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Nothing contained in this report is to be considered as the rendering of legal advice for specific cases, and readers
are responsible for obtaining such advice from their own legal counsel. This report is intended for educational and
informational purposes only.
© 2008, 2009, 2010, 2011, 2012 American Bankers Association. Not-for-profit reproduction is authorized
without prior permission provided that the source is credited.
OFFICE OF THE GENERAL COUNSEL
STATUS OF IMPORTANT BANKING CASES
April 2013
NEW THIS MONTH
Page 21 CONSUMER PROTECTION: The Supreme Court holds prevailing debt
collectors suing under the Fair Debt Collection Practices Act do not have to
prove bad faith or harassment by the plaintiff to recover certain costs, Marx
v. General Revenue Corp.
Page 22 CONSUMER PROTECTION: A California appellate court fines Liberty
Tax for unlawfully marketing refund anticipation loans, The People v. JTH
Tax, Inc.
Page 23 CONSUMER PROTECTION: A Nevada state court dismisses 300+ count
indictments against two California title officers in “robo-signing” case,
State of Nevada v. Trafford, Sheppard.
Page 24 CONSUMER PROTECTION: The sixth circuit overturns a nationwide
settlement of three “robo-signing” class actions because the settlement
terms were unfair to the unnamed class members, Vassalle v. Midland
Funding LLC.
Page 25 CONSUMER PROTECTION: U.S. Department of Justice settles its fair
lending lawsuit involving Hispanic borrowers with Texas Champion Bank,
United States of America v. Texas Champion Bank.
Page 52 MORTGAGE/SUBPRIME LENDING: The ABA files an amicus brief
warning about the problems of regulating residential mortgage-backed
securities, Retirement Board of the Policemen’s Annuity and Benefit Fund
of the City of Chicago v. the Bank of New York Mellon.
Page 68 FDIC RECEIVERSHIP: A federal district in D.C. holds that bank
regulators properly closed and seized United Western Bank, , United
Western Bank v. Office of the Comptroller of the Currency.
2
ANTITRUST
1. NACS v. Board of Governors of the Federal Reserve System, (Case
No. 11-cv-02075; United States District Court for the District of Columbia)
Issues and Potential Significance: The retail industry is challenging components of
a final rule adopted by the Board of Governors of the Federal Reserve System
(“Federal Reserve”) in 2011. The final rule established “interchange transaction fees
by implementing Section 920 of the Electronic Fund Transfer Act, Section 1075 of
the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Durbin
Amendment).
The litigation seeks to set aside the Federal Reserve’s debit card interchange rules on
the grounds that they are “arbitrary and capricious” under the Administrative
Procedure Act. The complaint alleges that the interchange rates for debit cards set
by the Federal Reserve were too generous, and that in drafting the final rule the
Federal Reserve ignored the statutory injunction that any debit interchange fee must
be “reasonable and proportional to the cost incurred by the issuer with respect to the
transaction.” The plaintiffs point to the first iteration of the debit card rules –
presented in the Federal Reserve’s Notice of Proposed Rulemaking that was issued
December 28, 2010 – where the Federal Reserve capped the debit card interchange
rate at 12 cents per transaction. The final rule (issued June 28, 2011, and effective
October 1, 2011) increased the maximum permissible interchange fee from the
proposed 12 cents per transaction to 21 cents per transaction (plus 5 basis points
multiplied by the value of the transaction). The plaintiffs argue that the Federal
Reserve’s initial proposal was a more appropriate result because it “largely followed
the letter of the Durbin Amendment.” The plaintiffs contend that the Federal
Reserve was pressured by the banking industry to ignore the limitations of the
Durbin Amendment and increase the amount of the cap by illegally expanding the
categories of transactional costs that could be recovered by an issuer.
This is an important case for the banking industry. While recognizing that the ABA
does not support price controls and that the interchange rules adopted by the Federal
Reserve reduced interchange fee income within the industry by 45 percent from pre-
Dodd Frank levels, it is in the best interests of the banking industry for the ABA to
support the Federal Reserve’s efforts to defend its rulemaking. The intent of this
litigation is to invalidate the price cap based upon an interpretation of the Durbin
Amendment that, if successful, would ultimately force the Federal Reserve to issue
new rules that would push the interchange fee cap back down closer to the 12 cents
per transaction.
Proceedings/Rulings: The complaint was filed on November 22, 2011. On January
24, 2012, the court granted a Motion for Extension of Time to File Answer. The
Federal Reserve Board has been granted a deadline to file an answer by March 2,
2012.
3
On March 2, 2012, Plaintiffs filed an Amended Complaint seeking for declaratory
relief from the Federal Reserve. According to the Amended Complaint, the Federal
Reserve revised its prior determination not to include network switch fees in its
allowable costs by expanding the categories of recoverable costs to a point that far
exceeds its statutory authority under the Durbin Amendment. The complaint alleges
that the Federal Reserve’s interpretation of the statute is unreasonable and, therefore,
invalid under the Administrative Procedure Act. The Plaintiffs are alleging that
portions of the Final Rule are arbitrary, capricious, and an abuse of discretion.
Plaintiffs have also filed a motion for Summary Judgment with the Court that is
based on the same legal theory as the Amended Complaint.
On March 15, 2012, the American Bankers Association joined seven other amici to
file an unopposed motion for leave to file an amicus brief in the case.
On May 11, 2007, Senator Durbin filed an amicus on behalf of the Plaintiffs arguing
that the Board exceeded its statutory authority under the Durbin Amendment.
Oral arguments were heard on October 2, 2012.
2. Brennan v. Concord EFS Inc., et al. (Northern District of California,
Case No. 04-2676) (Ninth Circuit Case No. 10-17354):
Issues and Potential Significance: This case, which has appeared in more issues of
the Banking Docket than any other dispute, involves an antitrust challenge to
“foreign” ATM fees. After seven years, several intermediate rulings, and an
abortive foray to the Ninth Circuit, on September 16, 2010, the trial court dismissed
the case on the merits. The case is now on appeal to the United States Court of
Appeals for the Ninth Circuit.
This is one of a series of putative class-action suits brought in the United States
District Court for the Northern District of California by individuals who paid
“foreign ATM fees.” A “foreign” ATM Transaction” is a cash withdrawal in which
an ATM cardholder uses an ATM owned by an entity other than his or her own
bank.
“Foreign ATM transactions” involve four parties: (1) the “cardholder,” i.e. the
customer who retrieves money from the ATM machine; (2) the “card-issuer
bank,” i.e. the bank at which the customer holds an account and from which the
customer has received an ATM card; (3) the “ATM owner,” i.e. the entity that
owns the ATM machine from which the customer withdraws money on his
account; and (4) the “ATM network,” i.e. the entity that administers the
agreements between various card-issuer banks and ATM owners and thereby
ensures that customers can withdraw money from one network member’s ATM as
readily as from another’s.
4
A single foreign ATM transaction generates up to four different fees. Generally, a
customer must pay two fees – one to the ATM owner for use of that entity’s ATM
machine (known as a “surcharge”) and one to the bank at which he has an account
(known as a “foreign ATM fee”). The card-issuer bank also pays two fees. It pays
one of these fees, known as a “switch fee,” to the ATM Network that routed the
transaction. It pays a second fee, known as an “interchange fee,” to the owner of
the foreign ATM.
Only two of the four fees are involved in this case: the “interchange fee” that the
card issuing bank pays to the ATM owner and the “foreign ATM fee” that the
customer pays to his or her bank for using a foreign ATM. Plaintiffs, a putative
class of bank customers, allege that Defendants, the Star ATM Network and
several large banks, have conspired to illegally fix the interchange fee that the
card-issuer bank pays to the ATM owner. Critically, Plaintiffs do not allege that
Defendants have conspired to illegally fix the foreign ATM fee that customers
pay to their bank when they use a foreign ATM. Instead, Plaintiffs assert that
their banks pay an unlawfully inflated interchange fee and then pass the cost of
the artificially high interchange fee along to their customers through inflated
foreign ATM fees.
The district court dismissed the case on the grounds that the Plaintiffs lack
standing to bring an antitrust claim for damages under the rule set forth in Illinois
Brick Co. v. Illinois, 431 U.S. 720 (1977). In Illinois Brick, the Supreme Court
held that only “direct purchasers,” i.e., those entities that directly pay the
allegedly fixed price, may recover antitrust damages. Id. at 736. The Court
reasoned that allowing “indirect purchasers,” i.e. those entities to whom the direct
purchaser passes on all or part of the cost of the allegedly fixed price, to recover
damages would introduce into antitrust litigation substantial “evidentiary
complexities and uncertainties” over the apportionment of overcharges between
direct and indirect purchasers. Id. at 732; see also Delaware Valley Surgical
Supply Inc. v. Johnson & Johnson, 523 F.3d 1116, 1120-21 (9th Cir. 2008).
Plaintiffs did not dispute that they paid the purportedly unlawful interchange fee
only indirectly. Under their theory, ATM card-issuing banks pay the artificially
inflated interchange fee directly and then, at least according to Plaintiffs, pass
some portion of it on to their customers as part of the foreign ATM fee. The court
concluded that Plaintiffs were “indirect purchasers” and that their claims did not
fall under one of the three accepted exceptions to the direct purchaser rule.
Plaintiffs appealed the dismissal to the Ninth Circuit. The case was argued
December 6, 2011.
Proceedings/Rulings: The plaintiffs allege violations of federal antitrust laws
against several large financial institutions (including VISA and MasterCard, and
Concord EFS, the entity that manages the interchange system among various banks
and ATMs). Those cases are:
5
Pamela Brennan, et al. v. Concord EFS, Inc., et al., 04-2676-SBA
Peter Sanchez v. Concord EFS, Inc., et al., 04-4574-VRW
Deborah Fennern v. Concord EFS, Inc., et al., 04-4575-VRW
Miller v. Concord EFS Inc., et al., 04-4892-VRW
Melissa Griffin, et al. v. Concord EFS, Inc., et al., 05-00220-VRW
Cecilia Salvador, et al. v. Concord EFS, Inc., et al., 05-00382-VRW
Spohnholz v. Concord EFS, Inc., et al., 05-03725 CRB
The Court has consolidated the cases with Brennan as the lead case. By order
dated January 26, 2005, the court stayed the proceedings in the Sanchez, Fennern,
Miller, and Griffin cases.
Given its significance, and the fact that it has been pending for nearly six years,
this case has a long and somewhat tortured procedural history. In 2005, the
District Court ruled that the Plaintiffs’ allegations, if true, would establish that the
Defendants had engaged in illegal price-fixing. See Brennan v. Concord EFS,
Inc., 369 F. Supp. 2d 1127 (N.D. Cal. 2005) (Walker, J.). In its ruling, the
district court first noted that the Plaintiffs’ objection is not to the existence of an
interchange fee, but rather to its fixed nature. The district court also noted that
the Complaint had described a “naked” attempt to fix prices, as opposed to an
attempt to fix price that the Star network members determined was “ancillary” to
a legitimate, procompetitive venture: “In other words, Plaintiffs alleged that
Defendants fixed the interchange fee because they could, not because a fixed fee
was necessary to sustain the ATM network.” Because the Defendants could not
defend against such allegations of “naked price fixing” without invoking evidence
that was beyond the scope of the Complaint, the Court denied the motion to
dismiss.
Shortly after the ruling on the motion to dismiss, Defendants filed a motion for
partial summary judgment. The Court issued a Memorandum and Order on
November 30, 2006 directing the parties to address the fundamental question of
whether a “per se” antitrust analysis applies to this case. The district court
observed that “if Defendants can set forth evidence to support plausible,
procompetitive justifications for their agreement to fix the interchange fee,” then
the “per se” rule would not apply.
Defendants moved for summary judgment on August 3, 2007, having adduced
evidence bearing on the applicability of the per se rule. In an order issued on
March 24, 2008, the Court granted Defendants’ motion and held that the “rule of
reason” analysis applies to this case, thereby determining that the price-fixing
challenged by Plaintiffs is not the kind of “naked” horizontal restraint that lacks
any redeeming virtue. In re ATM Fee Antitrust Litig., 554 F. Supp. 2d 1003,
1016-17 (N.D. Cal. 2008). The district court concluded that Plaintiffs’ challenge
to Defendants’ setting of a fixed interchange fee must be analyzed under the “rule
of reason” because it challenged a “core activity” of the defendants’ joint venture,
6
citing the Supreme Court decision in Texaco Inc. v. Dagher. Moreover, the
District Court found that the interchange fee is reasonably ancillary to the
legitimate cooperative aspects of a joint venture that requires horizontal restraints
if the venture’s product is to be available at all.
Given substantial uncertainty in the law regarding which mode of analysis to
apply, the trial court certified for appeal the threshold issue of whether the per se
or “rule of reason” should be employed in this case. The Ninth Circuit, however,
declined to hear the case.
Plaintiffs subsequently filed a Second Amended Complaint. The Defendants, in
turn, moved to dismiss it on a number of grounds, including that Plaintiffs had
failed to properly allege a relevant market, as required by antitrust law. In their
Second Amended Complaint, Plaintiffs had defined the relevant market as the
“provision of Foreign ATM Transactions routed over Star,” which they identified
as “wholly derivative from and dependent on the market for deposit accounts.”
The Defendants maintained that this single-brand, derivative aftermarket failed as
a matter of law because the Second Amended Complaint lacked any allegations
that consumers were locked into their deposit account relationship. Such lock-in
was, in Defendants’ view, a prerequisite to a finding that a derivative aftermarket
exists.
In an order issued September 2009, the district court granted Defendants’ motion
to dismiss the Second Amended Complaint. The Court agreed with Defendants
that the existence of customer “lock-in” was a crucial component of a derivative
aftermarket theory and that Plaintiffs had failed “to plead a viable theory
suggesting that once a customer signs up for a bank account, he is ‘locked in’ to
that bank’s services.” Because Plaintiffs informed the Court at oral argument that
they could add such allegations to a subsequent complaint, the district court
granted the Defendants’ motion with leave to amend.
On October 16, 2009, Plaintiffs filed their Third Amended Complaint. The
Defendants alleged the existence of a second, broader relevant market, composed
of all “ATM Networks,” rather than just the Star Network. Second, in an attempt
to bolster their argument in support of a derivative aftermarket composed of only
those transactions routed over the Star Network, the Defendants attempted to
identify a number of alleged “monetary and non-monetary” switching costs that
“economically lock in [bank customers to] their deposit accounts.”
On May 14, 2010, the court held oral argument on the Defendants’ motion to
dismiss the Third Amended Complaint. These motions argued that neither of
Plaintiffs’ two alleged relevant markets is legally cognizable under antitrust law.
On June 21, 2010, the Court issued an order denying in part and granting in part
Defendants’ joint motion to dismiss. The Court agreed with Defendants that
Plaintiffs’ single-brand, derivative aftermarket theory fails as a matter of law.
7
However, the district court also found that Plaintiffs’ “all ATM Networks” market
was both plausible and sufficiently pled. In particular, the district court found that
Plaintiffs “have sufficiently alleged that the Defendants and Star possess market
power in this broader market.” The district court found that the “Plaintiffs allege,
in detail, that Defendants have set interchange fees at a level that is well above
their costs and have maintained these supracompetitive prices (and the resulting
profits) for many years.” The District Court concluded that “[i]f true, this
prolonged period of substantially-above-cost pricing provides a strong indication
that the Defendants and Star possess market power in the ATM Networks
market.”
By separate order dated June 21, 2010, the district court indicated that it “wishes
to proceed to summary judgment on the limited issue of whether Plaintiffs lack
standing to bring an antitrust claim for damages under the rule set forth in Illinois
Brick Co. v. Illinois, 431 U.S. 720 (1977).” At oral argument on the Motion to
Dismiss, the Defendants stated that there are members of the Star Network that
consistently pay out more in Interchange Fees than they receive. The Court asked
for briefs on this issue, and specifically asked the Defendants to “identify
evidence supporting this assertion and explain why these direct purchasers do not
fall within the recognized exceptions to the Illinois Brick rule.”
On September 16, 2010, the court granted Defendants’ motion for summary
judgment. As discussed above, the court ruled that the Plaintiffs lack standing to
bring a claim for damages under the Illinois Brick rule.
The case was argued on December 6, 2011.
On July 12, 2012, the Ninth Circuit upheld the district court’s dismissal on the
grounds that Plaintiffs lacked standing to bring the antitrust claim. The Ninth
Circuit determined that the Plaintiffs were indirect purchasers and therefore
prohibited from asserting an antitrust claim.
On July 26, 2012, Plaintiffs filed a petition for rehearing and a petition for
rehearing en banc.
On March 13, 2013, the ninth circuit denied the petition for rehearing and
the petition for rehearing en banc. The court issued its mandate on March
25, 2013.
3. Robert Ross v. Bank of America, et al., (Case No. 05-cv-7116,
United States District Court for the Southern District of New York).
Issues and Potential Significance: This case presents a class action brought by
holders of credit cards containing mandatory arbitration clauses. The complaint,
which was filed in the United States District Court for the Southern District of
New York, alleges that the defendant banks illegally colluded to force cardholders
8
to accept mandatory arbitration clauses and class action waivers in their
cardholder agreements in violation of the Sherman Act.
The Plaintiffs set forth two antitrust claims. The first claim alleges a conspiracy
to impose mandatory arbitration clauses in violation of Section 1 of the Sherman
Act, 15 U.S.C. § 1. The second claim alleges that the banks participated in a
group boycott by refusing to issue cards to individuals who did not agree to
arbitration, also in violation of Section 1.
If successful, this litigation would invalidate the arbitration clauses contained in
the credit card agreements at issue in this case. The Complaint seeks the entry of
an order enjoining the banks from continuing their alleged “collusion” relating to
arbitration clauses, invalidating the existing mandatory arbitration clauses, and
forcing the Appellants to withdraw all pending motions to compel arbitration. See
15 U.S.C. § 26. It would also provide a troubling precedent – attacking the
industry-wide use of arbitration provisions using via the antitrust statutes.
Proceedings/Rulings: On September 20, 2006, the district court dismissed the
Complaint on the grounds that the cardholders had failed to establish standing
under Article III of the Constitution. In re Currency Conversion Fee Antitrust
Litig., No. 05 Civ. 7116 (WHP), 2006 U.S. Dist. LEXIS 66986 (S.D.N.Y. Sept.
20, 2006). The district court’s decision acknowledged certain of the antitrust
injuries asserted by the cardholders, but ultimately agreed with the banks that
these injuries were entirely speculative and, therefore, insufficient to establish
Article III standing. Specifically, the district court found that the cardholders’
injuries are “contingent on their speculation that someday (1) Defendants may
engage in misconduct; (2) the parties will be unable to resolve their differences;
(3) Plaintiffs may commence a lawsuit; (4) the dispute will remain unresolved;
and (5) Defendants will seek to invoke arbitration provisions.” Id. at *14-15.
Further, the district court found that any “alleged anticompetitive effects are
inchoate.”
The Second Circuit took up the case to consider whether the presence of
mandatory arbitration clauses found in credit card contracts issued by the
Appellees, if one assumes that they are the product of illegal collusion among
credit providers, can give rise to a cognizable “injury in fact.”
In a decision issued April 25, 2008, the Second Circuit reversed the district court,
finding that the complaint adequately alleged a harm that satisfied Article III of
the Constitution. The Court found that -
[t]he harms claimed by the cardholders, which lie at the heart of
their Complaint, are injuries to the market from the banks’ alleged
collusion to impose a mandatory term in cardholder agreements,
not injuries to any individual cardholder from the possible
invocation of an arbitration clause. The antitrust harms set forth in
9
the Complaint – for example, the reduction in choice for
consumers, many of whom might well prefer a credit card that
allowed for more methods of dispute resolution – constitute
present market effects that stem directly from the alleged collusion
and are distinct from the issue of whether any cardholder’s
mandatory arbitration clause is ever invoked. The reduction in
choice and diminished quality of credit services to which the
cardholders claim they have been subjected are present anti-
competitive effects that constitute Article III injury in fact.
Significantly, the Court did not address the merits of the cardholder’s claims or
whether the cardholders’ alleged injuries would survive a heightened antitrust
standing analysis. The Court noted, however, that “there is no heightened
standard for pleading an injury in fact sufficient to satisfy Article III standing
simply because the alleged injury is caused by an antitrust violation.” While it
recognized that Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007), requires a
heightened pleading standard “in those contexts where [factual] amplification is
needed to render [a] claim plausible,” plausibility is not at issue in the case
because the Court was only considering the adequacy of the cardholder’s Article
III standing.
