OFFICE OF THE GENERAL COUNSEL STATUS OF...
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OFFICE OF THE GENERAL COUNSEL
STATUS OF IMPORTANT BANKING CASES
March 5, 2010
NEW THIS MONTH
Page 2 Court overturns FDIC Temporary Cease and Desist order
blocking voluntary liquidation of bank, Advanta Bank v. Federal
Deposit Insurance Corporation
Page 39 Internet banking case will explore issue of what constitutes
commercially reasonable security for online transactions,
PlainsCapital Bank v. Hillary Machinery, Inc.
Page 40 Fourth Circuit clarifies rules for when a consumer may invoke the
remedy of rescission under TILA to recapture fees in an
abandoned loan transaction. Weintraub v. Quicken Loans, Inc.
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For Your Convenience…
Updates to the case entries appear in bold print, and
New cases that are added to the list are in bold print and marked with a
star in the margin.
ADMINISTRATIVE ACTIONS
* 1. Advanta Bank v. Federal Deposit Insurance Corporation, (United
States Court of Appeals for the District of Columbia Circuit, Case No. 10-
5051). This is a challenge to a Temporary Order issued by the FDIC seeking to
halt the voluntary liquidation of Advanta Bank, an FDIC-insured institution.
Issues and Potential Significance
This case presents a fascinating legal issue: may the FDIC block a voluntary
liquidation of a bank in an instance where the liquidation will ultimately make
it more difficult for the FDIC to recover its cost of resolving a failure at a
different institution?
Enacted as part of the Financial Institutions Reform, Recovery and
Enforcement Act in 1989, section 1815(e) of the Federal Deposit Insurance Act
allows the FDIC to recover the cost of resolving a failed institution by looking
to other FDIC-insured institutions within the same corporate family. Known
as “cross guarantee,” the statute survived a legal challenge as to its
constitutionality in the 1990’s. See Branch v. United States, 69 F.3d 1571, cert.
denied, 519 U.S. 810 (1995). In many instances, the amount of the assessment
(which may be made immediately due and payable) is enough to render
insolvent a well-capitalized institution insolvent.
In situations where a failure appears likely, holding company management
frequently attempts to take steps to shield the value of their healthy institutions
from this assessment in order to protect their investment. While it is not always
a practical option, the voluntary liquidation and termination of deposit
insurance at a healthy bank is one such strategy for shielding bank assets.
Advanta Bank has challenged the FDIC’s attempt to prevent such a voluntary
liquidation and immediately freeze the bank’s assets via an administrative
order issued under section 8(c) of the Federal Deposit Insurance Act. On
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February 16, 2010, Advanta scored a rare victory at the District Court level
when a magistrate judge upheld the bank’s challenge to the FDIC’s order,
ruling that government had exceeded its authority to halt the voluntary
liquidation of the bank. The matter is currently before the United States Court
of Appeals for the District of Columbia Circuit.
Proceedings/Rulings
The pleadings in this case reflect that Advanta Bank is a Delaware-chartered
bank that is insured by the FDIC. Advanta Bank does not take deposits from
the public; its primary activity is to provide deposit services for affiliate
companies. Advanta Bank is an indirect subsidiary of Advanta Corp.
Advanta Corp. owns another bank subsidiary, Advanta Bank Corp. of Draper,
Utah.
Advanta Bank Corp. has, for some time, experienced financial difficulties, and
entered into a Consent Cease and Desist Order with the FDIC in June of 2009.
The Consent Order requires the institution to maintain its Tier 1 Leverage
Capital Ratio at a minimum of five percent. The FDIC also ordered Advanta
Bank Corp. to submit a capital restoration plan. The bank, however, refused to
do so. The pleadings reflect that Advanta Bank Corp. suggested to the FDIC
that instead of recapitalizing the bank, the institution should be placed into
receivership.
On November 8, 2009, Advanta Corp. and several subsidiaries filed a
voluntary petition for reorganization under Chapter 11 of the United States
Bankruptcy Code. Advanta Corp. and several of its subsidiaries filed for
Chapter 11 bankruptcy in November of 2009. Despite these developments,
Advanta Bank and Advanta Bank Corp. remain open.
