Saturday, July 2, 2016

FYI: MD Penn Holds Notice Explaining Tax Consequences of Debt Cancellation Could Be Misleading

The U.S. District Court for the Middle District of Pennsylvania, recently denied a debt collector's motion to dismiss, holding that a collection notice describing the potential tax consequences of settlements involving cancellation of indebtedness of $600 or more may be misleading or deceptive to the least sophisticated consumer.  

 

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

 

A consumer filed a complaint against a debt collector alleging the defendant supposedly violated the federal Fair Debt Collection Practices Act ("FDCPA") by sending a letter that stated that "any indebtedness of $600.00 or more, which is discharged as a result of a settlement, may be reported to the IRS as taxable income pursuant to the Internal Revenue Code 6050 (P) and related federal law. The amount of the alleged debt at the time that the letter was sent was $798.67 and the offer to settle was for $638.94. The amount of savings if the offer was accepted would be $159.73."

 

As you may recall, to prevail on an FDCPA claim, a plaintiff must prove that: (1) she is a consumer, (2) the defendant is a debt collector, (3) the defendant's challenged practice involves an attempt to collect a debt as the act defines it, and (4) the defendant has violated a provision of the FDCPA in attempting to collect the debt.

 

Under section 1692e of the FDCPA, "[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt." 15 U.S.C. § 1692e.

 

Under applicable authority in the Third Circuit, a debt collection letter is deceptive and therefore violates the FDCPA where the can reasonably be held to have two or more different meanings.  In addition, when evaluating a claim for alleged deceptive conduct under section 1692e of the FDCPA, the Third Circuit employs a least sophisticated debtor standard. This standard is an objective one, meaning that the specific plaintiff need not prove that she was actually confused or mislead, only that the objective least sophisticated debtor would be.

 

The District Court relied on Velez v. Enhanced Recovery Company LLC, 2016 U.S. Dist. LEXIS 57832 (E.D. Pa. May 2, 2016), to address the allegations in the instant case.

 

In Velez, the debt collector sent the plaintiff consumer a collection letter for an amount in excess of $600. The communication included the exact same tax reporting language as in the instant case – i.e., that discharged indebtedness of $600 or more would be reported to the IRS. There, as with here, the defendant debt collector argued that the statement simply reflected the controlling statute and IRS regulation, and thus was not deceptive or misleading, and in any event was not material.

 

The District Court noted that its sister court in Velez found that the proposed amount of reduction of the amount due on the debt could not possibly have been reportable under the relevant circumstances, as like here it was less than a $600 reduction.  The Court held that, if under the circumstances there could not have possibly been a tax reportable event, then the statement in the collection letter would have been false. The Court in Velez found that while the communication may not be false in all respects, it certainly was not completely true.

 

The Court held that the plaintiff consumer in this case pled a plausible claim that the communication at issue could mislead or deceive the lease sophisticated debtor. In addition, the Court held, the communication was material because the least sophisticated debtor may be influenced by the communication.

 

The Court also held that the debt collector's use of the conditional "may" in the challenged language did not remove from the realm of possibility that the least sophisticated debtor might be deceived into thinking that the debt collector must or will report certain settlement amounts to the IRS, even when it does not intend to, or would not be required to, under the relevant statute and regulations.

 

In addition, the Court held the least sophisticated debtor might be misled into thinking that there will be adverse tax consequences for settling a debt for less than the total amount due.  The Court noted that, in its view, it would not be unusual for the least sophisticated debtor to believe the challenged statements suggest the debtor could get in trouble with the IRS for the refusal to pay the debt, or for obtaining any debt forgiveness of $600 of more.

 

Accordingly, the District Court denied the defendant debt collector's motion to dismiss.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

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

 

Admitted to practice law in Illinois

 

 

 

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Friday, July 1, 2016

FYI: 5th Cir Confirms Self-Serving Testimony of Emotional Distress Insufficient Under FCRA, Proximate Cause Required, Commercial Losses Not Recoverable

The U.S. Court of Appeals for the Fifth Circuit recently confirmed that the federal Fair Credit Reporting Act, 15 U.S.C. § 1681, et seq. ("FCRA"), does not allow recovery for commercial or investment property losses.

