FYI: 9th Cir Holds FCRA "Permissible Purpose" Plaintiff Had Standing, Establishes Elements for Such Claims

In a case of first impression in that circuit, the U.S. Court of Appeals for the Ninth Circuit recently reversed a trial court's dismissal of a consumer's Fair Credit Reporting Act ("FCRA") claim for lack of standing and failure to state a claim, holding that the plaintiff had Article III standing.

 

In so ruling, the Ninth Circuit held that the consumer suffered a concrete injury in fact when a bank obtained her credit report for a purpose not authorized by the statute, and it was irrelevant whether the report was published or used by the party requesting it.

 

The Court further held that:  (1) in order to state a claim under this provision of FCRA, a plaintiff only needs to allege that the credit report was obtained for an unauthorized purpose;  (2) the defendant must then plead that it was obtained for an authorized purpose; and  (3) the plaintiff need not plead the actual purpose, but only facts creating a reasonable inference the report was obtained for an improper purpose.

 

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

 

A consumer reviewed her credit report from one of the "big three" credit reporting agencies and discovered that a bank with whom she allegedly had no prior or existing relationship had requested her credit report. The consumer filed suit alleging that the bank violated the FCRA by obtaining her credit report without her consent and not for any of the purposes authorized under the Act.

 

The trial court dismissed the complaint with prejudice for lack of standing and failure to state a claim, and the plaintiff appealed.

 

On appeal, the Ninth Circuit noted that the case presented two issues of first impression in that circuit: "(1) whether a consumer suffers a concrete Article III injury in fact when a third-party obtains her credit report for a purpose not authorized by the FCRA and (2) whether the consumer-plaintiff must plead the third-party's actual unauthorized purpose in obtaining the report to survive a motion to dismiss."

 

The Court answered "yes" to the first question and "no" to the second, holding that "a consumer suffers a concrete injury in fact when a third-party obtains her credit report for a purpose not authorized by the FCRA … [,] a consumer-plaintiff need allege only that her credit report was obtained for a purpose not authorized by the statute to survive a motion to dismiss[,] [and] the defendant has the burden of pleading it obtained the report for an authorized purpose."

 

The Court noted that the FCRA prohibits a person from using or obtaining a consumer report for any purpose unless it is obtained for an authorized purpose and the user certifies the authorized purpose for which it is obtained or used.

 

As you may recall, FCRA provides that a "consumer reporting agency" can only furnish a consumer report for certain enumerated purposes "and no other." See 15 U.S.C. § 1681(b)(a).

 

These permissible purposes include, among other things, that the consumer report was obtained in response to a court order, or pursuant to the consumer's written instructions, or only "[t]o a person which it has reason to believe — (A) intends to use the information in connection with a credit transaction involving the consumer … and involving the extension of credit to, or review or collection of an account of, the consumer; (B) … for employment purposes; or (C) in connection with the underwriting of insurance involving the consumer; or (D) … in connection with a license or other benefit granted by a governmental instrumentality …; or (E) [to] a potential investor or servicer, or current insurer …; or [who] otherwise has a legitimate business need for the information—(i) in connection with a business transaction that is initiated by the consumer; or (ii) to review an account to determine whether the consumer continues to meet the terms of the account."

 

On the issue of standing, the Court explained that Article III of the U.S. Constitution limits federal courts' power "only to 'Cases' and 'Controversies' … [and] '[s]tanding to sue is a doctrine rooted in the traditional understanding of a case or controversy.' … '[T]he irreducible constitutional minimum' of standing consists of three elements. The plaintiff must 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.'"

 

According to the Ninth Circuit, the case at bar primarily involved the first "injury in fact" element, with the Court explaining that "[t]o establish injury in fact, a plaintiff must show that he or she suffered 'an invasion of a legally protected interest' that is 'concrete and particularized' and 'actual or imminent, not conjectural or hypothetical.' … 'Concrete' is not, however, necessarily synonymous with 'tangible.' Although tangible injuries are perhaps easier to recognize … intangible injuries can nevertheless be concrete.'"

