FYI: 9th Cir Holds "Net Impression" Test Applies to CFPA Actions for Deceptive Solicitations

The U.S. Court of Appeals for the Ninth Circuit recently affirmed a trial court's ruling in favor of the Consumer Financial Protection Bureau (CFPB) against a company and its owner that provided fee-based scholarship and financial aid services to prospective and current college students.

 

In so ruling, the Ninth Circuit held:

 

1) The defendants here met the definition of a "covered person" under the Consumer Financial Protection Act (CFPA) because they provided "financial advisory services to consumers on individual financial matters or relating to proprietary financial products or services"; and

 

2) The Federal Trade Commission's "net impression" test applies when determining whether a solicitation is deceptive under the CFPA.

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

 

The defendants were the founder and operator of a company that solicited thousands of prospective and current college students by sending them a letter that generally advised students to avoid taking out student loans until the student applied for all of the available and free financial aid programs. The letters included an information sheet, demographic form, and instructions on how to pay a "processing fee" in exchange for enrollment in a financial aid program and provide as many targeted financial aid opportunities as possible to all students. 

 

Over 75,00 students paid a total of nearly $5 million dollars in processing fees. In exchange for the fee, the only service provided to the students was a booklet that contained general overview on student financial aid, federal student loans, tax implications, and federal and state financial aid programs. Hundreds of consumers filed complaints that promoted an investigation.

 

As a result of the investigation, the CFPB filed an enforcement action alleging that the defendants' conduct was deceptive because it misled students into believing that: (1) the company would provide a program to assist them in applying for scholarships; (2) the company would match them to individually targeted scholarship opportunities; and (3) the students would miss financial aid opportunities by not complying with the filing deadline.

 

The CFPB moved for summary judgment against individual defendant and a default judgment against the defendant company. The trial court granted the CFPB'S motion for summary judgment against the individual defendant by first ruling that his conduct fell under the CFPB's enforcement authority and that his actions deceived students by falsely implying that the defendants had a program for financial aid applications, falsely implying students would be matched with scholarships, and falsely implying that students would forfeit the services if they failed to comply with the arbitrary deadlines.

 

The trial court awarded restitution of all company revenues totaling $4,738,028 in and imposed a civil penalty of $10 million and injunctive relief. The individual defendant appealed.

 

The individual defendant raised three (3) issues on appeal. First, he argued that he was not subject to the CFPB's authority because he provided nonfinancial advice about "free scholarships."  Second, he argued that the net impression of the solicitations was not deceptive.  Lastly, he argued that the trial court erred in calculating the restitution and civil penalty sums. 

 

Appellant first argued that he is not a "covered person" under the Consumer Finance Protection Act ("CFPA") because he merely provided nonfinancial advice on free, gift-based scholarships. 12 U.S.C. § 5481(6). As a result, he argued, the CFPB did not have proper authority under the CFPA.

 

As you may recall, under the CFPA, it is unlawful for a covered person 'to engage in any unfair, deceptive, or abusive act or practice.'" CFPB v. CashCall, Inc., 35 F.4th 734, 746 (9th Cir. 2022). One of the ways that a business can be a "covered person" is if it provides "financial advisory services to consumers on individual financial matters or relating to proprietary financial products or services".  12 U.S.C. § 5481(15)(A)(viii).

 

The individual defendant argued that he was not a covered person because he did not provide "financial advisory services" as defined by the CFPA because scholarships are not financial in nature because they do not have to be repaid. Additionally, he argued that he did not hold himself out as an expert in finance.

 

The Ninth Circuit disagreed.  The Court noted that the ordinary meaning of finance is broad and encompasses both cash financing and debt financing and the definition of "finance" specifically contemplates raising funds, regardless of their origin, for college tuition. Moreover, the Ninth Circuit found that the individual defendant implied expertise in the field of student loan financial aid. As a result, the Court held that provided "financial advisory services" as defined in 12 U.S.C. § 5481(15)(A)(viii) and the trial court did not err in classifying the appellant as a "covered person" under the CFPA.

 

Next, the individual defendant argued that the trial court erred by failing to consider the net impression of his solicitations when it determined they were deceptive.

 

An unlawful "`deceptive' practice is one `tending to deceive,' that is, `to cause to believe the false.'" CashCall, Inc., 35 F.4th at 746 (quoting Deceive & Deceptive, WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY (2002)). In similar cases brought under similar wording in the Federal Trade Commission Act, a "solicitation may be likely to mislead by virtue of the net impression it creates even though the solicitation also contains truthful disclosures." FTC v. Cyberspace.com LLC, 453 F.3d 1196, 1200 (9th Cir. 2006).

