FYI: 8th Cir Reverses Dismissal of Uniform Fraudulent Transfer Act Claim for Lack of Standing

The U.S. Court of Appeals for the Eighth Circuit recently reversed a trial court order dismissing a plaintiff's complaint for lack of standing, holding that the plaintiff properly alleged an injury in fact because it claimed an economic harm to it that was concrete and personal to the plaintiff.

 

In so ruling, the Eighth Circuit found that standing existed even if the claim may lack merit under the Missouri Uniform Fraudulent Transfer Act, because Article III standing is distinct from the merits of a state law claim.

 

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

 

The Plaintiff sold vehicle service contracts. Plaintiff had an agreement with a distributor (Distributor) to sell its vehicle service contracts. The Distributor agreed to pay Plaintiff a share of any refunds when a customer cancelled the vehicle service contracts early. Plaintiff claimed that the Distributor did not meet its contractual obligation to pay its share of the early cancellations.

 

In a separate Texas state court action, Plaintiff sued the Distributor and its owners seeking damages, injunctive relief, and a declaration that Plaintiff has a security interest in the Distributor's assets.

 

In this action Plaintiff sued the Distributor's owners and several entities affiliated with the Distributor ("Defendants") under the Missouri Uniform Fraudulent Transfer Act (MUFTA). The MUFTA affords relief to creditors "who are victims of fraudulent transfers."

 

Plaintiff claimed that the Distributor's owners wrongly transferred the Distributor's assets to themselves to avoid the Distributor paying its share of the early cancellations under the contract.  Plaintiff alleged that as a result of these wrongful transfers it had to pay over $6 million to cover the Distributor's share of refunds to customers that cancelled their vehicle service contract early.  Plaintiff also alleged that the Distributor wrongly transferred at least $350,000 to the Defendants that should have gone towards contractually agreed upon marketing and advertising expenses.

 

Defendants moved to dismiss arguing that plaintiff lacked standing to sue because no injury in fact could have occurred until Plaintiff prevailed in the separate Texas action.  The trial court agreed with Defendants and dismissed the case for lack of standing. This appeal followed.

 

As you may recall, to establish standing a plaintiff must allege that they "(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."

 

The Eighth Circuit observed that to show an injury in fact, Plaintiff had to allege an injury that "is actual or imminent, as well as concrete and particularized."  The Eighth Circuit held that Plaintiff met this obligation because it alleged economic losses totaling over $6 million and this alleged economic harm "is a concrete, non-speculative injury" that is personal to Plaintiff.

 

The Court rejected the Defendants' arguments that the Plaintiff had to prevail in the Texas state court case first before it could allege an injury in fact because Article III standing "is distinct from the merits of a claim under the Missouri Uniform Fraudulent Transfer Act." Thus, regardless of whether Plaintiff "can satisfy the elements of a claim under the Act, it has alleged a present injury in fact that is sufficient to establish Article III standing."

 

The Eighth Circuit next examined Defendants' theory that the Plaintiff could not demonstrate an alleged injury that is fairly traceable to Defendants' conduct because the third-party Distributor caused the alleged injury.  The Eighth Circuit rejected this argument because it takes two to tango. 

 

A fraudulent transfer required the Distributor to transfer the assets and the Defendants to accept the transfer.  Plaintiff alleged that the Defendants received and kept the disputed assets rendering the Distributor insolvent and contributing to Plaintiff's harm.  The Eighth Circuit concluded that this claimed injury is "fairly traceable" to Defendants' alleged conduct.

 

Therefore, the Eighth Circuit reversed the trial court's order that Plaintiff lacked standing.

 

 

 

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: 9th Cir Holds TCPA's "Federal Debts" Exception Unconstitutional, Joins 4th Cir

The U.S. Court of Appeals for the Ninth Circuit recently reversed the dismissal of a putative class action under the federal Telephone Consumer Protection Act, 47 U.S.C.  § 227, et seq. (TCPA), finding that the plaintiff adequately alleged that the defendant placed calls using an automated telephone dialing system. 

