Wednesday, February 1, 2023

FYI: Cal App Ct (6th Dist) Holds Alleged Misidentification of "Charge-Off Creditor" Not "Material"

The California Court of Appeal, Sixth Appellate District, recently affirmed the dismissal of a consumer's California Rosenthal Fair Debt Collection Practices Act (Rosenthal Act) claim based on an alleged violation of the federal Fair Debt Collection Practices Act (FDCPA).and the California Fair Debt Buying Practices Act (CFDBPA) in supposedly failing to properly identify the "charge-off creditor".

 

In so ruling, the Sixth District held that:

 

1-  A consumer plaintiff seeking to establish a prima facie violation of the Rosenthal Act premised on a misrepresentation in connection with the collection of a debt must show the alleged violation is material, where the alleged state law violation is premised on enumerated provisions of the FDCPA.

 

2-  Although the collection action complaint at issue was incorrect and did not "reasonably identify" the charge-off creditor in violation of Cal. Civ. Code 1788.58(a)(6), this error did not constitute a de facto "false representation of" the "character, . . . or legal status of the debt" under 15 U.S.C. § 1692e(2)(A). In other words, the purported misidentification of the charge-off creditor did not implicate the debt's "character, amount, or legal status." 15 U.S.C. § 1692e(2)(A).

 

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

 

A consumer incurred debt on a consumer credit account with a consumer lender.  The debt was sold and assigned to a trustee, and was eventually sold to a debt buyer, which sued to collect the charged-off debt. The debt buyer dismissed that action without prejudice following the consumer's attempt to file a cross-complaint (counterclaim) alleging violations of the Rosenthal Act, premised on incorporated provisions of the FDCPA, and an alleged violation of the CFDBPA based on the debt buyer's apparent misidentification of the charge-off creditor as the consumer lender rather than the trustee.

 

The consumer sued the debt buyer and its counsel, alleging false or misleading representations in the collection action, in violation of the Rosenthal Act. The defendants filed an anti-SLAPP (strategic lawsuit against public participation) motion under California Code of Civil Procedure section 425.16 to strike the Rosenthal Act claim from the consumer's complaint.

 

California Code of Civil Procedure section 425.16, commonly known as the anti-SLAPP statute, provides that a cause of action arising from an act in furtherance of a person's constitutional right of petition or free speech in connection with a public issue is subject to a special motion to strike, unless the plaintiff establishes a probability of prevailing on the claim. Cal. Code Civ. Proc., § 425.16, subd. (b)(1).

 

A court evaluates a special motion to strike in two steps. The first examines the nature of the conduct that underlies the plaintiff's allegations to determine whether it is protected by Code of Civil Procedure section 425.16; the second assesses the merits of the plaintiff's claim. Barry v. State Bar of California (2017) 2 Cal.5th 318, 321.

 

The trial court granted the defendants anti-SLAPP motion and struck the Rosenthal Act claim. The consumer timely appealed.

 

On appeal, the consumer argued that he met his prima facie burden and the trial court erred in finding otherwise. He contended that in granting the defendants' anti-SLAPP motion, the court erred by considering the defendants' unauthenticated hearsay evidence, improperly weighing that evidence, and making a "materiality" determination based on case law interpreting the federal FDCPA, which he maintained is not a proper consideration under the Rosenthal Act.

 

Section 1788.17 of the Rosenthal Act provides that "every debt collector collecting or attempting to collect a consumer debt shall comply with the provisions of [15 U.S.C. s]ections 1692b to 1692j, inclusive . . . and shall be subject to the remedies in [15 U.S.C. s]ection 1692k . . . ." § 1788.17. The Rosenthal Act, through section 1788.17, thus "incorporates by reference the [federal] FDCPA's requirements . . . and makes available the FDCPA's remedies for violations." Riggs v. Prober & Raphael (9th Cir. 2012) 681 F.3d 1097, 1100.

 

The FDCPA regulates the conduct of debt collectors by prohibiting "any false, deceptive, or misleading representation or means in connection with the collection of any debt." 15 U.S.C. § 1692e. It is a violation of the FDCPA to falsely represent "the character, amount, or legal status of any debt," id., § 1692e(2)(A), or to "use . . . any false representation or deceptive means to collect or attempt to collect any debt." Id., § 1692e(10). A false or misleading statement is not actionable under the FDCPA unless it is material. Afewerki v. Anaya Law Group (9th Cir. 2017) 868 F.3d 771, 773.

