the Office of the Illinois Attorney General's Consumer Protection Division ("Attorney General") to file an amicus brief regarding their position on the case. The Illinois Attorney General's Office generally supported Plaintiff's position and argued that the Defendants failed to show that dismissal is warranted based on both the Utah forum selection clauses contained in the loan and security agreements and res judicata.

 

Plaintiff argued that Illinois law applied and Defendants argued that Utah law applied.  The Appellate Court examined both and determined that, regardless of which state's law applied, Plaintiff's complaint should not have been dismissed based on the forum selection clauses contained in the loan documents.

 

In Utah, a Plaintiff's claim that a contract was entered into fraudulently is "sufficient to render the forum selection clause unenforceable." Energy Claims Ltd. v. Catalyst Investment Group. Ltd., 2014 UT 13, ¶¶ 51-53. Because Plaintiff's complaint included allegations that the entire loan transaction was improper and lender's practices were deceptive and unlawful, the Appellate Court concurred with the Plaintiff and Attorney General's office and held that Plaintiff's complaint should not be dismissed under Utah law.

 

Under Illinois law, "a forum-selection clause in a contract is prima facie valid and should be enforced unless the opposing party shows that enforcement would be unreasonable under the circumstances." Dancor Construction, Inc. v. FXR Construction, Inc., 2016 IL App (2d) 150839, ¶ 75.  In order to invalidate a forum selection clause the alleged fraud must be specific to the forum selection clause. IFC Credit Corp. v. Rieker Shoe Corp., 378 Ill. App. 3d 77, 93 (2007).

 

Because the Plaintiff and Defendants both relied on portions of the loan documents to support their respective arguments, and the loan documents contained inconsistent provisions regarding which state law governs, the Appellate Court held there were issues of fact as to the factors the court must consider to determine if it would be unreasonable under the circumstances to enforce the forum selection clauses.

 

Accordingly, the Appellate Court held that the trial court erred in dismissing plaintiff's complaint based on the forum selection clauses contained in the loan documents.

 

Plaintiff also argued that the trial court improperly determined that that res judicata applied to the complaint based on the Utah judgment. Plaintiff argued that the lender's lawsuit was related to a money judgment against Plaintiff, not to determine ownership rights of the property. Lender argued that Plaintiff's entire complaint was barred by res judicata because the issue of the ownership of the LLC has already been adjudicated by a court in Utah, which determined that Lender owns the LLC.

 

Illinois and Utah law both require the party who claims the doctrine applies must prove three elements, including: (1) a final judgment on the merits, (2) an identity of the parties or their privies, and (3) an identity of causes of action. The Appellate Court held that lender did not meet its burden to prove that res judicata barred Plaintiff's claim because the Utah order did not specifically state the issues or causes of action in the case sufficiently to determine whether the causes of action are the same as they are in this case.

 

Although the Utah judgment mentioned the security agreement, Plaintiff's claims were based on other agreements in the loan documents not referenced by the Utah order. Additionally, the Appellate Court, relying partially on the Attorney General's position that the court need not apply res judicata if it would be fundamentally unfair to do so, held there are questions of fact regarding whether it would be unreasonable or unfair to apply res judicata to Plaintiff's complaint. 

 

Lastly, the Appellate Court held that the trial court's dismissal of Plaintiff's IMFL claim was improper because the trial court's order relied on Defendants' assertion that it did not violate IMFL, a conclusion of law which required the determination of various underlying facts that were disputed. Because the trial court's dismissal was based on factual disputes, dismissal was not proper.

 

Accordingly, the Appellate Court reversed and remanded for further proceedings.

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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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FYI: Illinois Sup Ct Holds New BIPA Cause of Action Accrues With Each Violation

The Illinois Supreme Court recently held that a separate claim accrues under the Illinois Biometric Information Privacy Act (BIPA) each time a private entity scans or transmits an individual's biometric identifier or other protected information in violation of section 15(b) or (d) of the BIPA.

 

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

 

A manager for a fast food restaurant chain brought a class action suit in federal court against the restaurant chain on behalf of a putative class of employees who allegedly scanned their fingerprints to access their paystubs and company computers. The manager alleged that the restaurant chain unlawfully collected her alleged biometric information and disclosed it to its third-party vendor in violation of sections 15(b) and (d) of BIPA.