The case was remanded back to the district court for further proceedings.
On January 21, 2009, the district court denied Discover’s motion to dismiss for
lack of Article III standing and antitrust standing, finding that the plaintiffs had
successfully tied Discover’s conduct to their alleged harm. The district court
found that the plaintiffs had adequately plead sufficient facts to support their
claims –the occurrence of alleged meetings between the defendants (including
times and purpose of those meetings), the specific product of the alleged
conspiracy, and the claimed anti-competitive effect. With respect to “anti-trust”
standing, the court concluded that the complaint alleged sufficient anti-trust injury
(reduced choice and diminished quality of credit card services) and that the class
is an “efficient enforcer.”
On October 6, 2009, the Court granted a class certification pursuant to Rule
23(b)(2) that was reached via a stipulation between the parties. The class
includes:
“A class consisting of all persons holding during the period in suit
a credit or charge card under a United States cardholder agreement
with any of the Bank Defendants (including, among other cards,
cards originally issued under the MBNA, Bank One, First USA
and Providian brands), but not including members of the proposed
Subclass, subject to an arbitration provision relating to their cards.
A subclass consisting of all persons holding during the period in
suit a credit card under a United States cardholder agreement with
Discover Bank, which cardholders have not previously
10
successfully exercised their right to opt-out of the Arbitration of
Disputes.”
On October 22, 2009, the Court granted final approval of a proposed settlement
between the parties. The settlement embodied terms of a previous Stipulation and
Settlement Agreement that was reached between the parties as the result of
mediation in 2005 - 2006. The terms of the settlement include the creation of a
fund ($336 million) with which to pay class members and counsel, and an
agreement by the bank defendants to enhance their disclosures concerning foreign
transaction fees.
On December 18, 2009, the Court received and docketed the settlement
agreements between the class and defendants J.P. Morgan Chase, Bank of
America, and Capital One. A conference with the settling parties was scheduled
for January 8, 2010.
On January 15, 2010, the Court issued a scheduling order governing the approval
of settlements with a number of the defendants (including Bank of America,
Capital One, Chase, and HSBC).
On January 18, 2010, the Court dismissed the motion to dismiss the first amended
class action complaint filed by the National Arbitration Forum.
On February 9, 2010, the court issued a scheduling order directing The National
Arbitration Forum’s opposition to the class certification to be filed on or before
May 28, 2010. Class Plaintiffs were required to respond to the opposition on or
before July 2, 2010.
Defendants Bank of America, N.A., JP Morgan Chase & Co., Chase Bank USA,
N.A., Capital One Bank (USA), N.A., HSBC Finance Corporation and HSBC
Bank Nevada, N.A., were all granted a preliminary order approving a class action
settlement on March 18, 2010.
On March 22, 2010, the court ordered non-settling parties to appear for a status
conference on May 14, 2010. The status conference was later changed to May 21,
2010.
On June 1, 2010, class plaintiffs filed their motion final approval of the
settlements with Bank of America, Capital One, Chase and HSBC.
On June 21, 2010, the Court issued an order closing fact discovery in the case on
June 30, 2010.
On July 22, 2010, the court issued a final judgment and order dismissing the
claims against Bank of America, N.A., JP Morgan Chase & Co., Chase Bank
USA, N.A., Capital One Bank (USA), Capital One Bank, N.A., HSBC Finance
11
Corporation, and HSBC Bank Nevada, N.A., on the merits and with prejudice,
according to the terms of the settlement agreement among Plaintiffs and the
above-named Defendants.
On August 19, the Court issued a revised scheduling order to see the case through
the remainder of fact discovery and discovery related to expert witnesses for the
remaining parties.
On May 10, 2011, the parties filed cross motions for summary judgment with
respect to the Citi and Discover defendants. Opposition to these motions was
filed on July 12, 2011. Oral argument was heard on November 7, 2011.
On December 13, 2011, class plaintiffs finally reached a settlement agreement
with the National Arbitration Forum. The court has scheduled a hearing on entry
of a Final Judgment and Order of Dismissal for April 27, 2012, where the court
will consider whether the settlement, on the terms and conditions of the
Settlement Agreement, is “fair, reasonable and adequate.” Based on that hearing,
the court will issue a final approval.
On February 8, 2012, the Court granted Plaintiffs motion for summary judgment
as to Citigroup’s sixth affirmative defense and denied the motion for summary
judgment of Defendants Citigroup and Discover – the two remaining defendants
in the case.
On March 6, 2012, the Court issued a revised order scheduling oral arguments for
pending motions on June 4, 2012, and the trial on January 7, 2013.
On March 16, 2012, a number of settlements were proposed. The proposed
stipulation and agreement of settlements are between JPMorgan Chase, Capital
One Bank, Bank of America, and HSBC Bank.
On March 22, 2012, Class Plaintiffs filed a motion for final approval of class
action settlement with the National Arbitration Forum.
On April 30, 2012, a final judgment and order of dismissal was issued with
respect to Defendant National Arbitration Forum.
On August 3, 2012, the court ordered that all filings not subject to a claim of
privilege, as well as discovery documents in the case, be made available to
American Express, Citi and Discover, in accordance with the April 21, 2009
stipulated confidentiality order.
On September 11, 2012, the court denied the plaintiffs’ motion to empanel an
advisory jury. Courts typically empanel an advisory jury only if 1) at least one of
the claims to be tried has facts in common with another claim that will be tried to
a jury as a matter of right; and, 2) when certain “special factors” suggest that a
12
jury composed of members of the community would provide the court with
valuable guidance in making its own findings and conclusions. Plaintiffs did not
meet either of the requirements to empanel an advisory jury.
On February 7, 2013, the court held a trial in this matter after which it issued a
schedule as follows: The parties were ordered to submit proposed findings of fact
and conclusions of law, and any other post-trial memoranda by March 19, 2013;
and all parties must submit any responsive findings of fact and conclusions of
law, and any opposing memoranda by April 16, 2013. Closing and oral arguments
are scheduled for May 3, 2013.
4. National ATM Council, Inc. et al., v. VISA Inc. et al., Cases No. 11-
01803, 11-01831, 11-01882 (United States District Court for the District of
Columbia).
Issues and Potential Significance: On February 13, 2013, U.S. District Court
Judge Amy Jackson dismissed the lawsuits alleging that Visa Inc., MasterCard
Inc., JPMorgan Chase, Bank of America, and Wells Fargo violated the Sherman
Act by conspiring to set ATM fees. The plaintiffs consisted of several consumers
and 13 owners of independent non-bank ATMs. The plaintiffs alleged that Visa
and MasterCard contracts prevented ATM operators from offering lower prices on
other networks.
Proceedings/Rulings: In a 37-page opinion, the court found that the plaintiffs
failed to adequately show that they were harmed by Visa and MasterCard’s ATM
fee policies or demonstrate that there was a conspiracy to unlawfully set fees.
Section 1 of the Sherman Act makes “every contract, combination in the form of
trust or otherwise, or conspiracy, in restraint of trade or commerce,” illegal. To
prove a violation of Section 1, a party must be able to show that not only does
such an agreement exist, but that the agreement exists with the intent to restrain
trade.
The plaintiffs are expected to file an amended complaint.
5. In re: Payment Card Interchange Fee and Merchant Discount
Antitrust Litigation, (Case No. 1:05-md-01720-JG-JO)(Eastern District New
York).
Issues and Potential Significance: This is a consolidation of many individual
lawsuits brought by a number of retail merchants against Visa USA, MasterCard,
Inc., and dozens of major banks. Each of these lawsuits alleges that the defendant
banks and credit card issuers colluded to set excessive credit card fees in violation
of applicable federal antitrust laws. These cases were consolidated into this
multi-district proceeding after a ruling from the Multidistrict Litigation Panel on
October 19, 2005.
13
The litigation challenges the process by which the credit card industry sets
interchange fees paid by retail merchants to issuing banks in order to receive
payments for transactions on the banks’ cards. The complaints allege that the
“contracts, combinations, conspiracies, and understandings” allegedly entered into
by the numerous defendants “harm competition” and cause retail merchants to
“pay supra-competitive, exorbitant, and fixed prices for General Purpose Network
Services, and raise prices paid by all of their retail customers.” The suit seeks
damages, as well as declaratory and injunctive relief.
This litigation presents a significant challenge to the fundamental pricing structure
of the credit card system. The Plaintiffs allege that the Bank Defendants, by
virtue of their control over the boards of directors of MasterCard and Visa, dictate
the amount charged as interchange fees for each network. Further, because so
many banks are members of both boards, they “ensure that the Interchange Fees
of Visa and MasterCard increase in parallel and stair-step fashion, rather than
decreasing in response to competition from each other.” The plaintiffs also
challenged the networks’ “Anti-Steering Restraints,” a group of rules promulgated
by both Visa and MasterCard which they claim prevents merchants from
encouraging customers to use less expensive forms of payment. The complaint
also alleges that that Visa has engaged in monopolization in violation of Section 2
of the Sherman Act and that both MasterCard and Visa have engaged in
prohibited tying and exclusive dealing arrangements.
Proceedings/Rulings: Due to their size and complexity, the progress of this
litigation through the district court system has been relatively slow. Matters were
further complicated when, in May 2006, defendant MasterCard announced an
IPO, in which it proposed to sell approximately 60 million shares of MasterCard
Class A common stock to the public. To effectuate this offering, MasterCard first
redeemed and reclassified all of its outstanding common stock, approximately 100
million shares, then held by its member banks.
On May 22, 2006, Plaintiffs filed a supplemental complaint based on the IPO.
The Supplemental Complaint contends that the MasterCard IPO was a pretext
designed to insulate the company from the prohibitions of Section 1 of the
Sherman Act. Specifically, the Supplemental Complaint alleges that the
agreements leading to the IPO constitute a conspiracy in restraint of trade in
violation of Section 1 of the Sherman Act, and that the stock transfers by which
the IPO is effected violate Section 7 of the Clayton Act. The Plaintiffs also argue
the transaction constitutes a fraudulent conveyance under New York law.
On November 25, 2008, Judge Gleeson issued a memorandum opinion granting
the Defendants’ motions to dismiss Plaintiffs claims based on the IPO in their
entirety, rejecting (for now) plaintiffs’ claims that the initial public offering of
MasterCard stock violated both federal antitrust law and state fraudulent
14
conveyance law. The Court, however, granted plaintiffs leave to amend their
complaint to address a number of issues identified in the Court’s opinion.
Plaintiffs filed a Second Supplemental Class Action Complaint on February 20,
2009, supplementing its claims to encompass the restructuring of VISA via an
IPO in March of 2008.
At a hearing held April 16, 2009, Judge Orenstein reserved his decision on (1)
whether to grant defendants’ request for a hearing on the class Plaintiffs’ motion
for class certification, and (2) plaintiffs’ motion to consolidate the pending Rule
12(b)(6) and Rule 56 motions.
As reported by the parties in their joint status report filed on July 2, 2009, the
following dispositive motions are still pending before the court:
1. Motion to Dismiss the Second Consolidated Amended Class Action
Complaint;
2. Motion to Dismiss the First Amended Supplemental Class Action
Complaint; and
3. Motion to Dismiss the Second Supplemental Class Action Complaint.
Oral arguments on Defendants’ motion to dismiss were rescheduled for
November 18, 2009. The court also heard arguments on the Class Plaintiffs
motion for class certification, and defendants’ motion to strike expert testimony
on November 19, 2009.
Judge Orenstein heard oral arguments on November 23, 2009, and is reserving a
ruling on the pending motions.
Discovery in this case took an interesting path: the European Union (EU) filed an
amicus brief with the court urging confidential treatment for two documents
prepared in connection with its own investigation of Visa and MasterCard. In an
order dated August 27, 2010, the court denied the motion to compel the
production of the EU documents. According to the court, the law of international
comity mandates “an exception to usual rule that all relevant information is
discoverable.”
On October 21, 2010, the Court issued a minute order requesting that the parties
confer on (1) the potential impact of the enactment of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, and (2) the proposed settlement of the
government's claims against the Network Defendants in United States v.
American Express Company, et al., 10-CV-4496 (NGG) (CLP) (see below).
15
On July 7, 2011, the bank defendants filed a comprehensive motion for summary
judgment (546 pages) to dismiss the Second Consolidated Amended Class Action
Complaint.
Judge Gleeson heard oral arguments regarding the parties' summary judgment
motions on November 2, 2011. The parties are still awaiting a decision.
On February 12, 2012, a status report order was issued by the judge.
On September 11, 2012, the court held a status hearing to hear objections to the
preliminary approval of the approved settlement. A second conference is
scheduled for September 27, 2012.
On October 19, 2012, Plaintiffs filed a second amended complaint against
MasterCard Incorporated.
6. United States v. American Express Company, (Case No. 10-CV-
4496) (United States District Court for the Eastern District of New York).
Issues and Potential Significance: The United States and a number of state
Attorney Generals allege that American Express, MasterCard and Visa have each
adopted rules that restrain merchants from encouraging consumers to use
preferred payment forms, which they argue is a violation of Section 1 of the
Sherman Act. The case is a “related matter” to the class action that is pending in
the Eastern District of New York, In re: Payment Card Interchange Fee and
Merchant Discount Antitrust Litigation (see above).
The Department of Justice filed a civil antitrust lawsuit in U.S. District Court for
the Eastern District of New York challenging rules that American Express,
MasterCard and Visa have in place that, in its view, prevent merchants from
steering customers to other less-expensive credit/debit products. The complaint
alleges that Amex/Visa/MasterCard rules prohibit merchants from offering
discounts or other incentives to consumers in order to encourage them to pay with
credit cards that cost the merchant less to accept. DOJ’s suit alleges that because
rules prevent merchants from offering consumers discounts, rewards and
information about card costs, the merchants’ cost of business increased and that
increase was then passed along to the consumer. Joining DOJ in its lawsuit are
the states of Connecticut, Iowa, Maryland, Michigan, Missouri, Ohio and Texas.
Simultaneously with the filing, DOJ announced that it reached a settlement with
Visa and MasterCard. As approved by the Court, the settlement requires
MasterCard and Visa to allow their merchants to:
Offer consumers an immediate discount or rebate or a free or discounted
product or service for using a particular credit card network, low-cost card
within that network or other form of payment;
16
Express a preference for the use of a particular credit card network, low-
cost card within that network or other form of payment;
Promote a particular credit card network, low-cost card within that
network or other form of payment through posted information or other
communications to consumers; and
Communicate to consumers the cost incurred by the merchant when a
consumer uses a particular credit card network, type of card within that
network, or other form of payment.
The settlement allows any merchant that only accepts Visa and MasterCard to
take advantage of the relief immediately.
Proceedings/Rulings: The Department of Justice filed its complaint on October
4, 2010. On the same day, it filed a proposed stipulation of settlement with Visa
and MasterCard.
The case is likely to have a number of other similar litigations involving
American Express join the current action via the Multi-District Panel.
On December 20, 2010, plaintiffs filed an amended complaint against American
Express Company, American Express Travel Related Services, MasterCard
International and Visa, Inc. The complaint adds a number of additional states as
plaintiffs. States participating in the litigation are: Arizona, Connecticut, Hawaii,
Idaho, Illinois, Iowa, Maryland, Michigan, Missouri, Montana, Nebraska, New
Hampshire, Ohio, Rhode Island, Tennessee, Texas, Utah, and Vermont.
On July 20, 2011, the court entered final judgment approving the settlement
between the Department of Justice and Visa and MasterCard.
Also of interest, American Express and the United States have crafted a stipulated
order governing the “Preservation and Production of Documents and
Electronically Stored Information.” This order provides practitioners with an
example of how the United States approaches e-discovery issues in complex
cases.
On March 23, 2012, a status conference was held. Another status conference was
held on June 5, 2012.
7. Pinon, et al. v. Bank of America, (Case No. 08-15218, United States
Court of Appeals for the Ninth Circuit).
Issues and Potential Significance: On January 31, 2007, plaintiffs filed a class
action complaint against a number of national banks doing business in California.
Plaintiffs in this case, credit card customers located in California, contend that a
number of banks/ credit card issuers have conspired to impose penalty fees on credit
card customers that are (1) improbably uniform, and (2) legally excessive. The suit
17
alleges that the penalty fees violate the National Bank Act, the Sherman Act
(antitrust), and various provisions of the California Code.
One of the foundational legal theories in this litigation is that excessive fees
allegedly charged by the National Bank defendants brush up against the
constitutional limits of punitive damages under the Due Process clause. Plaintiffs
also allege that the defendant banks have conspired to "fix prices and maintain a
price floor for late fees" in violation of the Sherman Act.
The suit also identifies various other “firms, corporations, organizations, and other
business entities, some unknown and others known, not joined as defendants” as
“co-conspirators.” These “co-conspirators” include “financial institutions that issue
credit cards, payment industry media, third-party processors such as First Data
Resources(“FDR”) and Total Systems Services, Inc. (“TSYS”) that process payment
card transactions, credit card industry consultants, trade associations such as the
American Bankers Association, and the two major credit card networks, Visa U.S.A.
(“Visa”) and MasterCard International, Inc. (MasterCard.).”
The district court’s dismissal of the case in late 2007 indicates that the Plaintiffs’
very aggressive legal theories are not viable as a matter of law. The case is
currently on appeal to the Ninth Circuit, where proceedings remain stayed as a
result of the bankruptcy of Washington Mutual’s parent holding company.
Proceedings/Rulings: Three additional class actions were filed in the District
against the same defendants alleging substantially the same facts and causes of
action. (Case No. C-07-0772-SBA; Case No. C-07-1113-SBA; and Case No. C-
07-1310-MMC). The parties stipulated to a consolidation of these four cases, and
an amended/consolidated complaint was filed on May 8, 2007.
On November 16, 2007, the district court dismissed the complaint without
prejudice. The Court rejected plaintiff’s theory that defendants’ penalty fees
constitute punitive damages subject to limitation under the Due Process Clause
because they significantly exceed any actual damages that the defendants incur.
Plaintiffs argued that the court must interpret federal banking statutes, principally
the National Bank Act to incorporate Due Process limits on credit card late and
overlimit fees. They also asserted that the remedial provisions of the banking
statutes, such as 12 U.S.C. § 86, provided a cause of action for such allegedly
excessive fees. The Court disagreed, finding that the Due Process Clause was not
implicated because the fees are not imposed by a court nor are they penalties
“advanc[ing] governmental objectives” to protect against behavior that harms the
“general public.” Rather, they are paid by one party to another pursuant to private
contract. The Due Process Clause constrains government action; it does not
restrain or protect against private conduct.
The court also concluded that plaintiffs failed to allege sufficient facts to support
their claims of price-fixing under the Sherman Act or California’s Cartwright Act.
18
Finally, the Court also dismissed plaintiffs state law claims alleging violations of
the California Unfair Competition Law (UCL) (CAL. BUS. & PROF. CODE §§
17200 et seq.); the Consumers Legal Remedies Act (CLRA) (CAL. CIV. CODE
§§ 1750 et seq.); breach of the covenant of good faith and fair dealing; and unjust
enrichment.
The complaint was dismissed without prejudice. Plaintiffs were granted leave to
submit an amended complaint that would be viable under the law as stated in the
court’s order, if they can do so in good faith. Plaintiffs, however, notified the
court that they did not intend to file an amended complaint. On January 4, 2008,
the Court dismissed the case with prejudice.
On January 30, 2008, Plaintiffs appealed to the Ninth Circuit. On November 4,
2008, Appellee Washington Mutual moved the court to substitute JP Morgan
Chase Bank, N.A. in its place. JP Morgan Chase purchased the assets and
liabilities of Washington Mutual after a receiver was appointed for the latter
institution in September, 2008.
On August 2, 2012, the parties filed a joint motion to dismiss Washington Mutual
from the case. Washington Mutual has filed for Chapter 11 bankruptcy protection.
The Ninth Circuit has stayed all proceedings as a result.
ARBITRATION
8. American Express Company, et al., v. Italian Colors Restaurant, et
al., Case No. 12-133 (U.S. Supreme Court).