 

Here, the claimed false statement in contravention of the FDCPA (specifically, sections 1692e(2)(A) and e(10)) and comprising the alleged section 1788.17 violation was based on the collection action complaint's alleged misidentification of the charge-off creditor, which the consumer contended violated section 1788.58(a)(6) of the California Fair Debt Collection Practices Act (CFDCPA).

 

The consumer contended that the trial court erred in finding that his Rosenthal Act claim lacked minimal merit under the applicable anti-SLAPP standards. He asserted that the failure of the collection action complaint to comply with the charge-off creditor disclosure requirement set forth in the CFDBPA (§ 1788.58 (a)(6)) was "patent" when comparing the collection action complaint with the verified discovery responses from the collection action which supplied the relevant debt assignment information.

 

The consumer argued that the verified discovery responses and collection action complaint together satisfied his burden to make a prima facie showing of facts to support a judgment in his favor because the section 1788.58 violation "necessarily also constitutes a false statement in an attempt to collect a debt" under the federal FDCPA.

 

As a preliminary matter, the Sixth District concluded that the consumer did not meet his initial burden to demonstrate that his prima facie showing was enough to win a favorable judgment on his Rosenthal Act claim.

 

The Sixth District found that the purpose of the CFDBPA, as set forth in the uncodified legislative findings and declarations, is to regulate "the adequacy of documentation required to be maintained by the [debt buying] industry in support of its collection activities and litigation," Stats. 2013, ch. 64, § 1, subd. (a), and to ensure the "[d]ocumentation used to support the collection of a debt [is] sufficient to prove that the individual who is being asked to pay the debt is in fact the individual associated with the original contract or agreement" Id., § 1, subd. (c).

 

Given these statutory purposes, the Court concluded that the requirement that the collection complaint allege "[t]he name and an address of the charge-off creditor at the time of charge off . . . in sufficient form so as to reasonably identify the charge-off creditor," § 1788.58(a)(6), appears intended to ensure adequate documentation to link the debt buyer's claim to the charge-off creditor and consumer account of the debtor.

 

Whether the nature of the relationship between the consumer lender and the trustee was such as might satisfy the "reasonably identify" standard set out in section 1788.58(a)(6) was a factual question that the Sixth Appellate District decided it need not resolve for purposes of this appeal. This is because the Court was not persuaded that the asserted CFDBPA violation supported a Rosenthal Act violation for false or misleading statements in connection with collection of a debt, as stated in the federal FDCPA.

 

Whether debt collection efforts are false, deceptive, or misleading for purposes of the federal FDCPA requires an objective analysis that " 'takes into account whether the "least sophisticated debtor would likely be misled by a communication." ' " Tourgeman v. Collins Financial Services, Inc. (9th Cir. 2014) 755 F.3d 1109, 1119. This inquiry "does not ask the subjective question of whether an individual plaintiff was actually misled by a communication. Rather, it asks the objective question of whether the hypothetical least sophisticated debtor would likely have been misled." Afewerki, supra, 868 F.3d at p. 775.

 

Here, assuming that the consumer established that the consumer lender was not the charge-off creditor at the time of charge off and, as a result, the collection action complaint was incorrect and did not "reasonably identify" the charge-off creditor in violation of section 1788.58(a)(6), the Sixth District determined that there was no support for his contention that this translated into a de facto "false representation of" the "character, . . . or legal status of the debt" under title 15 U.S.C. § 1692e(2)(A). This is because the purported misidentification of the charge-off creditor did not implicate the debt's "character, amount, or legal status." 15 U.S.C. § 1692e(2)(A).

 

In the Sixth District's view, the consumer did not show how the purported misrepresentation of the charge-off creditor was a material misrepresentation under the standard applicable to alleged FDCPA violations, let alone how it would likely mislead the hypothetical least sophisticated debtor. See Tourgeman, supra, 755 F.3d at p. 1119; Afewerki, supra, 868 F.3d at p. 775. To the contrary, unlike the identity of a consumer's original creditor, whose "false identification in a dunning letter would be likely to mislead some consumers in a material way," Tourgeman, supra, 755 F.3d at p. 1121, a hypothetical debtor receiving the debt buyer's collections complaint would recognize the consumer lender as the creditor that issued and serviced the credit account until nonpayment on the account, charge-off, and sale to the debt buyer bringing the collections suit. The misidentification of the trustee in this instance fell squarely within the category of "mere technical falsehoods that mislead no one." Donohue v. Quick Collect, Inc. (9th Cir. 2010) 592 F.3d 1027, 1034.