 

The restaurant chain filed a motion for judgment on the pleadings, arguing that the manager's claims were untimely because they first accrued when BIPA went into effect in 2008, more than 10 years before the complaint was filed. The manager responded by arguing that a new claim accrued each time she scanned her fingerprints and the restaurant chain sent her biometric data to its third-party authenticator.

 

The federal trial court agreed with the manager and denied the restaurant chain's motion. The trial court later certified its order for immediate interlocutory appeal, finding that its decision involved a controlling question of law on which there was substantial ground for disagreement.

 

The U.S. Court of Appeals for the Seventh Circuit accepted the certification and found the parties' competing interpretations of claim accrual reasonable under Illinois law and thus certified the following question to the Illinois Supreme Court:

 

"Do section 15(b) and 15(d) claims accrue each time a private entity scans a person's biometric identifier and each time a private entity transmits such a scan to a third party, respectively, or only upon the first scan and first transmission?"

 

The Illinois Supreme Court began by noting that section 15(b) of BIPA mandates informed consent from an individual before a private entity collects biometric identifiers or information. Specifically, section 15(b) provides that "[n]o private entity may collect, capture, purchase, receive through trade, or otherwise obtain a person's or a customer's biometric identifier or biometric information unless it first" obtains informed consent from the individual or the individual's legally authorized representative. 740 ILCS 14/15(b).

 

After reviewing section 15(b)'s plain language, the Illinois Supreme Court agreed with the manager that "collect" in the context of the statute means to "to receive, gather, or exact from a number of persons or other sources" and "capture" means "to take, seize, or catch." Webster's Third New International Dictionary 334, 444 (1993).

 

Additionally, the Court disagreed with the restaurant chain that these were things that could happen only once; the restaurant chain obtained an employee's fingerprint and stored it in its database, but the employee was then also required to use his or her fingerprint to access paystubs or company computers. The Court determined that the restaurant chain failed to explain how such a system could work without collecting or capturing the fingerprint every time the employee needed to access his or her computer or pay stub.

 

Furthermore, the Illinois Supreme Court held that the restaurant chain's suggestion that the "unless it first" phrase in section 15(b) refers only to the first collection of biometric information was inaccurate because that phrase actually refers to the private entity's statutory obligation to obtain consent or a release. See 740 ILCS 14/15(b).

 

Similar to section 15(b), the Court noted that section 15(d) mandates consent or legal authorization before a specific action is taken. It provides that "[n]o private entity in possession of a biometric identifier or biometric information may disclose, redisclose, or otherwise disseminate a person's or a customer's biometric identifier or biometric information unless" it obtains informed consent from the individual or their legal representative or has other legal authorization to disclose that information. 740 ILCS 14/15(d).

 

As with section 15(b), the Illinois Supreme Court concluded that the plain language of section 15(d) applies to every transmission to a third party. The Court reasoned that it did not need to specifically determine the meaning of "redisclose" in section 15(d) because the other terms in that section are broad enough to include repeated transmissions to the same party. "Disclose" means to "expose to view," Webster's Third New International Dictionary 645 (1993)), and Webster's gives as an example something happening more than once: "the curtain rises to [disclose] once again the lobby" Id. The Court pointed out that a fingerprint scan system requires a person to expose his or her fingerprint to the system so that the print may be compared with the stored copy and that this happens each time a person uses the system.

 

Additionally, the Illinois Supreme Court determined that section 15(d) has a catchall provision that broadly applies to any way that an entity may "otherwise disseminate" a person's biometric data. "Disseminate" means "to spread or send out freely or widely." Id. at 656. The restaurant chain asserted that this was something that could happen only once, but the Court found that the chain provided no definitional support for this assertion.

 

Accordingly, the Illinois Supreme Court answered the certified question by holding that the plain language of sections 15(b) and (d) requires that a claim accrues under BIPA upon each transmission of a person's biometric identifiers or other protected information without prior informed consent.

