FYI: Quick Primer on FHA Disparate Impact Claims

Following the ruling by the Supreme Court of the United States (SCOTUS) in Bank of America Corp. v. City of Miami, 137 S. Ct. 1296 (2017), one of the primary and developing issues in FHA disparate impact litigation is proximate cause. 

 

The issue of whether an alleged violation of the FHA proximately caused any cognizable injury is currently being contested in multiple jurisdictions, and may likely develop in a fractured manner perhaps leading ultimately to another eventual determination by the SCOTUS. 

 

 

Background

 

Briefly, the City of Miami ruling follows the groundwork set forth in Texas Dept. of Housing and Comty. Affairs v. Inclusive Comty Affairs Project, Inc., 135 S. Ct. 2507 (2015) where the SCOTUS held that the FHA allowed for disparate impact claims. 

 

Importantly, the Court in Inclusive Communities cautioned that FHA claims for disparate impact discrimination must be supported by proof of "robust causality."  As explained by the Court, this requirement "ensures that racial imbalance does not, without more, establish a prima facie case of disparate impact and thus protects defendants from being held liable for racial disparities they did not create." 

 

Inclusive Communities established four elements for a prima facie claim for a disparate impact violation of the FHA:

 

1) Show statistically-imbalanced lending patterns which adversely impact a minority group;

2) Identify a facially-neutral policy used by defendant;

3) Allege that such policy was "artificial, arbitrary, and unnecessary"; and

4) Provide factual allegations that meet the "robust causality requirement."

 

City of Miami should not be discussed without an understanding of Walmart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011). 

 

In Dukes, the SCOTUS held that a class claim for discrimination could not satisfy the commonality requirements under Rule 23 where there was no uniform discriminatory policy alleged.  The Dukes ruling raised the bar for disparate impact class claims because on its face a disparate impact claim is premised not upon an overtly discriminatory policy or practice but instead upon the discriminatory effects of facially neutral policies.     

 

The Court's ruling in Dukes was follows by a number of complaints filed across the country by various municipal and county entities asserting disparate impact claims against lenders and banks for their alleged activities in mortgage origination and servicing. 

 

The City of Miami action is one of those cases.  The main issues before the Court in City of Miami were whether or not the governmental entities had standing under Article III of the Constitution (e.g. a justiciable controversy, concrete injury) and whether the entities had prudential standing (e.g. "zone of interest") under the FHA.  The SCOTUS held that the City of Miami was within the zone of interest of the FHA, and the City did sufficiently allege standing under Article III.  However, the Court reversed the Eleventh Circuit's determination that the City had adequately demonstrated proximate cause. 

 

In particular, the SCOTUS emphasized that "foreseeability alone is not sufficient to establish proximate cause under the FHA" and that it required "some direct relation" between the injury claimed by the municipality and the alleged wrongful conduct. 

 

The Court held that harms alleged could not simply be the "ripples of harm" resulting through the interconnected housing market.  However, the SCOTUS declined to establish with more detail the boundaries required to establish proximate cause, and instead, opted to allow the district and circuit courts to flesh out this detail. 

 

It is yet to be seen whether or not a municipality can meet the proximate cause burden.  

 

 

Current Litigation Testing the Contours of Proximate Cause

 

FHA litigation is now proceeding in numerous jurisdictions, often centering on the issue of proximate cause. 

 

County of Cook v. Wells Fargo & Co. Case No. 14-CV-9548 (N.D. Ill.) is one such case.  Following the Court's ruling in City of Miami, the trial court allowed Cook County to amend its pleading in an attempt to meet the new standards.  In its amended pleading, Cook County alleged multiple injuries which were directly caused by the discriminatory mortgage lending and servicing practices by Wells Fargo including equity stripping and loan modification denials.  Among other harms, Cook County alleged injury as a result of alleged increased administrative costs for foreclosure and eviction complaints, alleged decreased tax revenue, and alleged decreased racial stability. 

 

Wells Fargo moved to dismiss arguing that Cook County failed to meet the robust causality requirements under Inclusive Communities and that the harms were too remotely to satisfy the direct relation requirements for proximate cause under City of Miami. 

 

The trial court in County of Cook determined the plaintiff County had adequately met its pleading burden.  The robust causality requirement was properly alleged and substantiated through allegations demonstrating the supposed existing of related statistical racial disparities in its practices, and through allegations that Wells Fargo maintained a policy of equity stripping which directly caused these disparities. 

 

Additionally, the trial court found that there was enough alleged to potentially establish a direct causal connection between this alleged conduct and the harm incurred by Cook County, in part.  Specifically, the court found that the alleged increased costs of foreclosure and eviction litigation imposed on Cook County as a result of the increased foreclosures resulting from Wells Fargo's equity stripping conduct were inexorably connected. 