 

Insofar as section 1788.17 "incorporates the FDCPA, so that a violation of the FDCPA is per se a violation of the Rosenthal Act," Best v. Ocwen Loan Servicing, LLC (2021) 64 Cal.App.5th 568, 576, the Sixth District concluded that the inverse was also true: a misrepresentation that is immaterial and thus not actionable under the FDCPA fails to support a prima facie violation of section 1788.17.

 

Furthermore, the Sixth District held that, although a court tasked with an anti-SLAPP motion "does not weigh evidence or resolve conflicting factual claims," Baral v. Schnitt (2016) 1 Cal.5th 376, 384, where, as here, the relevant representation in connection with the collection of the debt (i.e., the collection action complaint) is not subject to conflicting factual claims and the viability of the claim is evaluated according to an independent, objective standard of review, the court can properly ascertain the plaintiff's showing at the second step of the anti-SLAPP procedure without weighing the evidence or resolving factual disputes.

 

Thus, having applied the settled standard for evaluating a false statement or misrepresentation as set forth in the FDCPA, the Sixth District decided that the consumer had not met his burden to demonstrate a prima facie violation of section 1788.17 of the Rosenthal Act. Accordingly, the Court concluded that the trial court did not err in granting the defendants' anti-SLAPP motion.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th 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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Friday, January 27, 2023

FYI: Ohio Sup Ct Upholds Denial of Coverage for Ransomware Attack Losses

The Ohio Supreme Court recently reversed the decision of an appellate court and reinstated the trial court's grant of summary judgment in favor of an insurer and against an insured company on the company's claim for breach of contract and bad faith denial of insurance coverage relating to damages arising from a ransomware attack.

 

In so ruling, the Ohio Supreme Court held that because a ransomware attack caused no "direct physical loss of or damage to" the company's software —- a requirement for coverage under the policy at issue -— the insurer was not responsible for covering the resulting loss.

 

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

 

As background, the insured company became the target of a ransomware attack when a hacker illegally gained access to the company's computer systems and encrypted files needed for using its software and database systems.  After looking into the timing and financial feasibility of recovering the files through the assistance of a third-party company, the insured company decided to pay the ransom.

 

At the time of the ransomware attack, the company was insured under a businessowners insurance policy issued by the defendant insurer. Thus, the insured company's general manager contacted the insurer to file an insurance claim within a day of the attack. However, the insurer denied coverage because, among other reasons, there was no "direct physical loss of or damage to 'media'," as defined in the electronic-equipment endorsement in the policy.

 

The policy's electronic-equipment endorsement provided:

 

When a limit of insurance is shown in the Declarations under ELECTRONIC EQUIPMENT, MEDIA, we will pay for direct physical loss of or damage to "media" which you own, which is leased or rented to you or which is in your care, custody or control while located at the premises described in the Declarations. We will pay for your costs to research, replace or restore information on "media" which has incurred direct physical loss or damage by a Covered Cause of Loss. Direct physical loss of or damage to Covered Property must be caused by a Covered Cause of Loss.

 

Furthermore, the electronic-equipment endorsement defined "media" as "materials on which information is recorded such as film, magnetic tape, paper tape, disks, drums, and cards." The definition section further stated that "media" included "computer software and reproduction of data contained on covered media."

 

The insured company filed a lawsuit against the insurer, alleging that the insurer breached the insurance policy by denying coverage under the electronic-equipment endorsement and that the insurer denied coverage in bad faith.

 

The insurer answered the complaint by denying the insured company's legal claims and counterclaimed for a declaratory judgment that "no coverage, payment or indemnity is owed" to the company under the policy. Thereafter, the insurer filed a motion for summary judgment on the insured company's claims and its counterclaim for declaratory judgment.

 

The trial court granted summary judgment to the insurer and explained that the evidence showed that the software and database systems were not damaged by the encryption but that the insured company was prevented from accessing or using those systems because of the ransomware encryption.

 

The insured company appealed the trial court's grant of summary judgment, and the appellate court reversed the trial court's decision. The appellate court determined that the language of the electronic-equipment endorsement potentially applied to the insured company's claim if the company could prove that its media, i.e., its software, was in fact damaged by the encryption. The insurer timely appealed.

 

This appeal turned on the legal interpretation of the electronic-equipment endorsement in the businessowners insurance policy issued by the insurer. The Ohio Supreme Court found the language in the electronic-equipment endorsement to be clear and unambiguous in its requirement that there be direct physical loss of, or direct physical damage to, electronic equipment or media before the endorsement is applicable. Because software is an intangible item that cannot experience direct physical loss or direct physical damage, the Court determined that the endorsement did not apply in this case.