Issues and Potential Significance: This class action arbitration suit is back on the
ABA docket after the Supreme Court vacated and remanded the case back to the
Second Circuit “for further consideration” given Court’s decision in Stolt-Nielsen
S. A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010). Stolt-Nielsen held that
the Federal Arbitration Act prohibits compelling a party to submit to arbitration
absent contractual evidence that the party agreed to do so.
Proceedings/Rulings: This case was originally brought in the United States
District Court for the Southern District of New York, contending that Amex’s
merchant contracts contained illegal “tying” arrangements, in violation of Section
1 of the Sherman and Clayton Acts. The merchant agreements which contain
mandatory arbitration provisions prohibit arbitration on a class-wide basis. Amex
moved to compel plaintiffs to arbitrate their claims, and sought to dismiss
plaintiffs’ complaints or stay the proceedings pending arbitration.
In 2006, the district court granted Amex’s motion to compel arbitration. The
plaintiffs appealed the decision to the Second Circuit.
19
On January 30, 2009, the Second Circuit ruled that the class action waiver
provision in the merchant agreement was unenforceable because to make it
enforceable would grant Amex de facto immunity from antitrust liability by
removing the plaintiffs’ only reasonably feasible means of recovery.
On May 29, 2009, Amex filed a Petition for a Writ of Certiorari to the United
States Supreme Court. The ABA filed an amicus brief in support of the petition
on June 26, 2009.
On May 3, 2010, the Court granted the petition for a writ of certiorari and
summarily vacated the Second Circuit’s judgment and remanded the case back to
the Second Circuit for further consideration in light of the Supreme Court’s
decision in Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010).
On February 1, 2012, the Second Circuit refused to enforce American Express’
(Amex) class arbitration waiver for a third time in Amex III. The Second Circuit
concluded that the recent Supreme Court decision AT&T Mobility v. Concepcion
did not alter its ruling. The plaintiffs in Concepcion were consumers challenging
the class arbitration waivers in their cellular phone contracts. The plaintiffs
claimed that a California common law rule held that arbitration clauses containing
class waivers in certain consumer contracts were unenforceable when individual
damages are small. However, the Supreme Court held that the class arbitration
waivers were valid because the Federal Arbitration Act preempted the California
common law rule. Despite the Concepcion holding, the Second Circuit still held
that Amex’s class arbitration waiver violated antitrust laws, and was therefore
unenforceable.
On May 29, 2012, the Second Circuit denied AMEX’s petition for rehearing en
banc with five judges dissenting.
On July 30, 2012, Amex filed a Petition for a Writ of Certiorari to the United
States Supreme Court. The ABA filed an amicus brief in support of the petition
on August 22, 2012.
On November 9, 2012, the Court granted the Petition for a Writ of Certiorari.
On December 28, 2012, the American Bankers Association filed an amicus brief
in support of American Express.
Oral arguments were held on February 27, 2013.
ATM DISCLOSURES
9. The Electronic Fund Transfer Act (EFTA) and its implementing
regulations have spawned a new sub-genre of class action litigation that targets
20
community banks: lawsuits over whether a bank’s ATM has properly disclosed
the operator’s fee structure.
The past 12 months has seen a small explosion in the number of suits that have
been filed. For example, one particular law firm in Texas has filed approximately
60 individual actions in federal courts across Texas, Alabama, and Tennessee.
One especially efficient attorney in Pennsylvania is cutting out the middleman,
filing several suits on her own behalf. And in 2012, eleven suits have been filed
between September and October by a single plaintiff in New York against
community banks in Tennessee.
The EFTA caps class action damages at the lesser of $500,000 or 1% of the net
worth of a defendant (plus attorney fees and costs). The statute also provides a
defendant with excellent grounds to respond should they choose to contest the suit
rather than settle. For example, ATM operators are not liable for damages if –
The required notice was removed as a result of vandalism or other acts by
third parties;
The alleged violation was not intentional and resulted from a bona fide
error; or
The bank can demonstrates a good faith attempt at compliance with any
rule, regulation, or interpretation by the Board of Governors of the Federal
Reserve Board.
These last two points are of particular importance to state chartered non-Member
institutions. At least one institution has successfully raised the FDIC’pre-2009
interpretation of the EFTA’s disclosure requirements as a defense to an alleged
failure to provide “on machine” notice. See Dover v. Union Building and Loan
Savings Bank.
In a May 2011 case, Riviello v. Pennsylvania State Employees Credit Union, the
Plaintiff sued the Pennsylvania State Employees Credit Union (“PSECU”) for
operating an ATM that violated the EFTA. The case was filed in the Middle
District of Pennsylvania. The Court granted PSECU’s motion for summary
judgment because the Plaintiff failed to present any evidence that disputed
PSECU’s version of the facts that the ATM notice had been removed by a third
party. Rendering its opinion, on March 28, 2012, the Court ruled that while the
defendants presented a complete defense to liability by submitting affidavits and
photographs, Plaintiff did not. The Court noted that PSECU successfully
established that the Plaintiff failed to substantiate his claim with evidence.
On June 19, 2012, the ABA and nine other trade associations submitted a letter to
the House Committee on Financial Services seeking the passage of legislation that
would eliminate the “unnecessary and duplicative” ATM fee disclosure. The
panel considered the bill on Wednesday, June 26, 2012. The bill, H.R. 4367
passed the legislation on July 9, 2012.
21
On Friday, December 21, 2012, the president signed into law the bill that will
repeal the outdated, and duplicative requirement that a placard must be attached to
ATMs announcing that a fee may be charged. The bill (H.R. 4367) was cleared
for enactment by the Senate on Tuesday, December 11, 2012.
10. The Americans with Disabilities Act (ADA) has set new standards
for ATM operators across the country. On March 15, 2012, all ATMs were
required to comply with the 2012 ADA Accessibility Standards. The revised law
requires that all ATMs be equipped with speech-enabled technology, headset
jacks, and other items so visually-impaired customers can use the machines
without assistance. Due primarily to vendor delays, several ATMs have not yet
been upgraded to comply with the new law. Consequently, several banks,
primarily in Ohio and Pennsylvania, have been sued by private litigants for non-
compliance. Plaintiffs may seek injunctive relief (a court order requiring that the
ATM be made compliant) and attorneys’ fees. However, under the ADA private
litigants are only entitled to attorneys’ fees if they are deemed a “prevailing” party
by the court.
On June 15, 2012, a Pennsylvania federal judge dismissed a suit brought by the
same Plaintiff in Riviello v. Pennsylvania State Employees Credit Union. The suit
alleged that the Philadelphia Federal Credit Union violated the fee disclosures
requirements of the Electronic Funds Transfer Act and the handicapped
provisions of the Americans with Disabilities Act because Philadelphia FCU
failed to post a fee placard that was adequately suitable to its sight-impaired,
legally blind customers. The suit alleged that the notices were “too small.”
Riviello v. Philadelphia Federal Credit Union. The court dismissed the case
ruling that the disclosure notice posted by Philadelphia Federal Credit Union was
sufficient to meet the provisions of the EFTA because Plaintiff had no problem
completing his transaction due to his alleged disability. A plaintiff is limited to
claims regarding violations relating to his/her particular disability and as such,
plaintiff could not prevail on his claims on the grounds that some blind consumers
would not be able to read the notice.
CONSUMER PROTECTION
* 11. Marx v. General Revenue Corp., (United States Supreme Court;
Case No. 11-1175)
Issues and Potential Significance: On February 26, 2013, the Supreme Court
held that prevailing debt collectors who have been sued under the Fair Debt
Collection Practices Act (“FDCPA”) may seek costs under Rule 54 of the
Federal Rules of Civil Procedure.
22
Plaintiff filed a suit in district court against General Revenue Corporation
(“GRC”) alleging that GRC violated the Fair Debt Collection Practices Act
when it harassed and falsely threatened her with wage garnishment of up to
50% of her wage earnings, in an attempt to collect on a student loan debt.
Shortly after the plaintiff filed the suit, GRC made her an offer of judgment
under Federal Rule of Civil Procedure 68 to pay plaintiff $1,500, plus
reasonable attorney’s fees and costs to settle the suit. Plaintiff did not
respond to the offer, and subsequently amended her complaint adding a
claim that GRC unlawfully sent a fax to her workplace that requested
information about her employment status.
Proceedings/Rulings: The district court found that the plaintiff failed to
prove that GRC violated the FDCPA. As part of the court’s judgment,
pursuant to Federal Rule of Civil Procedure 54(d)(1), the plaintiff was
ordered to pay GRC $4,543.03 in costs. Plaintiff then filed a motion to vacate
the award , arguing that the court lacked the authority to award costs under
Rule 54(d)(1) because 15 U.S.C. § 1692k(a)(3) only permits such an award if
the underlying action was brought in bad faith and for the purpose of
harassment.
The Tenth Circuit affirmed the district court’s award of costs, agreeing in
part that costs were allowed under Rule 54(d)(1), which grants the district
courts discretion to award costs to prevailing parties “unless a federal statute
… provides otherwise.”
The Supreme Court sided with the Tenth Circuit and held that the awards
were proper. The Court’s decision overturned a contrary ruling in the Ninth
Circuit.
A copy of the opinion is attached.
* 12. The People v. JTH Tax, Inc., (Case No. A125474; Court of Appeal
for the State of California, First Appellate District)
Issues and Potential Significance: On March 9, 2013, the Court of Appeal for
the State of California, First Appellate District affirmed a lower court’s
monetary judgment against Liberty Tax for violations of state and federal
lending, unfair competition, consumer protection, and false advertising laws.
Proceedings/Rulings: In February 2007, the California Attorney General
filed a complaint alleging that Liberty Tax violated several state laws,
including California’s unfair competition laws and false advertising law, by
broadcasting and printing “misleading and deceptive” statements in
advertisements regarding Liberty’s refund anticipation loans and electronic
refund checks. The complaint alleged that Liberty Tax’s refund anticipation
loans and electronic refund check applications contained inadequate
23
disclosures regarding debt collection, specific costs and interests on the
extension of credit, and the time it takes to receive money under refund
options offered.
A lower court found that Liberty’s handling fee, between $24 and $30, for
processing refund anticipation loans violated the Truth in Lending Act
(“TILA”), because the checks were considered a form of credit which allows
customers to delay payment for tax preparation services. Liberty should
have disclosed this finance charge to its customers. The court also found that
Liberty’s practice of selling refund anticipation loans and electronic refund
checks to third party lenders who then collected refund loan debts from prior
transactions was “deceptive and unfair,” and violated California’s Unfair
and Deceptive Acts and Practices statutes.
Liberty appealed the lower court’s decision on January 17, 2013.
On March 7, 2013, the court of appeal affirmed the lower court’s ruling and
ordered Liberty Tax to pay $1.169 million, in civil penalties and $135,000 in
restitution. Liberty Tax filed a petition for review with the California
Supreme Court.
A copy of the Court of Appeal decision is attached.
13. State of Nevada v. Trafford, District Court, Clark County (Case
No. 11-C-277573)
On February 25, 2013, Clark County, Nevada District Judge Carolyn
Ellsworth dismissed the criminal indictment against Gerri Sheppard and
Gary Trafford, two Southern California title officers charged with several
violations including “robo-signing” and mortgage fraud.
The 440 paged indictment filed on November 16, 2011, alleges the defendants
directed a Nevada notary public to forge signatures on a Notice of Default
and Election to Sell under Deed of Trust document. The forged signatory
documents were then filed with the county recorder. The indictment alleged
that the defendants filed over ten thousand forged signatory foreclosure
documents between 2005 and 2008.
The judge dismissed the case amid allegations of prosecutorial misconduct.
The defendants accused the prosecutors of providing misleading information
to the grand jury, improperly intimidating a witness to plead guilty (the
witness committed suicide), and failing to disclose that the defendant’s
company was foreclosing on the home of one of the prosecutors. The judge
did not address most of the defendants’ allegations but did rule that the
inaccurate grand jury presentation tainted the indictment.
24
The judge did not issue a written ruling and the charges were dismissed
without prejudice and may be re-filed.
14. Vassalle v. Midland Funding LLC et al., (The United States Court
of Appeals for the Sixth Circuit; Case Nos. 11-3814, 11-3961, 11-4016, 11-
4019, 11-4021)
The Sixth Circuit Court of Appeals has rejected a nationwide settlement of
three class-action suits alleging that a creditor’s practice of using “robo-
signed” affidavits in debt collection actions violates the Fair Debt Collection
Practices Act (“FDCPA”).
Issues and Potential Significance: The case involved a nationwide settlement
of three class-action suits arising from similar facts: Midland Funding v.
Brent; Franklin v. Midland Funding; and Vassalle v. Midland Funding.
In April 2008, Midland Funding LLC filed a debt-collection action against
defendant Andrea Brent in an Ohio municipal court. Attached to the
complaint in this case was an affidavit signed by an employee of Midland
Credit Management (“MCM”) claiming personal knowledge of the amount
of money owed by the defendant. The defendant Andrea Brent filed a class-
action counterclaim against Midland Funding and Midland Credit
Management alleging violations of the FDCPA. The counterclaim alleged
that MCM employees routinely signed affidavits such as the one attached to
the initial complaint without having adequate knowledge of the facts
presented. The other two related suits were filed while Midland Funding v.
Brent was still pending litigation. All three suits were filed in municipal
courts before being transferred to the Northern District of Ohio.
On August 11, 2009, the Northern District of Ohio ruled that “robo-signed”
affidavits presented in debt collection actions violate the FDCPA because
such affidavits are “false and misleading” and influenced by “false
attestation” of personal knowledge. The Midland funding case, Midland
Funding v. Brent was the first of the three cases to be brought in the state of
Ohio. Vassalle v. Midland Funding was the last.
In January 2011, plaintiff Martha Vassalle alleged common-law claims of
fraudulent misrepresentation, negligence, and unjust enrichment in her suit
against Midland Funding and entered into settlement talks with the plaintiffs
in the other two cases. The parties reached an agreement on March 9, 2011,
and on August 12, 2011, the court approved the class settlement and ordered
defendants to pay $5.2 million and to put into place procedures to prevent
the use of robo-signing under monitoring for a year. The distribution of the
settlement funds allotted $8,000 collectively to the three named class
plaintiffs, and $17.38 to each of the unnamed plaintiffs.
25
Eight of the 133,000 unnamed plaintiffs appealed the to the Sixth Circuit
arguing that the settlement was unfair, unreasonable and inadequate.
On February 26, 2013, the Sixth Circuit found that the settlement should
never have been approved because it did not satisfy the adequacy of
representation and superiority of a class action requirements needed for
proper class certification. Adequacy of representation was lacking because
the settlement’s forgiveness of the debts owed by the class representatives
gave them an unfair advantage over that of the unnamed class members.
While the settlement forgave the named plaintiffs of their debts, the
settlement would prevent the unnamed class members from using the alleged
robo-signed affidavits against the defendant in any other lawsuit. This, the
court said, would “virtually assure that [the defendant] will be able to collect
on these debts.” The superiority factor was not satisfied because the
unnamed class members now had an interest in individually challenging the
affidavits in lawsuits seeking to vacate the defendant's state court judgments
against them, raising the likelihood that many of the unnamed class members
would bring individual lawsuits.
A copy of the Vassalle decision is attached.
* 15. United States of America v. Texas Champion Bank, (United States
District Court for the Southern District of Texas, Corpus Christi Division;
Case No. 13-cv-00044)
On March 5, 2013, the U.S. Department of Justice (“DOJ”) reached a
settlement with Texas Champion Bank (“Bank”), to resolve allegations that
the Bank’s lending practices discriminated against Hispanic borrowers.
Issues and Significance: The complaint filed on February 19, 2013, alleged a
“statistically significant” disparity between the interest rates Texas
Champion Bank charged to Hispanic and non-Hispanic borrowers on
unsecured consumer loans between 2006 and 2010. According to DOJ, the
interest rate discrepancy stemmed from the bank’s policy of giving its loan
officers “broad subjective discretion” to set rates and the fact that the loan
officers knew the national origin of the loan applicants. The FDIC referred
the case to DOJ in 2010.
If it is approved by the court, the agreement requires the Bank to do the
following: pay $700,000 to approximately 2,000 Hispanic borrowers; revise
its pricing policies to include a uniform pricing matrix setting forth objective,
non-discriminatory standards for setting interest rates; implement a
monitoring program; post non-discrimination notices; and implement ECOA
training.
A copy of the complaint and the consent order are attached.
26
16. RiverIsland Cold Storage, Inc., et al v. Fresno-Madera Production
Credit Association, (Case No. S190581; California Supreme Court)
On January 14, 2013, the California Supreme Court issued a unanimous decision
redefining the fraud exception of the parol evidence rule. The court held the parol
evidence rule does not exclude evidence of fraud that contradicts the terms of a
written contract. In doing so, the court overruled its own 78-year old decision in
Bank of America v. Pendergrass (1935).
Issues and Potential Significance: Plaintiffs fell behind on their loan payments
to Fresno-Madera Production Credit Association (“Fresno-Madera”) but were
able to restructure their debt into a new agreement on March 26, 2007. The new
agreement stated that Fresno-Madera would take no enforcement action until July
1, 2007, as long as the plaintiffs made specific payments towards their loan. The
plaintiffs also guaranteed eight separate parcels of real property by initialing
pages that bore the legal descriptions of these parcels.
On March 21, 2008, Fresno-Madera recorded a notice of default after plaintiffs
neglected to make the required payments. Fresno-Madera eventually dismissed its
foreclosure proceedings against the plaintiffs after they paid off the loan.
Plaintiffs later filed suit against Fresno-Madera seeking damages for fraud and
negligent misrepresentation, and other causes of action for the rescission and
reformation of the restructuring agreement.
According to plaintiffs, the vice president of Fresno-Madera met with them two
weeks prior to the signing of the restructured agreement and promised them a two
year payment extension in exchange for addition collateral consisting of two
ranches.
Proceedings/Rulings: Fresno-Madera moved for summary judgment citing the
parol evidence rule – codified in California Code of Civil Procedure Section 1856
and Civil Code section 1625 – which bars evidence of any representations
contradicting the terms of a written agreement, except to establish fraud. The trial
court relied on Pendergrass in its ruling and granted summary judgment. In
Pendergrass, the fraud exception does not allow parol evidence of promises at
odds with the terms of the written agreement.
The Court of Appeal reversed the trial court’s decision reasoning that
Pendergrass is limited to cases of promissory fraud and considered false
statements about the contents of an agreement itself to be factual
misrepresentations beyond the scope of the Pendergrass rule. Fresno-Madera
petitioned the California Supreme Court’s to review the appeal court decision.
On January 14, 2013, the California Supreme Court revisited the Pendergrass rule
and found that its limitations conflicts with established doctrine. While the rule
27
established in Pendergrass was intended to prevent fraud, it may “actually
provide a shield for fraudulent conduct.” Pendergrass had no support in the
language of the statute codifying the parol evidence rule and the exception for
evidence of fraud, was ill-considered, and should be overturned.
On March 7, 2013, the court issued its mandate.
17. Meyer v. Portfolio Recovery Associates LLC, (U.S. Court of Appeals
for the Ninth Circuit; Case No. 11-56600)
Issues and Potential Significance: On October 12, 2012, the Ninth Circuit affirmed
the district court’s decision to grant a motion for a preliminary injunction and
provisional class certification to Plaintiff in a case which alleges that Portfolio
Recovery Associates LLC’s (“PRA”) debt collection efforts violated the Telephone
Consumer Protection Act of 1991 (“TCPA”) because PRA did not receive express
prior consent to contact consumers. The injunction restrains PRA from using its
Avaya Proactive Contact Dialer to place calls to cellular telephone numbers with
California area codes.
Proceedings/Rulings: Plaintiff Jesse Meyer initially brought suit against PRA on
January 3, 2011 in the Superior Court of California, but the case was removed to the
District Court for the Southern District of California on May 9, 2011.
In his complaint, Plaintiff alleged that PRA’s practice of calling individuals on their
cell phones, using an automatic telephone dialing system, without prior consent
violated the Telecommunications Privacy Act or Telephone Consumer Protection
Act.
The calls to Plaintiff began in September 2010 by PRA to collect an alleged account
balance which PRA purchased from Computer Learning Center, and persisted
through December 2010 even after Plaintiff repeatedly asked PRA representatives
not to call his cell phone number again.