 

In so ruling, the Ninth Circuit joined with a similar ruling by the Fourth Circuit, and held that the TCPA's exception for calls "made solely to collect a debt to or guaranteed by the United States" was incompatible with the First Amendment and severed the exception as an unconstitutional restriction on speech.

 

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

 

As you may recall, the TCPA prohibits the use of an automatic telephone dialing system (ATDS) to place informational or collection calls or text messages to a cell phone without the user's prior express consent.  The TCPA defines an ATDS as "equipment which has the capacity … (A) to store or produce telephone numbers to be called, using a random or sequential number generator; and (B) to dial such numbers."  47 U.S.C. § 227(a)(1).

 

The plaintiff alleged that the defendant used an ATDS to alert its users, as a security precaution, when their account was accessed from an unrecognized device or browser.  For unknown reasons, the plaintiff received messages from the defendant despite not being a user of the defendant's products and services, and never consented to such alerts.

 

The plaintiff sued on behalf of two putative classes:  people who received a message from the defendant without providing their cell phone number to the defendant; and, people who notified the defendant that they did not wish to receive messages but later received at least one message.

 

The plaintiff alleged that the defendant maintained a database of phone numbers and explained how the defendant programed its equipment to automatically generate messages to those stored numbers. 

 

The defendant filed a motion to dismiss. The trial court concluded that the plaintiff inadequately alleged that the defendant used an ATDS to send its messages and dismissed the complaint with prejudice.

 

This appeal followed. 

 

The Ninth Circuit began its analysis by explaining that an ATDS need not be able to use a random or sequential generator to store numbers.  Instead, it merely needs to have to capacity to "store numbers to be called" and "to dial such numbers automatically."  Marks v. Crunch San Diego, LLC, 904 F.3d 1041, 1053 (9th Cir. 2018).

 

The defendant urged the Ninth Circuit to interpret Marks narrowly, as such an expansive definition of an ATDS would capture smartphones because they can store numbers and, using built in automated response technology, dial those numbers automatically.

 

The defendant also sought to differentiate its equipment because it stored numbers "to be called" only reflexively as a preprogramed response to external stimuli outside of its control. 

 

The Ninth Circuit disagreed, stating that the statutory text provide no basis to exclude equipment that stored numbers "to be called" only reflexively.  Instead, the equipment need only have the "capacity" to store numbers to be called.  47 U.S.C. § 227(a)(1).

 

Moreover, the Ninth Circuit noted that phone numbers are frequently stored for purposes other than "to be called", and provided examples such as merchants and restaurants that stored numbers to identify customers in their loyalty program.

 

Unpersuaded by these arguments, the Ninth Circuit held that plaintiff sufficiently plead that the defendant used an ATDS.

 

The defendant also argued that it was entitled to dismissal on the pleadings because the TCPA excepts calls "made for emergency purposes."  47 U.S.C. § 227(b)(1)(A).

 

However, because the plaintiff alleged that he did not have an account with the defendant, meaning his account could not have faced a security issue, the Ninth Circuit determined that the emergency exception cannot apply to the defendant's text messages.

 

Next, the Ninth Circuit turned to the defendant's argument that the TCPA's "debt-collection exception" was incompatible with the First Amendment. 

 

As you may recall, in 2015 Congress added an exception for calls "made solely to collect a debt owed to or guaranteed by the United States."  47 U.S.C. § 227(b)(1)(A)(iii).

 

The Ninth Circuit observed that the pre-amendment TCPA was content neutral and consistent with the First Amendment.  Gomez v. Campbell-Ewald Co., 768 F.3d 871, 876 (9th Cir. 2014), aff'd 136 S. Ct. 663 (2016).

 

The TCPA satisfied intermediate scrutiny, as the Ninth Circuit explained, because it was narrowly tailored to advance the "government's significant interest in residential privacy" and left open "ample alternative channels of communication."  Moser v. Fed. Commc'ns Comm'n, 46 F.3d 970, 974 (9th Cir. 1995).