 

The Ohio Supreme Court concluded that the most natural reading of the phrase "direct physical loss of or damage to" was that the company was insured for direct physical loss of its media and insured for direct physical damage to its media. See Ward Gen. Ins. Servs., Inc. v. Emps. Fire Ins. Co., 114 Cal.App.4th 548, 554, 7 Cal.Rptr.3d 844 (2003); see also Santo's Italian Café, L.L.C. v. Acuity Ins. Co., 15 F.4th 398, 402 (6th Cir.2021). Similarly, although the term "computer software" was included within the definition of "media," the Court held that it was included only insofar as the software was "contained on covered media" and that "covered media" means media that has a physical existence.

 

Accordingly, because the insurance policy at issue did not cover the type of loss the insured company experienced, the Ohio Supreme Court held that the insurer did not breach its contract with the company. Therefore, the Court reversed the judgment of the appellate court and reinstated the trial court's grant of summary judgment in favor of the insurer.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

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

 

Admitted to practice law in Illinois

 

 

 

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Wednesday, January 25, 2023

FYI: 7th Cir Reverses Denial of Bankruptcy Trustee's Action to Recover Money Paid to Debt Collector

In a bankruptcy trustee's adversary action to recover money paid to a collection agency within 90 days prior to the filing of the debtor's bankruptcy petition, and pursuant to a previous garnishment order, the U.S. Court of Appeals for the Seventh Circuit recently reversed the ruling of a trial court denying the trustee's application.

 

In so ruling, Seventh Circuit held that federal rather than state law defines the meaning of a "transfer" under 11 U.S.C. 547(b)(4)(A). The "transfer" occurs when money changes hands.  Here, the Seventh Circuit held, the money at issue changed hands within the 90 days prior to the filing of the debtor's bankruptcy petition, and not previously when the garnishment order was entered.

 

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

 

As you may recall, bankruptcy trustees can recover some transfers made to outside parties during the 90 days before the debtor files a petition. 11 U.S.C. 547(b)(4)(A). The trustee in a bankruptcy discovered that about $3,700 had been paid to a collection agency during those 90 days under a garnishment order, which was issued by an Indiana state court more than 90 days before the debtor filed his bankruptcy petition. The trustee began an adversary proceeding to recover the $3,700.

 

Relying on In re Coppie, 728 F.2d 951 (7th Cir. 1984), the collection agency argued that the definition of a "transfer" under section 547 depends on state law and that, under Indiana law, a "transfer" occurs when a garnishment order is entered, not when money is paid.

 

The trial court found Coppie controlling and denied the trustee's application. The trial court added that Coppie appeared to be wrongly decided, but wrote that only the Seventh Circuit can overrule its own decisions. The trustee timely appealed.

 

On appeal, the Seventh Circuit did in fact find that Coppie was wrongly decided. The reason was that Barnhill v. Johnson, 503 U.S. 393 (1992) held that federal rather than state law defines the meaning of a "transfer" in §547. A ruling by the Seventh Circuit in 1984 must give way to a decision by the Supreme Court of the United States in 1992.

 

Barnhill arose from a check that was signed and delivered outside the 90-day preference window but negotiated inside that window. The SCOTUS held that the date of the check was irrelevant and that only payment of the check marks a "transfer."

 

Here, the Seventh Circuit reasoned that the rule that the "transfer" occurs when money changes hands is as applicable to garnishment as it is to checks. The check is an instruction to a bank, while the garnishment order is an instruction to an employer. The date of transfer is the time at which the money passes to the creditor's control.

 

As the Seventh Circuit pointed out, this was not the first time that it recognized the effect of Barnhill on the definition of a transfer. Freedom Group, Inc. v. Lapham-Hickey Steel Corp., 50 F.3d 408, 412 (7th Cir. 1995) collected several decisions that did not comport with Barnhill. The Seventh Circuit overruled or disapproved each of them after a circulation to the full court under Circuit Rule 40. Nevertheless, Freedom Group did not include Coppie in its list of defunct rulings, possibly because it was a rarely cited opinion.

 

The collection agency tried to distinguish Barnhill and Freedom Group on the ground that they dealt with dates on which people learned of a transfer order (for example, the date on which a check arrived in the mail) rather than the date the order was made or took effect.

 

However, the Seventh Circuit determined that the rationale of Barnhill did not depend on a payment order's entry versus the date any given person learned of it. Under Barnhill, both dates are irrelevant to the "transfer." Deferred knowledge of a transfer order may affect priority among creditors, if something happened between entry of an order and notice to a person trying to make a secured loan, but only the date of payment matters when defining a transfer under §547.