Plaintiff sought class certification to bring a class action against PRA for violations
of TCPA in district court. The district court granted the motion for a preliminary
injunction and provisional class certification on September 14, 2011. PRA appealed
the district court ruling to the Ninth Circuit, claiming that the district court lacked
jurisdiction and authority to issue the September 14, 2011 ruling and abused its
discretion by certifying a provisional class – which was limited to all persons using a
cellular phone number that 1) PRA did not obtain either from a creditor or from the
injunctive class members; and 2) has a California area-code; or 3) where PRA’s
records identify the Injunctive Class member as residing in California - for purposes
of the preliminary injunction.
On October 12, 2012, the Ninth Circuit held that the district court acted within its
discretion when it ruled that Meyer “met the commonality, typicality, and adequacy
28
requirements of the Federal Rules of Civil Procedure (“FRCP”). Wal-Mart Stores,
Inc. V. Dukes, 131 S. Ct. 2541 (2011). The Ninth Circuit concluded that PRA
violated the TCPA because PRA failed to obtain consent to call the customers at the
time of the transaction that resulted in the debt. The court ruled that consumers who
provided their cellular telephone numbers to PRA after the original transaction are
not deemed to have conveyed prior express consent to be contacted under the TCPA.
The Ninth Circuit also affirmed the district court’s preliminary injunction because
the Plaintiff demonstrated that he and other class members would suffer irreparable
harm from PRA’s continued violations of TCPA, which violates class members’
rights to privacy
On November 2, 2012 the ABA filed an amicus brief in support of an en banc
rehearing. The ABA argued that the Ninth Circuit Panel incorrectly concluded that
providing a cell phone number after the time of the original transaction does not
establish prior express consent under the TCPA.
On December 28, 2012, the court denied the petition for an en banc rehearing, but
amended the final two sentences of the third paragraph on page 12258 of its October
12, 2012 slip opinion to read as follows:
Pursuant to the FCC ruling, prior express consent is consent to call a
particular telephone number in connection with a particular debt that is given
before the call in question is placed. Id. at 564–65. PRA did not show a
single instance where express consent was given before the call was placed.
Id. at 565.
An amended opinion is filed concurrently with this order.
The judges recommended the Appellant’s petition for an en banc rehearing be
denied and reaffirmed the district court’s order granting plaintiffs’ motion for a
preliminary injunction and provisional class certification. The court issued its
mandate on January 8, 2013.
18. Rose v. Bank of America, N.A., (Supreme Court of the State of
California; Case No. S199074)
Issues and Potential Significance: Examines if a cause of action under the
California’s Unfair Competition Law (“UCL”) may not be based on an alleged
violation of the Truth in Savings Act (“TISA”) given Congress’ repeal of the TISA
provision permitting private rights of action.
Proceedings/Rulings: Plaintiffs brought a putative class action lawsuit against Bank
of America, alleging that the bank violated TISA by failing to properly notify them
about price increases of certain deposit account fees. However, in 2001, Congress
amended TISA to prohibit all private rights of action. Nevertheless, the plaintiffs
29
argued that they were permitted to allege TISA violations under the UCL. Both the
trial and appellate courts ruled against the plaintiffs.
On November 21, 2011, the Court of Appeal of the State of California, Second
Appellate District affirmed the lower court decision and held that Congress’ repeal
of the TISA provision was explicit and does not permit UCL claims brought by
private parties.
The plaintiffs appealed to the California Supreme Court.
On September 20, 2012, The American Bankers Association and California Bankers
Association filed a joint amicus brief with the California Supreme Court supporting
the lower court’s holding that a cause of action under California’s Unfair
Competition Law (“UCL”) may not be based on alleged violations of the Truth in
Savings Act (“TISA”) because Congress repealed all TISA private rights of action.
19. State National Bank of Big Spring v. The Consumer Financial
Protection Bureau, (United States District Court for the District of Columbia; Case
No. 12-cv-01032)
The State National Bank of Big Spring, Texas and two advocacy groups have
sued the Consumer Financial Protection Bureau (CFPB), the Financial Stability
Oversight Council (FSOC), and various government officials, alleging that
portions of the Dodd-Frank Act that empower the CFPB and FSOC are
unconstitutional. The thirty-two page complaint was filed in the U.S. District
Court for the District of Columbia on June 21, 2012, by lead attorney and former
White House Counsel, C. Boyden Gray.
The lawsuit’s significant claims allege that Title 1 and Title 10 of Dodd-Frank
violate the separations of powers and are therefore unconstitutional. Title 1
delineates FSOC’s responsibilities, and Title 10 creates the CFPB. According to
the complaint, Dodd-Frank gives the CFPB, “unrestrained power” that ignores the
concept of separation of powers. For example, the suit alleges that Congress does
not control CFPB’s budget because its funding comes directly from the Federal
Reserve. The suit also argues that even the President is prevented from
significantly regulating the agency because the CFPB Director is appointed for a
five year term and can only be removed “for cause.” The suit alleges that judicial
review is also limited, because Dodd-Frank mandates that the courts give
deference to CFPB’s legal interpretations. The suit also claims that FSOC’s
“unbridled discretion” to select which banks are “too big to fail” is also
unconstitutional and will unjustifiably raise borrowing costs for smaller banks.
The State National Bank claims that the risks caused by CFPB’s “unlimited
powers” forced the $275 million institution to cease all consumer mortgage
lending in October 2010. The bank also alleges that CFPB’s recent rule on
remittances made compliance so expensive that the bank stopped offering
30
international wire services to its customers on May 23, 2012. The plaintiffs are
petitioning the court to stop the CFPB and the FSOC from exercising any powers
delegated to them by Title 1 and Title 10 of Dodd-Frank.
On November 20, 2012, Defendants filed a motion to dismiss for lack of
jurisdiction.
On February 13, 2013, eight more states (Alabama, Georgia, Kansas, Montana,
Nebraska, Ohio, Texas and West Virginia) joined the suit against CFPB.
20. Rosenfield v. HSBC Bank, USA (United States Court of Appeals for
the Tenth Circuit; Case No. 10-1442).
Issues and Potential Significance: The question presented is whether a lawsuit
seeking rescission pursuant to the Truth in Lending Act (“TILA”) is timely where
the consumer provided notice of rescission to the lender within three years of closing
but did not file suit until after the three-year deadline had passed.
On March 26, 2012, the Consumer Financial Protection Bureau (“CFPB”) received
permission from the Tenth Circuit to file an amicus brief after the filing deadline had
lapsed. The CFPB’s brief argued that a borrower need only send a notice of
rescission and not file a lawsuit, within the three-year period to validly exercise a
right to rescind.
Borrowers who do not receive the mandated disclosures required by TILA have the
right to notify the lender of their intent to rescind the transaction within three years
of consummation. The majority of courts have held that a borrower must notify the
lender and file suit within three years.
In March 2012, the CFPB announced plans to file three additional briefs making
identical arguments about TILA rescission rights in the following federal circuits:
Third (Sherzer v. Homestar Mortg. Servs., Case No. 11-4254); Fourth (Wolf v. Fed.
Nat’l Mortg. Ass’n, Case No. 11-2419); and the Eighth Circuits (Sobieniak v. BAC
Home Loans Servicing LP, Case No. 122-1053.)
The ABA, the Consumer Bankers Association, and the Consumer Mortgage
Coalition filed a joint amicus brief in the Tenth Circuit on May 3, 2012, and in the
Eighth Circuit on May 24, 2012, challenging CFPB’s interpretation of TILA.
However, on May 2, 2012, in Gilbert v. Residential Funding LLC, Case No. 10-
2295, another case in the Fourth Circuit considering the same issue, the court
adopted the CFPB’s position. The Fourth Circuit is the first federal appellate court
to hold that a timely rescission notice temporarily suspends TILA’s statute of
limitations. No amicus briefs were filed in Gilbert.
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On June 11, 2012, the Tenth Circuit rejected the CFPB’s position, and sided with the
banking industry. In a decision which largely agreed with the analysis in ABA’s
amicus brief, the court ruled that allowing TILA challenges to extend beyond three
years would undercut the commercial certainty intended by Congress. On July 3,
2012 the Tenth Circuit issued its mandate.
On July 16, 2012, the ABA, the Consumer Bankers Association, and the Consumer
Mortgage Coalition filed a joint amicus brief in Wolf, the Fourth Circuit TILA
recession case. Given the negative ruling in Gilbert, the ABA is ultimately striving
to have its amicus brief considered by an en banc court. However, the only way to
get an amicus brief before an en banc court for review in the Fourth Circuit is to file
it with the initial appeal. Meaning, if the defendants in Wolf ultimately request an en
banc rehearing of a negative ruling in their case, the ABA’s amicus brief would be
submitted to the en banc court.
On February 28, 2013, the fourth circuit issued an unpublished opinion
affirming the district court’s ruling in Wolf.
On December 5, 2012, oral arguments were held in Wolf. The Fourth Circuit advised
the parties that Gilbert is precedent, and any argument on the statute of repose
“should be saved for en banc review.” There has been no request for en banc
rehearing yet.
In the meantime, in another case, Miranda v. Wells Fargo, the Fourth Circuit
affirmed that while Gilbert overturns the district court’s dismissal of the complaint
as time-barred, it does not overturn the dismissal on the basis that Plaintiff failed to
state a claim for rescission by failing to plead tender of the net loan proceedings.
21. Sherzer v. Homestar Mortgage Services, (United States Court of
Appeals for the Third Circuit; Case No. 11-4254).
In a published opinion issued on February 5, 2013, the Third Circuit ruled that a
lawsuit seeking rescission pursuant to the Truth in Lending Act (“TILA”) is timely if
a borrower provides notice of rescission to the lender within three years of closing
but did not file suit until after the three-year deadline had passed. The court
determined that rescission is exercised upon notice. Section 1635(f) does not
mention requirements for filing suit, or the issue of filing suit for that matter, raising
the question of what that silence means. The court interpreted it to mean a suit was
not time-barred by the three-year rescission requirement.
In this case, Daniel and Geraldine Sherzer obtained two secured mortgage loans
from Homestar Mortgage Services for $705,000 and $171,000 respectively. The
couple closed on the loans on August 26, 2004, after which the loans were later
assigned to HSBC Bank. On May 11, 2007, less than three years after the closing
date, the Sherzers sought to exercise their right to rescind the loan agreements for
32
what they asserted was a failure on the part of Homestar to provide all the
disclosures required by TILA.
HSBC agreed to rescind the lesser of the two loans but refused to rescind the loan
for $705,000 because Homestar was not in violation of TILA. The Sherzers sued
Homestar and HSBC in the United States District Court for the Eastern District of
Pennsylvania asking that the court rescind the loan and reward damages and
remedies.
The district court sided with HSBC and Homestar, determining that the rescission
request was time-barred under Section 1635(f) of TILA even if the borrowers mailed
a rescission notice within the three-year period, but did not file suit within that three-
year period.
The Third Circuit issued an opinion on February 5, 2013 reversing the district
court’s ruling and remanded the case. The court issued its mandate on March 20,
2013.
22. Rodriguez v. National City Bank, Case No. 08-2059 (E.D. Penn.).
The United States District Court for the Eastern District of Pennsylvania has
issued a potentially significant ruling regarding the viability of pursuing large Fair
Lending Act/Equal Credit Opportunity Act cases on a class action basis. Taking
its cue from the recent United States Supreme Court decision concerning class
action cases involving massive numbers of plaintiffs, Wal-Mart Stores Inc. v.
Dukes, the court declined to approve a settlement of a large class action lawsuit
due to the potential lack of “commonality” and “typicality” of the claims.
Filed in 2008, class plaintiffs alleged that National City Bank demonstrated an
established pattern and practice of racial discrimination in the financing of
residential home purchases, in violation of the Fair Housing Act, 42 U.S.C. §
3601 and the Equal Credit Opportunity Act, 15 U.S.C. § 1691. Specifically,
Plaintiffs allege that the bank’s “Discretionary Pricing Policy” authorized a
subjective surcharge of additional points, fees, and credit costs to an otherwise
objective risk-based financing rate. The result, it was argued, was a disparate
impact on minority applicants for home mortgage loans.
The parties reached a settlement of the claims, and a motion to approve that
settlement was filed with the court. In an order issued on September 9, 2011, the
Court declined to approve the settlement on the grounds that the Supreme Court’s
opinion in Wal-Mart Stores Inc. v. Dukes precluded the court from certifying the
case as a class action, thereby rendering the settlement unfair. Like the District
Court in In re: Wells Fargo Residential Mortgage Lending Discrimination Litigation,
the court found that the potential factual differences among the claims held by class
members – differences that were generated by the discretion accorded to the bank’s
loan officers - made it impossible for the plaintiffs to establish that the claims across
33
the class were sufficiently typical so as to justify litigating them in a class action
setting:
Plaintiffs do not satisfy the commonality requirement simply
because the dispositive legal issue of whether Defendants’
discretionary pricing policy constituted a common practice that
affected class members in a discriminatory manner is the same for
each member of the class. In Dukes, the Supreme Court did not
find the common question of whether Wal-Mart’s policy of giving
discretion to managers in pay and promotion decisions that
resulted in a disparate impact to be enough, but instead found that
the common question required would have to be narrowed to each
supervisor. In this case, there were many loan officers that were
involved in using discretion that created the alleged discrimination.
Applying Dukes, Plaintiffs would likely have to show the disparate
impact and analysis for each loan officer or at a minimum each
group of loan officers working for a specific supervisor. Indeed,
the Supreme Court found the fact that it was entirely possible that
some supervisors engaged in discrimination while others did not to
show that plaintiffs were “unable to show” that each plaintiff’s
claims “will in fact depend on the answers to common questions.”
Dukes, 131 S. Ct. at 2554.
There have been no further updates in this case. Parties are still awaiting
the judge’s final order denying the settlement.
23. Jordan v. Paul Financial, LLC, (Case No. 07-04496, Northern
District of California).
Issues and Potential Significance: This is a putative class action suit involving
payment-option “Option ARM” mortgages issued by Paul Financial in order to
finance a purchaser’s primary residence. Plaintiff alleges that the loans in
question were a “deceptively devised” financial product.
Specifically, it is alleged that Paul Financial promised that the loans would have a
low, fixed interest rate, and that the lender breached an agreement to apply
plaintiff’s monthly payments to both the principal and interest owed on the loan.
It is also alleged that Paul Financial disguised from plaintiff that his option ARM
loan was designed to cause negative amortization. Plaintiff brought claims under
the Truth in Lending Act (“TILA”), 15 U.S.C. §§ 1601, et seq. and California’s
Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code §§ 17200 et seq.; as
well as common law claims for fraud, breach of contract, and breach of the
covenant of good faith and fair dealing.
In July of 2009, the trial court dismissed a significant portion of plaintiffs’ case.
The court dismissed plaintiff’s TILA claim for damages as being outside the one-
34
year statute of limitations. The court partially granted the Defendants’ motion for
summary judgment with respect to the rescission claims. The court concluded
that because the variable rate feature of the product was disclosed by the bank, an
alleged failure to disclose the risk of negative amortization would not be a
“material” non-disclosure that would trigger the three-year statute of limitation for
rescission.
The court reached a different conclusion with respect to the alleged failure to
disclose the annual percentage rate. Unlike the risk of negative amortization,
disclosure of the APR is a “material” disclosure; if it is not made, a borrower is
entitled to the extended three-year period for rescission of the loan transaction.
The court also allowed claims to go forward (to the extent they are not time
barred) under California’s Unfair Competition Law (“UCL”) because the UCL
claim is predicated on TILA violations. The court declined to dismiss claims that
defendants fraudulently failed to disclose material information about plaintiff’s
loan. The court found that there are factual disputes on each of the elements of
plaintiff’s fraud claim that precluded summary judgment.
The court further clarified which causes of action would be allowed to go forward
in an order issued on September 30, 2010. The Court granted a motion by RBS
(the entity that provided financing to Paul Financial and is the current owner of
the loan) to dismiss the Plaintiffs’ TILA claims as untimely. The court, however,
declined to grant dismissal of a number of state law claims against RBS:
Failure To Disclose Material Facts. The plaintiffs cite provisions in the
loan agreement which they allege are misleading, such as the portion of
the loan which states that “my monthly payment could be less than the
amount of the interest portion of the monthly payment that would be
sufficient to repay the unpaid principal.” Plaintiffs allege that under the
terms of the loan it was not a possibility but a certainty that the monthly
payment would be insufficient to repay the unpaid principal and interest
because of the teaser rate. Moreover, plaintiffs allege that in basing the
payment schedule on the low teaser rate while simultaneously disclosing a
higher APR, defendants “failed to disclose the actual interest costs that
borrowers were going to incur on their loans.” The court concluded that
this cause of action was not preempted by TILA or Regulation Z based on
the Federal Reserve Commentary that “[s]tate law requirements that call
for the disclosure of items of information not covered by the Federal law,
or that require more detailed disclosures, do not contradict the Federal
requirements.” 12 C.F.R. Pt. 226, Supp. I, 28(a)(3).
Fraudulent Omissions: The court found that the plaintiffs had adequately
pleaded their case against co-defendant Paul Financial. The court also
found that the plaintiffs are entitled to pursue a recovery against RBS
under the theory that RBS aided and abetted Paul Financial, or that the
35
fraudulent activity was part of a joint venture between RBS and Paul
Financial.
California Unfair Competition Law: A business practice which is
unlawful, fraudulent, or unfair may be actionable under the California
Unfair Competition Law (UCL). As a threshold issue, the court ruled that
to the extent that plaintiffs’ cause of action is based on violations of TILA,
they are now time-barred. Scrambling, the plaintiffs now aver that they
have satisfied the “unlawful” prong of the UCL because the disclosures
violated the FTC Act, 15 U.S.C. § 45(a)(1), which proscribes “[u]nfair
methods of competition in or affecting commerce, and unfair or deceptive
practices in or affecting commerce.” The court concluded that plaintiffs
had not met their burden to plead this cause of action, and dismissed it,
while granting them permission to amend their complaint so they can
attempt to meet the required pleading standards. The court also concluded
that the plaintiffs had adequately pled their case under the “fraud” and
“unfair” prongs of the UCL, and that these causes of action could go
forward.
Proceedings/Rulings: Plaintiffs sought to certify two classes of plaintiffs; a
national class consisting of all individuals who received an Option ARM loan
through Paul Financial on their primary residence in the United States from
August 30, 2003, to the present, and a California class consisting of similar
borrowers located in the state of California. In filing their motion for class
certification, plaintiffs also moved to enjoin Paul Financial from resetting of their
interest rates.
On January 27, 2009, the court denied plaintiff’s motion for class certification and
for a preliminary injunction.
The court concluded that the named plaintiff lacked standing to represent the
national class with respect to TILA claims because they were time barred under
the statute. The plaintiffs also lacked standing to represent the California class
because they were unable to establish “traceability” – that the defendants held or
serviced the loans at issue. Plaintiff’s proposal to conduct class discovery to
identify all possible defendants, and to then join them in the litigation, was
rejected by the court. The court also concluded that plaintiff could not establish
that their loans were “typical” of those held by other class members.
Defendants moved for summary judgment with respect to all claims on December
30, 2008. On July 1, 2009, the court granted in part and denied in part the
Defendants’ motions for Summary Judgment. The court granted Defendant’s
Summary Judgment on Plaintiff’s TILA claim for damages. TILA contains a one
year statute of limitations for damages claims. Since Plaintiff’s loan was
consummated in January 2006 and the action was not filed until August 2007, the
Court agreed that the one-year statute of limitations had passed.
36
The court partially denied Defendants’ motion for summary judgment with
respect to the rescission claims. Generally, TILA provides that borrowers have
until midnight of the third business day following the consummation of a loan
transaction to rescind the transaction. 15 U.S.C. § 1635(a). A borrower’s right of
rescission is extended from three days to three years if the lender (1) fails to
provide notice of the borrower’s right of rescission or (2) fails to make a material
disclosure. 12 C.F.R. § 226.23(a)(3). Here, plaintiff did not contend that Paul
Financial failed to provide notice of his right of rescission. Rather it focused on
whether defendants’ alleged failure to disclose either (1) the risk of negative
amortization, or (2) the APR was “material.”