 

However, the Ninth Circuit noted that the debt-collection exception changed the framework because the TCPA now favors speech "solely to collect a debt owed to or guaranteed by the United States."   

Because this section "target[ed] speech based on its communicative content", the Ninth Circuit found the exception content-based and therefore subject to strict scrutiny.  Reed v. Town of Gilbert, Ariz., 135 S. Ct. 2218, 2226 (2015).

 

Under strict scrutiny the debt collection exception may be justified only if it is narrowly tailored to serve compelling state interests.  Reed, 135 S. Ct. at 2226.

 

The Ninth Circuit observed that the government advanced only one interest:  "the protection of personal and residential privacy." 

 

However, the Ninth Circuit found autodialed calls to collect government debt were "every bit as invasive of residential and privacy rights as any other automated call," and permitting callers to collect government debt hinders, not furthers, the government's asserted interest.

 

Moreover, the debt collection exception in the Ninth Circuit's view was not the least restrictive means to protective the public fisc. 

 

As the Ninth Circuit explained, "Congress could protect the public fisc in a content neutral way by phrasing the exception in the terms of the relationship rather than content," or "[t]he government could also obtain consent from its debtors or place the calls itself."

 

Because the debt-collection exception was insufficiently tailored to advance the government's interests, the Ninth Circuit concluded that the debt-collection exception failed strict scrutiny. 

 

Lastly, the Ninth Circuit explained that only the debt collection exception violated the First Amendment and severing the exception would not undermine the TCPA.

 

The Ninth Circuit noted that its ruling was consistent with the Fourth Circuit's ruling in Am. Ass'n of Political Consultants, Inc. v. FCC, 923 F.3d 159 (4th Cir. 2019), which also held that the debt collection exception was unconstitutional and severance was the appropriate remedy.

 

Accordingly, the Ninth Circuit reversed the trial court's ruling and remanded 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

 

 

 

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FYI: 7th Cir Says "Costs" Includes Collector's Percentage Fee, Disagrees With 8th and 11th Circuits

Distinguishing contrary rulings from the Eighth and Eleventh Circuits, the U.S. Court of Appeals for the Seventh Circuit recently held that a debt collector's percentage fee was recoverable under the language of a contract that required the consumer to pay "any costs (including reasonable attorney's fees) incurred by [the creditor] in attempting to collect amounts due."

 

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

 

A consumer bought a monthly pass to Six Flags amusement parks. The contract stated that if the buyer failed to make the required monthly payments, he would be responsible for "any costs (including reasonable attorney's fees) incurred by [Six Flags] in attempting to collect amounts due."

 

The consumer failed to pay as promised, and Six Flags hired a debt collection company to recover the balance owed. The contract with the debt collection company provided that it could charge "a 5% management fee plus an additional amount based on the number of days the debt was delinquent (in this case, an additional 20%)."

 

The debt collection company sent a demand letter to the consumer "for the $267.31 he owed, plus $43.28 in costs…."

 

The consumer failed to pay and instead "filed a class action lawsuit under the Fair Debt Collection Practices Act ("FDCPA"), alleging that [the debt collector] charged a fee not 'expressly authorized by the agreement creating the debt.' 15 U.S.C. § 1692f(1).

 

The trial court denied both sides' motions for summary judgment and the case went to trial. The trial judge "held that the percentage-based collection fee was expressly authorized" by the language in the contract with the consumer stating that if the account was delinquent for more than 30 days, the account would be cancelled and the consumer "billed for any amounts that are due and owing plus 'any costs (including reasonable attorney's fees) incurred by [Six Flags] in attempting to collect amounts due or otherwise enforcing this agreement."

 

On appeal, the Seventh Circuit framed the issues before it as (a) whether the collection fee was "expressly authorized by the agreement creating the debt" and (b) "whether the collection fee was a 'cost[] … incurred by [Six Flags] in attempting to collect amounts due."

 

The Court analyzed whether the collection fee was "cost" followed by "whether it was a cost 'incurred … in attempt to collect[,]" and answered "yes" to both questions.