 

However, the trial court also held that the claimed damages for decreased tax revenue and racial instability were too far removed and dependent upon multiple other factors to meet the direct cause requirement of City of Miami, and instead these were more akin to the "ripples of harm" warned of in that opinion.

 

The U.S. District Court for the Eastern District of Pennsylvania reached a similar conclusion on the motion to dismiss pending before it on the City of Philadelphia's disparate impact complaint.  See City of Philadelphia v. Wells Fargo & Co., Case No. 17-cv-2203 (E.D. Pa.).  The City of Philadelphia alleged similar claims and injuries against Wells Fargo as those raised by Cook County. 

  

Initially, the court in City of Philadelphia found that the complaint met the robust causality requirements from Inclusive Communities by identifying several different policies and connected those policies to injuries with specifically allegations showing a statistical impact on minority communities.  On the proximate cause issue, the court determined that the city adequately alleged proximate cause for the non-economic injuries (e.g. decrease in racial stability and integrative communities).  Thus, the opinion in City of Philadelphia is more expansive than Cook County as it allows the claims for injuries towards the racial stability and integration of its communities.

 

The Cook County case has a dispositive motion deadline set for June of 2019, and the City of Philadelphia matter has a proposed dispositive motion deadline for March of 2019.  The summary judgment phase has stalled out other disparate impact claims under the current framework.

 

Separately, the U.S. Court of the Appeals for the Ninth Circuit affirmed summary judgment in favor of the defendant banks where the lower court determined that the municipality failed to meets its burden in demonstrating a "robust causal" connection between the purported neutral policies and the racial disparity.  City of L.A. v. Wells Fargo & Co., 691 Fed. Appx. 453 (9th Cir. 2017).  In particular, the Ninth Circuit found that the alleged policies of incentivizing loan officers to extend high amount loans and marketing to low-income borrowers would "affect borrowers equally regardless of race."    The City of L.A. opinion was published a few weeks after City of Miami but the Ninth Circuit did not reach any discussion on proximate cause. 

 

Even more recently, the U.S. District Court for the Southern District of Florida granted summary judgment in favor of the defendant lender in City of Miami Gardens v. Wells Fargo & Co., Case No. 14-cv-22203 (S.D. Fla.).  Just as with the City of L.A. case, the court in Miami Gardens determined that the city failed to present evidence establishing a prima facie violation of the FHA. 

 

As an initial matter, the court in City of Miami Gardens identified numerous evidentiary failings with the City's claim including deficient corporate representative testimony from the City, and the striking of their material witnesses' affidavit for lack of personal knowledge as to the existence of any offensive loans.  In short, the court found that there was a complete lack of evidence presented by the city to demonstrate the elements and robust causality required under Inclusive Communities.   Once again, the court did not reach an analysis of the proximate cause issue established in City of Miami.

 

As discovery progresses in the Cook County and City of Philadelphia cases, it will be interesting to see if those governmental plaintiffs are able to put together sufficient evidence to prevail on summary judgment where the cities of Los Angeles and Miami Gardens failed.

 

 

 

 

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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FYI: 6th Cir Rejects Account Overdraft Claims

The U.S. Court of Appeals for the Sixth Circuit recently held that the consumer plaintiff's breach of contract claim against the defendant bank failed where the bank processed the consumer's transactions in accordance with the terms of the agreement with the consumer, even though the transactions were not processed in the order they were made by the consumer, which resulted in a greater number of non-sufficient funds ("NSF") charges. 

 

The Court further held that the bank did not violate the agreement's limit of five NSF charges per day where it initially charged eight NSF fees to the account before manually removing three charges the next business day.   

 

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

 

The consumer plaintiff ("Plaintiff") opened a joint checking account with the defendant bank ("Bank"), which was subject to the Bank's "Terms and Conditions" disclosure guide ("Agreement").  The Agreement discussed the method by which the Bank would process transactions, including Automated Clearing House ("ACH") transactions.

 

Specifically, the Agreement provided that "[o]ur policy is to process . . . ACH transactions . . . first – as they occur on their effective date for the business day on which they are processed."

 

The Agreement also stated that it was "subject to . . . payment processing system rules," which included the National Automated Clearing House Association Operating Rules and Guidelines ("NACHA Guidelines"). 

 

The NACHA Guidelines defined the effective date of an ACH transaction as "the date specified by the Originator on which it intends a batch of Entries to be settled." 