 

Moreover, the Seventh Circuit decided that Freedom Group did not purport to provide a comprehensive list of all decisions undermined by Barnhill and that it was enough to hold now that Coppie must be treated just as Freedom Group treated similar decisions.

 

Accordingly, the Seventh Circuit concluded that federal law defines a "transfer" and only actual payment counts as a "transfer." Coppie, which held otherwise in both respects, accordingly was overruled, and this case was remanded with instructions to resolve the trustee's claim on the merits.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th 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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Saturday, January 21, 2023

FYI: 9th Cir Holds "Net Impression" Test Applies to CFPA Actions for Deceptive Solicitations

The U.S. Court of Appeals for the Ninth Circuit recently affirmed a trial court's ruling in favor of the Consumer Financial Protection Bureau (CFPB) against a company and its owner that provided fee-based scholarship and financial aid services to prospective and current college students.

 

In so ruling, the Ninth Circuit held:

 

1) The defendants here met the definition of a "covered person" under the Consumer Financial Protection Act (CFPA) because they provided "financial advisory services to consumers on individual financial matters or relating to proprietary financial products or services"; and

 

2) The Federal Trade Commission's "net impression" test applies when determining whether a solicitation is deceptive under the CFPA.

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

 

The defendants were the founder and operator of a company that solicited thousands of prospective and current college students by sending them a letter that generally advised students to avoid taking out student loans until the student applied for all of the available and free financial aid programs. The letters included an information sheet, demographic form, and instructions on how to pay a "processing fee" in exchange for enrollment in a financial aid program and provide as many targeted financial aid opportunities as possible to all students. 

 

Over 75,00 students paid a total of nearly $5 million dollars in processing fees. In exchange for the fee, the only service provided to the students was a booklet that contained general overview on student financial aid, federal student loans, tax implications, and federal and state financial aid programs. Hundreds of consumers filed complaints that promoted an investigation.

 

As a result of the investigation, the CFPB filed an enforcement action alleging that the defendants' conduct was deceptive because it misled students into believing that: (1) the company would provide a program to assist them in applying for scholarships; (2) the company would match them to individually targeted scholarship opportunities; and (3) the students would miss financial aid opportunities by not complying with the filing deadline.

 

The CFPB moved for summary judgment against individual defendant and a default judgment against the defendant company. The trial court granted the CFPB'S motion for summary judgment against the individual defendant by first ruling that his conduct fell under the CFPB's enforcement authority and that his actions deceived students by falsely implying that the defendants had a program for financial aid applications, falsely implying students would be matched with scholarships, and falsely implying that students would forfeit the services if they failed to comply with the arbitrary deadlines.

 

The trial court awarded restitution of all company revenues totaling $4,738,028 in and imposed a civil penalty of $10 million and injunctive relief. The individual defendant appealed.

 

The individual defendant raised three (3) issues on appeal. First, he argued that he was not subject to the CFPB's authority because he provided nonfinancial advice about "free scholarships."  Second, he argued that the net impression of the solicitations was not deceptive.  Lastly, he argued that the trial court erred in calculating the restitution and civil penalty sums. 

 

Appellant first argued that he is not a "covered person" under the Consumer Finance Protection Act ("CFPA") because he merely provided nonfinancial advice on free, gift-based scholarships. 12 U.S.C. § 5481(6). As a result, he argued, the CFPB did not have proper authority under the CFPA.

 

As you may recall, under the CFPA, it is unlawful for a covered person 'to engage in any unfair, deceptive, or abusive act or practice.'" CFPB v. CashCall, Inc., 35 F.4th 734, 746 (9th Cir. 2022). One of the ways that a business can be a "covered person" is if it provides "financial advisory services to consumers on individual financial matters or relating to proprietary financial products or services".  12 U.S.C. § 5481(15)(A)(viii).

 

The individual defendant argued that he was not a covered person because he did not provide "financial advisory services" as defined by the CFPA because scholarships are not financial in nature because they do not have to be repaid. Additionally, he argued that he did not hold himself out as an expert in finance.

 

The Ninth Circuit disagreed.  The Court noted that the ordinary meaning of finance is broad and encompasses both cash financing and debt financing and the definition of "finance" specifically contemplates raising funds, regardless of their origin, for college tuition. Moreover, the Ninth Circuit found that the individual defendant implied expertise in the field of student loan financial aid. As a result, the Court held that provided "financial advisory services" as defined in 12 U.S.C. § 5481(15)(A)(viii) and the trial court did not err in classifying the appellant as a "covered person" under the CFPA.

 

Next, the individual defendant argued that the trial court erred by failing to consider the net impression of his solicitations when it determined they were deceptive.