 

The Court also concluded that where a plaintiff points to no evidence that the denial of credit was actually caused by the defendant's inaccurate credit reporting, judgment is proper in favor of the furnisher.

 

Finally, the Fifth Circuit concluded that a plaintiff is not entitled to emotional distress damages where the only evidence of emotional distress is the plaintiff's own self-serving and conclusory deposition testimony.

 

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

 

The plaintiff borrower acquired two mortgages with the defendant lender.  The borrower alleged that the defendant lender erroneously reported various delinquencies on the loans to the three consumer reporting agencies (CRAs).

 

The borrower alleged that she engaged in numerous communications with the lender and the CRAs to remove the allegedly erroneous information. The lender eventually removed all negative reports for both loans.

 

The borrower alleged that she suffered actual damage because her poor credit supposedly prevented her from obtaining a loan to acquire property and to repair her home, and that she suffered emotional distress as a result of her frustrations.

 

More specifically, the borrower alleged that she was going to use the proceeds of the loan she was denied as a real estate investment, as she was in the business of buying and fixing up real estate. She also alleged she intended to rent the property and obtain rental income.

 

The trial court granted summary judgment in favor of the lender, and the borrower appealed.  Only the disposition of the Fair Credit Reporting Act (FRCA) claims was challenged on appeal.

 

As you may recall, the FCRA was enacted to protect an individual from inaccurate or arbitrary information in a consumer report. Numerous courts have concluded that the FCRA does not cover reports used or expected to be used only in connection with commercial business transactions.

 

Moreover, courts have specifically held that real estate investment losses due to allegedly inaccurate credit information are not within the scope of the FCRA.

 

Accordingly, the Fifth Circuit held that the borrower's loan application and the related credit information involved an attempted commercial transaction, and therefore was not within the scope of the FCRA.

 

However, the borrower also alleged that the lender's FCRA violations resulted in denial of an emergency loan for repairs on her personal residence after it was impacted by a hurricane.

 

The Fifth Circuit noted that, in order to prevail on a FCRA claim for actual damages, the plaintiff must present evidence sufficient to raise a material fact question on the issue of whether the denial of credit was proximately caused by the defendant's alleged misreporting of the plaintiff's credit history. 

 

Here, the Fifth Circuit found that the borrower no evidence to this effect.  In fact, the Court noted, the borrower's credit reports showed that numerous different financial institutions reported late payments from the borrower, not just the defendant lender.  Thus, she raised no issue of material fact and the district court did not err.

 

The borrower further alleged she was entitled to emotional distress damages resulting from the stress and anxiety of fighting with lender and trying to clear up her credit. The Fifth Circuit found that the borrower failed to present sufficient evidence to create an issue of material fact as to whether she suffered compensable emotional distress.

 

The Fifth Circuit held that the FCRA permits recovery for humiliation and mental distress and for injury to one's reputation and creditworthiness. However, the Court held, a claim related to emotional distress requires a "degree of specificity" and "must be supported by evidence of genuine injury," such as "the observations of others," "corroborating testimony," or "medical or psychological evidence."

 

The Fifth Circuit had previously held that self-serving testimony that a plaintiff was upset, hurt, angry, or frustrated, was insufficient to support an award for emotional distress. The only evidence the borrower in this case showed was her own vague deposition testimony that she was a "complete wreck" and had a lot of "anxiety and stress."

 

The Court held that this uncorroborated testimony lacks specificity and fails to show the nature and extent of the actual emotional harm. Thus, the Fifth Circuit held, there was no issue of material fact and the district court did not err.

 

Accordingly, the Fifth Circuit affirmed the district court's judgment.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

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

 

Admitted to practice law in Illinois

 

 

 

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Thursday, June 30, 2016

FYI: PA Sup Ct Holds Any Entity May Be Liable for Charging Excessive Attorney's Fees

In an appeal that garnered significant attention from consumer groups who filed briefs as amici curiae, the Supreme Court of Pennsylvania recently held that any entity that charges excessive attorney's fees in connection with a foreclosure may be liable for treble damages, fines, and attorney's fees under the Pennsylvania Loan Interest Protection Law.