In 2008 the FDIC became concerned that Advanta Bank lacked any apparent
plans for profitable operations. Crucially, the FDIC advised Advanta Bank
that “Management must either formulate a plan for offering banking
activities to the public or submit a plan for voluntary liquidation and
termination of deposit insurance.” (Emphasis added) In November of 2009
the FDIC proposed that Advanta Bank consent to a Cease and Desist order.
The Cease and Desist order would have restricted transactions between the
Advanta Bank, Advanta Corp. and its affiliates, including a prohibition on
the payment of dividends.
Rather than submit to the Cease and Desist Order, Advanta Bank began to
voluntarily liquidate. The bank currently has no deposits, and it has applied
to the FDIC to terminate its deposit insurance.
On December 16, 2009, the FDIC initiated an enforcement action under Section
8(b) of the Federal Deposit Insurance Act, along with a Temporary Order
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(issued under Section 8(c)) aimed in large part at preventing the dissipation of
the bank’s assets as a result of the liquidation. The Bank denies that it has
engaged in any unsafe or unsound practices and maintains that the FDIC’s
allegations are a pretext for an attempt to freeze the Bank’s assets for a
potential cross-guarantee claim should Advanta Bank Corp. fail and be placed
into receivership.
On December 24, 2009, Advanta Bank filed suit in the United States District
Court for the District of Columbia to block the FDIC’s Temporary Order. On
February 16, 2010, the District Court ruled that the Temporary Order
exceeded the FDIC’s statutory authority. The court found that, because the
FDIC had previously informed the bank that it would have to either offer
banking services to the public or liquidate, the FDIC could not reasonably
argue that the orderly liquidation of the bank and termination of insurance
constitutes an “unsafe or unsound” practice or improper dissipation of assets,
necessary prerequisites for the issuance of a Temporary Order:
The Notice of Charges, however, does not indicate that the
termination of the Bank itself is an unsafe or unsound practice,
nor could it. The Bank was told by the FDIC that it either
needed to formulate a plan to become profitable (i.e. begin
community banking) or close and terminate its insurance. Given
the choice between the two, the bank chose termination and
began the process of returning money to its depositors and
otherwise winding up its affairs. The FDIC cannot ask the Bank
to begin termination, and then declare that termination, once it
begins and nears its conclusion, is an unsafe or unsound banking
practice. Nor does the FDIC claim that the unsafe banking
practices (i.e., the conflicting duties of the Board of Directors)
caused the termination. Thus, it is not the unsafe banking
practices which are causing the dissipation of assets, but rather
the process of termination, which the FDIC started, which are
“dissipating” the assets. Under the statute, the FDIC can only
issue a temporary cease and desist order where the possibility of
the dissipation of assets is more than a theoretical consequence of
the unsafe or unsound practice. Here the assets are being
dissipated because the FDIC asked the bank to liquidate and
terminate its insurance. While the liquidation (and thus the
dissipation of assets) may, theoretically, be linked somehow to
the unsafe or unsound practice, the statute and Congress, which
passed it, require more. Thus, the FDIC acted outside the clear
boundaries of §1818(c)’s grant of authority in issuing the
temporary cease and desist order.
The matter has been appealed to the United States Court of Appeals for the
District of Columbia Circuit. On February 25, 2010, the Court of Appeals
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granted a request by the FDIC for an emergency stay of the District Court’s
ruling. The Court of Appeals granted the stay in order to provide the court
“sufficient opportunity to consider the merits of the emergency motion for stay
pending appeal…” The Court of Appeals took care to note that the stay of the
lower court’s ruling “should not be construed in any way as a ruling on the
merits [of the request for a stay].”
A copy of the District Court order is attached as a PDF file.
ANTITRUST
2. Brennan v. Concord EFS Inc., et al. (Northern District of California,
Case No. 04-2676): 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 have 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.