 

"'In determining whether an intangible harm constitutes injury in fact, both history and the judgment of Congress play important roles … [and] it is instructive to consider whether an alleged intangible harm has a close relationship to a harm that has traditionally been regarded as providing a basis for a lawsuit in English or American courts.' … 'The … injury required by Art. III may exist solely by virtue of 'statutes creating legal rights, the invasion of which creates standing.'"

 

The Ninth Circuit further recited that "a bare procedural violation may not establish a concrete harm sufficient for Article III standing[,]" but "an alleged procedural violation [of a statute] can by itself manifest concrete injury where Congress conferred the procedural right to protect a plaintiff's concrete interests and where the procedural violation presents 'a risk of real harm' to that concrete interest.'"

 

The Court also explained that it has "recognized a distinction between violations of a procedural right …and a substantive right … [and a] violation of a substantive right invariably 'offends the interests that the statute protects.'"

 

Based on the foregoing prior rulings, the Court concluded that the plaintiff had standing to sue under FCRA section 1681b(f)(1) because "[f]irst, obtaining a credit report for a purpose not authorized under the FCRA violates a substantive provision of the FCRA.

 

This is because, the Ninth Circuit held, this section of FCRA, "which prohibits obtaining a credit report for a purpose not otherwise authorized—protects the consumer's substantive privacy interest. The section does not merely 'describe a procedure' that one must follow. Rather, [it] is the central provision protecting the consumer's privacy interest: every violation invades the consumer's privacy right that Congress sought to protect in passing the FCRA."

 

Accordingly, the Court held, "the Plaintiff 'need not allege any further harm to have standing.'"

 

Second, the Court noted that it had "previously found the invasion of the interest at issue — the right to privacy in one's consumer credit report — confers standing."

 

"Third, historical practice also supports a finding of standing … [because] [t]he harm attending a violation of §1681b(f)(1) of the FCRA is closely related to—if not the same as—a harm that has traditionally been regarded as providing a basis for a lawsuit: intrusion upon seclusion (one form of the tort of invasion of privacy)."

 

The Ninth Circuit concluded that the plaintiff had "standing to vindicate her right to privacy under the FCRA when a third-party obtains her credit report without a purpose authorized by the statute, regardless whether the credit report is published or otherwise used by that third-party."

 

The Court then turned to the second issue of first impression: "[m]ust "the consumer-plaintiff plead the third-party's actual unauthorized purpose in obtaining the credit report to survive a motion to dismiss? The Court answered "no," finding that "[t]he trial court erred in holding that … [plaintiff] has the burden of pleading the actual purpose behind [defendant's] procurement of her credit report. A plaintiff need allege only facts giving rise to a reasonable inference that the defendant obtained his or her credit in violation of  §1681b(f)(1) to meet their burden of pleading."

 

As with any affirmative defense, the defendant bears "the burden of pleading it had an authorized purpose to acquire [plaintiff's] credit report[,] … first, because "the FCRA generally prohibits obtaining a credit report, … but then provides a numerous and diverse list of exceptions[.] … As such, the authorized purposes … are matters of exception that the defendant must plead as a defense."

 

"Second, placing the burden on the plaintiff would be unfair, as it would require the plaintiff to plead a negative fact that would generally be peculiarly within the knowledge of the defendant."

 

Finally, the Ninth Circuit concluded that the complaint contained "sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face'".

 

Here, the Court noted that the plaintiff alleged "that she did not have a credit relationship with [defendant]" and made  "factual assertions which negative each permissible purpose for which [defendant] could have obtained her credit report and for which [plaintiff] could possibly have personal knowledge."

 

Accordingly, the trial court's order of dismissal was reversed and the case remanded.

 

 

 

 

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.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments 

 

FYI: 3rd Cir Holds Failure to Turn Over Collateral Repossessed Prior to Bankruptcy Does Not Violate Automatic Stay

The U.S. Court of Appeals for the Third Circuit recently held, in a case of first impression in that Circuit, that a secured creditor's failure to turn over collateral repossessed prior to the filing of the bankruptcy petition does not violate the automatic stay.