 

An unlawful "`deceptive' practice is one `tending to deceive,' that is, `to cause to believe the false.'" CashCall, Inc., 35 F.4th at 746 (quoting Deceive & Deceptive, WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY (2002)). In similar cases brought under similar wording in the Federal Trade Commission Act, a "solicitation may be likely to mislead by virtue of the net impression it creates even though the solicitation also contains truthful disclosures." FTC v. Cyberspace.com LLC, 453 F.3d 1196, 1200 (9th Cir. 2006).

 

The Ninth Circuit expressly adopted the net impression test brought in enforcement actions under the CFPA.

 

The individual defendant argued that a reasonable student should have assumed that by responding to the requests for information that they were proceeding with his program to help them finance their college education, and this could not have been deceiving.

 

The Ninth Circuit disagreed and held that based on the record as a whole the individual defendant promised to proceed with a program and apply for the maximum financial aid of those programs when the student submitted the demographic form and paid the processing fee. In return the students only received a booklet with generalized information. Additionally, the Court noted, the letter created a false sense of urgency by listing deadlines to apply.

 

Based upon the net impression created by his entire solicitation packet, the Ninth Circuit held that the trial court did not err by concluding that no genuine issue of material fact existed as to the deceptive nature of the defendant's conduct.

 

The defendant also argued that the trial court's calculation of restitution and civil penalties was improper. However, the Court of Appeals did not consider this argument because it was not properly raised at the trial court.

 

Accordingly, the Ninth Circuit concluded that the individual defendant was subject to the CFPB's authority and that no genuine issue of material fact existed to counteract the deceptive nature of his conduct, and upheld the trial court's summary judgment ruling in favor of the CFPB. 

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th 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

 

 

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Wednesday, January 18, 2023

FYI: 5th Cir Rejects Allegations That Bank Owed Fiduciary Duty to Non-Customer

The U.S. Court of Appeals for the Fifth Circuit recently affirmed the ruling of a trial court rejecting various claims by a non-customer that a bank owed a fiduciary duty to ensure that assets were kept in a trust for the non-customer.

 

In so ruling, the Fifth Circuit held:

 

  • The plaintiff's negligence claim was time-barred under Texas' two-year statute of limitations because the plaintiff brought the suit five years after the subject transfers; and

 

  • Texas courts require a substantial amount of evidence to show that a bank has accepted a fiduciary duty to ensure that assets were kept in a trust for a non-customer third party, and the plaintiff did not provide sufficient evidence here

 

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

 

An investor and the CEO of an oil company developed a business relationship. Throughout that relationship, the investor provided loans, cash advances, and funds to the CEO and the oil company.

 

The investor alleged that, without his knowledge, the CEO transferred a number of the investor's shares from the agreed upon trust account into the accounts of various corporations beneficially owned or controlled by the CEO.

 

The investor and the CEO continued to have a business relationship until 2016, at which point the CEO's actions and words made the investor concerned he would not receive his shares back from the CEO.

 

In late 2017, as part of a larger suit against the CEO, the investor also sued the banks the accounts were in for (1) breach of trust and fiduciary duty, (2) negligence, and (3) conspiracy to commit theft.

 

The trial court granted summary judgment on all counts relating to the banks and awarded them attorneys' fees under the Texas Theft Liability Act ("TTLA"). The investor timely appealed.

 

The investor's claims were predicated on his theory that the banks owed him a fiduciary duty. Therefore, said the investor, the banks should have asked for his consent before transferring the shares.

 

First, the investor claimed that the banks were negligent in failing to obtain the consent of the owner of shares before transferring such shares because that failure went against industry and company policy.

 

Under Texas law, any injury incurred from the banks' alleged negligence in transferring the shares without the investor's consent arose at the time of the transfer. Therefore, without reaching the merits, the Fifth Circuit concluded that the negligence claim was time-barred under Texas' two-year statute of limitations because the investor brought the suit five years after the transfer.

 

Second, the investor asked the Fifth Circuit to find that the account at issue was a "special account," a fixture of Texas law that can create a fiduciary duty from a bank to a non-client.

 

Such accounts are formed when "a customer deposits funds for a specific purpose and the bank agrees to be responsible for the safe-keeping, return, or disbursement of the same funds that were entrusted to it."  Bandy v. First State Bank, Overton, 835 S.W.2d 609, 618-19 n.4 (Tex. 1992). Texas courts generally require explicit proof that the bank agreed to such a duty. See Villarreal v. First Presidio Bank, No. EP-15-CV-88-KC, 2017 WL 1063563, at *7 (W.D. Tex. 2017). The presumption is always that no such special account exists, and "[t]he burden is upon one who contends that the bank is his trustee or owes a duty to restrict the use of funds for certain purposes."  Citizens Nat'l Bank of Dall. v. Hill, 505 S.W.2d 246, 248 (Tex. 1974).