Issues and Potential Significance
The litigation presents a challenge on antitrust grounds to the right of a non-
proprietary network to set network-wide ―interchange‖ fees that govern the
amount of money paid by an ATM card issuer – generally a bank – to the owner
of an ATM when the ATM is used by the issuer‘s customer. Customers at most
commercial banks receive ATM cards that allow them to make withdrawals from
their accounts electronically. Typically, these ATM cards permit withdrawals not
only from ATM machines at the bank where they hold their accounts, but also
from ATM machines owned or operated by other banks. The plaintiffs claim that
the entities named in the lawsuit, several large financial institutions (including
VISA, MasterCard, and Concord EFS, the entity that manages the interchange
system among various banks and ATMS) has engaged in illegal price fixing in the
setting the interchange fees that are charged for processing a ―foreign‖ ATM
transaction, i.e. a transaction at an ATM not owned or operated by the customer‘s
own bank. An adverse decision could have an impact on the smooth functioning
of the ATM system and the cost of providing a customer with near-universal
access to their accounts via any ATM machine. The disposition of this case will
also provide an analytical framework to assess future challenges to interchange
under the complex antitrust statutes.
Interestingly, the court may be pushing the parties toward settlement. In January
the court ordered the parties to submit pending issues to a mediator with anti-trust
experience to see if the case can be resolved.
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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:
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.
―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. that 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.
Foreign ATM transactions involve multiple fees. Generally, a customer must pay
two fees — one to the ATM owner for the 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‖). Out of the money that a customer pays directly to his
own bank, the bank then also pays two fees. The first of the bank‘s fees is known
as a ―switch fee‖ and is paid directly to the ATM network. The second of the
bank‘s fees — and the one at issue in this lawsuit — is known as an ―interchange
fee‖ and is paid directly to the owner of the foreign ATM.
In this case, Plaintiffs contest the legality of the interchange fee. Since 2003, the
interchange fee at issue in the litigation has been set at $0.46 for on-premise
transactions (i.e., transactions at ATMs deployed on a bank‘s premises), and
$0.54 for off-premise transactions. In 2005, the United States District Court for
the Northern District of California ruled that Plaintiffs had stated a viable claim
for price-fixing. See Brennan v. Concord EFS, Inc., 369 F. Supp. 2d 1127 (N.D.
Cal. 2005) (Walker, C.J.). Specifically, the Court held that Plaintiffs had stated a
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claim of ―naked‖ price-fixing subject to analysis under the per se rule. In its
ruling, the Court first noted that the Plaintiffs‘ objection is not to the existence of
an interchange fee, but rather to its fixed nature. Further, the court 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, pro-competitive venture. In other words, the Court construed the
complaint as alleging 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‖ analysis applies to this case. The 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 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,
citing the Supreme Court decision in Texaco Inc. v. Dagher. Moreover, the 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,
A number of the defendant banks filed motions to dismiss the Second Amended
Complaint filed by Plaintiffs on January 31, 2009. On September 4, 2009, the
Court issued an order partially dismissing the case.
The District Court resolved the threshold issue of whether plaintiffs have standing
to assert antitrust claims; it dismissed the causes of action alleged under Section 1
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of the Sherman Act because the complaint failed to allege a relevant product
market that was cognizable under the antitrust laws. The term ‗relevant market‘
encompasses notions of geography as well as product use, quality, and
description. The geographic market extends to the area of effective competition
where buyers can turn for alternate sources of supply. The Plaintiffs defined
their ―relevant product market‖ at issue in the case as being ―the provision of
Foreign ATM Transactions‖ routed over the Star Network. Plaintiffs argued that
this ―relevant product market‖ was wholly derivative from and dependent on the
market for deposit accounts.
The Court disagreed. It determined that the primary problem with Plaintiffs‘
definition of the ―relevant product market‖ was that it consisted only of
transactions routed over the Star network, excluding other ATM networks.
Reduced to its essence, the Plaintiffs allege that the one brand – Star – was its
own market despite the presence of other competing ATM networks. The court
distinguished the ATM market from situations where courts have recognized
single brand monopolies that have the effect of locking in consumers after the sale
and exclude competition in the derivative aftermarket:
The prior single brand derivative aftermarket cases have focused
on the provision of expensive, durable goods. Once a consumer
buys such a good, like a photocopier, he is ―locked in‖ to
purchasing compatible parts and service for a considerable length
of time, given the expense and difficulty of buying a new
photocopier. In those circumstances, market imperfections prevent
customers from imposing market discipline in the derivative
market because of the difficulty of switching among competitors in
the primary market.