With respect to the risk of negative amortization, Regulation Z provides that
“[t]he term ‘material disclosures’ means the required disclosures of the annual
percentage rate, the finance charge, the amount financed, the total payments, the
payment schedule, and the disclosures and limitations referred to in § 226.32(c)
and (d).” 12 C.F.R. § 226.23(a)(3) n.48. The Commentary on this regulation
states that only one of the required disclosures regarding variable-rate loans – that
the transaction contains a variable-rate feature – is considered “material” such that
it triggers the extended rescission period. The court concluded that because the
variable rate feature was disclosed, an alleged failure to disclose the negative
amortization feature would not be a “material” non-disclosure that would trigger
an extended right of rescission.
The court reached a different conclusion with respect to the alleged failure to
disclose the annual percentage rate. Unlike the risk of negative amortization,
disclosure of the APR is a “material” disclosure; if it is not made, a borrower is
entitled to the extended three-year period for rescission of the loan transaction.
The loans in question stated that the APR was 6.99% and explains that the APR is
“[t]he cost of your credit as a yearly rate.” At the same time, the Note states that
“I will pay interest at a yearly rate of 1%. The interest rate I will pay may
change.” In plaintiff’s view, the reference to two “yearly” rates of interest is
confusing and therefore fails to comply with TILA’s requirement that the
disclosure of the APR be clear and conspicuous. The court denied summary
judgment in favor of the defendants because it concluded that a factual dispute
exists as to whether an ordinary consumer would be confused by a reference to
both an APR and a different “finance charge” as “yearly” rates of interest.
The court also allowed claims under California’s Unfair Competition Law to go
forward (to the extent they are not time barred) because the UCL claim is
predicated on the TILA violations. The court declined to dismiss claims that
defendants fraudulently failed to disclose material information about plaintiff’s
loan. The court found that there are factual disputes on each of the elements of
plaintiff’s fraud claim that precluded summary judgment.
37
Plaintiffs were granted leave to file an amended complaint, which added two
additional plaintiffs. A fourth amended complaint has also been filed against
HSBC. HSBC has filed an answer, while RBS has moved to dismiss the amended
complaint.
On September 30, 2010, the court granted in part and denied in part RBS’s motion
to dismiss. RBS has filed an answer to Plaintiff’s Fourth Amended Complaint.
On April 7, 2011, RBS filed a motion for summary judgment. They argue:
Plaintiffs lost standing to bring this claim when they filed for bankruptcy
and such standing passed to the bankruptcy trustee.
The subject loan documents were not misleading, as Plaintiffs admitted
that they understood the terms in the Note and the effect of negative
amortization, the terms “Interest Rate” and APR are different as a matter
of law and, in any event, that Plaintiffs’ complete Truth in Lending
Disclosure Statement compares and distinguishes the two.
Plaintiffs’ claims fail because RBS did not aid or abet a material omission
in the loan documents, and RBS did not have a joint venture with Paul
Financial.
Plaintiffs’ fraudulent omissions claim fails because there was no
concealed material fact in the loan documents and because Plaintiffs
cannot show actual reliance on the loan documents.
Plaintiffs’ claim under California’s Unfair Competition Law fails because
they cannot satisfy standing under the UCL, RBS cannot be held
vicariously liable, the alleged material omission was not unfair or
fraudulent, and Plaintiffs’ requested relief is unavailable under the UCL.
On May 11, 2011, the Plaintiffs and HSBC announced that they had reached a
settlement in principle. It appears that the case against Paul Financial and RBS
Financial Products will continue.
In July, HSBC and plaintiff Gregory Jordan voluntarily dismissed the litigation.
The hearings on plaintiffs’ motion for class certification and RBS’s motion for
summary judgment were continued and not dismissed.
The status of the litigation with respect to RBS took an interesting (and
infuriating) series of turns. RBS filed a Motion for Summary Judgment, seeking
dismissal of Plaintiffs’ claims. In that motion, RBS argued, inter alia, that
plaintiffs Eli and Josephina Goldhaber lacked standing because they failed to list
the court action in their schedule of assets in a Chapter 7 bankruptcy proceeding,
and that their bankruptcy estate is the real party in interest. The district court
continued the hearings on the pending motions pending a resolution of this
threshold issue. The Goldhabers reopened their bankruptcy case and claimed to
have entered into a stipulation with the Bankruptcy Trustee giving the Goldhabers
standing to prosecute this class action on behalf of the bankruptcy estate without
38
further advice or consent by the Trustee. RBS made an offer of settlement of the
Goldhabers’ claims to the Bankruptcy Trustee, which was accepted over the
objection of the Goldhabers. In August of 2011, the Trustee filed a motion in the
bankruptcy court seeking approval of a settlement between the Trustee and RBS.
The Bankruptcy Court heard argument of the Settlement Approval Motion on
September 7, 2011. After argument, the Bankruptcy Court denied the motion.
The settlement having fallen through, the district court once again took up the
motions for class certification and for summary judgment.
A hearing on the motion regarding class certification was heard by the court on
December 5, 2011. The parties have been submitting supplemental briefing on the
issue of whether the class claims share sufficient “commonality”, citing Wal-Mart
Stores v. Dukes and the recent string of cases in the mortgage lending area
denying class certification.
On August 23, 2012, the Court denied RBS Financial, Inc.’s motion for summary
judgment, and granted Plaintiffs’ motion for class certification.
On November 5, 2012, the parties opted for, and the court approved, mediation
which is now scheduled for January 31, 2013.
24. In Re: Checking Account Overdraft Litigation, Case No. 09-MD-
02036 (S.D. Fla.), Cases No. 10-12957, 10-12373, 10-15040 (11th
Cir.).
Issues and Potential Significance: This is a large multi-district case that
challenges the common practice of processing withdrawals from a customer’s
account via a debit card in “largest to smallest” order. The case consolidates over
thirty different cases, with more being added on a regular basis.
The significance of this case stems from its sheer size (in terms of number of
defendants and the institutions that are involved) and its potential to generate a
huge liability for the industry if the plaintiffs are successful. While the industry
has been successful in defeating this type of claim, in district court has denied a
well-crafted motion to dismiss. In short, this is clearly a case that bears watching.
This case also tees up the availability of mandatory arbitration as the sole method
of resolving issues relating to overdraft. The trial court issued a number of
rulings with seemingly conflicting outcomes. That issue is now before the
Eleventh Circuit.
In February of 2011, plaintiffs and Bank of America announced that they had
reached a tentative settlement of all claims. Bank of America agreed to pay $410
million exchange for a full and complete release. This settlement is subject to the
parties crafting a final agreement, and is subject to court approval.
39
Proceedings/Rulings: The initial complaints in this case were filed in late 2009.
Plaintiffs are current or former checking account/debit card customers. The
Defendants are several federally chartered banks. The core allegation is that these
institutions are charging excessive overdraft fees on debit card accounts because
the Defendants process daily charges to the account using a “largest to smallest”
sorting. It is claimed that this method allows the Defendants to unfairly maximize
the amount of overdraft fees that they may charge. The suits rely upon a number
of legal theories, including breach of contract, breach of a covenant of good faith
and fair dealing, unconscionability, conversion, unjust enrichment, and violation
of the consumer protection statutes of the various states where the plaintiffs are
located.
In December of 2009, several of the Bank defendants moved to dismiss the case.
This omnibus motion argued that: (1) the doctrine of federal preemption under
the National Bank Act barred state regulation of the activities of the national bank
defendants; (2) the customer contracts with the banks explicitly authorized
Defendants to post debits from "high to low"; (3) the common law doctrine of
unconscionability may be used only as a defense, not as an affirmative cause of
action; (4) that conversion will not lie since the depositor does not have title to the
money deposited; (5) that an adequate remedy at law exists for the claimed injury,
negating the application of the equitable doctrine of unjust enrichment; and (6)
that state consumer protection laws are inapplicable.
On March 11, 2010, the Court denied the Plaintiffs’ “omnibus” motion to dismiss.
In a wide-ranging order the court declined to preempt state contract or tort actions
in this instance because they only “incidentally” affect the banks’ exercise of their
federally granted deposit-taking powers under the National Bank Act and OCC
regulation. The court also concluded that the contractual language of the
depositor agreements did not bar a claim for a breach of the covenant of good
faith and fair dealing because the plaintiffs do not seek to vary the language of the
contract, but “rather to have the express contractual terms carried out in good
faith.” The court also agreed that while “Defendants appear to be correct in their
assertion that, ordinarily, unconscionability is properly asserted as a defense to a
contract rather than an affirmative cause of action,” the court concluded that “this
is not the ordinary case.”
On April 20, 2010, a number of defendants petitioned the Court under Section 4
of the Federal Arbitration Act (“FAA”) seeking to compel Plaintiffs to arbitration
in accordance with the parties agreements which contained mandatory arbitration
provisions. Plaintiffs in response argued that the agreements contained
deficiencies that rendered the agreements unenforceable.
The Court’s handling of the arbitration issue has been inconsistent. Taking up
Plaintiffs’ arguments that the arbitration agreements were unconscionable under
applicable state law, the court found that the arbitration provisions were
40
unenforceable because they had the “practical effect of precluding consumers
from bringing an action against a bank.” This issue is now on appeal to the
Eleventh Circuit.
Not all efforts to enforce agreements to arbitrate were unsuccessful. On May 25,
2010, granted Huntington National Bank’s motion to compel arbitration, Gulley v.
Huntington Bancshares Incorporated, et al. S.D. Fla. Case No. 10-cv-23514. The
court concluded that the arbitration provision in question was not unconscionable
under Ohio law. Thus, it was a surprise to many when, on June 16, 2010, the
Court denied Cleveland Ohio-based Keybank’s motion to compel arbitration. The
district court declined to apply Ohio law, ruling instead that its choice of law
analysis led the court to conclude that the state of Washington had a greater
interest in the transactions at issue. Applying Washington law, the district court
concluded that the arbitration clause was substantively unconscionable.
On August 23, 2010, the court also denied a motion to compel arbitration in the
Dasher v. RBC Bank (USA). The court ruled that the arbitration provision was
unconscionable and therefore invalid and unenforceable. This decision was
appealed to the Eleventh Circuit. On October 14, 2010, the district court stayed
proceedings in Dasher pending the outcome of the appeal. On June 17, 2011, the
joint motion to vacate and remand the Dasher litigation to the district court was
granted.
On October 26, 2010, the Court denied motions to compel arbitration in two other
cases: Speers v. U.S. Bank. (Case No. 09-cv-23126), and Waters v. U.S. Bank,
N.A. (Case No. 09-cv-23034). The Court ruled that Defendant waived its
opportunity to file the motion to compel arbitration when the bank failed to file its
motion by the court ordered deadline. The bank filed a notice of appeal to the
Eleventh Circuit the next day. The Eleventh Circuit has stayed the district court
action with respect to Speers and Waters pending an expedited appeal. On March
25, 2013, the court lifted the stay in Speers.
On November 3, 2010, the Court set out a scheduling order for the “First
Tranche” of cases, targeting a trial date in March of 2012.
On December 2, 2010, the Court issued a scheduling order for the “Third
Tranche” of cases. A trial date has been scheduled for November 19, 2012.
On February 4, 2011, plaintiffs and Bank of America announced that they had
reached a tentative settlement of all claims against the bank. Bank of America
has agreed to pay $410 million exchange for a full and complete release. This
settlement is subject to the parties crafting a final agreement, and is subject to
court approval.
On March 21, 2011, the Court denied motions to dismiss in 6 cases, Shane Swift
v. BancorpSouth, Inc., (10-cv-23872), Casayuran et al. v. PNC Bank, N.A., (10-
41
cv-21869), Cowen et al. v. PNC Bank, N.A., (10-cv-21869), Hernandez et al. v.
PNC Bank, N.A., (10-cv-21868), Matos v. National City Bank (10-cv-21771), and
Harris v. Associated Bank, N.A., (10-cv-22948). These rulings were based on the
court’s earlier Omnibus Order.
On April 13, 2011, the Court issued a scheduling order for the “Fourth Tranche”
of cases. It is based on a January 2013 trial date.
The Supreme Court’s recent decision in Concepcion (see above) – holding that
class action waivers do not render an arbitration agreement “unconscionable” –
has sparked an interesting spate of motions in the case. JP Morgan Chase has
filed motions based on Concepcion seeking to enforce the arbitration clauses in
the customer agreements in several (but not all) of the cases that have been filed
against the bank. This, in turn, has sparked a discovery dispute with Plaintiffs
over the appropriateness of deposing the class representatives, and whether doing
so constitutes an abandonment of Chase’s right to arbitrate.
On May 17, 2011, Defendant JPMorgan filed a motion requesting that the Court
revisit its prior ruling regarding the preemptive effect of the National Bank Act in
light of the Eleventh Circuit’s recent decision in Baptista v. JPMorgan Chase
Bank, N.A., — F.3d —, 2011 WL 1772657 (11th Cir. May 11, 2011). The Court
held oral argument on this issue on July 12, 2011. The next day, the Court issued
an order finding that Baptista does not demand reversal of this Court's Omnibus
Order. Referring to the preemption provisions of the Dodd Frank Act and that
statute’s adoption of the preemption analysis espoused by the United States
Supreme Court in Barnett Bank, the Court read Baptista “as holding that a state
statute is preempted by the [National Bank Act] where it is directed at limiting a
right expressly granted to federally chartered banks by the NBA.” The court
found that the claims brought by the plaintiffs are -
[D]istinguishable from Baptista because it is not predicated upon a
bank's authority to charge fees. As this Court previously noted in its
Omnibus Order, In re Checking Account Overdraft Litig., 694 F. Supp.
2d at 1310-1311, none of the MDL Plaintiffs have claimed that banks are
unable to charge fees to their customers. Indeed such a claim would fail
in light of the OCC's interpretation of the NBA, which permits banks to
"charge fees and to allow banks latitude to decide how to charge them."
See also 12 C.F.R. § 7.4002(b)(2). Instead, Plaintiffs only seek recovery
for the manner in which banks manipulated their debit and checking
charges, rather than the manner in which those fees were computed. Cf
In re Checking Account Overdraft Litig., 694 F.Supp. 2d at 1313-14.
The Court also noted that it has previously identified this same distinction in its Omnibus
Order, but that it “bears further discussion:”
A desire to limit a bank's authority to charge a fee is not synonymous
with a desire to hold a bank liable for the bad-faith manner in which an
account is reorganized to justify a larger number of overdraft charges.
42
Baptista holds that the former cannot be permitted in light of the
NBA's preemptive reach. But neither this Court nor the Eleventh
Circuit can prevent a lawsuit by an individual under the latter, since
the NBA has not foreclosed such claims. Instead, very much to the
contrary, 12 C.F.R. § 7.4007(c) states as follows:
State laws are not preempted. State laws on the
following subjects are not inconsistent with the
deposit-taking powers of national banks and apply to
national banks to the extent that they only incidentally
affect the exercise of national banks' deposit-taking
powers: (1) Contracts; (2) Torts; [and] (3) Criminal
Law...
Id. (emphasis added). Inherently, therefore, the NBA rests upon a
foundation of state contract law that it does not - it cannot - preempt.
The Court concluded that the claims raised by Plaintiffs (and the state laws upon
which they are founded) only "incidentally affect the exercise of national banks'
deposit-taking powers" and the other powers granted to them by the NBA. Instead,
the Court construed plaintiffs’ claims as only seeking to “ensure that the banks'
actions are not taken in bad faith and in breach of the banks' duty to act in good faith
towards their depositors” and that “the oft-presumed duty of good faith and fair
dealing is certainly subordinate to a bank's ability to "charge fees and to allow banks
latitude to decide how to charge them.”
On July 25, 2011, the court granted plaintiff’s motion to certify the first tranche of
cases as a class action. The court certified as a class:
All Union Bank customers in the United States who had one or
more consumer accounts and who, from applicable statutes of
limitation through August 13,2010 (the "Class Period"), incurred
an overdraft fee as a result of Union Bank's practice of sequencing
debit card transactions from highest to lowest.
It also approved the creation of four subclasses consisting of (1) two state-good
faith and fair dealing subclass (encompassing California and
Oregon), (2) a California unjust enrichment subclass, (3) three state
unconscionability subclasses (encompassing California, Oregon and Washington),
and (4) a California unfair competition subclass.
On September 1, 2011, the court took up (on remand from the United States Court
of Appeals for the Eleventh Circuit) the issue of whether it properly denied
motions submitted by five defendants seeking to compel arbitration. The
Eleventh Circuit specifically directed the Court to consider whether the Supreme
Court’s decision in Concepcion affected the analysis. In its order, the Court
concluded that while Concepcion represented a major sea-change in the
43
jurisprudence regarding the ability to enforce arbitration provisions that contain
class-action waivers, any determination as to whether a particular clause was
unconscionable had to be undertaken on a case-by-case basis. The Court then
determined that each of the arbitration clauses in question were unenforceable.
This order has been appealed to the Eleventh Circuit.
On November 22, 2011, the court issued its final approval of the settlement of
claims against Bank of America. The order contains an interesting assessment of
the merits of the claims and defenses, including preemption.
On December 29, 2011, the court issued a final order of dismissal in the case
against City National Bank of West Virginia and City Holding Company.
On January 23, 2012, the court accepted U.S. National Association’s motion to
compel arbitration and stayed briefing and other proceedings temporarily for
ninety days. Should mediation not be successful, the parties’ proceedings will re-
commence on or before April 23, 2012.
On February 6, 2012, the Court docketed an order suspending a revised
scheduling order pending the filing of an anticipated settlement agreement
between JPMorgan and Plaintiffs. The anticipated settlement is for an amount of
$110 million and comes on the heels of Bank of America’s $410 million
settlement last year.
In a separate but related case in the multi-district litigation, the Court denied
Wells Fargo’s Motion for Stay Pending Appeal which was filed with the Court on
December 16, 2011. The motion for stay was in response to the Court’s order
denying Wells Fargo’s Motion to Dismiss for Lack of Jurisdiction. Ruling on the
Motion to Stay, the Court stated that the appeal was “frivolous” since it was filed
after the Court issued a denial of an untimely filed motion to compel arbitration.
On March 1, 2012, IBERIABANK filed a motion seeking final approval of a $2.5
million settlement with the Plaintiffs. The agreement requires IBERIABANK to
begin posting debit card transactions to IBERIABANK accounts in the order in
which they are authorized or settled by the bank. IBERIABANK began correcting
this process in November of 2011. If approved, the Plaintiffs will receive a pro
rata share of the settlement. On April 16, 2012, the Court approved the settlement.
A final proposed order approving settlement is currently being drafted.
On April 26, 2012, the Court approved the proposed IBERIABANK settlement;
Plaintiffs will receive $2.5 million and other injunctive relief.
On April 20, 2012, Bank of Oklahoma and Citizens Financial (a unit of Royal
Bank of Scotland) began settlement discussions. Citizens Financial has offered
Plaintiffs $137.5 million to resolve the dispute.
44
On May 4, 2012, the Court certified a class action in Shane Swift v. BancorpSouth
Bank (10-cv-23872). The lawsuit alleges that BancorpSouth Bank engaged in a
systematic scheme to extract the greatest possible number of overdraft fees from
Plaintiff by manipulating and re-ordering debit card transactions. Plaintiff alleges
that BancorpSouth did not properly disclose or explain its overdraft rules to
customers.
On May 24, 2012, the parties in Lopez v. JPMorgan Chase Bank, N.A. agreed to a
settlement. Under the terms of the agreement JPMorgan will pay a total of $110
million to the plaintiffs, including attorneys’ fees.
On August 1, 2012, the Court granted Citibank’s motion to dismiss the fourth
amended complaint of Plaintiff Mike Amrhein for lack of subject matter
jurisdiction after the plaintiff filed for Chapter 7 bankruptcy and failed to list his
claims against Citibank as an exempt asset from his bankruptcy claim.
The Court also denied Defendant, Susquehanna Bank’s motion to dismiss on
August 1, 2012.
On August 16, 2012, the court granted class certification in Simmons et al. v.
Comerica Bank (10-cv-326-0) and approved a class settlement in Wolfgeher v.
Commerce Bank, N.A. (10-cv-22017). Plaintiffs in Simmons v. Comerica allege
that Comerica employed software programs specifically designed as part of a
systemic scheme, to extract the greatest possible number of overdraft fees from its
customers. In Wolfgeher v. Commerce Bank, N.A., Commerce Bank agreed to pay
the settlement class $18,300,000 including attorney’s fees and costs.
On August 27, 2012, the Eleventh Circuit reversed the district court, and ruled the
arbitration clause in Barras v. Branch Banking and Trust Company is enforceable.