 

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

 

The debtor's automobile was repossessed after she defaulted on her installment loan. She then filed a voluntary petition under Chapter 13 of the Bankruptcy Code, notified her creditors and demanded the return of the automobile.

 

The creditors did not comply, and the debtor filed a motion for turnover and for sanctions for violating the automatic stay.

 

The Bankruptcy Court entered an order requiring the creditors to return the automobile to the debtor because the automobile was property of the estate under section 542(a) of the Bankruptcy Code, but denied the request for sanctions.

 

In so ruling, the Bankruptcy Court adopted the minority view "that a creditor does not violate the stay in regard to property of the estate if it merely maintains the status quo."  The majority view is "that Section 542(a)'s turnover provision 'is self-effectuating' because 'it does not allow for the possibility of defenses to turnover.'"

 

The District Court affirmed the Bankruptcy Court, and the debtor appealed to the Third Circuit.

 

On appeal, the Third Circuit noted that it was presented with an issue of first impression: "whether, upon notice of the debtor's bankruptcy, a secured creditor's failure to return collateral that was repossessed pre-bankruptcy petition is a violation of the automatic stay."

 

The Court answered "no," joining the minority position taken by the Tenth and D.C. Circuits, "holding that a secured creditor does not have an affirmative obligation under the automatic stay to return a debtor's collateral to the bankruptcy estate immediately upon notice of the debtor's bankruptcy because failure to return the collateral received pre-petition does not constitute 'an act … to exercise control over property of the estate …'" under Code section 362(a)(3). The Court thus affirmed the District Court's order affirming the Bankruptcy Court.

 

The Third Circuit rejected the majority position, held by the Second, Seventh, Eighth, Ninth and Eleventh Circuits, that "a secured creditor, upon learning of the bankruptcy filing, must return the collateral to the debtor and failure to do so violates the automatic stay …" because doing so violates section 362(a)'s prohibition on any "act … to exercise control of property over the estate."  Under these rulings, "Section 362(a)(3)'s automatic stay provision and Section 542(s)'s turnover provision operate together[,] … a violation of the turnover provision results in a violation of the automatic stay."

 

The Court began by examining the statutory language of section 362(a)(3), explaining that "[i]f we ultimately determine that a provision 'is clear and unambiguous, [we] must simply apply it.' However, if we find that a provision is ambiguous, 'we then turn to pre-Code practice and legislative history to find meaning.'"

 

Although the Third Circuit agreed "that Section 362(a)(3) is unambiguous, [it declined] to hold that a plain reading of that Section compels the conclusion that the creditors in this case violated the automatic stay by failing to turn over the [automobile] to [the debtor]."

 

First, the Court concluded that "the text of Section 362(a)(3) requires a post-petition affirmative act to exercise control over property of the estate." It then reasoned that in the case at bar, "a post-petition affirmative act to exercise control over the [automobile] is not present." This is because the car was repossessed before the debtor filed bankruptcy. After the filing of the petition, "the creditors merely passively retained that same possession and control." Thus, "the requisite post-petition affirmative 'act … to exercise control over' the car was lacking.

 

The Third Circuit further reasoned that its conclusion "is bolstered by the legislative purpose and underlying policy goals of the automatic stay. It is well-established that one of the automatic stay's primary purposes is 'to maintain the status quo between the debtor and [his] creditors, thereby affording the parties and the [Bankruptcy] Court an opportunity to appropriately resolve competing economic interests in an orderly and effective way.'"

 

By retaining possession of the car "after learning of the bankruptcy filing, the creditors preserved the pre-petition status quo. To hold that such a retention of possession violates the automatic stay would directly contravene the status-quo aims of the automatic stay."