 

The Ninth Circuit expressly adopted the net impression test brought in enforcement actions under the CFPA.

 

The individual defendant argued that a reasonable student should have assumed that by responding to the requests for information that they were proceeding with his program to help them finance their college education, and this could not have been deceiving.

 

The Ninth Circuit disagreed and held that based on the record as a whole the individual defendant promised to proceed with a program and apply for the maximum financial aid of those programs when the student submitted the demographic form and paid the processing fee. In return the students only received a booklet with generalized information. Additionally, the Court noted, the letter created a false sense of urgency by listing deadlines to apply.

 

Based upon the net impression created by his entire solicitation packet, the Ninth Circuit held that the trial court did not err by concluding that no genuine issue of material fact existed as to the deceptive nature of the defendant's conduct.

 

The defendant also argued that the trial court's calculation of restitution and civil penalties was improper. However, the Court of Appeals did not consider this argument because it was not properly raised at the trial court.

 

Accordingly, the Ninth Circuit concluded that the individual defendant was subject to the CFPB's authority and that no genuine issue of material fact existed to counteract the deceptive nature of his conduct, and upheld the trial court's summary judgment ruling in favor of the CFPB. 

 

 

 

 

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: 5th Cir Rejects Allegations That Bank Owed Fiduciary Duty to Non-Customer

The U.S. Court of Appeals for the Fifth Circuit recently affirmed the ruling of a trial court rejecting various claims by a non-customer that a bank owed a fiduciary duty to ensure that assets were kept in a trust for the non-customer.

 

In so ruling, the Fifth Circuit held:

 

• The plaintiff's negligence claim was time-barred under Texas' two-year statute of limitations because the plaintiff brought the suit five years after the subject transfers; and

 

• Texas courts require a substantial amount of evidence to show that a bank has accepted a fiduciary duty to ensure that assets were kept in a trust for a non-customer third party, and the plaintiff did not provide sufficient evidence here

 

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

 

An investor and the CEO of an oil company developed a business relationship. Throughout that relationship, the investor provided loans, cash advances, and funds to the CEO and the oil company.

 

The investor alleged that, without his knowledge, the CEO transferred a number of the investor's shares from the agreed upon trust account into the accounts of various corporations beneficially owned or controlled by the CEO.

 

The investor and the CEO continued to have a business relationship until 2016, at which point the CEO's actions and words made the investor concerned he would not receive his shares back from the CEO.

 

In late 2017, as part of a larger suit against the CEO, the investor also sued the banks the accounts were in for (1) breach of trust and fiduciary duty, (2) negligence, and (3) conspiracy to commit theft.

 

The trial court granted summary judgment on all counts relating to the banks and awarded them attorneys' fees under the Texas Theft Liability Act ("TTLA"). The investor timely appealed.

 

The investor's claims were predicated on his theory that the banks owed him a fiduciary duty. Therefore, said the investor, the banks should have asked for his consent before transferring the shares.

 

First, the investor claimed that the banks were negligent in failing to obtain the consent of the owner of shares before transferring such shares because that failure went against industry and company policy.

 

Under Texas law, any injury incurred from the banks' alleged negligence in transferring the shares without the investor's consent arose at the time of the transfer. Therefore, without reaching the merits, the Fifth Circuit concluded that the negligence claim was time-barred under Texas' two-year statute of limitations because the investor brought the suit five years after the transfer.

 

Second, the investor asked the Fifth Circuit to find that the account at issue was a "special account," a fixture of Texas law that can create a fiduciary duty from a bank to a non-client.

 

Such accounts are formed when "a customer deposits funds for a specific purpose and the bank agrees to be responsible for the safe-keeping, return, or disbursement of the same funds that were entrusted to it."  Bandy v. First State Bank, Overton, 835 S.W.2d 609, 618-19 n.4 (Tex. 1992). Texas courts generally require explicit proof that the bank agreed to such a duty. See Villarreal v. First Presidio Bank, No. EP-15-CV-88-KC, 2017 WL 1063563, at *7 (W.D. Tex. 2017). The presumption is always that no such special account exists, and "[t]he burden is upon one who contends that the bank is his trustee or owes a duty to restrict the use of funds for certain purposes."  Citizens Nat'l Bank of Dall. v. Hill, 505 S.W.2d 246, 248 (Tex. 1974).