 

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

 

The borrower entered into a residential mortgage in 2002, and later defaulted.  In the foreclosure proceedings that followed, the mortgagee's counsel took several actions on the mortgagee's behalf. The parties eventually entered into a loan modification agreement.

 

The plaintiff then filed a putative class action against the mortgagee's counsel alleging violation of the Pennsylvania Loan Interest Protection Law ("PLIPL" or "Act 6") by supposedly charging excessive attorney's fees.  The trial court granted the mortgagee's counsel's motion to dismiss finding that their conduct as a debt collector was governed by the Pennsylvania Fair Credit Extension Uniformity Act ("PFCEUA").  The trial court also held that, because Section 406 of Act 6/PLIPL refers only to residential mortgage lenders, any violation of that provision does not give rise to a remedy against a law firm under Section 502 of Act 6/PLIPL.

 

The borrower appealed and a divided panel of the appellate court affirmed, holding that because the plain language of Act 6/PLIPL regulates only the conduct of residential mortgage lenders, Section 502 of Act 6/PLIPL does not authorize an action against a mortgagee's counsel for a violation of Section 406 of the statute. The majority reasoned that, had the legislature intended Section 406 to reach law firms acting on behalf of residential mortgage lenders, it would have used express language to that effect in the text.

 

The Supreme Court of Pennsylvania granted appeal, consolidating the matter with another that raised the same issue.

 

As you may recall, Act 6 in relevant part limits the attorney's fees that a "residential mortgage lender shall contract for or receive . . . from a residential mortgage debtor." 41 P.S. §406. As a remedy for a violation of Act 6's protective provisions, Section 502 permits recovery of treble damages "in a suit at law against the person who has collected such excess interest or charges." Id. §502. "Person" is defined as "an individual, corporation, business trust, estate trust, partnership or association or any other legal entity, and shall include but not be limited to residential mortgage lenders." Id. §101.

 

The issue was whether Section 502 of Act 6/PLIPL provides a remedy against any "person" who has collected unlawful attorney's fees, or whether its reach, in this respect, was limited to residential mortgage lenders.

 

The borrower contended that the mortgagee's counsel's conduct was actionable because the law firm was a person that collected illegal fees in connection with its representation of the residential mortgage lender in foreclosure proceedings. The borrower further argued that, under the law firm's reading of the statute, a mortgagee's use of a surrogate (i.e. their counsel) would render any violation of Section 406 irremediable, and that this result could not have been the Legislature's intent. 

 

The Supreme Court of Pennsylvania first looked to the arguments raised by the consumer groups as amici curiae.  The consumer groups argued that, under the lower courts' narrow interpretation, the prohibitions of Act 6/PLIPL would be too easily evaded by residential mortgage lenders who hire attorneys and other third parties to conduct debt collection and foreclosures. Therefore, the consumer group's argued, the provisions of Act 6/PLIPL must be construed broadly to effectively prevent harmful practices that the Legislature intended.

 

The Supreme Court held that the plain and explicit terms of the statute permit "[a] person who has . . . paid charges prohibited or in excess of those allowed by this act" to recover treble damages "in a suit at law against the person who has collected such excess . . . charges." 41 P.S. §502. The Court noted that the Legislature expressly defined "person" to "include but not be limited to residential mortgage lenders." Id. §101. Therefore, the Court concluded, Section 406 restricts the circumstances under which residential mortgage lenders may contract for or receive fees, while Section 502 provides a broad remedy against anyone who has collected such fees.

 

The Pennsylvania Supreme Court also noted that the Legislature created strong remedies and penalties to enforce protective provisions of the statute. The Court found that the Legislature's use of the term "person" in Section 502, which it defined to include actors other than residential mortgage lenders, suggests an intent to hold accountable any of the entities that might have engaged in the abusive practices specifically prohibited in Article IV.

 

The Supreme Court found that the lower courts' holdings disregarded the important principle of statutory construction that, when a statute's terms are plain, the courts are bound to enforce them.