The defendants challenged whether the district court had properly denied motions
submitted by the defendants seeking to compel arbitration. The Eleventh Circuit
remanded the case to the district court to determine if Concepcion affected the
analysis. The district court concluded that Concepcion significantly changed the
ability to enforce arbitration provisions that contain class-action waivers, but any
determination as to whether a particular clause was unconscionable had to be
undertaken on a case-by-case basis. The Court then determined that each of the
arbitration clauses in question were unenforceable. The order was appealed to the
Eleventh Circuit.
The Eleventh Circuit remanded the case to the district court with instructions to
compel arbitration.
On October 4, 2012, the court issued orders of final approval of settlement in
Larsen v. Union Bank and Eno v. M&I Marshall & Ilsley Bank. The parties in Eno
45
settled for $4,000,000 including attorney’s fees and costs. The parties in Larsen
settled for $35,000,000 or 63% of the likely value of their claims.
A number of cases settled in December, including the following: Buffington, et al.
v. SunTrust Banks, Inc., (09-cv-23632), Lopez v. JPMorgan Chase Bank, N.A.
(09-cv-23127), Luquetta v. JPMorgan Chase Bank, N.A. (09-cv-23432), Michelle
Keyes v. Fifth Third Bank (10-cv-60505), Melvin L. Thomas III and Billy D.
Lawson, Jr. v. BancorpSouth Bank and BancorpSouth, Inc. (12-cv-22180).
On March 12, 2013, the court granted a motion to compel arbitration in the
case Gordon v. Branch Banking & Trust Co., citing Hough v Regions
Financial Corp. et al., another case in this multidistrict litigation on appeal to
the Eleventh Circuit. The Hough appeal involved the application of Georgia
state law to questions of unconscionability in a bank customer agreement.
The Eleventh Circuit held provision of a contract similar to the contract in
Gordon, containing reimbursement provisions, “substantively and
procedurally” unconscionable under Georgia law.
The court also granted a motion to compel in Rider et al. v. Regions Financial
Corp. et al. on March 12, 2013.
On March 18, 2013, the court approved settlement in the amount of $62
million in three cases against TD Bank, N.A., Mosser v. TD Bank, N.A.,
Mazzadra et al. v. TD Bank, N.A., Hughes et al. v. TD Bank, N.A., effectively
dismissing the cases with prejudice.
25. In re: Bank of America Home Affordable Modification Program
(HAMP) Contract Litigation, 1:10-md-02193-RWZ (D. Mass.).
Issues and Potential Significance: This litigation arises out of the United States
Treasury’s highly-publicized Home Affordable Modification Program (HAMP).
Several suits have popped up in various jurisdictions.
The National Consumer Law Center has filed four separate actions – each
targeting a different lender/loan servicer doing business in Massachusetts
– alleging that the targeted defendants have failed to comply with their
obligation under the program to provide Plaintiffs (borrowers with home
mortgages that are in default) with a permanent loan modification.
A number of individual and class action suits brought against Bank of
America (In re: Bank of America Home Affordable Modification Program
(HAMP) Contract Litigation, MDL No. 2193). This litigation consists of
(1) eight putative class actions pending in seven districts (Western District
of Washington, the District of Arizona, Central District of California,
Northern District of California, the District of Massachusetts, the District
of New Jersey, and the Eastern District of Pennsylvania) and (2) six
46
individual actions pending in five districts (Southern District of West
Virginia, Eastern District of Louisiana, District of Massachusetts, the
Western District of Washington, and the Eastern District of Wisconsin).
The complaints allege that, as recipients of TARP funds and participants in the
HAMP program, the defendant banks are obligated to evaluate all loans that are
60 or more days delinquent for HAMP modifications. They also allege that if a
borrower contacts a “Participating Servicer” regarding a HAMP modification, the
Participating Servicer must collect income and hardship information to determine
if HAMP is appropriate for the borrower.
In general terms, borrowers seeking to obtain a HAMP modification must provide
the Servicer with updated financial information. If they comply and qualify for
the program, the homeowner may be offered a Trial Period Plan (“TPP”). The
TPP consists of a three-month period in which the homeowner makes mortgage
payments based on a formula that uses the updated financial information
provided. If the homeowner complies with all documentation requirements and
makes all three TPP monthly payments, the homeowner may be offered a
permanent modification of their loan.
The lawsuits allege that the banks and servicers are not offering HAMP relief to
all of the loans on their books that qualify for the program, and that they routinely
fail to offer permanent modifications to qualifying homeowners who apply under
the program.
Some of the cases – including a number of class actions involving Bank of
America– have been consolidated in a multidistrict proceeding that was originally
filed by the National Consumer Law Center, Johnson v. Bank of America Home
Loans, (D. Mass., Case No. 10-cv-10316-RWZ). The non-class action suits have
not been consolidated; the Multidistrict Panel noted that “[w]hile these actions
may share some questions of fact with the putative class actions, they will focus
to a large extent on individual issues of fact that are unique to each plaintiff’s
interactions with Bank of America. Indeed, several individual complaints do not
mention HAMP at all.”
Bottom line: the cases arising out of the industry’s implementation of the HAMP
program are likely to maintain a high profile. The consolidation of the class
action cases into a single proceeding should help move these proceedings along.
Proceedings/Rulings: The Multidistrict Panel identified a number of other
HAMP-related suits brought against Bank of America or BAC Home Loan
Servicing that are pending in other jurisdictions outside of Massachusetts. Cases
are being identified and transferred to the multi-district proceeding.
47
An amended consolidated complaint was filed on January 21, 2011. On February
22, 2011, Defendants BAC Home Loans Servicing, L.P. and Bank of America,
N.A. filed a motion to dismiss.
On April 5, 2011, a subset of the consolidated plaintiffs asked the court to issue a
preliminary injunction to block Bank of America from initiating foreclosure
proceedings.
On April 7, 2011, the court heard argument in connection with the defendants’
motion to dismiss, taking that motion under advisement.
On May 27, 2011, the Defendants filed a motion seeking to consolidate the BAC
Home Loans Servicing, L.P. and the Joseph v. Bank of America, N.A. cases with
the MDL case. Defendants’ request consolidation on basis that both actions are
based on the same facts and involve the same subject matter.
On July 6, 2011, the court partially granted the motion to dismiss. The decision
generally splits along the lines of the two proposed classes: a class of
homeowners whose mortgage loans have been serviced by one or both
defendants, but who were never offered a TPP, and a set of 15 statewide classes
of homeowners who entered into the TPP but were not given a permanent HAMP
modification.
With respect to homeowners who were not offered a TPP, the court dismissed
plaintiffs’ theories that Bank of America had breached the terms of the Servicer
Participation Agreement between the U.S. Department of the Treasury and the
bank, and associated arguments based on (1) a breach of the duty of good faith
and (2) promissory estoppels. The court found that these plaintiffs lacked
standing to sue based on an alleged breach of the agreement between the bank and
the Treasury Department for the fundamental reason that they were neither parties
to that agreement nor were they third party beneficiaries.
With respect to the second class of plaintiffs – those who entered into a TPP but
were not granted a permanent HAMP modification – the court denied the motion
to dismiss on the grounds that the complaint had plead adequate facts to survive
dismissal. The court, however, denied plaintiffs’ request for a preliminary
injunction to halt foreclosures. The plaintiffs were already beneficiaries of a
“voluntary foreclosure hold.” Second, the court found that entering an injunction
before class certification and a determination of the scope of such class or classes
would be both improper and unmanageable.
On November 4, 2011, the consolidated plaintiffs filed a Third Amended
Complaint. On December 12, 2011, BAC Home Loans filed a response to the
Third Amended Complaint.
48
On January 26, 2012, Plaintiffs of the unconsolidated non-class action filed a
second amended complaint.
A number of plaintiffs have since filed stipulations of dismissal. The first
stipulation of dismissal was filed on December 10, 2012, followed by a second on
January 24, 2013.
26. First Premier Bank and Premier Bankcard, LLC V. Board of
Governors of the Federal Reserve, U.S. District Court for the District of South
Dakota (Case No. 11-4103).
Issues and Potential Significance: This case challenges the amendments to
Regulation Z that went into effect in October 2011. The plaintiffs, Premier Bank and
Premier Bankcard, operate a credit card program aimed at consumers who would not
otherwise qualify for a traditional credit card product. The bank charges applicants a
fee prior to account opening.
The suit takes issue with amendments to 12 C.F.R. §226.52 that regulates credit card
fees paid prior to account opening. Premier Bank argues that this regulation exceeds
the statutory authority of the Federal Reserve and the Consumer Financial Protection
Bureau because the rulemaking authority granted under the Credit Card
Accountability and Responsibility and Disclosure Act of 2009 extends only to fees
paid in the first year during which the account is opened. 15 U.S.C. §1637(n). First
Premier argues that, if the revised regulation is enforced, the bank would be
unable to charge the fee and, as a result, forced to close its credit card program.
Proceedings/Ruling: First Premier Bank filed a complaint on July 20, 2011,
seeking a preliminary injunction to stay the pending October 2011 effective date
of the revised regulation. The Court heard argument on the motion for an
injunction on September 1, 2011.
On September 23, 2011, the Court granted First Premier’s motion for a
preliminary injunction. In its opinion, the court found that the bank had
demonstrated a likelihood of success on the merits and had otherwise met the
other requirements for the issuance of an injunction.
Regarding the merits of its case, the court concluded that the plain language of
section 1637(n) “indicates that this statute is only meant to prevent creditors from
charging fees to the credit balance itself, which would deceptively reduce the
available credit the consumer has available to him or her when first opening the
account.” Because of this, the court ruled that “[n]othing in the plain language of
this statute implies that it is meant to prohibit creditors from charging pre-account
fees or any other fees as long as they are not charged to the account.” The court
rejected the Federal Reserve’s/CFPB’s arguments that “broad purposes” of the
legislation necessitates a rule that precludes fees paid prior to opening the account
because the “statute is clear and unambiguous” and that “plain language of the
statute itself, the legislative history surrounding its enactment, and the Board’s
49
initial interpretation of the statute’s intent” lead to the conclusion that the statute
only gives the Board the authority to promulgate regulations that operate within
the boundaries of Congress’s clearly expressed delegation.
This case has been pending further proceedings since May 2012.
27. JNT Properties v. KeyBank, Case No. 2011-1392 (Ohio Supreme
Court).
This case presents a discretionary appeal to the Ohio Supreme Court seeking the
review of a decision involving the “365/360” method of computing interest on
commercial loans.
KeyBank was sued in the Cuyahoga County Court of Common Pleas for breach
of contract. Plaintiff, a commercial borrower, alleged that the rate being charged
by KeyBank exceeded the rate that is stated in the loan documents. The
documents, which are a “standard” form used by many banks in Ohio, state that
(1) interest is charged at “8.95 percent per annum,” and (2) that the interest is to
be calculated using the “365/360” method. The trial court, however, found the
actual language used in the loan documentation to be “unintelligible” and
reformed the agreement to comport with KeyBank’s interpretation of the contract.
The Ohio Appellate Court reversed, ruling that there are open issues of fact
regarding the intention of the parties which preclude the lower court from
reforming the contract at this stage of the case.
This case is now before the Ohio Supreme Court.
The Court accepted the case for appeal on November 30, 2011.
On January 23, 2012, the American Bankers Association and the Ohio Bankers
League filed a joint amicus brief in support of KeyBank.
Oral arguments were heard on May 22, 2012.
On June 25, 2012, JNT Properties filed a motion with the trial court to voluntary
dismiss its case against KeyBank. KeyBank objected alleging that JNT Properties
was trying to improperly dismiss their complaint with the trial court to prevent the
Ohio Supreme Court from ruling on the case.
On July 13, 2012, the Ohio Supreme Court denied Plaintiffs’ motion to dismiss its
complaint.
On November 21, 2012, the Ohio Supreme Court issued a slip opinion finding
that the promissory note’s interest computation clause that permits the use of the
365/360 method is not ambiguous. The court conceded the clause could have
50
been more clearly drafted, but still found there was no doubt that the purpose of
the clause was to “define the method to be used to calculate interest payments.”
Meanwhile, two similar cases are still pending in Ohio’s Cuyahoga County Court.
Ely Enterprises, Inc. v. FirstMerit Bank, N.A., (Case No. 08-cv-667641) and DK
& D Properties, LTD v. National City Bank, Case No. 08-cv-680078).
As was expected, Plaintiffs filed a voluntary notice of dismissal without prejudice
on November 28, 2012, in DK&D Properties v. National City Bank.
FEDERAL PREEMPTION
28. Kilgore, et al., v. KeyBank National Association, (Ninth Circuit,
No. 09-16703).
Issues and Potential Significance: At issue in this case is an attempt by
Plaintiffs to use a state consumer protection statute – the ubiquitous California
Unfair Competition Law, § 17200 – to manufacture an obligation to insert certain
contractual terms into a loan document based on a federal regulation that is
facially inapplicable.
In a very favorable ruling, the United States District Court for the Northern
District of California held that the National Bank Act preempts any state law –
even state laws of “general application” that do not directly attempt to regulate the
operations of National Banks – if they are deployed in a manner that more than
incidentally affects a national bank's ability to exercise its federally granted
lending powers under the National Bank Act.
Given the significance of the principle at stake, the ABA (along with the Clearing
House Association and the Consumer Bankers Association) filed an amici brief
supporting affirmance of the district court’s opinion.
Proceedings/Rulings: At issue in this case were student loans made by KeyBank
to students enrolled at a private helicopter flight academy located in California.
The students paid the academy approximately $60,000 in tuition for flight
training. Unfortunately for the students, the academy shut down and declared
bankruptcy before the students completed their training. The students filed suit to
enjoin KeyBank from collecting on the loans or reporting the outstanding loan
balances to credit reporting agencies.
The students brought six causes of action under California’s Unfair Competition
Law, Cal. Bus. & Prof. Code § 17200. The claims were premised on the
argument that KeyBank was required by Federal Trade Commission regulations
to insert a “holder” clause in the loan agreements. A “holder” clause, which is
required for purchase money loan agreements, preserves a borrower’s ability to
51
raise claims and defenses against the lender that arise from the seller’s
misconduct. This clause, the plaintiffs argue, would have preserved their ability
to contest their obligation to repay the student loans with KeyBank on the grounds
that the flight school had failed to provide them with the contracted-for training.
The court, the United States District Court for the Northern District of California,
dismissed the case. In a very favorable opinion, the Court found that (1) the
Federal Trade Commission’s regulations do not apply to this transaction, and (2)
the use of the California UCL to impose a particular term or condition in a loan
transaction involving a national bank is preempted by the National Bank Act. The
Court concluded that OCC regulations and Ninth Circuit precedent wholly
supports the conclusion that the relief sought by Plaintiffs’ “would deploy state
law to alter those terms of credit and bar KeyBank from collecting on Plaintiffs’
debts” and that their claims were properly dismissed “in light of its clear
interference with powers conferred on KeyBank by federal law.”
Plaintiffs appealed the case to the Ninth Circuit. On November 1, 2010, the
American Bankers Association filed an amicus brief supporting KeyBank.
On March 7, 2012, the Court issued an opinion which sought to answer whether
the recent decision in AT&T Mobility, Inc. v. Conception, U.S. , 131 S. Ct.
1740 (2011), and the Federal Arbitration Act, preempts the California law
prohibiting the arbitration of claims for broad, public injunctive relief, and
whether such arbitration clauses are unconscionable.
The Count found in favor of Keybank on the motion to compel arbitration, ruling
that the arbitration clause was not unconscionable and that federal law does
indeed supersede California’s Broughton Cruz law. Shortly after the ruling in
Conception, the Northern District of California determined that the California
state law prohibiting the arbitration of claims for broad, public injunctive relief
did not survive the Supreme Court ruling in Conception. Other cases pending in
the Northern California Court, and having similar questions of law, have since
been determined to not survive Conception either. The Supremacy Clause states
that federal law – in this case, the Federal Arbitration Act – “is the supreme law
of the land.”
The court reversed the district court’s ruling, vacated the judgment, and remanded
the case back to the district court with instructions to compel arbitration.
On March 21, 2012, Appellee filed a petition for rehearing and a petition for
rehearing en banc.
On September 21, 2012, the court, by a majority vote, ordered that the case be
reheard en banc. In the meantime, the opinion of the court will not be cited as
precedent by or to any court of the Ninth Circuit.
52
On December 11, 2012, the court heard oral arguments for rehearing en banc.
MORTGAGE/SUBPRIME LENDING
29. Policemen’s Annuity and Benefit Fund of the City of Chicago v.
Bank of America, NA, et al., (Case No. 12-cv-2865; United States District Court
for the Southern District of New York)
A federal district court in New York will decide whether the Trust Indenture Act
(“TIA”) applies to pass-through mortgage-backed securities certificates.
Issues and Potential Significance: On April 11, 2012, the Policemen’s Annuity
and Benefit Fund of the City of Chicago brought a putative class action against
Bank of America, N.A and U.S. Bank National Association in their capacities as
trustees of residential mortgage-backed securities alleging that both banks
breached their contractual duties under the trust’s Pooling and Servicing
Agreements (“PSA”) and violated the Trustee Indenture Act of 1939 when the
banks failed to take certain actions required by the PSAs. Under the TIA, a trustee
is obligated to “give to the indenture security holders…notice of all defaults
known to the trustee, within ninety days after the occurrence thereof… .” And by
failing to take those actions, plaintiffs claim that defendants caused a decline in
the value of plaintiffs’ mortgage-backed securities.
Proceedings/Rulings: On December 7, 2012, the district court held that plaintiffs
have standing to pursue claims: (a) relating to the five Trusts in which it
purchased certificates; and (b) on behalf of purchasers of certificates (i) whose
certificates are backed by the loan group that back plaintiffs certificates, or (ii)
whose certificates are cross-collateralized by loan groups that back plaintiffs
certificates.
Plaintiffs filed a second amended class action complaint on January 15, 2013.
* 30. Retirement Board of the Policemen’s Annuity and Benefit Fund of
the City of Chicago v. The Bank of New York Mellon, (Case No. 13-664;
United States Court of Appeals for the Second Circuit, Case No. 11-cv-5459;
United States District Court for the Southern District of New York).
This is a case with similar facts to the case above (Policemen’s Annuity and
Benefit Fund of the City of Chicago v. Bank of America, NA, et al.) brought by
the same plaintiff against The Bank of New York Mellon in the Southern
District of New York challenging whether the Trust Indenture Act (“TIA”)
applies to pass-through mortgage-backed securities certificates.
Issues and Potential Significance: On August 5, 2011, the Retirement Board
of the Policemen’s Annuity and Benefit Fund of the City of Chicago
53
(“Retirement Board”) brought legal action against The Bank of New York
Mellon (“BNYM”) in its capacity as trustee of residential mortgage-backed
securities. According to the Retirement Board, BNYM breached its
obligations under the trust’s Pooling and Servicing Agreements (“PSA”) and
violated the Trustee Indenture Act of 1939 when it failed to take certain
actions required by the PSAs to protect its investors.
Proceedings/Rulings: On April 3, 2012, the district court partially dismissed
the complaint for the Retirement Board’s lack of standing to pursue claims
regarding trusts in which they had never invested. BNYM filed a motion to
reconsider the court’s refusal to dismiss the complaint in its entirety, and on
February 14, 2013, the district court denied the motion but certified the April
3, 2012 order for interlocutory appeal.
On March 4, 2013, the American Bankers Association and the New York
Bankers Association filed an amicus brief in support of the permission to file
interlocutory appeal, expressing concern over the potential effects of
regulating Residential Mortgage-Backed Securities (“RMBS”) under TIA
regulations which are designed for the oversight of debt instruments. Doing
so, the brief argues, could cause confusion and create disruptions for market
participants that could prove costly in the long run.
A copy of the ABA brief is attached.
31. Township of Mount Holly, New Jersey v. Mount Holly Gardens
Citizens in Action, Inc., Case No. 11-1507 (United States Supreme Court).
Disparate impact claims alleged under Fair Housing Act (“FHA”) are before the
Supreme Court once again. The plaintiffs petitioned for a writ of certiorari before
the Supreme Court and, if accepted, the decision could transform enforcement
standards under the FHA.