 

Therefore, the only question was whether the banks expressly accepted a duty to ensure the stocks were kept in trust for the investor.

 

The banks provided evidence that the customer agreement they signed with the CEO when he opened his accounts stated that the banks' nature of services will be solely to execute transactions and act as broker-dealer and custodian, and could not be modified except by "a written instrument signed by an authorized representative" of the bank, and "only the undersigned has any interest in the Account(s) established pursuant to this agreement."  

 

Therefore, the Fifth Circuit held that no jury could find that the banks showed an express agreement that they "owe[d] a duty to restrict the use of the funds for certain purposes."  Citizens Nat'l, 505 S.W.2d at 278. The Appellate Court held that the trial court thus did not err in granting summary judgment in favor of the banks.

 

Lastly, the investor contended that the banks conspired with the CEO to steal the investor's money because each had knowledge of, agreed to and intended a common objective or course of action: the theft of the investor's shares in the oil company.

 

In Texas, "[t]he essential elements [of civil conspiracy] are: (1) two or more persons; (2) an object to be accomplished; (3) a meeting of minds on the object or course of action; (4) one or more unlawful, overt acts; and (5) damages as the proximate result."  Massey v. Armco Steel Co., 652 S.W.2d 932, 934 (Tex. 1983). To establish a meeting of the minds, "there must be an agreement among [the alleged conspirators] and each must have a specific intent to commit the act."  San Antonio Credit Union v. O'Connor, 115 S.W.3d 82, 91 (Tex. 2003).

 

The Fifth Circuit observed that the investor's theory appeared to be that the " meeting of the minds" occurred when the banks transferred the funds without the investor's consent, because if the banks knew that the funds were meant to be held in trust for the investor, then agreeing to transfer them without the investor's consent was evidence of their mutual intent to steal from the investor.

 

However, even in a summary judgment posture, the Fifth Circuit held that the investor did not provide enough evidence to show that the banks owed a fiduciary duty. Without such a duty, the banks' transfer was nothing more than compliance with its customer's request and, without further evidence, could not demonstrate an intent of minds to steal from the investor. The Fifth Circuit ruled that summary judgment on this claim was therefore correct.

 

Accordingly, the Fifth Circuit affirmed the decision of the trial court.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th 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, January 15, 2023

FYI: 2nd Cir Holds FCRA Does Not Apply to Inaccuracies Involving Legal Disputes

The U.S. Court of Appeals for the Second Circuit recently affirmed a trial court's order granting summary judgment in favor of a credit reporting agency, and ruled that reporting a student loan debt that was discharged in bankruptcy as "due and owing" is not cognizable as an "inaccuracy" under the federal Fair Credit Reporting Act (FCRA).

 

In so ruling, the Second Circuit held that inaccuracies that turn on legal disputes are not cognizable under the FCRA. Here, the question of whether the student loan debt was discharged in bankruptcy, or whether it was still due and owing, was a legal one to which the FCRA did not apply.

 

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

 

A consumer alleged that his private educational loan was discharged in bankruptcy. He then sued a credit reporting agency under the FCRA for reporting the loan as "due and owing." Pursuant to that provision, credit reporting agencies "shall follow reasonable procedures to assure maximum possible accuracy of the information" in the reports they prepare. 15 U.S.C. § 1681e(b).

 

The consumer claimed that his credit report was inaccurate because it continued to list his outstanding student debt following his chapter 7 bankruptcy. He argued that the educational loan was discharged in bankruptcy because, as a private loan, it was not exempted from discharge under section 523(a)(8) of the Bankruptcy Code. That provision defines as non-dischargeable, among other things, "an educational . . . loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution." 11 U.S.C. § 523(a)(8)(A)(i).

 

The trial court granted summary judgment in favor of the credit reporting agency. Relying primarily on the declaration from the student lender's employee, the trial court determined that the consumer's loan was non-dischargeable, and that therefore its inclusion on his credit report was not an inaccuracy. The consumer timely appealed.

 

The Second Circuit began its analysis by concluding that the trial court's reasoning was in error.

 

The Appellate Court noted that competing evidence in the record raised a genuine and material dispute as to whether the consumer's loan was made under a program that included governmental funding. Although the lender's employee declared that the loan was issued "under a program that was funded, in part, by non- profit organizations, including governmental units," the Second Circuit observed that the prospectus that the consumer submitted —- which the trial court did not address —-cut the other way. That document indicated that the loan was made under a separate program funded only with private funds.