 

The Seventh Circuit rejected the plaintiff's argument that the contract authorized only "actual costs … like letterhead and postage but not collection fees" because "the contract never uses the term 'actual costs,' nor does anything in text suggest it should be read so restrictively. … To the contrary, the contract explicitly allows for "any costs."

 

After citing legal and non-legal dictionaries for the definitions of "cost" the Court explained that the " $43.28 at issue … is literally the sole 'cost' of Six Flags' 'attempt to collect' the debt."

 

The Seventh Circuit next rejected the plaintiff's argument that "costs" meant those expenses awarded by a court to a prevailing litigant because "nothing in this contract suggests that the word 'costs' bears that narrow meaning here."

 

The Court explained that the subject contract authorizes "the collection of any costs, including reasonable attorney's fees." "That phrase has a significant impact on the contract's breadth because the word 'including' generally 'introduces examples, not an exhaustive list.'"

 

Relying in part on the fact the Blacks' Law Dictionary defines "Costs of Collection" as including attorney's fees, the Seventh Circuit reasoned that "[i]f attorney's fees are one nonexhaustive example of what's included, we fail to see the basis to exclude analogous collection fees."

 

The Court then concluded "that a percentage-based collection fee is a 'cost' within the meaning of this language[,]" explaining that "[i]n doing so, we acknowledge that we depart from two of our sister circuits."

 

In one case, the Eighth Circuit "held that a debt collector 'violated the Act by adding the collection fee based on a percentage fee rather than on actual costs when [the debtor's] agreement with the credit union provide she was liable only for actual costs.'" In the second case, "the Eleventh Circuit said the same of a contract that allowed for 'costs of collection, including a reasonable attorney's fee.'"

 

Acknowledging that the language at issue in those two cases "was materially indistinguishable from the contract at issue here[,]" the Court disapproved of those decisions for two reasons.

 

"First, those decisions relied on a pair of assumptions we find questionable: that the contracts at issue authorized only 'actual costs,' and that 'actual costs' necessarily do not include collection fees." The contract at issue, however, did not mention "actual costs" and instead "allows for 'any costs,' and the most reasonable reading of that term is to include fees in attempting to collect."

 

Second, the contract involved in the Eleventh Circuit's case, "like the one at issue here, explicitly provided that the term 'costs' includes attorney's fees. And attorney's fees are not 'actual' costs as the Eleventh Circuit used that term." Accordingly, the Court refused "to hold that the term 'costs' bears such a narrow meaning when the contract explicitly tells us that the term is broad enough to include more."

 

Finally, the Court rejected the plaintiff's argument that "[r]egardless of the definition of 'cost,' … the collection fee wasn't authorized because it hasn't been 'incurred' yet[,]" reasoning that "[t]he problem with [plaintiff's] argument is its premise: he assumes that because the contract uses the word 'incurred,' it applies only to obligations that already exist prior to billing. But the contract never says that."

 

The Seventh Circuit then analyzed the grammar used by the contract, explaining that the word "incurred" is a past participle, which we generally use to form one of two things: perfect tenses or the passive voice." It then noted that "[a] quick survey of judicial opinions confirms that the past participle is an uncommonly flexible device. Sometimes courts have, as [plaintiff] insists we should, found that a past participle refers to a competed event. … In other situations, courts have said that past participles 'describe the present that of a thing …. In still others, courts have found that past participles can refer to future events."

 

Because "nothing in the contract's actual language says much about timing at all[,] [t]hat silence strongly supports [the debt collection company's] argument: absent limiting language, 'any' should mean 'any.' It should include costs incurred at any time, including those that will necessarily be incurred at the time of payment."

 

Agreeing with the trial  judge "that the word 'incurred' lacks a specific temporal restriction[,]" and stressing that "[t]he contested $43.28 is not an estimate [but] the precise amount that would have been due had [plaintiff] paid his debt [when he received the demand letter], the Seventh Circuit concluded that "this standard collection fee falls within the contract's broad language authorizing 'any costs' of collection. As a result, the [debt collector's] letter did not violate the FDCPA."

 

 

 

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   |   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.

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and

 

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