 

The Third Circuit rejected the debtor's argument that section 542(a) turnover provision was "self-executing," reasoning that "a creditor's obligation to turn over estate property to the debtor is not automatic. Rather the turnover provision requires the debtor to bring an adversary proceeding in Bankruptcy Court in order to give the Court the opportunity to determine whether the property is subject to turnover under Section 542(a)."

 

 

 

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.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments 

 

FYI: 11th Cir Reverses Denial of Class Cert in Challenge to Post-Discharge Mortgage Statements

In putative class action of borrowers who received mortgage statements after a bankruptcy discharge, the U.S. Court of Appeals for the Eleventh Circuit recently reversed a trial court order denying certification for failure to establish predominance.

 

In so ruling, the Eleventh Circuit held that a mortgage servicer's affirmative defense that it is not liable under the federal Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. § 1692 et seq., and the Florida Consumer Collection Practices Act ("FCCPA"), Fla. Stat. § 559.55 et seq., because the only remedy for violating a discharge injunction is under the Bankruptcy Code requires no individualized inquiries and is common to all class members.

 

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

 

The named-plaintiff borrowers obtained a home loan secured by a mortgage.  After the borrowers defaulted, the note holder filed foreclosure.  The borrowers then filed for Chapter 7 bankruptcy protection.  The borrowers did not reaffirm the debt, vacated the property, and the bankruptcy court entered a discharge order pursuant to section 524(a)(2) that relieved them from any personal liability on the mortgage debt.

 

After the discharge order, the note holder's mortgage servicer sent the borrowers multiple monthly statement for their mortgage loan.  In response the borrowers sued the mortgage servicer on behalf of themselves and a putative class alleging claims arising out of the FDCPA and the FCCPA.

 

The named-plaintiff borrowers alleged that the servicer violated the FDCPA because the monthly mortgage statements "attempted to collect a debt and represented that it had a legal right to collect upon discharged monetary amounts." This allegedly violated the FDCPA's prohibition against using "false, deceptive, or misleading representation[s]" including by making false representations about "the character, amount, or legal status of [a] debt." 15 U.S.C. § 1692e(2)(A). The named-plaintiff borrowers claimed that sending the monthly statements falsely represented that the servicer "had a legal right to collect the mortgage debt from the [borrowers] and also falsely represented the legal status of the debt."

 

The named-plaintiff borrowers also claimed that the servicer violated the FCCPA as the mortgage statements allegedly "claim[ed] and attempt[ed] to enforce a debt which was not legitimate and not due and owing." Fla. Stat. § 559.72(9).

 

Relevant to this appeal, the servicer raised an affirmative defenses that the Bankruptcy Code precluded the FDCPA and FCCPA claims.

 

The borrowers moved for class certification and asked the trial court to certify the following class:

 

"All Florida consumers who (1) have or had a residential mortgage loan serviced by [the servicer], which [the servicer] obtained when the loan was in default; (2) received a Chapter 7 discharge of their personal liability on the mortgage debt; and (3) were sent a mortgage statement dated September 11, 2013 or later, in substantially the same form [as mortgage statements the borrowers received that] was mailed to the debtor's home address in connection with the discharged mortgage debt.

 

The trial court determined that the named-plaintiff borrowers failed to establish predominance as required under Federal Rule of Civil Procedure Rule 23(b)(3), and denied the motion for class certification.

 

The trial court found that the class included members who, like the named-plaintiff borrowers, vacated their homes, as well as members who did not leave their homes. The trial court determined that the servicer's preemption defense would only apply when borrowers remained in their homes and the exception to discharge injunctions in section 524(j) applied.  As such, the trial court then reasoned that it would be necessary to conduct individualized inquiries "for every class member to determine whether the § 524(j) exception applied, and if so, whether the Bankruptcy Code precluded and/or preempted the FDCPA and FCCPA."

This interlocutory appeal followed.

 

The Eleventh Circuit framed the question before it as follows: "whether the district court abused its discretion in deciding that common issues did not predominate for the alleged claims."