 

Even though it disagreed with the trial court's assessment of the record and did not endorse its interpretive approach, the Second Circuit determined that it  "may affirm . . . on any grounds for which there is a record sufficient to permit conclusions of law, including grounds not relied upon by the district court." CBF Indústria de Gusa S/A v. AMCI Holdings, Inc., 850 F.3d 58, 78 (2d Cir. 2017).

 

The Second Circuit ultimately affirmed the trial court's ruling.  As the credit reporting agency argued in the alternative, that the FCRA does not require credit reporting agencies to adjudicate legal disputes such as the post-bankruptcy validity of the consumer's educational loan debt.

 

The relevant provision of the FCRA states that when preparing credit reports, credit reporting agencies "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). Thus, to prevail on a section 1681e claim against a consumer reporting agency, the Second Circuit decided that it is necessary for a plaintiff to establish, among other things, that a credit report contains an inaccuracy. See Shimon v. Equifax Info. Servs. LLC, 994 F.3d 88, 91 (2d Cir. 2021).

 

In Shimon, the Second Circuit held that a credit report is inaccurate "either when it is patently incorrect or when it is misleading in such a way and to such an extent that it can be expected to have an adverse effect." Id.

 

Thus, the Second Circuit concluded that the "inaccuracy" the consumer alleged did not meet the above-referenced statutory test because it evaded objective verification. There was no bankruptcy order explicitly discharging this debt. The lender continued to treat the debt as outstanding following the consumer's bankruptcy, and, for that matter, so did the consumer.

 

Instead, the Second Circuit reasoned that the accuracy of the credit reporting agency's reporting that the debt was still owed depended on whether it was "dischargeable," which itself depended on whether section 523(a)(8)(A)(i) applied to the consumer's educational loan. And that question, finally, turned on the unsettled meaning of the word "program" within section 523(a)(8)(A)(i) of the Bankruptcy Code.

 

In the Second Circuit's view, the specialized attention and legal reasoning required to determine the post-bankruptcy validity of the consumer's debt meant that its status was not sufficiently objectively verifiable to render the credit report "inaccurate" under the FCRA.

 

Additionally, the Second Circuit pointed out that every other circuit to have considered an analogous question has agreed: inaccuracies that turn on legal disputes are not cognizable under the FCRA.

 

Some circuits reached this conclusion by holding, as the Second Circuit did, that claims under the FCRA require factual inaccuracies to be actionable. For example, the First Circuit concluded that a debtor's claim that his credit report contained an inaccurate report of a legally invalid mortgage "crossed the line between alleging a factual deficiency that [the credit reporting agency] was obliged to investigate pursuant to the FCRA and launching an impermissible collateral attack against a lender by bringing an FCRA claim against a consumer reporting agency." DeAndrade v. Trans Union LLC, 523 F.3d 61, 68 (1st Cir. 2008). Likewise, the Ninth Circuit held that "collateral attacks on the legal validity of...debts" cannot satisfy the "inaccuracy" element of an FCRA claim. Carvalho v. Equifax Info. Servs., LLC, 629 F.3d 876, 891–92 (9th Cir. 2010).

 

The Tenth Circuit reached the same conclusion but based its reasoning on the "reasonable procedures" element, which, the circuit concluded, requires only that credit reporting agencies "look beyond information furnished to them when it is inconsistent with the [credit reporting agency's] own records, contains a facial inaccuracy, or comes from an unreliable source." Wright v. Experian Info. Sols., Inc., 805 F.3d 1232, 1239 (10th Cir. 2015). In that case, the Tenth Circuit held that, as a matter of law, reasonable procedures do "not require [credit reporting agencies] to resolve legal disputes about the validity of the underlying debts they report." Id. at 1242.

 

Finally, the Seventh Circuit reached a similar conclusion drawing on both a distinction between factual and legal inaccuracies and an analysis of what the "reasonable procedures" element requires. See Denan v. Trans Union LLC, 959 F.3d 290, 293–96 (7th Cir. 2020).

 

Consistent with these decisions, the Second Circuit held that the consumer failed to allege an inaccuracy within the plain meaning of section 1681e(b) of the FCRA. The unresolved legal question regarding the application of section 523(a)(8)(A)(i) to the consumer's educational loan rendered his claim non-cognizable under the FCRA.

 

Accordingly, the Second Circuit affirmed, on an alternative ground, the trial court's order granting summary judgment in favor of the consumer reporting agency.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th 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.


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