It is unclear to the Court that a holder of a bank account, on the
other hand, faces such hurdles in simply moving his business
elsewhere.
The court, however, granted Plaintiffs leave to amend their complaint to permit
them to allege an adequate relevant market. The court also dismissed Citigroup‘s
motion to dismiss with prejudice on the grounds that Plaintiff had failed to make
any allegations specific to the holding entity, Citigroup.
On October 16, 2009, Plaintiffs filed a Third Amended Complaint. Motions to
dismiss the complaint were filed. On January 12, 2010, the Court (1) set the
hearing on the motion to dismiss for February 26, 2010, and (2) ordered counsel
to meet and confer in selecting a mediator with anti-trust knowledge. Once
selected, the mediator is directed to see if the remaining issues in the case can be
resolved prior to the hearing. On February 22, 2010, the parties agreed via
stipulation to remove the hearing on the pending motions to dismiss from the
court’s calendar in order to pursue mediation.
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3. Robert Ross v. Bank of America, et al., (Case No. 06-4755, United
States Court of Appeals for the Second Circuit; Case No. 05-cv-7116, United
States District Court for the Southern District of New York). 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 to accept mandatory arbitration clauses and class
action waivers in their cardholder agreements in violation of the Sherman Act.
Issues and Potential Significance
The Complaint sets 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, 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.
A number of the defendants (including Bank of America, Capital One, Chase, and
HSBC) have tentatively settled – the proceedings to approve those settlements are
currently scheduled to be completed this summer. Discovery is ongoing for the
remaining defendants (which include Citigroup, Discovery, and National
Arbitration Forum).
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
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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, assuming 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
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‖
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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 January 23, 2009, the District Court ordered the current stay on discovery be
lifted with respect to Novus Credit Services, Inc. and Discover.
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
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). Final settlement agreements shall be filed with
the Court on or before February 19, 2010. All papers supporting preliminary
approval of these settlements shall be filed with the Court on or before February
26, 2010. Oppositions to preliminary approval, if any, must be filed with the
Court on or before March 5, 2010. The Court shall hear argument from all
interested parties who desire to be heard on preliminary approval on March 12,
2010 at 11:30 AM. Should preliminary approval be granted, the Court shall hold
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a hearing on the final approval of these settlements, the payment of attorneys' fees
and the reimbursement of litigation expenses on July 15, 2010.
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 must respond to the opposition
on or before July 2, 2010.
4. In re: Payment Card Interchange Fee and Merchant Discount
Antitrust Litigation, (Case No. 1:05-md-01720-JG-JO)(Eastern District New
York). This is a consolidation of 23 separate suits (eight actions in the Southern
District of New York, three actions in the District of Connecticut, two actions in
the Northern District of California, one action in the Northern District of Georgia,
and nine actions in the Eastern District of New York) into a multi-district class
action lawsuit against Visa USA, MasterCard, Inc., and dozens of major banks
alleging that they colluded in setting excessive credit card fees, in violation of
applicable federal antitrust laws. These cases were consolidated in to this
proceeding after a ruling from the Multidistrict Litigation Panel on October 19,
2005.
Issues and Potential Significance
The litigation by a number of retail merchants challenges the process by which
the credit card industry sets interchange fees, which retail merchants pay 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
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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 February 12, 2008, the Magistrate Judge Orenstein issued an order
recommending that the Court grant in part and deny in part a motion filed by
MasterCard and the bank defendants to dismiss Class Plaintiffs' Supplemental
Complaint challenging MasterCard‘s public offering. The Magistrate Judge
Orenstein recommended that the claims against the bank defendants based on
alleged violations of Section 7 of the Clayton Act should be dismissed (with leave
to amend) because they are technically deficient. With respect to the Clayton Act
claim against MasterCard, the Magistrate Judge found that plaintiffs could not
plead a viable Section 7 claim based on MasterCard's acquisition of the stock of
another, but declined dismissal because plaintiffs‘ case was focused on
MasterCard's acquisition of assets, which was deemed to be viable claim. The
Magistrate Judge also recommended that the fraudulent conveyance claims should
be dismissed against all defendants, with leave to amend.
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
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.
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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 currently 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.
5. Pinon, et al. v. Bank of America, et al., (Case No. 08-15218, United
States Court of Appeals for the Ninth Circuit). On January 31, 2007, plaintiffs filed
a class action complaint against a number of national banks doing business in
California.
Issues and Potential Significance
Plaintiffs in this case, credit card customers located in California, contend that a the
defendant bank or credit card issuers have conspired to impose penalty fees on credit
card customers that are (1) improbably uniform, and (2) legally excessive. They
allege that the penalty fees violate the National Bank Act, the Sherman Act
(Antitrust), and various provisions of the California Code. Their centerpiece
argument is that the National Banks that are defendants in the action are charging
excessive penalty fees that 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
15
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 theories are not viable as a matter of law. The case is currently
on appeal to the Ninth Circuit.
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 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.
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.
16
On January 30, 2008, Plaintiffs filed a notice of appeal with 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.
Proceedings at the Ninth Circuit are stayed as a result of Washington Mutual’s
failure and the bankruptcy of the bank’s holding company. The stay will be in
place for 120 days pursuant to 11 U.S.C. section 362(a), after which time
Washington Mutual has been ordered to file a status report concerning the
bankruptcy proceedings. All pending motions have been held in abeyance.
6. Shawn Howard v. Canandaigua National Bank & Trust, (Case No.
09-cv-6513, United States District Court for the Western District of New York).
This case is one of a series of class action suits targeting ATM operators for
violations of ATM disclosure practices. On October 9, 2009, Plaintiff brought a
class action complaint alleging that the bank failed to provide an external notice
of its assessment of a fee for use of its ATMs, in violation of the Electronic Fund
Transfer Act (“EFTA”), 15 U.S.C. § 1693 et seq., and 12 C.F.R. § 205 et seq.
Issues and Potential Significance
The issues raised in this litigation present a potential “gotcha” for banks that
operate ATMs. The EFTA requires that ATM operators provide notice of any
fees assessed to customers. Customers must be notified of these fees at the time of
the transaction or service and the amount of the fees must be revealed. These
notices must be posted in places where they will be visible to customers: such as
on the ATM screen or on the actual machine where it is conspicuous.
Plaintiffs in this case allegedly made cash withdrawals at an ATM operated by the
bank and were charged an access fee of $2.00. Plaintiffs claim that, at the time of
the transaction, no written notice was visible or “posted on or at” the ATM.
Significantly, the complaint does not allege that the ATM failed to display an ―on
the screen‖ notice that a fee of $2 would be charged, nor does Plaintiff deny that
they agreed to the $2 fee before proceeding with the transactions.
Notwithstanding the fact that Plaintiffs had actual knowledge of the $2 charge,
they argue that, because there was no external sign, the bank violated the
Electronic Fund Transfers Act (―EFTA‖), 15 U.S.C. § 1693 et seq., and its
implementing regulations, 12 C.F.R. § 205 et seq.
Proceedings/Rulings
This case is still in its early stages. On November 24, 2009, the bank filed a motion
to dismiss the complaint on the basis that the case is not suitable for disposition via a
17
class action, given the highly-particularized fact issues regarding each putative
class members‘ interaction with the ATM.
ARBITRATION
7. American Express Company, et al., v. Italian Colors Restaurant,
et al., No. 08-1473 (U.S. Supreme Court). This case takes up the issue of whether
arbitration clauses contained in merchant agreements with a credit card company
that contain
Issues and Potential Significance
This case potentially very significant for banks that rely on arbitration agreements
containing class action waivers. It is expected that the United States Supreme
Court will authoritatively settle the issue of whether class action waiver clauses
are enforceable under the Federal Arbitration Act.
Proceedings/Rulings
This case was originally brought in the United States District Court for the
Southern District of New York, contending that American Express’s merchant
contracts contained illegal “tying” arrangements, in violation of Section 1 of the
Sherman Act and the Clayton Act. The merchant agreements contained
mandatory arbitration provisions which prohibited arbitration on a class-wide
basis. American Express moved to compel plaintiffs to arbitrate their claims, and
sought to dismiss plaintiffs’ complaints or stay the proceedings pending
arbitration.
On January 30, 2009, the Second Circuit ruled that the class action waiver
provision in the merchant agreement is unenforceable under the Federal
Arbitration Act.
On May 29, 2009, American Express 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.
The case was scheduled to be considered at the conference to be held on
September 29, 2009.
BANKRUPTCY
18
8. Milavetz, Gallop & Milavetz v. United States; United States v.
Milavetz, Gallop & Milavetz, (United States Supreme Court; Case Nos. 08-1119
& 08-1225).
Issues and Potential Significance
This case takes up the constitutionality of certain provisions of the Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005. It is potentially
significant for the financial services industry because an adverse ruling would
weaken the provisions designed to prevent abuses by creditors of the bankruptcy
system that were enacted as part of the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005.
Section 526(a) and 528(b)(2)(B), of the Bankruptcy Code prevent a ―debt relief
agency‖ from counseling clients to incur added debt in anticipation of bankruptcy.
The Supreme Court will take up the issue of whether attorneys are considered
‗debt relief agencies and, if so, whether the portions of the statute that preclude a
―debt relief agency‖ from advising clients to take on more debt in advance of
filing for bankruptcy protection violate the First Amendment of the U.S.
Constitution.
Proceedings/Rulings
Milavetz, Gallop & Milavetz is a Minnesota law firm that offers counseling to its
clients who are contemplating bankruptcy. The firm claims that, as applied to
attorneys, the disclosure requirements of the statute and the limitation on the type
of advice that a ―debt relief agency‖ may offer a prospective debtor are an
―unconstitutionally overbroad restriction of free speech.‖
The Eighth Circuit ruled that attorneys who assist clients in bankruptcy matters
are indeed ―debt relief agencies‖ under the Bankruptcy code, and are therefore
subject to sections 526(a)(4) and 528(b)(2). The Court found that 526(a)(4),
which precludes a ―debt relief agency‖ from advising clients to take on more debt
in contemplation of a bankruptcy filing, is unconstitutional as applied to attorneys
because the language of the statute is ―neither narrowly tailored nor necessarily
limited to prevent only the speech that the government has an intent in
restricting.‖ The statutory prohibition on advising clients to incur more debt in
anticipation of filing bankruptcy was found to be overly broad because it made no
distinction in cases where an assisted person lacks any actual intent to manipulate
the bankruptcy system.
The Eighth Circuit, however, ruled that the portions of sections 528(a)(4) and
528(b)(2), requiring a ―debt relief agency‖ to place a disclosure on its bankruptcy-
related advertisements stating that they are ―debt relief agency‖ for purposes of
the Bankruptcy Code, are constitutional. The court reasoned that the disclosure
19
requirements are reasonably and rationally related to the government‘s interest in
preventing the deception of consumer debtors.
The issues certified by the Court for review are:
1. Whether the appellate court‘s interpretation of attorneys as ―debt relief
agencies‖ is contrary to the plain meaning of 11 U.S.C. § 101(12A).
2. Whether 11 U.S.C. § 528, as applied to attorneys, restricts commercial
speech by requiring mandatory deceptive disclosures in their
advertisements violates the constitutional First Amendment right to Free
Speech.
3. Whether 11 U.S.C. § 528 requiring deceptive disclosures in
advertisements for consumers and attorneys violates constitutional Fifth
Amendment right to Due Process.
4. Whether Section 526(a)(4) precludes only advice to incur more debt with
a purpose to abuse bankruptcy system.
5. Whether Section 526(a)(4), construed with due regard for the principle of
constitutional avoidance, violates the First Amendment.
Oral arguments before the Supreme Court were heard on December 1, 2009.
CONSUMER PROTECTION
9. Chawezi Mwantembe, et al. v. TD Bank, N.A., et al, (Case No. 09-
0135; United States District Court for the Eastern District of Pennsylvania). At issue
is whether state consumer protection laws regarding gift cards are preempted by the
federal National Bank Act and regulations of the Office of Comptroller of the
Currency.
Issues and Potential Significance
In the aftermath of the Supreme Court‘s opinion on preemption in Clearinghouse
v. Cuomo, banking practitioners have been waiting for the dust to settle in order to
get a better sense of how the lower courts will interpret the court‘s ruling and
whether state law enforcement officials will ramp up their attempts to exert
regulatory oversight over national banks.
This case takes up an attempt to enforce a Pennsylvania gift card statute that
requires issuers to disclose that the issuer may deduct dormancy and replacement
fees from gift cards prior to their expiration dates.
Citing the ―sea change‖ in preemption jurisprudence effected by Cuomo, on
November 17, 2009, the Court ruled that the National Bank Act did not preempt
20
state law in this instance because enforcing state consumer protection laws
regarding the disclosures would not conflict with federal law governing gift cards
and would not unduly impair the ability of a national bank to engage in the
business of selling gift cards.
It will be worth watching to see whether, post Cuomo, there a renewed effort by
the states to bring litigation or administrative actions to enforce state gift card
statutes. There was litigation filed in 2004 by the attorney generals of New York,
New Hampshire, and Connecticut to enforce their respective state‘s laws. The
results vis-à-vis whether state law was preempted by the National Bank Act was
mixed. Compare, SPGGC, Inc., v. Kelly A. Ayotte, Attorney General (First Circuit)
(National Bank Act preempts state restrictions on sales of giftcards by National
Banks) and SPGGC, Inc. v. Richard Blumenthal (Second Circuit) (National Bank
Act does not preempt Connecticut statute concerning gift cards. The OCC took
the position in 2005 the National Bank Act did not preempt state law in this area.
The OCC‘s explained that, in its view, the National Bank Act did not completely
preempt state law because a federal statute creating an exclusive cause of action had
not supplanted the state gift-card statute. The OCC has subsequently offered
guidance on appropriate disclosures of fees relating to giftcards. OCC Bulletin 2006-
34, Gift Card Disclosures, 2006 WL 2384741 (Aug. 14, 2006)
Proceedings/Rulings
The suit was originally filed in the Court of Common Pleas of Delaware County
in 2008. The case was removed to federal court in January of 2009. Plaintiffs
allege that TD Bank failed to adequately disclose the terms and conditions of when it
would assess dormancy and replacement fees on gift cards sold by the bank.
Plaintiffs also allege that the undisclosed dormancy and other fees were deducted led
to diminished values of gift cards before their expiration in a way that was
―unlawful, deceptive and misleading.‖ Plaintiffs argued the failure is a violation of
Unfair Trade Practices and Consumer Protection Laws.
On March 3, 2009, TD Bank moved to dismiss the case on the grounds that the
Pennsylvania state consumer protection laws are preempted by the National Bank
Act, and by regulations issued by the Office of Comptroller of the Currency. The
hearing on the motion to dismiss was heard on July 22, 2009.
On November 17, 2009, Judge Timothy J. Savage denied the motion to dismiss. In
his opinion, he concluded that the state law imposing disclosure and marketing
requirements for gift cards did not ―prevent or significantly interfere‖ with the
activities of national banks, or the ability of federal regulators to exercise power.
Because state consumer protection laws regarding disclosure do not conflict with
federal law in this instance, and as such do not unduly interfere in defendant‘s ability
to engage in the business of selling gift cards, the Court concluded that the state law
claims were not preempted. The decision noted the ―sea change‖ in the
21
―perception of the preemptive effect of the NBA and the OCC regulations‖ as a
result of the Supreme Court‘s decision in Cuomo:
Before this pronouncement, courts appeared to be expanding the
scope of federal preemption for national banks. Cuomo reverses
this trend and has dispelled the popular notion that all state laws
that affect national banks in any way or to any degree are
preempted. (Citations omitted)
Defendant filed an answer to the complaint on December 7, 2009. The
Court issued a scheduling order setting a discovery deadline of March 19,
2010. Motions for class certification are due no later than April 16, 2010.
Oral arguments on the plaintiff‘s motion for class certification are
currently scheduled to be heard on June 16, 2010.