 

As you may recall, Rule 23(b)(3) requires a trial court to determine whether "the issues in the class action that are subject to generalized proof and thus applicable to the class as a whole, . . . predominate over those issues that are subject only to individualized proof."  To accomplish this the court must "identify the parties' claims and defenses and their elements" and "then classify these issues as common questions or individual questions by predicting how the parties will prove them at trial." "Common questions are ones where the same evidence will suffice for each member, and individual questions are ones where the evidence will vary from member to member." The court then must "determine whether the common questions predominate over the individual ones."

 

Regarding the FDCPA claim, the Eleventh Circuit found that the trial court erred when it found that the servicer's Bankruptcy Code preemption affirmative defense only applied "to class members who remained in their homes." Instead, because the servicer's affirmative defense "potentially barred every class member's FDCPA claim, the district court was required to treat the defense as raising a common issue."

 

The Eleventh Circuit observed that section 1692e(2)(A) of the FDCPA bars a debt collector from making "any false, deceptive, or misleading representation . . . in connection with the collection of any debt," which includes making a false representation about "the character, amount, or legal status of any debt." Here, the named-plaintiff borrowers alleged that the servicer violated this section by attempting "to collect a mortgage debt that had been discharged."

 

The servicer's preemption affirmative defense asserted "that the Bankruptcy Code provides the only remedy for a claim that a creditor violated a bankruptcy court's discharge injunction and thus bars an FDCPA claim resting on the creditor's attempt to collect a debt in violation of a bankruptcy court's discharge injunction."

 

The Eleventh Circuit determined that trial court erred because whether the Bankruptcy Code precludes an FDCPA "claim that a creditor engaged in false or deceptive conduct by trying to collect a debt in violation of a discharge injunction is common to all class members."

 

Specifically, according to the Eleventh Circuit, the trial court wrongly ignored the borrowers' allegations that the servicer violated discharge injunctions when it sent mortgage statements to class members who left their homes "as section 524(a) provides that a bankruptcy court's discharge order operates as an injunction that bars any act to collect a discharged debt as a personal liability of the debtor." 11 U.S.C. § 524(a)(2). Thus, the servicer's affirmative defense "that it is not liable under the FDCPA because the only remedy for violation of a discharge injunction is under the Bankruptcy Code applies to all class members," regardless of whether they vacated their properties.

 

This error, the Eleventh Circuit held, requires vacating the class certification order because when a trial court "improperly categorizes a question as presenting a common or an individual issue" in determining predominance, it abuses its discretion.

 

The Eleventh Circuit did not decide whether the servicer's preclusion affirmative defense is "meritorious — that is, whether the Bankruptcy Code actually precludes or displaces any remedy available under the FDCPA and FCCPA" and specifically noted that it has not yet "addressed this question, which has split the circuits."  Compare, Walls Wells Fargo Bank, N.A., 276 F.3d 502, 511 (9th Cir. 2002) ("Because [the debtor's] remedy for violation of § 524 no matter how cast lies in the Bankruptcy Code, her simultaneous FDCPA claim is precluded."), with Garfield v. Ocwen Loan Servicing, LLC, 811 F.3d 86, 91 (2d Cir. 2016) ("the Bankruptcy Code does not broadly repeal the FDCPA for purposes of FDCPA claims based on conduct that would constitute alleged violations of the discharge injunction.")

 

Turning to the alleged FCCPA claim, the Eleventh Circuit reached the same conclusion.  The servicer raised the same defense that the Bankruptcy Code preempted each class member's FCCPA claim. For the same reasons that it used concerning the FDCPA claim, the Eleventh Circuit determined that the trial court abused its discretion in finding that the preemption affirmative defense raised an individualized issue instead of an issue common to all class members.

 

Therefore, the Eleventh Circuit reversed the trial court's order denying class certification, and remanded for the trial court to reconsider whether common questions of law or fact predominate given that whether the Bankruptcy Code preempted the alleged claims raises a common, rather than an individualized, issue.

 

 

 

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.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments