FYI: 6th Cir Agrees No Article III Standing in FACTA "Truncation" Putative Class Action

The U.S. Court of Appeals for the Sixth Circuit recently affirmed dismissal of a consumer's claims that a retail food store violated the federal Fair and Accurate Credit Transactions Act of 2003's (FACTA) "truncation requirement" by printing more digits of the consumer's credit card than permissible by statute.

 

In so ruling, the Sixth Circuit held that the alleged violation did not establish an increased risk of identity theft, and thus, did not satisfy Article III's injury in fact requirement to establish standing for her FACTA claim, agreeing with the majority of the other federal appellate courts on this issue.

 

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

 

A consumer ("Consumer")  made a purchase at a fast-food restaurant location operated by a franchisee that owns over 130 locations of the prominent burger chain, where she allegedly received an electronically printed receipt containing the first six and last four digits of her card number. 

 

As you may recall, FACTA was enacted in 2003 as an amendment to the Fair Credit Reporting Act aimed to prevent identity theft, and provides that "no person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of sale or transaction." 15 U.S.C. § 1681c(g)(1) (the "truncation requirement").

 

The Consumer filed a putative class action complaint against the restaurant and its related corporate entities ("Restaurant") on behalf of all similarly situated customers who received allegedly noncompliant receipts from the Restaurant within two years of the suit's filing date, alleging violations of FACTA's truncation requirement.

 

The trial court dismissed the complaint without prejudice on the basis that the court lacked subject matter jurisdiction over the Consumer's claims because she failed to demonstrate any harm to her identity based upon the Restaurant's technical violation of FACTA, and that allegations of hypothetical future injury were insufficiently concrete to confer standing under Article III.  The instant appeal followed.

 

On appeal, the Sixth Circuit noted that, to satisfy Article III standing requirements, a plaintiff must show (1) she suffered an injury in fact, (2) caused by defendants, that (3) is redressable by a judicial decision (Spokeo v. Robins, 136 S. Ct. 1540, 1547 (2016)).  The appellate court further noted that the injury-in-fact requirement is not automatically satisfied by a statutory violation (Id. at 1549), but requires a "concrete injury even in the context of a statutory violation."  Thole v. U.S. Bank N.A., 140 S. Ct. 1615, 1620–21 (2020) (quoting Spokeo, 136 S. Ct. at 1549). 

 

Here, the Consumer contended that she suffered a concrete injury based on a congressional grant of a statutory right and remedy.  The Sixth Circuit acknowledged that the "the violation of a procedural right granted by statute can be sufficient in some circumstances to constitute injury in fact . . . [and] a plaintiff in such a case need not allege any additional harm beyond the one Congress has identified" (Spokeo, 136 S. Ct. at 1549).

 

However, the Sixth Circuit rejected the Consumer's claim that the risk of identity theft here constituted a concrete injury, as consistent with the findings of other circuits presented with identical facts (disclosure of the first six and last four digits of the consumer's credit card).  See Muransky, v. Godiva Chocolatier, Inc., 979 F.3d 917, 928-29 (11th Cir. 2020) (en banc); Katz v. Donna Karan Co., LLC, 872 F.3d 114, 116 (2d Cir. 2017); Noble v. Nevada Checker Cab Corp., 726 F. App'x 582, 583 (9th Cir. 2018) (first and last four digits); see also Kamal v. J. Crew Grp., Inc., 918 F.3d 102, 113 (3d Cir. 2019) (Clarification Act enacted after FACTA, which limited liability for printing the expiration date, "also expresses Congress's judgment that not all procedural violations of FACTA will amount to concrete harm").

 

The Consumer further claimed that the increased-risk-of-injury constituted real harm, arguing that FACTA creates a concrete interest "vest[ing] consumers with an interest in using their credit and debit cards without facing an increased risk of identity theft." See Jeffries v. Volume Servs. Am., Inc., 928 F.3d 1059, 1064 (D.C. Cir. 2019).  In Jeffries, the D.C. Circuit held that the plaintiff in Jeffries did suffer an injury in fact because the receipt which contained all sixteen digits and the expiration date "contained enough information to defraud [the plaintiff]."  Id. at 1067. 

 

The Sixth Circuit reasoned that the Jeffries found standing because the complaint alleged sufficient fats to establish that a violation of the statute actually caused harm or risk of harm, but that no such risk existed here, because the Consumer's complaint failed to aver how "whether the challenged violation of [the plaintiff's] statutory right harmed or created a 'risk of real harm' to the concrete interests protected by FACTA." Id. at 1065.

 

Moreover, the Consumer here did not allege that the receipt was lost, stolen, or seen by a third set of eyes, and while forcing her to safeguard her receipt can be a legitimate injury, such a hypothetical future harm is not a concrete injury.  Muransky, 979 F.3d at 931 (internal quotation omitted).

 

Lastly, the Sixth Circuit considered the Consumer's arguments that the intangible harm caused by the purported FACTA violation was analogous to common law torts of breach of confidence and invasion of privacy.  As the Supreme Court of the United States stated in Spokeo, "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." 136 S. Ct. at 1549.

 

The Jeffries court concluded that a FACTA violation resembles a common law breach of confidence because the truncation requirement establishes a similar relationship of trust between consumer and merchant by requiring the merchant to safeguard a customer's card information (Jeffries at 1064–65), but other circuit courts have found no resemblance. 

 

The Third Circuit in Kamal rejected the analogy because there was no allegation of disclosure of the consumer's information to a third party (Kamal, 918 F.3d at 114) while the Eleventh Circuit found any analogy lacking based on the absence of disclosure to a third party and lack of a confidential relationship that typically exists between a consumer and retailer. (Muransky at 932). 

 

Noting that the receipt was not disclosed to a third party causing injury or increased risk of harm, the Sixth Circuit agreed with the Third and Eleventh Circuit's view rejecting the Consumer's breach of confidence analogy, as well as her invasion of privacy analogy on the same basis.

 

Because the Consumer failed to satisfy Article III's injury in fact requirement, the trial court's dismissal of her FACTA claim was affirmed.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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: 2nd Cir Rejects Spokeo Challenge to Putative Class Action Over Alleged Delays in Recording Mortgage Satisfactions

The U.S. Court of Appeals for the Second Circuit recently held that a borrower had Article III standing to sue in federal court for statutory damages from a mortgagee for its alleged violations of New York's mortgage satisfaction recording statutes.

 

In so ruling, the Second Circuit held that:

 

-  State legislatures may create legally protected interests whose violation supports Article III standing, subject to certain federal limitations.

 

-  The mortgagee's alleged failure to record the plaintiffs' mortgage discharge created a material risk of concrete and particularized harm to the plaintiffs by providing a basis for an unfavorable credit rating and reduced borrowing capacity.

 

-  These risks and interests, in addition to that of clouded title, which an ordinary mortgagor would have suffered (but plaintiffs did not), are similar to those protected by traditional actions at law.

 

-  The plaintiffs could pursue their claims for the statutory penalties imposed by the New York Legislature, as well as for other relief.

 

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

 

The trial court held that the plaintiffs had Article III standing to seek statutory damages from a mortgagee for its violations of New York's mortgage-satisfaction-recording statutes. N.Y. Real P. Law ("R.P.L.") § 275, N.Y. 20 Real P. Actions & Proc. L. ("R.P.A.P.L.") § 1921.

 

These statutes require mortgage lenders to record satisfactions of mortgage (also known as "certificates of discharge") within thirty days of the borrower's repayment. A failure renders the lender liable to the mortgagor for increasing statutory damages in amounts dependent on the lateness of the ultimate filing; for a ninety-day delay, the penalty is $1,500. R.P.L. § 275(1); R.P.A.P.L. § 1921(1).

 

Here, the defendant mortgagee allegedly did not record the satisfaction of the plaintiffs' mortgage until nearly  eleven months after full payment was received and almost ten months after the law required. Therefore, the plaintiffs sued for the statutory penalty and to represent a class of similarly wronged borrowers.

 

After denying the mortgagee's motion for judgment on the pleadings, the trial court certified for interlocutory appeal the question of whether the plaintiffs had Article III standing to sue the mortgagee for statutory damages and other relief. The Second Circuit accepted the certification.

 

The Second Circuit first held that the invasion of interests protected by state law can support Article III standing. The Court determined that if a statute protects against a harm bearing a "close relationship" to a harm traditionally recognized at common law, the harm alleged due to a violation of that statute constitutes a concrete injury in fact sufficient to establish Article III without any additional showing. Spokeo Inc. v. Robins, 136 S. Ct 1540, 1549 (2016).

 

In R.P.L. § 275 and R.P.A.P.L. § 1921, the New York State Legislature obligated lenders to timely file mortgage satisfactions and gave borrowers rights to claim a penalty payment in designated amounts for the mortgagee's failure to comply.

 

The Court held that the intangible rights the mortgage-satisfaction-recording statutes seek to protect and the concurrent injury from a mortgagee's violation of the statutes, i.e., the delay in recording a mortgage satisfaction, have "a close relationship to [multiple] harm[s] that ha[ve] traditionally been regarded as providing a basis for lawsuit in English or American courts." Id. Specifically, the Court concluded that the interests are similar to those in common law cloud of title and defamation suits.

 

The Second Circuit next decided that the plaintiffs' complaint supported a plausible inference that the bank's violation both (1) harmed the plaintiffs' financial reputations during the nearly ten-month period of the mortgagee's noncompliance with the thirty-day filing deadline, and (2) created a material risk of particularized harm to them during that period by impairing their credit and limiting their borrowing capacity. The Court also noted that these interests are protected by the state's statutory timely filing requirements and its imposition of a penalty payment obligation on the noncompliant bank to the wronged borrower.

 

Furthermore, the Court reasoned that, even if it were to characterize the satisfaction-of-mortgage statutes as "procedural" (as the trial court did) rather than substantive, it would still hold that the plaintiffs established a concrete injury for Article III purposes. Although Spokeo held that "a bare procedural violation, divorced from any concrete harm" does not satisfy the injury-in-fact requirement of Article III, "the violation of a procedural right granted by statute can be sufficient in some circumstances to constitute injury in fact," such as when the violation presents a "material risk of [concrete] harm." Id. at 1549-50.

 

The Second Circuit found that, during the mortgagee's alleged ten-month delay in recording the discharge of more than $50,000 in debt, there was in the Court's view a real risk of material harm to the plaintiffs of the type that the legislation would be expected to protect against. Specifically, the Court inferred that the delay adversely affected the plaintiffs' credit during the ten months, making it difficult to obtain financing had they needed it in an emergency, and left a false public record of indebtedness even if they had not attempted to borrow.

 

Because it held that a mortgagee's violation of the mortgage-satisfaction-recording statutes by itself gives rise to a risk of real harm, the Second Circuit also concluded that a mortgagor need not allege any further harm to meet the concrete injury requirement. Regardless, the Court also decided that the plaintiffs in fact suffered impaired credit and a loss in financial reputation during those ten months in which their discharge unlawfully went unrecorded.

 

Accordingly, considering these particularized actual harms and risks of harm and their general recognition in the common law, the Second Circuit held that the plaintiffs had Article III standing to pursue their claims.

 

Therefore, the Court affirmed the trial court's judgment and remanded the case for further proceedings consistent with its ruling.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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: 11th Cir Reverses Trial Court, Allows False Claims Act Action to Proceed Against Lender and Executive

The U.S. Court of Appeals for the Eleventh Circuit recently concluded that summary judgment was improper on a group of relators' False Claims Act (FCA) claim because genuine issues of material fact remained as to whether a lender's alleged false certifications were material.

 

The Eleventh Circuit agreed with the trial court that the relators' claim was not barred by previous public disclosure. The Court also held that the trial court had personal jurisdiction over the lender's majority shareholder and chairman of its board of directors.  Finally, the Court held that the relators lacked Article III standing on the fraudulent transfer claim because the FCA does not assign the right to relators to bring additional causes of action related to the FCA claim.

 

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

 

The relators in this case were mortgage brokers. For years, they specialized in originating United States Department of Veterans Affairs (VA) mortgage loans, particularly Interest Rate Reduction Refinance Loans (IRRRL).

 

As background, once a lender has approved an IRRRL, it gives closing instructions to the attorney or title company handling the closing for the lender. The lender or its agent then prepares a HUD-1 statement, listing all the closing costs and fees. The HUD-1 requires lenders to break out the costs they incurred and the amounts they are collecting for various charges and fees, such as title search and title examination. Before closing, the lender is to review the HUD-1 for accuracy. Then, after the lender's agent closes the loan, the lender sends the HUD-1 to the VA along with a certification that it has not imposed impermissible fees on the veteran borrower. Only upon this certification does the VA issue a guaranty to the lender.

 

The relators here learned through their work with IRRRLs that lenders supposedly often charged veterans fees that were prohibited by VA regulations, while allegedly falsely certifying to the VA that they were charging only permissible fees. In doing so, these lenders allegedly induced the VA to insure the IRRRLs, thereby reducing the lenders' risk of loss in the event a borrower defaults.