 

Furthermore, the law firm argued that the Legislature would not have impliedly created liability for attorneys in Act 6/PLIPL, while expressly exempting them from such liability in the PFCEUA. The Supreme Court rejected this argument, noting that there are many interrelating protections contained in state and federal regulatory statues, particularly those governing consumer affairs, and that conduct that is omitted from one regulatory framework may still violate another.

 

Thus, the Supreme Court of Pennsylvania held that a borrower may recover under Section 502 of the Pennsylvania Loan Interest Protection Law from any entity, not solely the residential mortgage lender, that collects excessive attorney's fees in connection with a foreclosure.

 

Accordingly, the Supreme Court reversed the orders of the lower courts.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

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

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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Wednesday, June 29, 2016

FYI: Ala App Ct Rejects Debtor's Attempt to Recast Creditor's Claims to Make Them Time-Barred

The Court of Civil Appeals of Alabama recently rejected a debtor's attempt to recast a creditor's collection claims to make the claims subject to a shorter statute of limitations.

 

In so ruling, the Court held that Alabama's civil procedure rule as to motion for summary judgment affidavits is satisfied by testimony as to an affiant's personal knowledge of the information contained in an affidavit.  

 

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

 

The debtor opened a credit card account with a bank 1995. Years later, in 2009, the debtor failed to make payment as agreed.  The bank charged off the account, and it was purchased by the plaintiff-appellee debt buyer.

 

In October of 2013, the plaintiff debt buyer filed a complaint seeking to recover the balance due on the account, and filed a motion seeking a default judgment with affidavits of two employees. The affidavits intended to demonstrate that the plaintiff debt buyer had purchased a number of accounts, including the account at issue, from the bank in 2011. The debt buyer also included a generic credit-card application in support of its motion. The trial court entered a default judgment in favor of the plaintiff debt buyer on November 20, 2013.

 

On December 17, 2013, the debtor filed a motion seeking to set aside the default judgment, and the trial court granted his motion. Months later, the debt buyer filed a motion for summary judgment. The debtor moved to strike the debt buyer's affidavits in support of its motion for summary judgment, arguing the affidavits did not comply with the Alabama rule of civil procedure relating to motion for summary judgment affidavits. The debtor also moved for summary judgment arguing the applicable statute of limitations period had expired.

 

The trial court denied the debtor's motion to strike and motion for summary judgment, and granted summary judgment for the plaintiff debt buyer.  The debtor appealed.

 

The Court of Civil Appeals of Alabama addressed the debtor's arguments that the trial court erred by failing to strike the affidavits, by denying his motion for summary judgment, and by entering summary judgment in favor of the plaintiff debt buyer.

 

As you may recall, Ala. R. Civ. P. 56(e) states, "Form of Affidavits; Further Testimony; Defense Required. Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein."

 

The debt buyer's affiants each asserted they had personal knowledge of certain admissible facts to which they were competent to testify. The Appellate Court held that the affiants complied with Rule 56(e) and were properly considered by the trial court. Accordingly, the Court ruled that the trial court did not err in denying the debtor's motion to strike the affidavits.

 

The debtor also argued that one of the plaintiff debt buyer's claims should be considered to be a claim on an open account subject to the three-year statute of limitations provided by § 6-2-37, Ala. Code 1975, rather than on an account stated subject to the six-year statute of limitations provided by § 6-2-34, Ala. Code 1975.

The Appellate Court rejected this argument, holding that the debtor did not have the ability to recast the plaintiff debt buyer's account-state claim as the plaintiff is the master of its own complaint. 

 

The debtor also argued that the trial court erred in entering summary judgment in favor of the plaintiff debt buyer on its breach of contract claim or on its account stated claim.

 

To establish an account stated in Alabama, at a certain point the creditor renders to the debtor a statement of an account of the outstanding balance and the debtor admits the correctness of the statement regarding the debt. The rendering of the account statement and the acceptance by the debtor of the correctness of the statement rendered forms a new contract.

 

In University of South Alabama v. Bracy, 466 So. 2d 148, 150 (Ala. Civ. App. 1985), the Appellate Court concluded that a "debtor's admission to the correctness of the statement and to his liability thereon can be express or implied." The plaintiff in Bracy had presented evidence indicating that Bracy had incurred a debt and that he had made payments on that debt for four years without objection. 466 So. 2d at 150. The Court concluded that Bracy's payments on the account amounted to an implied admission of liability.

 

Following the ruling in Bracy, the Appellate Court here held that genuine issues of fact existed as to elements of an account-stated claim. Thus, the Appellate Court held that the trial court erred by entering summary judgment in favor of the plaintiff debt buyer on its account-stated claim.

 

The Appellate Court also found that the plaintiff debt buyer failed to present a valid contract.  Accordingly, the Appellate Court held that the trial court erred by entering summary judgment in favor of the plaintiff debt buyer on its breach of contract claim.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

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

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   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

 

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Tuesday, June 28, 2016

FYI: SCOTUS Denies Cert in 2nd Cir Case Holding Non-Bank Debt Collector Could Not Charge Usurious Fees or Interest Allowed for Bank Originator

As you may recall from our prior updates (see below), the U.S. Court of Appeals for the Second Circuit recently reversed a district court's ruling that federal National Bank Act preemption applicable to the loan originator allowed a non-bank consumer debt buyer to charge interest in excess of state usury limits.

 

In so ruling, the Second Circuit noted that, "[a]lthough it is possible that usury laws might decrease the amount a national bank could charge for its consumer debt in certain states (i.e., those with firm usury limits, like New York), such an effect would not 'significantly interfere' with the exercise of a national bank power."

 

The Court did not address the "valid when made" doctrine.  Based on its ruling, the Court revived the consumer's claims under the federal Fair Debt Collection Practices Act and state usury law. The Court also vacated the district court's denial of the consumer's motion for class certification.

 

The defendant consumer debt buyer filed a petition for a writ of certiorari with the Supreme Court of the United States.  Numerous industry groups filed briefs amici in support of the petition.

 

However, the Supreme Court of the United States recently denied the consumer debt buyer's petition. 

 

A copy of the docket for the matter in the Supreme Court of the United States is available at:

 

http://www.supremecourt.gov/search.aspx?filename=/docketfiles/15-610.htm

 

This allows the Second Circuit's ruling to remain in effect.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

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

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   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

 

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Webinars

 

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California Finance Law Developments

 

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Insurance Recovery Services

 

 

 


From: Ralph T. Wutscher <rwutscher@mauricewutscher.com>
Date: Mon, Aug 17, 2015 at 9:24 PM
Subject: FYI: 2nd Cir Denies Re-Hearing in Case Holding Non-Bank Debt Collector Could Not Charge Usurious Fees or Interest Allowed Under Valid Contract Made By Bank Originator
To: "Ralph T. Wutscher" <rwutscher@mauricewutscher.com>
Cc: New York Office, New Jersey Office, Florida Office, Chicago Office, San Diego Office, San Francisco Office, Philadelphia Office, DC Office, Indiana Office, Ohio Office, Texas Office

The U.S. Court of Appeals for the Second Circuit recently denied the defendant debt buyer's petition for panel rehearing, or, in the alternative, for rehearing en banc, as to its ruling (discussed in our update below) that federal National Bank Act preemption applicable to the loan originator does not allow a non-bank debt buyer to charge interest in excess of state usury limits. 

 

In so ruling, the Second Circuit noted that, "[a]lthough it is possible that usury laws might decrease the amount a national bank could charge for its consumer debt in certain states (i.e., those with firm usury limits, like New York), such an effect would not 'significantly interfere' with the exercise of a national bank power." 

 

The Court did not address the "valid when made" doctrine.  Based on its ruling, the Court revived the consumer's claims under the federal Fair Debt Collection Practices Act and state usury law. The Court also vacated the district court's denial of the consumer's motion for class certification.

 

A copy of the ruling denying the petition for rehearing is attached. 