Issues and Potential Significance: The case would require the Supreme Court to
decide whether a disparate impact claim may be alleged under the Fair Housing
Act. The Plaintiffs’ claim that plans to redevelop their community will have a
disproportionally negative effect on its minority residents.
Proceedings/Rulings: The case was initially dismissed on a summary judgment
motion in district court and made its way to the Third Circuit where the dismissal
was reversed. The Third Circuit found that the district court misapplied the
standard for deciding whether the residents could establish a prima facie case
under Title VIII and did not draw all reasonable inferences in favor of the
residents of Mount Holly.
The homes in Mount Holly are comprised mostly of African-American and
Hispanic residents who are described as poor – almost all of its residents earn less
54
than 80% of the area’s median income – and crime ridden. About 28% of the
crimes in the area occur in the Gardens.
In 2003, the township implemented the Gardens Area Redevelopment Plan which
called for the demolition of all homes in the neighborhood and the
permanent/temporary relocation of its residents. The redevelopment plan
suggested the construction of new housing units. Garden residents objected to the
proposals and to the process of relocation. Despite their objections, the
development proceeded and a developer began to redevelop the neighborhood.
Residents were offered $15,000 and a $20,000 no-interest loan to assist with the
purchase of replacement homes. The township offered purchasing prices of
between $32,000 and $49,000 to buy the homes in the Gardens. The new homes
being built ran between $200,000 and $275,000.
In October 2003, Citizens in Action filed a suit in state court alleging that the
Mount Holly Township had violated New Jersey’s redevelopment laws and
various anti-discrimination laws.
The New Jersey Superior Court dismissed the case on a motion for summary
judgment in favor of the township on the basis that the area was destroyed and
anti-discrimination claims were premature because the redevelopment project had
not yet began. The Appellate Court affirmed the lower court decision, and the
case was ultimately dismissed by the New Jersey Supreme Court.
In May 2008, Plaintiffs filed suit in federal district court alleging violations of the
Fair Housing Act, Title VIII of the Civil Rights Act, and Equal Protection Clause
of the Fourteenth Amendment. The district court ruled that there was no prima
facie case of discrimination under the Fair Housing Act and that Plaintiffs has
failed to show an alternative solution would have had a lesser impact.
The Third Circuit granted a motion to stay the redevelopment pending an appeal
and later found that the district court misapplied the standard for deciding whether
the residents could establish a prima facie case under Title VIII and did not draw
all reasonable inferences in favor of the residents of Mount Holly.
On June 11, 2012, the township filed a petition for a writ of certiorari at the US
Supreme Court. Responses to the petition were filed on July 13, 2012.
On October 29, 2012, the Court invited the solicitor general to file a brief
expressing the views of the United States. Briefing is still ongoing.
32. The People of the State of New York v. JPMorgan Chase Bank,
(Supreme Court of the State of New York, Kings County, Index number
002768/2012).
55
Issues and Potential Significance: This case arises out of several states claims
against banks for their creation and use of Mortgage Electronic Registration
Systems, Inc. (“MERS”) and what the states are calling fraudulent foreclosure
practices. The suit names JPMorgan Chase Bank, Chase Home Finance, LLC,
EMC Mortgage Corporation, Bank of America, N. A., BAC Home Loans
Servicing, LP, Wells Fargo Bank, N.A., Wells Fargo Home Mortgage, Inc.,
MERSCORP, Mortgage Electronic Registration Systems, Inc. and was filed only
days before forty-nine states and the federal government reached a historic
settlement agreement against the country’s five major loan service banks –
Ally/GMAC, Bank of America, Citi, JPMorgan Chase, and Wells Fargo.
Proceedings/Rulings: The complaint which was filed on February 3, 2012,
alleges that the creation and use of MERS resulted in a number of fraudulent
practices and illegal acts, including the filing of over 13,000 foreclosure actions
against New York homeowners – many of which were “faulty and deceptive.”
New York State joined the recent settlement with Ally, Bank of America and
others, so it will be interesting to see if this suit goes away or stays. According to
the terms of the settlement, details of which are sparsely publicly available, banks
are still accountable for other claims not covered by the settlement. Claims
against MERS or MERSCORP are not part of the settlement.
On June 25, 2012, JPMorgan Chase filed a motion to dismiss. The case is still
pending.
A hearing for the motion to dismiss was heard on February 28, 2013.
33. Hudson Valley Federal Credit Union v. New York State
Department of Taxation and Finance, (Case No. 25032/99, New York Supreme
Court, Appellate Division).
Issues and Potential Significance: Are mortgages made to federal credit unions
to secure loans made to its members exempt from the mortgage recording tax?
New York Supreme Court’s Appellate Division says “no.” The case is currently
before New York’s highest court, the Court of Appeals.
Proceedings/Rulings: In a decision issued on June 2, 2011, the Appellate Court
held that since the mortgage tax is a tax on the privilege of recording a mortgage
and not a tax on property, the exemption from taxation for the property of a
federal credit union does not apply.
On May 12, 2009 Hudson Valley Federal Credit Union filed a complaint against
the New York State Department of Taxation and Finance challenging the
imposition of a New York state mortgage recording tax on mortgages given to
secure loans made by federal credit unions to their members. The challenge was
on the grounds that federal credit unions are exempt from such taxation under the
56
Federal Credit Union Act of 1934 and the Supremacy Clause of the United States
Constitution.
On July 21, 2011, the Supreme Court, New York County dismissed the complaint,
rejecting Hudson Valley’s contention that the Federal Credit Union Act should be
interpreted in such a way that it exempts federal credit unions’ mortgage loans,
and the right to record them, from the mortgage recording tax simply because “the
imposition of the tax undermines the statute’s main policy of making low-cost
credit available to average Americans by increasing the cost of mortgage loans.”
A number of parties have filed amicus curiae briefs in the case which is now
before the New York Court of Appeals.
The ABA and the New York Bankers Association filed a joint amicus brief in
support of the New York State Department of Taxation and Finance on May 17,
2012.
On July 9, 2012, Hudson Valley Federal Credit Union filed a reply brief in
response to the joint amicus filed by the ABA and the New York Bankers
Association.
Oral argument was heard on September 4, 2012. See a copy of the Oral Argument
Transcript.
On October 18, 2012, the Court of Appeals for the State of New York held that
federal credit unions must pay the New York’s mortgage recording tax. The court
reasoned that if federal credit unions were exempt from the tax it would have been
expressly stated in the Federal Credit Union Act (FCUA) The court observed,
“the FCUA contains an extensive list of exemptions relevant to federal credit
unions, it makes no mention of mortgages or loans of any kind … This omission
weighs against Hudson Valley’s argument.”
34. Federal Housing Finance Agency v. Chicago, (Case No. 11-cv-
08795 (U.S. Dist. Ct. N.D. Illinois).
Issues and Potential Significance: On September 6, 2008, the Director of the
Federal Housing Finance Agency (“FHFA”), acting under the authority of the
Housing and Economic Recovery Act of 2008 (“HERA,” codified at 12 U.S.C.
4617 et seq.), placed Fannie Mae and Freddie Mac under conservatorship and
appointed FHFA as Conservator. The City of Chicago passed an ordinance on
July 28, 2011, that broadly defines “mortgagee’ to include holders of mortgages,
their successors in interest, and servicers and that requires mortgagees to maintain
and register vacant buildings, including those in foreclosure.
As Conservator for Fannie Mae and Freddie Mac, FHFA sued the City of Chicago
on December 12, 2011, seeking declaratory judgments and injunctions against the
ordinance. FHFA claims that its duties as Conservator are exempt from
57
supervision by the City or the State of Illinois and that the ordinance is preempted
as to Fannie Mae and Freddie Mac because it would subject them to supervision
by state entities in addition to supervision by FHFA. FHFA also claims that the
ordinance attempts to create an obstacle to accomplishment of “the full and
explicit purposes of Congress” in assigning supervision of Fannie Mae and
Freddie Mac to FHFA and thus is preempted. FHFA claims that the ordinance
impermissibly attempts to subject Fannie Mae and Freddie Mac to local taxes and
fees (other than property taxes) and to local penalties and fines despite a
conservator’s statutory immunity from those penalties and fines. The suit seeks
orders from the court declaring that FHFA, Fannie Mae and Freddie Mac are
statutorily immune from the ordinance as it applies to mortgagees or obligees,
enjoining its enforcement against them in their capacities as mortgagees or
obligees, and ordering refunds of fees and costs paid by FHFA, Fannie Mae and
Freddie Mac under the ordinance.
On January 17, 2012, the City of Chicago responded to the FHFA’s motion for
summary judgment, opposing what the City called the FHFA’s attempt to
suppress the City’s right to respond to the complaint and the FHFA’s “attempt to
confuse and cloud issues concerning the legal sufficiency of its complaint.”
On March 2, 2012, the City filed a motion to dismiss the complaint on the
grounds that Plaintiff lacked subject matter jurisdiction to attack the application of
a City ordinance approved by the city council. The motion argues that the only
party authorized to bring suit is the Director of the FHFA. And since there has
been no party appointed to fill this position, an Acting Director can only stand-in
for a Director.
35. Board of County Commissioners of the County of Cleveland v.
MERSCORP, Inc, (Case No. 11-1727; District Court of Cleveland County for
the State of Oklahoma).
This is a class action brought by Cleveland County on behalf of the Board of
County Commissioners alleging that Defendants breached Oklahoma law when
they failed to record each and every mortgage assignment in the proper county
recording offices and failed to pay the assigned fees associated with such
assignments.
Under Oklahoma law, the requirement for assigning mortgages requires that each
and every mortgage is recorded with the county clerk of the recording office in
each county. This process is associated with a fee that county clerks are
responsible for collecting. Defendants operate as mortgage securitization firms –
working together with other banking institutions by dealing in the transfer of
mortgages under a system called MERS. MERS has been in operation since 1997
and includes a number of registered members (mostly banks and mortgage
institutions) in a private computer system that allows its users to register and track
changes in ownership interests in mortgages.
58
Plaintiffs allege that the MERS system is a scheme because it allows its members
to find faster and cheaper ways of securitizing mortgages and fails to record their
mortgages with county offices. Defendants have repeatedly failed to record
mortgages in the county recording offices by recording the land instruments in the
names of private corporate entities that act as placeholders in county public
records. This, plaintiffs allege, has resulted in far-reaching devastating
consequences for the counties in Oklahoma and their public land records, as well
as damage to public records.
The class action is seeking the court to enter an injunction compelling Defendants
to record prior and future mortgage and mortgage assignments on all real property
located in Oklahoma counties. Plaintiffs are also seeking restitution from
Defendants of all profits, benefits and other compensation that Defendants might
have obtained through what Plaintiffs call wrongful and improper conduct and
unjust enrichment.
On May 17, 2012, Defendant GMAC Residential Funding Corporation filed for
Chapter 11 bankruptcy automatically staying the case. A notice of removal of
state court action was filed on May 18, 2012.
On August 10, 2012, the Court granted the plaintiff’s motion to remand the case
to the District Court of Cleveland County, State of Oklahoma after several other
defendants, including MERSCORP Holdings, Inc., opposed the remand. The
Board of County Commissioners of the County of Cleveland sought to remand the
case to the district court in response to defendants’ notice of removal of the state
court action filed on May 18, 2012.
On September 10, 2012, defendant SpiritBank filed a motion to dismiss the
complaint citing a lack of authority to bring the suit against SpiritBank.
SpiritBank argued that the Board of County Commissioners could not bring the
suit against the defendant because the statute under which the Commission filed
its suit is meant to protect mortgage assignees, and not the counties in which the
assigned properties are located. As such, only assignees can bring a claim for an
alleged failure to properly record a mortgage.
On November 19, 2012, Plaintiffs filed an amended class action petition.
MISCELLANEOUS
36. Mortgage Bankers Association v. The United States Department of
Labor, (United States Court of Appeals for the District of Columbia Circuit, Case
No. 12-5246)
59
Issues and Potential Significance: The Mortgage Bankers Association (“MBA”)
challenged the Department of Labor’s (“DOL”) reclassification of mortgage loan
officers as eligible for overtime pay under the Fair Labor Standards Act
(“FLSA”).
Proceedings/Rulings: The Mortgage Bankers Association, a national trade
association representing the real estate finance industry, alleges that the DOL
violated the Administrative Procedures Act (“APA”), by changing its prior
Administrative Interpretation without a notice and comment process.
In August 2004, the DOL amended its regulations interpreting the wage and hour
requirements as set forth in the FLSA, which made it clear that “many financial
services employees qualify as exempt administrative employees, even if they are
involved in some selling to customers.” In a 2006 opinion letter in response to an
enquiry by the MBA seeking clarification from the DOL on the exempt status of
its mortgage loan officers who “spent less than fifty percent of their working time
on customer-specific persuasive sales activity,” the DOL concluded that the
Association’s mortgage loan officers classified as exempt employees. On March
24, 2010, the DOL issued an Administrative Interpretation withdrawing the 2006
opinion letter. The Administrative Interpretation concluded that in order for
mortgage loan officers to properly classify as exempt employees, their primary
duties must be administrative in nature. The DOL did not utilize the APA’s
procedure of sending out a notice seeking comments from interested parties when
it issued the 2010 interpretation.
The final ruling/interpretation triggered a wave of putative class action suits
accusing mortgage lenders of improperly denying loan officers overtime pay.
On January 12, 2011, the MBA filed suit against the DOL asserting that the
agency violated the APA when it issued the 2010 administrative interpretation.
The U.S. District Court for the District of Columbia rejected the MBA’s
Paralyzed Veterans of America v. D.C. Arena LP argument finding that it did not
apply in this case. The 1997 ruling in Paralyzed Veterans of America held that
once an agency interprets a regulation, it can only change that interpretation
through the “notice and comment” process.
The MBA appealed to the D.C. Circuit Court. In a reply brief filed on February
15, 2013, the DOL argued that Paralyzed Veterans of America v. D.C. Arena LP
should be overturned and the agency reclassification should be affirmed.
Oral arguments were held on March 22, 2013.
37. McCutcheon v. Federal Election Commission, (United States
Supreme Court; Case No. 12-536).
60
The Supreme Court will decide if aggregate contribution limits imposed by the
Federal Election Commission (“FEC”) on contributions by individuals are
constitutional.
On September 28, 2012, the U.S. District Court for the District of Columbia
dismissed a lawsuit brought by Shaun McCutcheon and the Republican National
Committee (“RNC”) alleging the Federal Election Campaign Act’s (“FECA”)
biennial limit on contributions made by individuals is an infringement on an
individual’s First Amendment rights and not supported by a sufficient government
interest.
FECA imposes limits on the amounts that individuals may contribute to federal
candidates and other political committees, the amounts of which are currently
capped as follows: $2,500 per election to a federal candidate, $30,800 per year to
a national party committee, and up to $5,000 per year to a non-party political
committee.
On September 28, 2012, a special three judge federal court in Washington, DC
rejected the plaintiffs’ claims holding that the aggregate contribution limits only
affect what an individual can contribute directly to committees. Individuals are
still free to volunteer, join political associations, and engage in independent
expenditures.
On February 19, 2013 the Supreme Court agreed to hear the case. The Court is
expected to hear argument during its next term starting in October.
38. Frontier State Bank Oklahoma City, Oklahoma v. Federal Deposit
Insurance Corporation, (United States Court of Appeals for the Tenth Circuit;
Case No. 11-9529).
Issues and Potential Significance: On December 26, 2012, the Tenth Circuit
found that a bank’s primary federal regulator has discretionary power to set a
bank’s capital minimum requirements at any level it chooses.
Proceedings/Rulings: In 2002, Frontier State Bank used a “leverage strategy” to
fund long-term investments with short-term borrowing hoping to profit from the
difference between long-term and short-term interest rates. In 2004, the Federal
Deposit Insurance Corporation (“FDIC”) determined that the bank’s leverage
strategy was too risky and negotiated a memorandum of understanding with the
bank which required, among other things, that the bank maintain a 7% leverage
capital ratio. In 2008, the FDIC alleged that Frontier Bank’s leverage strategy was
“unsafe or unsound” and sought a cease-and-desist order to stop the bank from
executing its leverage strategy. The administrative law judge sided with the FDIC
and increased Frontier’s minimum capital requirement to a 10% tier 1 capital
ratio.
61
Frontier appealed the final decision of the FDIC’s Board to the Tenth Circuit.
On December 26, 2012, the Tenth Circuit held that as Frontier’s primary
regulator, the FDIC has the authority to establish the bank’s minimum capital
requirements and the court did not have jurisdiction to review the FDIC’s
determination. The court issued its mandate on February 19, 2013.
39. NML Capital Ltd. v. Republic of Argentina, (Case No. 12-105;
United States Court of Appeals for the Second Circuit)
This case examines whether the federal district court may enter an injunction that
punishes non-parties with contempt when the non-party can neither cure nor
prevent the violation from occurring.
Bank of New York Mellon (BNY Mellon) was an indenture trustee for Exchange
bonds issued to holders by Argentina in 2005 and 2010. In 2001, the Republic of
Argentina defaulted on its bond debt and plaintiffs alleged that BNY Mellon, in
its capacity as an indenture trustee was a “third party” subject to a Southern
District of New York injunction which ordered the Republic of Argentina to “pay
any amounts due under the bonds or obligations issued pursuant to the Republic’s
2005 or 2010 Exchange offers….” In addition, the court permanently prohibited
Argentina from taking any action that will be deemed an evasion of the court’s
order. The injunction was issued based on a covenant in the 1994 Fiscal Agency
Agreement governing the defaulted bonds, which allows the court to enjoin any
payments to holders of the bonds unless Argentina makes pari passu payments to
the plaintiffs on their bonds.
On October 12, 2012, the case was appealed to the Second Circuit and on October
26, 2012, the Second Circuit affirmed the district court’s issuance of the
injunction but remanded the case for clarification on the issues of 1) the formula
used for paying plaintiffs, and 2) how the parties are bound by the injunction.
On November 21, 2012, the district court went a step further and expressly named
BNY Mellon as a party subject to the injunction. This rendered BNY Mellon
subject to the terms of the injunction which hold an indenture trustee in contempt
should Argentina remit funds to the trustee and the trustee pays the Exchange
holders and if Argentina fails to make the required payments to the plaintiffs.
BNY Mellon argues that its role in remitting payments to holders in no way “aids
and abets” the Republic of Argentina in its failure to pay plaintiffs on their
separate bonds.
On January 4, 2013, the ABA filed an amicus brief in support of BNY Mellon
arguing that the Indenture Trustee is not within the scope of Rule 65 of the
Federal Rules of Civil procedure and thus, not subject to the injunction issued by
the district court.
62
On March 26, 2013, the Second Circuit denied Argentina's request for an en
banc rehearing after the panel found that it owes $1.4 billion to bondholders
after a 2001 default on its sovereign debt.
40. Noel Canning v. NLRB, (United States Court of Appeals for the D.C.
Circuit; Case Nos. 12-1115, 12-1153).
Proceedings/Rulings: On January 25, 2013, a panel of the D.C. Circuit Court of
Appeals ruled, in Noel Canning v. NLRB that President Obama’s recess
appointment of three members to the National Labor Relations Board (NLRB)
was unconstitutional. The court invalidated the appointments on two grounds. In
the first the court unanimously concluded that under the Recess Appointments
Clause a President may only make appointments during an intercession break and
not an intracession break. The second, joined by two of the three judges held that
the President may only make recess appointments to fill vacancies that arise
during the recess not vacancies that happen to exist during the recess. The
appointments in question were made on January 4, 2012, when the Senate was in
session but operating under a unanimous consent agreement that provided the
Senate would meet “pro forma” twice a week for a few minutes, but the Senate
was not otherwise conducting business.
The unanimous court carefully examined the recess appointments clause of the
Constitution that states "[t]he President shall have Power to fill up all Vacancies
that may happen during the Recess of the Senate, by granting Commissions which
shall expire at the End of their next Session." The court determined that the
definition of “the Recess” is limited to the period which occurs between sessions
of Congress. The court held that recess appointments must be limited to these
intercession recesses and Congress had begun a new session at the time the
president made the NLRB appointments. Therefore, the court concluded,
“Considering the text, history and structure of the Constitution, these
appointments were invalid from their inception.”