 

The relators filed a qui tam action against the lender here under the False Claims Act (FCA), seeking to recover the money the VA had paid when borrowers defaulted on the lender's originated loans. The relators then amended the complaint, adding a state law fraudulent transfer claim against the lender's majority shareholder and chairman of its board of directors, as well as a corporate veil-piercing theory of liability, which made the executive a defendant to the FCA claim.

 

The trial court granted the executive's motion to dismiss the fraudulent transfer claim based on lack of standing and granted the lender's motion for summary judgment on the FCA claim. The relators timely appealed. In conditional cross-appeals, the executive argued that the trial court lacked personal jurisdiction over him, while the lender argued that if the Eleventh Circuit were to reverse the trial court's ruling on materiality, the FCA claim was nonetheless barred by previous public disclosure.

 

The Eleventh Circuit first addressed the trial court's grant of summary judgment on the relators' FCA claim.

 

To prevail on their FCA claim, the Court determined that the relators must have proved: "(1) a false statement or fraudulent course of conduct, (2) made with scienter, (3) that was material, (4) causing the government to pay out money or forfeit moneys due." Urquilla-Diaz v. Kaplan Univ., 780 F.3d 1039, 1045 (11th Cir. 2015).

 

While no single factor is dispositive, the Eleventh Circuit noted that some factors relevant to the materiality analysis include: (1) whether the requirement is a condition of the government's payment, (2) whether the misrepresentations went to the essence of the bargain with the government, and (3) to the extent the government had actual knowledge of the misrepresentations, the effect on the government's behavior. Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989, 2003 n. 5, 2004 (2016).

 

On the first factor, the Eleventh Circuit agreed with the trial court's conclusion that the lender's certification that it charged only permissible fees was a condition of the government's payment on IRRRL guaranties. The Court observed that the relevant VA regulation clearly designates that requirement a condition to payment: "no loan shall be guaranteed or insured unless the lender certifies . . . that it has not imposed and will not impose any [impermissible] charges or fees . . . ." 38 C.F.R. § 36.4313(a).

 

Regarding the second materiality factor, the Eleventh Circuit held that the certification requirement's centrality within the regulatory scheme also pointed toward materiality. The court concluded that the requirement promoted the IRRRL program's central purpose, and a reasonable factfinder could have found that it was essential to the bargain between the VA and the lender. Therefore, both the requirement's designation as a condition of payment and its centrality to the government program favored materiality in the Court's view.

 

Third, the Eleventh Circuit found that the VA did have actual knowledge of the lender's noncompliance through investigatory audits. Additionally, the Court noted that, although the VA never issued a guaranty with knowledge that improper fees were collected on that particular loan, it did issue loan guaranties related to a "particular type of claim," despite its knowledge of audit findings that the lender imposed impermissible fees on a certain percentage of its loans.

 

The trial court determined that the VA's reaction to the lender's noncompliance weighed against materiality. However, the Eleventh Circuit held that, even if it viewed the VA's continued issuance of guaranties as strong evidence of immateriality, that evidence was not unrebutted. Escobar, 136 S. Ct. at 2004. The Court reasoned that a factfinder would still have to weigh that factor against others, including, as relevant here, the certification requirement being a condition to payment and essential to the IRRRL program.

 

Thus, because there was sufficient evidence to support a finding of materiality, the Eleventh Circuit reversed the trial court's grant of summary judgment.

 

Because the Eleventh Circuit reversed the trial court's grant of summary judgment on the issue of materiality, it next addressed the lender's conditional cross-appeal arguing that the relators' FCA claim was barred by previous public disclosure. An FCA action cannot be based on allegations that are already publicly disclosed. 31 U.S.C. § 3730 (2006).

 

Here, the lender argued that the relators' allegations had already been publicly disclosed in a 2002 South Carolina consumer protection case, Cox v. Mortgage Investors Corp. d/b/a Amerigroup Mortgage Corp., in which a HUD-1 was filed on the docket, first in state court and later in federal court. Case No. 2:02-cv-3883- DCN (D.S.C. Nov. 15, 2002). In that case, one of the same relators from the present case admitted in a deposition that the Cox HUD-1 appeared to reflect impermissible fee bundling.