 

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

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building 
105 W. Madison Street, 18th Floor 
Chicago, Illinois 60602 
Direct:  (312) 551-9320
Fax: (312) 284-4751

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

 

Admitted to practice law in Illinois

 

 

 

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From: Ralph T. Wutscher <rwutscher@mauricewutscher.com>
Date: Thu, Jun 11, 2015 at 9:32 AM
Subject: FYI: 2nd Cir Holds Non-Bank Debt Collector Could Not Charge Usurious Fees or Interest Allowed Under Valid Contract Made By Bank Originator
To: "Ralph T. Wutscher" <rwutscher@mauricewutscher.com>

The U.S. Court of Appeals for the Second Circuit recently reversed a district court's ruling that federal National Bank Act preemption applicable to the loan originator allowed a non-bank consumer debt buyer to charge interest in excess of state usury limits. 

 

In so ruling, the Second Circuit noted that, "[a]lthough it is possible that usury laws might decrease the amount a national bank could charge for its consumer debt in certain states (i.e., those with firm usury limits, like New York), such an effect would not 'significantly interfere' with the exercise of a national bank power." 

 

The Court did not address the "valid when made" doctrine.  Based on its ruling, the Court revived the consumer's claims under the federal Fair Debt Collection Practices Act and state usury law. The Court also vacated the district court's denial of the consumer's motion for class certification.

 

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

 

The plaintiff obtained a credit card from a national bank in 2005. The following year, the bank's credit card program was transferred to another national bank, at which point the consumer received a document amending the terms and conditions of her credit card agreement, which included a Delaware choice-of-law provision.

 

The consumer's debt of approximately $5,000 was "charged-off" in 2008 as uncollectable, and the transferee bank sold the debt to an unaffiliated non-bank company specializing in the purchase of consumer debts.

 

In November of 2010, the non-bank purchaser's affiliate and servicer of its consumer debt accounts sent the plaintiff a demand letter seeking to collect the balance owed plus interest at 27% per annum.

 

In 2011, the plaintiff filed a putative class action against the non-bank debt purchaser and its non-bank servicer, alleging by charging more than the 25% interest per year permitted by New York law, the defendants engaged in abusive and unfair debt collection practices in violation of the federal Fair Debt Collection Practices Act ("FDCPA"), and violated New York usury law.

 

The plaintiff moved to certify the class and the defendants moved for summary judgment, both of which were denied by the district court on September 30, 2013.  As to the defendants' motion for summary judgment, the district court reasoned that genuine issues of material fact existed as to whether plaintiff received the cardholder agreement and change in terms, and whether the transferee bank had properly assigned the debt to the defendant non-bank debt purchaser.

 

As to the plaintiff's motion for class certification, the district court reasoned that because the National Bank Act applied to defendants as assignees of a national bank, a class action was inappropriate and the proposed class failed to satisfy Federal Rule of Civil Procedure 23(a)'s commonality and typicality requirements.

 

In May of 2014, the parties stipulated to the entry of judgment in defendants' favor for purposes of appeal. The stipulation included an agreement that the account was properly assigned to the defendants and that the plaintiff received the cardholder agreement and change in terms, thereby eliminating the two issues of material fact on which the district court had based its denial of the defendants' motion for summary judgment. The district court approved the stipulation and the plaintiff appealed.

 

On appeal, the plaintiff argued that the district court committed error when it held that the federal National Bank Act ("NBA") preempted plaintiff's state law usury claim.

 

The Court first cited to U.S. Supreme Court and Second Circuit precedent on preemption, explaining that the federal preemption doctrine derives from the Supremacy Clause of the United States Constitution.  The Court further explained that "[p]reemption can generally occur in three ways: where Congress has expressly preempted state law, where Congress has legislated so comprehensively that federal law occupies an entire field of regulation and leaves no room for state law, or where federal law conflicts with state law."

 

The Court went on to explain that the NBA expressly allows national banks to "charge on any loan … interest at the rate allowed by the laws of the State, Territory, or District where the bank is located." See 12 U.S.C. § 85. The NBA also "provide[s] the exclusive cause of action" for usury claims against national banks, and thus preempts claims under state usury laws.

 

The defendants argued that, as assignees of a national bank, they were effectively covered by the NBA and could legally recover interest at the rate allowed by Delaware, the state where the assignor bank is headquartered.

 

The Second Circuit disagreed, reasoning that, while under certain circumstances preemption under the NBA could be extended to entities that are not national banks, in order for this exception to apply, the state law at issue must "significantly interfere with a national bank's ability to exercise its powers" under the NBA.  For example, the Court noted that in most of the cases where the NBA has been extended to an unaffiliated non-national bank entity, the entity was acting on behalf of a national bank in the process of conducting the bank's business.

 

The Second Circuit distinguished the actions of the defendants in the case at bar from agents acting on a national bank's behalf, finding that the non-bank defendants here were acting on their own behalf in attempting to collect the plaintiff's credit card debt. In so finding, the Court cited to guidance published by the Office of the Comptroller of the Currency ("OCC"), the federal agency responsible for chartering, regulating and supervising national banks, which clarified in an OCC Bulletin that third-party debt buyers are not agents or subsidiaries of a national bank for purposes of NBA preemption.

 

The Court further distinguished the case at bar from two Eighth Circuit decisions holding that the NBA preempted state law usury claims, which were relied upon by the district court and defendants.

 

In Krispin v. May Department Stores, 218 F. 3d 919 (8th Cir. 2000), the Eighth Circuit applied the NBA to preempt state law usury claims against a department store chain that issued credit cards assigned to a wholly-owned national bank. The Court explained that Krispin did not support the defendants' preemption argument because, in Krispin, the department store chain assigned its credit card accounts to a wholly owned national bank and subsequently re-purchased the accounts, but the national bank retained an ownership interest in the accounts.

 

According to the Second Circuit, this led the Eighth Circuit in Krispin to conclude that that the real party in interest was the national bank. Unlike in Krispin, the Second Circuit noted, the national banks in the case at bar did not retain any ownership interest in the plaintiff's account.

 

In Phipps v. FDIC, 417 F.3d 1006 (8th Cir. 2005), the plaintiffs sued under Missouri law to recover a "finder's fee" paid to a third party entity upon the sale of mortgage loans. The Eighth Circuit in Phipps held that the fees constituted "interest" under the NBA, and held that the originating bank, not the assignee, was the real party in interest and the claims were preempted.

 

The Second Circuit reasoned that in Phipps, the national bank charged the interest or "finder's fee," while in the case at bar, the interest was charged to the plaintiff by the non-bank defendants after her account was sold to defendants. In addition, the Second Circuit noted, the non-bank entity in Phipps was an agent of the national bank and 12 C.F.R. § 7.1004(a) allows a national bank to use the services of and compensate non-employees for originating loans. In the case at bar, no such relationship existed between the non-bank defendants and the originating bank or its national bank transferee.

 

Turning to the issue of whether Delaware or New York law applied based on the choice-of-law provision in the underlying agreement, the Second Circuit declined to address the issue because it had not been ruled upon by the district court.

 

However, the Second Circuit rejected the plaintiff's argument that by attempting to collect interest at a rate higher than New York law allows, the non-bank defendants supposedly made a false representation in violation of FDCPA subsections 1692e(2)(A), (5), (10) and 1692f(1).

 

The Court reasoned that the district court's analysis was mistakenly based on its determination that the defendant non-bank entities were entitled to the same protections as the national bank from which they acquired the plaintiff's credit card account.

 

In addition, the Second Circuit held that the district court mistakenly concluded that Delaware law applied if the plaintiff received the cardholder agreement and change in terms, but those facts were only established by stipulation by the parties for purposes of appeal. Because the district court never reached the issue of which state's law applied, the Court vacated the district court's judgment on the FDCPA claim.

 

The Court also vacated the district court's denial of class certification because its analysis was based on the same ruling that the non-bank defendants were entitled to the same protection under the NBA as the originating bank.

 

Thus, the Second Circuit reversed the district court's holding that the NBA preempted the plaintiff's claims, vacated the district court's judgment and denial of class certification, and remanded the case for further proceedings.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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Email: rwutscher@MauriceWutscher.com

 

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