 

Lastly, the Illinois Supreme Court concluded that the statutory language made clear that the Illinois legislature chose to make damages under BIPA discretionary, rather than mandatory. However, the Court invited the Illinois legislature to address any policy-based concerns about potentially excessive damages awards.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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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FYI: 4th Cir Holds Alleged Violation of State Common Law and Statutory Privacy Law Not Enough for Article III Standing

The U.S. Court of Appeals for the Fourth Circuit recently reversed a trial court's contrary ruling in a putative class action relating to a data breach, and remanded the case back to state court for lack of Article III standing.

 

In so ruling, the Fourth Circuit held that a plaintiff providing six (6) digits of his Social Security Number in alleged violation of state common law and statutory law was not a concrete injury sufficient to warrant Article III standing.

 

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

 

The plaintiff alleged that the defendant company (Company) was a subsidiary of a credit reporting agency that suffered a data breach. The credit reporting agency engaged its subsidiary company to inform customers they were impacted by the data breach.  The defendant company's website prompted the impacted individuals to enter six (6) digits of their Social Security Number ("SSN") without requiring a password or other security precautions. The plaintiff alleged that the Company shared the six (6) digits of his SSN with the credit reporting agency who experienced the data breach.

 

Plaintiff filed a putative class action against Company in state court alleging that Company's practice of requiring six (6) digits of consumers' SSNs violated South Carolina's common-law right to privacy and South Carolina's Financial Identity Fraud and Identity Theft Protection Act (the "Act"). The Act prohibits "requir[ing] a consumer to use his social security number or a portion of it containing six digits or more to access an Internet web site, unless a password or unique personal identification number or other authentication device is also required to access the Internet web site." S.C. Code Ann. § 37-20-180(A)(4).

 

Plaintiff argued that Company violated the Act by requiring him to provide more than five (5) digits of his SSNs. The Company removed the case to federal court under the federal Class Action Fairness Act ("CAFA"). Plaintiff filed an amended complaint which added a claim of negligence.

 

Company moved to dismiss under Fed. R. Civ. Pro. 12(b)(6) for failure to state a claim. While the motion to dismiss was pending, the Supreme Court of the United States issued its ruling in TransUnion LLC v. Ramirez.  Plaintiff openly questioned whether or not he had standing.  Ultimately, the trial court held Plaintiff adequately alleged an intangible concrete injury in the manner of an invasion of privacy, which gave the trial court subject matter jurisdiction. However, the trial court granted the Company's motion to dismiss holding that Plaintiff did not plausibly state a claim under the Act or under common law principles of privacy or negligence.

 

Plaintiff appealed only the trial court's decision to dismiss his claim under the Act and requested the Appellate Court affirm the trial court's ruling affirming that he suffered a concrete injury sufficient to give him standing under Article III. 

 

As you may recall, under Article III, a federal court only hears cases or controversies in which (1) a plaintiff "suffered an injury in fact that is concrete, particularized, and actual or imminent," (2) "the injury was likely caused by the defendant," and (3) "the injury would likely be redressed by judicial relief." TransUnion, 141 S. Ct. at 2203. In examining whether the Plaintiff properly alleged an Article III injury in fact, the Fourth Circuit noted that there was no case law interpreting the Act under the Article III framework. However, the Appellate Court examined other jurisdictions involving the federal Fair and Accurate Credit Transactions Act ("FACTA").

 

FACTA forbids merchants from printing more than the last five digits of a credit card number or the card's expiration date on receipts offered to customers. Even though FACTA contains specific restrictions, federal courts still independently determine ether the plaintiff alleging a FACTA violation suffered a concrete injury. For example, the Eleventh Circuit Court of Appeals previously held that a plaintiff receiving a receipt containing the first six and last four digits of his sixteen-digit credit card number was not enough to establish a concrete injury because the plaintiff did not plausibly allege a material risk of or realist danger of identity theft. See Muransky v. Godiva Chocolatier, Inc., 979 F.3d 917, 921. However, the D.C. Circuit Court held that a plaintiff receiving a receipt that exposed the entire credit card number and expiration date constituted a concrete injury because it was sufficient information for a criminal to defraud. See Jeffries v. Volume Servs. Am., Inc., 928 F.3d 1059, 1066 (D.C. Cir. 2019).