 

The Eleventh Circuit framed the public disclosure inquiry as a three-part test: "(1) have the allegations made by the plaintiff been publicly disclosed; (2) if so, is the disclosed information the basis of the plaintiff's suit; (3) if yes, is the plaintiff an 'original source' of that information?" Cooper v. Blue Cross & Blue Shield of Fla., Inc., 19 F.3d 562, 565 n.4 (11th Cir. 1994) (per curiam).

 

Under that formula, "one generally must present a submitted statement or claim (X) and the true set of facts (Y), which shows that X is untrue. These two things together allow the conclusion (Z) that fraud has occurred." United States ex rel. Saldivar v. Fresenius Med. Care Holdings, Inc., 841 F.3d 927, 935 (11th Cir. 2016) (citing Springfield, 14 F.3d at 654).

 

The Eleventh Circuit held that the Cox HUD-1 was not an "allegation" under the Springfield test because it only set forth the (X) variable. Id. at 654. The Court found that the information on the face of the Cox HUD-1 alone did not disclose that the lender concealed impermissible fees; only the relator's later deposition did that. To be an allegation of fraud, the Court concluded that the Cox HUD-1 would also have had to reveal the true set of facts (Y): that the lender actually collected impermissible fees and bundled those fees on the same line-item as permissible fees.

 

Therefore, the Eleventh Circuit affirmed the trial court's finding on the lender's conditional cross-appeal that the relators' FCA claim was not barred by previous public disclosure.

 

Third, the Eleventh Circuit discussed the executive's conditional cross-appeal challenging personal jurisdiction. The Court held that the executive's criticism of veil piercing as a basis for personal jurisdiction ran up against circuit precedent. Meier ex rel. Meier v. Sun Int'l Hotels, Ltd., 288 F.3d 1264, 1272 (11th Cir. 2002); see also Stubbs v. Wyndham Nassau Resort & Crystal Palace Casino, 447 F.3d 1357, 1361 (11th Cir. 2006). Regardless of whether the actors are two companies, or a company and an individual, the Court interpreted the rule from Meier to state that, where the apparent forum contacts of one actor are really the forum contacts of another, it is consistent with due process to impute those contacts for personal jurisdiction purposes. 288 F.3d at 1272.

 

Under Meier, the Eleventh Circuit concluded that the relators could establish that the trial court had personal jurisdiction over the executive by sufficiently pleading that it could pierce the lender's corporate veil and impute the lender's forum contacts to the executive.

 

The Eleventh Circuit observed that the Fourth Amended Complaint included allegations that the executive unilaterally controlled the lender, ignored corporate formalities, and commingled his personal assets with corporate assets. Based on these allegations, the Court concluded that the relators established a prima facie case that the lender was the executive's alter ego, so that the lender's suit-related forum contacts were really the executive's.

 

As a result, the Eleventh Circuit affirmed the trial court's ruling that the executive was subject to personal jurisdiction in Georgia.

 

Finally, the Eleventh Circuit turned to the second issue the relators appealed: whether the trial court correctly held that the relators lacked Article III standing to pursue a state law claim against the executive under Georgia's Uniform Voidable Transfers Act (UVTA).

 

A plaintiff must satisfy three requirements to establish Article III standing: (1) "injury in fact," (2) a causal connection between the injury and the conduct complained of, and (3) likelihood of redress by a favorable decision. See Lujan v. Defs. of Wildlife, 504 U.S. 555, 560 (1992).

 

In Vt. Agency of Nat. Res. v. United States ex rel. Stevens, the Supreme Court of the United States explained that a relator does not have standing to pursue a qui tam action based on her own injury in fact. 529 U.S. 765, 772-73 (2000). Only as an assignee does the relator have standing to pursue the qui tam action. Id. at 773.

 

However, the Eleventh Circuit determined that the assignment to relators is partial rather than total because the FCA only assigns the narrow right to "bring a civil action for a violation of section 3729 for the person and for the United States Government." 31 U.S.C. § 3730(b)(1). Thus, the Court held that the FCA does not assign relators the right to pursue additional claims that arise from, or are related to, the qui tam action.

 

As a result, the Eleventh Circuit affirmed the trial court's holding that the relators lacked Article III standing to assert a fraudulent transfer claim against the executive under Georgia's UTVA.

 

Accordingly, the Eleventh Circuit affirmed in part and reversed in part the trial court's judgment and remanded back to the trial court for further proceedings consistent with its ruling.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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   |   Tennessee   |   Texas   |   Washington, DC

 

 

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