 

Therefore, the only question was whether the banks expressly accepted a duty to ensure the stocks were kept in trust for the investor.

 

The banks provided evidence that the customer agreement they signed with the CEO when he opened his accounts stated that the banks' nature of services will be solely to execute transactions and act as broker-dealer and custodian, and could not be modified except by "a written instrument signed by an authorized representative" of the bank, and "only the undersigned has any interest in the Account(s) established pursuant to this agreement."  

 

Therefore, the Fifth Circuit held that no jury could find that the banks showed an express agreement that they "owe[d] a duty to restrict the use of the funds for certain purposes."  Citizens Nat'l, 505 S.W.2d at 278. The Appellate Court held that the trial court thus did not err in granting summary judgment in favor of the banks.

 

Lastly, the investor contended that the banks conspired with the CEO to steal the investor's money because each had knowledge of, agreed to and intended a common objective or course of action: the theft of the investor's shares in the oil company.

 

In Texas, "[t]he essential elements [of civil conspiracy] are: (1) two or more persons; (2) an object to be accomplished; (3) a meeting of minds on the object or course of action; (4) one or more unlawful, overt acts; and (5) damages as the proximate result."  Massey v. Armco Steel Co., 652 S.W.2d 932, 934 (Tex. 1983). To establish a meeting of the minds, "there must be an agreement among [the alleged conspirators] and each must have a specific intent to commit the act."  San Antonio Credit Union v. O'Connor, 115 S.W.3d 82, 91 (Tex. 2003).

 

The Fifth Circuit observed that the investor's theory appeared to be that the " meeting of the minds" occurred when the banks transferred the funds without the investor's consent, because if the banks knew that the funds were meant to be held in trust for the investor, then agreeing to transfer them without the investor's consent was evidence of their mutual intent to steal from the investor.

 

However, even in a summary judgment posture, the Fifth Circuit held that the investor did not provide enough evidence to show that the banks owed a fiduciary duty. Without such a duty, the banks' transfer was nothing more than compliance with its customer's request and, without further evidence, could not demonstrate an intent of minds to steal from the investor. The Fifth Circuit ruled that summary judgment on this claim was therefore correct.

 

Accordingly, the Fifth Circuit affirmed the decision of the trial court.

 

 

 

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 Holds FCRA Does Not Apply to Inaccuracies Involving Legal Disputes

The U.S. Court of Appeals for the Second Circuit recently affirmed a trial court's order granting summary judgment in favor of a credit reporting agency, and ruled that reporting a student loan debt that was discharged in bankruptcy as "due and owing" is not cognizable as an "inaccuracy" under the federal Fair Credit Reporting Act (FCRA).

 

In so ruling, the Second Circuit held that inaccuracies that turn on legal disputes are not cognizable under the FCRA. Here, the question of whether the student loan debt was discharged in bankruptcy, or whether it was still due and owing, was a legal one to which the FCRA did not apply.

 

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

 

A consumer alleged that his private educational loan was discharged in bankruptcy. He then sued a credit reporting agency under the FCRA for reporting the loan as "due and owing." Pursuant to that provision, credit reporting agencies "shall follow reasonable procedures to assure maximum possible accuracy of the information" in the reports they prepare. 15 U.S.C. § 1681e(b).

 

The consumer claimed that his credit report was inaccurate because it continued to list his outstanding student debt following his chapter 7 bankruptcy. He argued that the educational loan was discharged in bankruptcy because, as a private loan, it was not exempted from discharge under section 523(a)(8) of the Bankruptcy Code. That provision defines as non-dischargeable, among other things, "an educational . . . loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution." 11 U.S.C. § 523(a)(8)(A)(i).

 

The trial court granted summary judgment in favor of the credit reporting agency. Relying primarily on the declaration from the student lender's employee, the trial court determined that the consumer's loan was non-dischargeable, and that therefore its inclusion on his credit report was not an inaccuracy. The consumer timely appealed.

 

The Second Circuit began its analysis by concluding that the trial court's reasoning was in error.

 

The Appellate Court noted that competing evidence in the record raised a genuine and material dispute as to whether the consumer's loan was made under a program that included governmental funding. Although the lender's employee declared that the loan was issued "under a program that was funded, in part, by non- profit organizations, including governmental units," the Second Circuit observed that the prospectus that the consumer submitted —- which the trial court did not address —-cut the other way. That document indicated that the loan was made under a separate program funded only with private funds.