 

The Fourth Circuit also examined its own precedent where plaintiffs whose personal information was compromised in a data breach had not shown an Article III injury based on an alleged "increased risk of future identity theft and the cost of measures to protect against it. See Beck v. McDonald, 848 8 F.3d 262, 267 (4th Cir. 2017). The Fourth Circuit also noted that it previously held that a plaintiff did have Article III standing when the plaintiff was victims of identity theft traceable to the defendant's data breach. See Hutton v. National Board of Examiners in Optometry, Inc.892 F.3d 613, 621–22 (4th Cir. 2018).

 

The Fourth Circuit noted that Article III excludes plaintiffs who rely on an abstract statutory privacy injury unless it came with a nonspeculative increased risk of identity theft. Here, Plaintiff did not allege that that entering six digits of his SSN on the Company's website or sharing the information with the credit reporting agency somehow raised his risk of identity theft. Because Plaintiff alleged a violation that relied entirely on a procedural violation of a statute, the Fourth Circuit held that this was not sufficient under Article III.

 

Plaintiff argued further that under the Act he had a privacy interest in his SSN and this right was violated when he gave six (6) digits of his SSN to the Company to determine if he was impacted by the credit reporting agency's data breach.  However, the Fourth Circuit distinguished Plaintiff's allegations of a general right to privacy in his Social Security Number coupled with a speculative connection to potential identity theft from other cases where receiving an unwanted telephone call or text message was considered invading the privacy interest in the home. See generally Krakauer v. Dish Network, L.L.C., 925 F.3d 643, 653 (4th Cir. 2019) and Gadelhak v. AT&T Servs., Inc., 950 F.3d 458, 462 (7th Cir. 2020).

 

The Fourth Circuit held that the Plaintiff did not adequately plead that that he was injured by the alleged statutory violation of the Company at all and he fell short of averring a concrete injury in fact. The Appellate Court did not determine whether Plaintiff stated a claim under the Act.

 

Because it determined that Plaintiff did not have standing under Article III, the Fourth Circuit vacated and remanded the trial court's judgment with instructions to remand this case to state court, where the state court could separately determine the merits of Plaintiff's claims. 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

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

 

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and

 

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FYI: 6th Cir Holds FDCPA SOL Triggered on Date of Last Violation, Not Date Faulty Collection Action Was Filed

The U.S. Court of Appeals for the Sixth Circuit recently reversed a trial court's dismissal of a consumer's federal Fair Debt Collection Practices Act ("FDCPA") claim, and held that the FDCPA claim actually fell within the statute of limitations.

 

In so ruling, the Sixth Circuit held that, because the FDCPA creates an independent statute of limitations for each discrete violation of the FDCPA, and even though the alleged FDCPA violation occurred in a collection lawsuit that was filed more than one year before the filing of the FDCPA action, the specific alleged FDCPA violation at issue occurred later in the collection lawsuit and within the FDCPA's one-year statute of limitation.

 

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

 

The consumer financed a furniture purchase through a retail installment contract ("RIC"). The RIC was sold to a financing company. The consumer defaulted, and the financing company, through its attorney, sued in state court to recover the debt and attorney's fees.

 

The RIC attached to the complaint did not establish a transfer to the financing company. The court ordered the financing company to file proof of assignment, and the company filed an updated RIC that listed the previous creditor's store manager as assigning the debt to the financing company. The trial court then granted the financing company summary judgment, but the state appellate court found that the financing company had not sufficiently demonstrated a valid transfer. The state appellate court remanded the case, and the financing company eventually filed a voluntary dismissal.

 

Then, 380 days after the financing company originally filed its lawsuit in state court, the consumer sued the financing company's attorney in federal court under the FDCPA, alleging that the attorney doctored the RIC mid-litigation to make it look like the assignment was proper.

 

Upon the attorney's motion, the federal trial court dismissed the complaint as untimely under the FDCPA's one-year limitations period. The consumer filed a motion for reconsideration, and the attorney filed a motion for attorney's fees. The trial court denied both motions, and the parties timely appealed.

 

Meanwhile, the consumer and the financing company entered into a settlement agreement that released the company, later clarifying in an addendum that the company's attorney was not released. Three months before the court denied the motions for reconsideration and attorney's fees, the attorney learned of the settlement agreement.