Two of the judges ruled that the Recess Appointments clause only allows the
President to fill vacancies that occurred during the intercession recess. The
judges stated the clause permits filling vacancies that “may happen” during the
recess of the Senate. The judges concluded that the phrase “may happen” means
that the vacancy must occur during an intercession recess. Meaning, if a position
is vacant before the end of the session, it cannot be appointed by the President
during the recess. The dissenting judge argued that the issue was superfluous and
should not have been addressed by the court.
Issues and Potential Significance: The court did not rule on the validity of
Richard Cordray’s appointment to the Consumer Financial Protection Bureau, but
his appointment is presumably invalid because Mr. Cordray was installed on the
same day as the NRLB members. Mr. Cordray’s appointment is being challenged
63
in State National Bank of Big Spring, Texas v. Geithner a case that was filed in
the same Circuit and is pending in federal district court.
The Department of Justice has not decided whether the government will seek an
en banc rehearing before the D.C Circuit or simply appeal to the Supreme Court.
However, the White House said the administration strongly disagrees with the
court’s novel and unprecedented decision.
On March 12, 2013, the NLRB announced that it will petition the Supreme
Court for review and will not seek an en banc rehearing before the D.C.
Circuit. The NLRB petition must be filed by April 25 2013.
41. Louis A. DeNaples v. Office of the Comptroller of the Currency,
(United States Court of Appeals for the District of Columbia; Case Nos. 12-1162,
12-1198)
Issues and Potential Significance: The D.C. Court of Appeals vacated an order
banning Louis A. DeNaples from banking for life in a case challenging the
interpretation and enforcement of Section 19 of the Federal Deposit Insurance Act
(“FDIA”). Section 19 restricts who may participate in the affairs of insured
depository institutions and bank and savings loan holding companies, barring
specifically individuals convicted of certain criminal offenses or those who have
entered into “a pretrial diversion or similar program in connection with consent
from the appropriate regulatory agency.”
Proceedings/Rulings: Louis A. DeNaples was the former chairman and majority
shareholder of First National Community Bank (FNB) and previously owned the
Mount Airy Casino in Pennsylvania. In 2008, a state prosecutor charged
DeNaples with perjury alleging he lied to the Pennsylvania Gaming Control
Board about his relationships with suspected members of the Italian Mafia. The
Gaming Board ultimately suspended his gaming license and forbid him from
managing the casino. The Office of the Comptroller of the Currency (“OCC”)
consequently issued a cease-and-desist order (“C&D”) barring DeNaples from
banking until the pending charges were resolved.
In 2009, DeNaples entered into an “agreement” with the district attorney to
withdraw all pending criminal charges if DeNaples satisfied certain prerequisites
including divesting his financial and operational interests in the casino. After the
district attorney’s office told the OCC about the agreement, the OCC issued a
C&D banning Mr. DeNaples from banking for life, alleging the agreement
constituted a pretrial diversion under Section 19.
DeNaples appealed to the D.C. Circuit Court of Appeals after the Board of
Governors of the Federal Reserve System (“Board”) denied his claim that the
OCC did not have the authority to issue the C&D because his agreement with the
64
state prosecutor did not constitute a “pretrial diversion or similar program”
required by Section 19.
While Congress was well-intentioned when it sought to give the agencies “more
effective regulatory powers to deal with crisis in financial institutions,” the court
expressed that it was not surprised that such regulatory powers have succeeded in
creating an overlap among the various enforcement provisions. The court
classified bank regulators enforcement of Section 19 as “bizarre,” “untenable,”
and “scatter-shot,” and accused the OCC of inconsistently interpreting Section
19’s definition of “pretrial diversion or similar program.”
The court remanded the case to the administrative law judge for further
consideration, mandating that the judge consider Pennsylvania state law’s
definition of “pretrial diversion.”
The court stayed the order pending a probable en banc rehearing request from the
government.
The court issued its mandate on March 26, 2013.
42. Gabelli v. Securities and Exchange Commission, (United States
Supreme Court; Case No. 11-1274), (U.S. Court of Appeals for the Second
Circuit; Case No. 10-3581).
The Supreme Court will decide if Section 2462 of Title 28, the general federal
statute of limitations that governs all civil penalties, begins to accrue at the time
of the offense or when the government knew or should have known of the
violation.
In April, 2008, the Securities and Exchange Commission (“SEC”) alleged that
Gabelli Funds, an investment advising company, violated several anti-fraud
provisions of the Securities Exchange Act by failing to disclose its preferential
treatment of an investor regarding short-term trading practices. In its complaint,
the SEC sought an injunction against future violations and civil monetary
penalties. The defendants moved to dismiss the SEC’s claims arguing that the
SEC’s civil penalties claims were barred by the statute of limitations because they
were filed more than 5 years after the alleged violation and that for more than two
years, all alleged fraudulent activity had ceased making an injunction
unnecessary. The district court agreed and on March 17, 2007, dismissed SEC’s
prayer for civil penalties holding that penalties were time barred.
The Second Circuit reversed and held that when a claim is brought under a
statute that “sounds in fraud”, the statute of limitations provisions under Section
2462 of Title 28 does not begin to run until the Government knew or should have
known of the violation.
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On April 24, 2012, the defendants petitioned the U.S. Supreme Court for a Writ of
Certiorari. The Court granted certiorari on September 25, 2012.
The ABA filed an amicus brief on November 16, 2012, arguing that the Second
Circuit incorrectly interpreted Section 2462 of Title 28. Oral arguments were held
on January 8, 2013.
On February 27, 2013, the Supreme Court held that Section 2462 of Title 28
begins to accrue when the fraud occurred, not when the fraud is discovered. The
Court explained that the fraud discovery rule was intended for private party
plaintiffs, not government enforcement actions. The Court reasoned that the rule
is appropriate for private plaintiffs because “[m]ost of us do not live in a state of
constant investigation,” looking for evidence that we were defrauded. However,
the Court said that the SEC’s “very purpose …is to root out fraud,” and therefore
is not entitled to the same deference.
43. FDIC, as Receiver of Integrity Bank of Alpharetta, Georgia, v.
Steven Skow, (United States Court of Appeals for the Eleventh Circuit; Case No.
12-90033) (United States District Court for the Northern District of Georgia; Case
No. 11-cv-0111)
As receiver for a failed bank attempting to recover losses, the FDIC may sue
former officers and directors whose gross negligence contributed to the failure of
the institution. However, under Georgia law, the FDIC as receiver may not pursue
claims of ordinary negligence against former bank employees.
On January 14, 2011, the FDIC as receiver of Integrity Bank of Alpharetta,
Georgia, sued eight former bank directors and officers seeking to recover over
$70 million in losses the bank suffered between February 4, 2005 and May 2,
2007. The complaint alleged that the Defendants caused the bank to pursue an
‘unsustainable growth strategy designed to exploit the then-expanding ‘bubble’ in
the residential and commercial real estate market.” The complaint also alleged
that Defendants targeted privileged loans to a small number of preferred
individual borrowers to an extent that exceeded Loan Policy and Georgia
statutory lending limits.
The Court granted the Defendants’ motion to dismiss the allegations based on
ordinary negligence. The Court reasoned that under Georgia law the business
judgment rule protected the defendants against claims arising from ordinary
negligence. However, the Court permitted the allegation based on gross
negligence to stand.
On March 26, 2012, Plaintiffs filed a motion for reconsideration. On April 23,
2012, the Court granted the motion for reconsideration and gave Defendants until
May 18, 2012 to respond to the motion.
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Defendants filed a response to Plaintiffs’ motion for reconsideration on May 18,
2012 seeking the Court to deny reconsideration based on the premise that (i) the
FDIC is attempting to resurrect an ordinary negligence claim that this particular
Court has already determined is not viable under the state’s judgment rule, (ii) the
FDIC is seeking an early ruling that cannot be used as a defense to the FDIC’s
claims, and (iii) the FDIC having anticipated that it will lose both its motion to
dismiss and motion for reconsideration is seeking the Court to certify the future
denial of its first two motions for interlocutory review.
On August 14, 2012, the Court denied Plaintiffs’ motion for reconsideration and
its motion for partial summary judgment. Parties have until December 28, 2012,
to complete discovery.
While discovery was still ongoing in the district court, the FDIC sought, and was
granted, permission to appeal the case to the Eleventh Circuit.
44. National Association of Manufacturers v. National Labor
Relations Board, (Case No. 12-5068; United States Court of Appeals for the
District of Columbia; Case No. 11-cv-01629; United States District Court for the
District of Columbia).
The National Association of Manufacturers (“NAM”) and its co-plaintiff the
Coalition for a Democratic Workplace (“CDW”) is challenging the authority of
the National Labor Relations Board (“NLRB”) to implement or enforce a “Notice
Rule” scheduled to take effect on April 30, 2012, because NAM claims the board
now lacks authority to effectively make any rulings without the required number
of board members to constitute a quorum of the Board.
The NLRB board consists of five members. With retirements and the term
expiration of members, there were positions that needed to be filled. On January
4, 2012, the President appointed two new members to the board without the
consent of the Senate. The appointments were made as “recess” appointments
even though NAM alleges that the Senate was not in “recess” at the time the
President made those appointments making them “unconstitutional, null and
void.”
In 2010, the Supreme Court held that the Board lacks authority to act with only
two members, New Process Steel, L.P. v. NLRB, 130 S. Ct. 2635 (2010). Plaintiffs
NAM and CDW are requesting that the challenged Notice Rule be enjoined
because the Board no longer has authority to implement or enforce the rule “in the
absence of a statutorily mandated quorum.”
In a memorandum opinion issued on January 6, 2012, the Department of Justice
(“DOJ”) held that the appointment of the Director of the Consumer Financial
Protection Bureau, during a senate recess was legal. Writing for the Department
of Justice, Virginia A. Seitz, assistant attorney general for the Office of Legal
67
Counsel wrote that even though the Senate held pro-forma sessions from January
3 to January 23, “in our judgment, the text of the Constitution and precedent and
practice thereunder support the conclusion that the convening of periodic pro
forma sessions in which no business is to be conducted does not have the legal
effect of interrupting an intersession recess otherwise long enough to qualify as a
‘Recess of the Senate’ under the Recess Appointments Clause. In this context, the
President therefore has discretion to conclude that the Senate is unavailable to
perform its advise-and-consent function and to exercise his power to make recess
appointments.”
The DOJ decision could weaken the potential legal challenges to the Director’s
appointment by outside groups opposed to the appointment, but according to press
accounts, the Chamber, the group representing non-bank lenders and most of the
banking lawyers (except for Citi) have suggested that others would be better to
bring the challenge.
On October 4, 2011, the Court consolidated National Association of Manufactures
v. National Labor Relations Board with the National Right to Work Legal
Defense and Education Foundation, Inc. v. National Labor Relations Board, and
the motion for preliminary injunction that originally accompanied the complaints
became moot because the Board extended the effective date for the new Rule.
In a Memorandum Opinion issued on March 2, 2012, the Court granted in part
and denied in part the Plaintiffs’ motion for summary judgment filed against the
National Labor Relations Board.
The Court held that NLRB did not exceed its statutory authority when it granted
the Board broad rulemaking authority to implement the provisions of Subpart A
of the Final Rule. This is the part of the Rule which required employers to post a
notice of employee rights “in a conspicuous place informing them of their NLRA
rights. On the issue of the two provisions under Subpart B, however, the Court
found that the NLRB exceeded its authority. Subpart B permits the Board to deem
failure to post an unfair labor practice notice, and to toll the statute of limitations
for claims brought by employees against employers who failed to post the notice.
Taking apart the language of the statute, the Court concluded that the Board had
prohibited more than just a mere failure to facilitate the exercise of an employee’s
rights, but had also allowed the Board to deem the failure to post to be unfair
labor practice in every situation based on its use of the word “interfere” in the
language of the Rule. Subpart B, Section 104.210 reads:
“Failure to post the employee notice may be found to interfere with,
restrain, or coerce employees in the exercise of the rights guaranteed
by NLRA Section 7, U.S.C. 157, in violation of NLRA Section …”
On March 5, 2012, Plaintiffs filed an appeal with the United States Court of
Appeals for the District of Columbia and motioned the district court to stay
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the injunction pending the appeal. The district court exercised its judicial
discretion by denying the motion to stay. In its ruling denying the motion,
the court stated that Plaintiffs had failed to demonstrate the likelihood of
success based on the merits of the case, and irreparable harm should the
injunction not be granted. The case is pending in the Court of Appeals.
Oral arguments were heard on September 11, 2012.
45. United Western Bank v. Office of Thrift Supervision and Federal
Deposit Insurance Corporation, Case No. 11-cv-00408 (United States District
Court for the District of Columbia).
On March 6, 2013, the court upheld OTS’s decision to appoint the FDIC as
receiver for the bank because the bank failed to demonstrate that the Acting
Director’s decision to reject the bank’s capital restoration plan was
“arbitrary and capricious.” According to the court, administrative records
submitted to the court during trial supported the OTS’s conclusion that the
bank failed to submit an acceptable capital restoration plan when it had
ample time to do so. The court found that the OTS reasonably determined
that the bank was facing a liquidity crisis and was reasonable to conclude
that there was an unacceptable risk that institution depositors would begin
withdrawing their deposits. Meaning, the court held that the regulators
properly closed and seized the bank.
United Western Bank was closed by the OTS on January, 21 2011. The directors
of the bank filed suit in the United States District Court for the District of
Columbia seeking the removal of the FDIC as receiver and a return of the bank.
The complaint alleged that the OTS’s decision to reject the bank’s recapitalization
plan and to close the bank was the result of the agency’s institutional bias against
the bank’s business plan and a preference for a “traditional” community banking
model.
The OTS filed a motion with the court seeking to dismiss the complaint on March
4, 2011. The agency argued that the suit must be dismissed because the
individual directors and shareholders/holding company lack standing to bring a
suit to remove the FDIC, and that United Western’s board failed to authorize the
suit within the 30 day period provided by the statute.
This latter point presents a bit of a Catch-22 for OTS; can the agency reasonably
expect that the FDIC (which succeeded United Western’s board after the bank
was closed) would ever authorize a suit to remove itself as receiver even if it were
manifestly clear that there were grounds to do so? Or does its position require
that a board must authorize litigation to contest the appointment of a receiver
prior to the institution being closed?
69
On April 19, 2011, the FDIC filed a joint motion to dismiss the complaint for lack
of subject matter jurisdiction, or for failure to state a claim upon which relief may
be granted.
On June 8, 2011, the district court ordered the OTS to produce the administrative
record supporting the decision to appoint a receiver for United Western. The
Court “preliminarily determined for purposes of this motion that there are likely
to be at least one proper plaintiff and one proper defendant in this action, and
therefore, discovery may proceed pending the issuance of the Court's
memorandum opinion and order on the motions to dismiss.”
On June 24, 2011, the Defendants’ motion to dismiss was granted in part and
denied in part. Defendant FDIC’s motion to dismiss was granted. This dismissed
the FDIC, United Western Bank, Inc, and other parties as parties in this litigation,
leaving the Savings Association and the Director of OTS as the only two parties
in the case.
Denying the OTS’s motion to dismiss, the court ruled that failure on the part of
the bank’s directors to formally authorize a challenge did not divest the
jurisdiction of the court. It wrote:
In the Court’s view, the directors’ failure to dot their “i’s” and
cross their “t’s” should not divest this Court of jurisdiction over
the precise type of claim that Congress authorized it to hear….
While the statute fully authorizes OTS to decapitate the bank, it
also grants the severed head one final request – to ask to be
reattached. It is no defense to complain that the head did not put it
in writing.
On August 11, 2011, the court ordered the Comptroller of the Currency (the new
defendant after the transfer of the OTS’s functions pursuant to the Dodd Frank
Act) to either (1) certify by August 31, 2011, that the administrative record
produced to the plaintiff (or the record as supplemented by any additional
materials produced on or before the date of the certification) is the accurate and
complete record of all of the information which the then Acting Director of the
Office of Thrift Supervision considered, directly or indirectly, or upon which he
relied, in making the January 21, 2011 decision to appoint a receiver for United
Western Bank pursuant to 12 USC 1464 (d)(2)(A). The court also ordered the
plaintiff to “submit to the Court a proposal detailing the scope of the limited
discovery it seeks to conduct to enable it to uncover evidence relevant to the
Court's determination of whether grounds exist for an order that the record be
supplemented in this case, i.e., whether documents that are properly part of the
administrative record have been withheld.” With respect to this latter issue, the
court ruled that “any proposed discovery [by plaintiff] must be limited to requests
for production of documents and interrogatories and should be narrowly tailored
70
to serve the rare and limited circumstances under which discovery may be granted
in an Administrative Procedure Act case in this Circuit.”
On September 1, 2011, the OCC submitted its declarations on behalf of 1) the
Acting Director of the Office of Thrift Supervision and 2) the Acting Comptroller
of the Currency establishing that administrative records provided to plaintiff and
to the Court were the true and complete administrative record of the receivership
of United Western Bank. The declarations also certified that all records contained
information that was either, directly or indirectly, and relied upon when the
Acting Director made the decision to put the bank in receivership.
On November 3, 2011, the court granted in part and denied in part Plaintiffs
motion to compel the production of the complete administrative record of
documents relating to defendants’ seizure of United Western Bank.
On February 16, 2012, Plaintiff responded to the FDIC’s Notice of In Camera
Production, asking the Court to reject the FDIC’s attempt to relitigate the Court’s
order to the FDIC to produce the complete administrative record of documents
relating to its seizure of United Western Bank.
The FDIC filed a motion to intervene the Court’s order to produce the documents
on February 10, 2012, insisting that all the relevant documents being held are
privileged. The FDIC has since changed course to admit that many of the
documents are not privileged. Plaintiff is seeking the Court to ignore the
intervention and stand by its February 9, 2012 ruling and to permit the case to
proceed.
On March 14, 2012, the Court issued an amended scheduling order. Plaintiff’s
motion for summary judgment is due April 20, 2012, and Defendants’ opposition
and cross motion for summary judgment is due on May 18, 2012. The amended
schedule was issued after the Court released a Memorandum Opinion and Order
on February 24, 2012, ordering the production of certain FDIC documents;
including an email circulated among FDIC Board members on November 5, 2010
(with one name redacted), and an agenda for the FDIC board closed meeting
which took place on November 9, 2010 (with privileged portions redacted).
On April 20, 2012, United Western Bank filed a motion for summary judgment
requesting that the court set aside its decision and order Defendants to remove the
FDIC as receiver of the bank. The motion also requests that the Court order the
FDIC to return the bank to its rightful owner.
On November 20, 2012, the court heard oral arguments on the motion for
summary judgment filed by United Western Bank, and the motion for summary
judgment and memorandum of points and authorities in opposition to plaintiff’s
motion for summary judgment filed by the OCC. Both motions have been taken
under advisement.
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A copy of the decision is attached.
PATENTS/ PATENTABLE SUBJECT MATTER
46. CLS Bank v. Alice, Case No. 2011-1301 (United States Court of
Appeals for the Federal Circuit).
There are several disputes in the Federal Circuit involving patentable subject
matter, one of the most common complaints being from inventors claiming
ownership of what are considered basic, widely understood concepts. The court
agreed to revisit the issue of patent-eligibility under Section 101 of the Patent Act
in CLS Bank v. Alice in an en banc rehearing scheduled for February 8, 2013.
Section 101 of the Patent Act provides for the issuance of a patent to a person
who invents or discovers any new and useful “manufacture,” “process,” or
“compromise of matter,” and the United States Supreme Court has created
exceptions for abstract ideas, natural phenomenons or laws of nature.
In July 2012, the panel of federal circuit judges reached a split 2-1 decision in the
case, finding Alice’s claim that a computer system assisting with closing financial
transactions without settlement risk was patentable. The court will address the
following issues:
I. What test should the court adopt to determine whether a computer
implemented invention is a patent ineligible “abstract idea”; and
when, if ever, does the presence of a computer in a claim lend
patent eligibility to an otherwise patent-ineligible idea?
II. In assessing patent eligibility under 35 U.S.C. § 101 of a computer
implemented invention, should it matter whether the invention is
claimed as a method, system, or storage medium; and should such
claims at times be considered equivalent for § 101 purposes?
The Federal Circuit’s divided decision reversed the district court’s ruling on
summary judgment that the claim was invalid and lacked patent-eligibility under
Section 101. CLS Bank filed its brief on November 30, 2012 and Alice was
scheduled to file in January 2013.
Oral arguments were heard on February 8, 2013.