 

Even though it disagreed with the trial court's assessment of the record and did not endorse its interpretive approach, the Second Circuit determined that it  "may affirm . . . on any grounds for which there is a record sufficient to permit conclusions of law, including grounds not relied upon by the district court." CBF Indústria de Gusa S/A v. AMCI Holdings, Inc., 850 F.3d 58, 78 (2d Cir. 2017).

 

The Second Circuit ultimately affirmed the trial court's ruling.  As the credit reporting agency argued in the alternative, that the FCRA does not require credit reporting agencies to adjudicate legal disputes such as the post-bankruptcy validity of the consumer's educational loan debt.

 

The relevant provision of the FCRA states that when preparing credit reports, credit reporting agencies "shall follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates." 15 U.S.C. § 1681e(b). Thus, to prevail on a section 1681e claim against a consumer reporting agency, the Second Circuit decided that it is necessary for a plaintiff to establish, among other things, that a credit report contains an inaccuracy. See Shimon v. Equifax Info. Servs. LLC, 994 F.3d 88, 91 (2d Cir. 2021).

 

In Shimon, the Second Circuit held that a credit report is inaccurate "either when it is patently incorrect or when it is misleading in such a way and to such an extent that it can be expected to have an adverse effect." Id.

 

Thus, the Second Circuit concluded that the "inaccuracy" the consumer alleged did not meet the above-referenced statutory test because it evaded objective verification. There was no bankruptcy order explicitly discharging this debt. The lender continued to treat the debt as outstanding following the consumer's bankruptcy, and, for that matter, so did the consumer.

 

Instead, the Second Circuit reasoned that the accuracy of the credit reporting agency's reporting that the debt was still owed depended on whether it was "dischargeable," which itself depended on whether section 523(a)(8)(A)(i) applied to the consumer's educational loan. And that question, finally, turned on the unsettled meaning of the word "program" within section 523(a)(8)(A)(i) of the Bankruptcy Code.

 

In the Second Circuit's view, the specialized attention and legal reasoning required to determine the post-bankruptcy validity of the consumer's debt meant that its status was not sufficiently objectively verifiable to render the credit report "inaccurate" under the FCRA.

 

Additionally, the Second Circuit pointed out that every other circuit to have considered an analogous question has agreed: inaccuracies that turn on legal disputes are not cognizable under the FCRA.

 

Some circuits reached this conclusion by holding, as the Second Circuit did, that claims under the FCRA require factual inaccuracies to be actionable. For example, the First Circuit concluded that a debtor's claim that his credit report contained an inaccurate report of a legally invalid mortgage "crossed the line between alleging a factual deficiency that [the credit reporting agency] was obliged to investigate pursuant to the FCRA and launching an impermissible collateral attack against a lender by bringing an FCRA claim against a consumer reporting agency." DeAndrade v. Trans Union LLC, 523 F.3d 61, 68 (1st Cir. 2008). Likewise, the Ninth Circuit held that "collateral attacks on the legal validity of...debts" cannot satisfy the "inaccuracy" element of an FCRA claim. Carvalho v. Equifax Info. Servs., LLC, 629 F.3d 876, 891–92 (9th Cir. 2010).

 

The Tenth Circuit reached the same conclusion but based its reasoning on the "reasonable procedures" element, which, the circuit concluded, requires only that credit reporting agencies "look beyond information furnished to them when it is inconsistent with the [credit reporting agency's] own records, contains a facial inaccuracy, or comes from an unreliable source." Wright v. Experian Info. Sols., Inc., 805 F.3d 1232, 1239 (10th Cir. 2015). In that case, the Tenth Circuit held that, as a matter of law, reasonable procedures do "not require [credit reporting agencies] to resolve legal disputes about the validity of the underlying debts they report." Id. at 1242.

 

Finally, the Seventh Circuit reached a similar conclusion drawing on both a distinction between factual and legal inaccuracies and an analysis of what the "reasonable procedures" element requires. See Denan v. Trans Union LLC, 959 F.3d 290, 293–96 (7th Cir. 2020).

 

Consistent with these decisions, the Second Circuit held that the consumer failed to allege an inaccuracy within the plain meaning of section 1681e(b) of the FCRA. The unresolved legal question regarding the application of section 523(a)(8)(A)(i) to the consumer's educational loan rendered his claim non-cognizable under the FCRA.

 

Accordingly, the Second Circuit affirmed, on an alternative ground, the trial court's order granting summary judgment in favor of the consumer reporting agency.

 

 

 

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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