 

As you may recall, there are five parties to an ACH transaction: (1) the Originator (the merchant with whom Plaintiffs did business), (2) the Originating Depository Financial Institution (the merchant's bank), (3) the ACH Operator (the Federal Reserve), (4) the Receiver (Plaintiff), (5) the Receiving Depository Financial Institution (the Bank).

 

Thus, in practice the effective date under the Agreement was the date the merchant or merchant's bank chose to submit the transaction to the Federal Reserve.  The Federal Reserve then includes that settlement date on the batch records it submits to the Bank, and the Bank processes the transactions in the order that they are presented by the Federal Reserve in batch files. 

 

Between Wednesday, February 25 and Saturday, February 28, 2015, Plaintiff authorized merchants to initiate a series of ten ACH transactions to be debited from Plaintiffs' checking account with the Bank.  Plaintiff did not have sufficient funds in his account to pay for the transactions.  Each of the relevant transactions was processed by the Bank on Monday, March 2, 2015. 

 

The transactions were not processed in the order Plaintiff initiated them with the largest transaction last, which would have caused him to have only one overdraft fee, but instead the largest transaction was processed first, which caused Plaintiff to initially incur eight overdraft fees on March 2, although three were manually reversed. 

 

Plaintiff thereafter filed a complaint asserting claims for breach of contract for (1) failing to process the transactions in the order he initiated them, and (2) initially posting eight overdraft charges on March 2 in violation of the Agreement's cap of five overdraft charges per day.  The Bank filed a motion for summary judgment, which was granted by the trial court.  Plaintiff timely appealed.

 

On appeal, Plaintiff argued that because the Bank's policy was to process ACH transactions "as they occur on their effective date," and because "occur" is defined in common parlance to mean "to come into existence," that "[a]ny reasonable person" reading the agreement would conclude that "occur" means the order Plaintiff initiated the transaction.

 

The Sixth Circuit rejected Plaintiff's argument for two reasons. 

 

First, the Agreement stated transactions would be processed as they occur "on their effective date," not necessarily the actual date that each transaction was initiated.  Under the Guidelines, which were incorporated into the Agreement, the term "effective date" means the "date specified by the Originator on which it intends a batch of Entries to be settled." 

 

Second, the unrebutted evidence demonstrated that the Bank followed the terms of the Agreement in how it processed Plaintiff's ACH transactions.  As evidence the Bank produced copies of the batch files it received from the Federal Reserve, which were confirmed by Plaintiff's billing statement showing his transactions were processed in the order they occurred in the Federal Reserve's batch files. 

 

The Sixth Circuit therefore held that "[t]here is no genuine dispute as to any material fact on [Plaintiff's] ordering-of-transactions claim." 

 

With respect to his overdraft-fees claim, Plaintiff argued that the Bank breached the Agreement by initially imposing eight overdraft fees on March 2, even though the Agreement stated that "[t]here is a combined limit of five Non-Sufficient Funds Charges per business day." 

 

The Sixth Circuit again rejected Plaintiff's claim, determining that the Bank "provided unrebutted evidence that [the Bank's] computer system is programmed to generate a list of customers who have had more than five overdraft fees assessed in a day," and that the Bank "manually reverses these additional fees for all affected customers the next business day," which was what occurred with respect to Plaintiff's account. 

 

The Sixth Circuit determined that as a result, Plaintiff was not required to pay more than five overdraft charges, and there was no breach.  Further, "even if we construe the initial posting of eight fees as a breach of the Agreement, the next-business-day reversal eliminated [Plaintiff's] damages, preventing [Plaintiff] from establishing another element necessary for a breach-of-contract claim." 

 

Thus, the Sixth Circuit held "[t]here is no genuine dispute as to any material fact on [Plaintiff's] overdraft-fees 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

 

 

 

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FYI: 4th Cir Holds Data Breach Victims Have Standing When Fraudulent Accounts Opened

The U.S. Court of Appeals for the Fourth Circuit recently vacated a judgment of dismissal in consolidated class actions arising from a data breach of personal information, holding that the plaintiffs had standing to sue because fraudulent credit cards were actually opened in the victims' names.

 

In so ruling, the Court distinguished its 2017 ruling in Beck v. McDonald, which held "a mere compromise of personal information, without more, fails to satisfy the injury-in-fact element in the absence of an identity theft."

 

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

 

In July of 2016, a group of optometrists who communicated through Facebook groups dedicated to the profession noticed that credit card accounts were fraudulently opened in their names. The victims concluded that the source of the problem had to be the national board that administered the test required to obtain an optometrist license, to which they were required to submit their social security numbers and other personal information.