 

Before the parties briefed the merits of their appeals, the attorney moved to dismiss the consumer's appeal for lack of jurisdiction based on the settlement agreement. The consumer argued that the attorney had forfeited this argument or, alternatively, that the agreement did not go to the Sixth Circuit's jurisdiction to hear the case. And, producing the addendum to the agreement as well as the attorney's employment contract with the financing company, the consumer also argued that the attorney was not an intended third-party beneficiary of the settlement agreement.

 

The Sixth Circuit denied the attorney's motion to dismiss the consumer's appeal, holding that the settlement agreement did not moot the appeal because, in the context of the case, the agreement did not go to the Court's jurisdiction to hear the case. The Court then allowed the parties to proceed with their briefing on appeal.

 

The consumer argued that her claim fell within the FDCPA's one-year statute of limitations. The attorney challenged the consumer's Article III standing to bring the lawsuit because, according to him, she was only pleading a statutory harm related to the state-court lawsuit and, therefore, could not meet the injury-in-fact requirement. The attorney also argued that the consumer's claim was time-barred and that she released her claim against him through the settlement agreement.

 

As you may recall, to establish Article III standing, a plaintiff must have suffered an injury-in-fact that is fairly traceable to the defendant's conduct and would likely be redressed by a favorable decision from a court. Rice v. Vill. of Johnstown, 30 F.4th 584, 591 (6th Cir. 2022). For the injury-in-fact requirement, a plaintiff's allegations must establish that she has experienced an injury that is "concrete, particularized, and actual or imminent." Barber v. Charter Twp. of Springfield, 31 F.4th 382, 390 (6th Cir. 2022).

 

Here, the Sixth Circuit concluded that the consumer was not merely pleading a statutory violation because she also alleged that she suffered an injury from defending against a state lawsuit that the financing company had no right to bring in the first place. Thus, in the Court's view, that harm established a concrete injury that met the injury-in-fact requirement. See Hurst v. Caliber Home Loans, Inc., 44 F.4th 418, 423 (6th Cir. 2022).

 

Regarding the statute of limitations question, the Sixth Circuit noted that every alleged discrete FDCPA violation has its own statute of limitations. Slorp v. Lerner, Sampson & Rothfuss, 587 F. App'x 249, 259 (6th Cir. 2014). "[T]he date on which the violation occurs" determines when the one-year statute of limitations starts running. § 1692k(d).

 

The Court then found that the consumer's complaint did allege a timely FDCPA violation: that the attorney filed an updated RIC and moved for summary judgment on that basis, allegedly affirmatively misrepresenting to the trial court that the assignment of the debt occurred before the financing company filed suit against the consumer.

 

The attorney argued that the alleged FDCPA violation was a continuing effect of the financing company's initial filing of the state lawsuit and was therefore time-barred because the consumer did not file within a year of the company's initiation of the state suit. See Slorp, 587 F. App'x at 259.

 

However, the Sixth Circuit held that the consumer's single claim was independent of the financing company's initial filing of the lawsuit —- not a continuing effect of it -— because it was a standalone FDCPA violation. The allegation was that the consumer introduced an RIC with a false assignment of debt that occurred after the lawsuit was filed. The Court reasoned that if it was only to consider the date the company filed suit, without regard to subsequent FDCPA violations within that lawsuit, it would create a rule that disregards the fact that § 1692k(d) creates an independent statute of limitations for each discrete violation of the FDCPA. See Bender v. Elmore & Throop, P.C., 963 F.3d 403, 407 (4th Cir. 2020).

 

The attorney also argued that the consumer released her FDCPA claim in the settlement agreement. The Sixth Circuit noted that the attorney first invoked that agreement in support of his jurisdictional argument that the agreement mooted the consumer's suit. At that time, the Court rejected the attorney's jurisdictional argument in its earlier order denying the motion to dismiss the appeal.

 

Nevertheless, the Sixth Circuit remanded this case for the trial court to evaluate in the first instance any merits argument based on the settlement agreement. Additionally, the Court vacated the trial court's order denying attorney's fees since the litigation below was allowed to continue.

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

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