 

Two optometrists filed suit in the U.S. District Court for Maryland under the Class Action Fairness Act, 28 U.S.C. § 1332(d)(2). Two weeks later, a third optometrist filed a similar class action in the same court. Both cases alleged that the national board database had been compromised and sought damages, restitution and injunctive relief.

 

In October of 2016, the national board moved to dismiss both complaints based on lack of subject matter jurisdiction under Fed. Civ. P. 12(b)(1) and failure to state a claim upon which relief can be granted Rule 12(b)(6). Shortly thereafter, the board moved to consolidate the two cases.

 

In March of 2017, the trial court dismissed both complaints for lack of standing, reasoning that "the Complaints simply alleged speculative harms that could only occur in the future [and] failed to establish standing either upon their asserted increased risk of identity theft or upon their expenses to negate identity theft." The trial court also concluded that any injury suffered by the plaintiffs was not fairly traceable to the national board because the plaintiffs failed to allege a plausible causal link between furnishing their personal information to the board and "their receipt of unsolicited credit cards." The plaintiffs appealed.

 

The Fourth Circuit began by explaining that "[t]o possess standing, a plaintiff must sufficiently allege … that they have: '(1) suffered an injury-in-fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision.'" … And class plaintiffs cannot meet their burden to establish standing '[w]ithout a sufficient allegation of harm to the named plaintiff in particular.' … When a complaint is evaluation at the pleading stage, however, 'general factual allegations of injury resulting from the defendant's conduct may suffice, for on a motion to dismiss we presume that general allegations embrace those specific facts that are necessary to support the claim.' … Accordingly, 'we accept as true' the 'allegations for which there is sufficient 'factual matter' to render them 'plausible on [their] face.'"

 

The Court focused on the "injury-in-fact and traceability" elements of standing because they were the ones challenged by the board. "To establish an injury-in-fact, the Plaintiffs must show that they 'suffered an invasion of a legally protected interest that is concrete and particularized and actual or imminent, not conjectural or hypothetical."

 

The Court then distinguished its 2017 decision in Beck v. McDonald, which held that "a plaintiff fails to 'establish Article III standing based on the harm from the increased risk of future identity theft and the costs of measures to protect against it.'" In that case, the Court "emphasized that a mere compromise of personal information, without more, fails to satisfy the injury-in-fact element in the absence of an identity theft."

 

The present action, the Fourth Circuit ruled, was different because the plaintiffs alleged "that they have already suffered actual harm in the form of identity theft and credit card fraud. The Plaintiffs have been concretely injured by the data beach because the fraudsters used — and attempted to use — the Plaintiffs personal information to open […] credit card accounts without their knowledge or approval. Accordingly, there is no need to speculate on whether substantial harm will befall the Plaintiffs."

 

The Court further reasoned that even though the plaintiffs did not allege "that they suffered fraudulent charges on their unsolicited […] credit cards, … the Supreme Court long ago made clear that '[i]n interpreting injury in fact … standing [is] not confined to those who [can] show economic harm.'"

 

The Fourth Circuit concluded that "[a] at a minimum, Plaintiffs have sufficiently alleged an imminent threat of injury to satisfy Article III standing." The Court held this is because the plaintiffs "incurred actual harm by receiving unsolicited credit cards—and in at least one instance incurring a credit score decrease…." In addition, "[b]ecause the injuries alleged by the Plaintiffs are not speculative, the costs of mitigating measures to safeguard against future identity theft support the other allegations and together readily show sufficient injury-in-fact to satisfy the first element of the standing to sue analysis."

 

Turning to the "traceability" element, the Fourth Circuit noted that it had previously held that "the 'fairly traceable standard is not equivalent to a requirement of tort causation.'"

 

It also noted that the plaintiffs had alleged the defendant board was "the only common source that collected and continued to store social security numbers that were required to open a credit card account, and also stored outdated persona information (such as maiden names and former married names) during the relevant time periods. Furthermore, other national optometry organizations do not gather or store Social Security numbers, or have investigated and confirmed that their databases have not been breached."

 

Based on these allegations, the Court concluded that "the Complaints contained sufficient allegations that [the board] was a plausible source of the Plaintiffs' personal information. Accordingly, the Complaints contain 'sufficient factual matter' to render the Plaintiffs' allegations plausible on their face with respect to traceability."

 

Because the Fourth Circuit held that the injury-in-fact and traceability elements of standing to sue were sufficient alleged in the complaints, and the third element of redressability was not contested, the Court concluded that the trial court erred in dismissing the Complaints for lack of standing, vacated the judgment, and remanded the case for further proceedings. 

 

 

 

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

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

 

Admitted to practice law in Illinois

 

 

 

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

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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