On January 22, 2010, TD Bank and Commerce Bank, N.A. petitioned the Multi
District Panel to have the case – along with several other similar actions -
transferred to the United States District Court for the District of New Jersey for
consolidated and coordinated pretrial proceedings. The cases are:
• Bradley Mann and Angelo Capizzi on behalf of themselves and all others
similarly situated v. TD Bank, N.A, et al., No. 1:09-cv-01062-RBK-AMD
(D.N.J)
• Chawezi Mwantembe, Margaret Munthali, and Fern Rutberg on behalf of
themselves and all others similarly situated v. TD Bank, N.A., et al., No.
2:09-cv-00135-TJS (E.D. Pa.)
• Sandra Elmoznino on behalf of herself and all others similarly situated v.
TD Bank, N.A., et al., No. 1:09-cv-09778-DC (S.D.N.Y.)
The defendants allege that the three cases raise similar issues of fact and law, and
may be properly consolidated.
10. Hickman, et al. v. Wells Fargo Bank, N.A., (Case No. 09-cv-5090;
United States District Court for the Northern District of Illinois). This case takes up
the issue of what a bank is obligated to disclose to a customer under the Truth-in-
Lending Act (―TILA‖) and Regulation Z if the institution reduces a customer‘s
home equity line of credit (―HELOC‖) due to a reduction in the value of the home.
Issues and Potential Significance
Filed as a class action on August 18, 2009, plaintiff alleges that Wells Fargo illegally
reduced his home equity line of credit due to ―a substantial decline in the value of
the property securing the account,‖ citing alleged violations of TILA, Regulation Z,
and Illinois Consumer Fraud law. The suit contends that the bank failed to disclose
22
what it estimated the current value of his home to be, how it determined that value,
and what property value would be required to reinstate the full credit limit. Plaintiff
argues that it is ―unconscionable‖ to reduce plaintiff‘s HELOC in light of the bank‘s
―receipt of billions of dollars of taxpayer funds‖ that were designed to preserve the
flow of credit to consumers.
The issues raised in this case are a product of the current economic downturn. The
populist appeal of this theory may see copycat suits filed by other plaintiff-oriented
firms.
Proceedings/Rulings
An initial status hearing was held on October 22, 2009 and continued to January 21,
2010. The bank filed a motion to dismiss the case on October 16, 2009. Well Fargo
argues that the claims based upon the bank‘s reliance on an automatic valuation
method (―AVM‖) must be dismissed because nothing in TILA or Regulation Z
prohibits the use of AVMs or requires the provision of such information in a
reduction notice. The bank also argues that Plaintiff‘s allegations as set forth in
the Complaint establish that Wells Fargo did provide the basis for the reduction
upon request, but that Plaintiff did not follow-up for any further information.
Instead, nearly a year later, the plaintiff filed the lawsuit.
On January 26, 2010, the Court granted in part, and denied in part the Defendant‘s
motion to dismiss the complaint for failure to state a claim. The Court declined to
grant a dismissal of Plaintiff‘s claims that the bank reduced the Plaintiff‘s
HELOC in violation of TILA and Regulation Z because to do so would be
premature; ruling on the merits of the claim would require the Court to adduce
facts beyond those plead in the complaint.
The court found that, pursuant to TILA, a creditor may ―[p]rohibit additional
extensions of credit or reduce the credit limit applicable to an account under [an
open end consumer credit] plan during any period in which the value of the
consumer‘s principle dwelling which secures any outstanding balance is
significantly less than the original appraisal value of the dwelling.‖ 15 U.S.C. §
1647(c)(2)(B). Similarly, under Regulation Z, a creditor may not change any term
of a HELOC agreement, except that, a creditor may ―[p]rohibit additional
extensions of credit or reduce the credit limit applicable to an agreement during
any period in which [] [t]he value of the dwelling that secures the plan declines
significantly below the dwelling‘s appraised value for purposes of the [home
equity] plan.‖ 12 C.F.R. § 226.5b(f)(3)(vi)(A). The official staff commentary to
Regulation Z issued by the Federal Reserve Board further explains that
[w]hat constitutes a significant decline for purposes of §
226.5b(f)(3)(vi)(A) will vary according to individual circumstances.
In any event, if the value of the dwelling declines such that the
initial difference between the credit limit and the available equity
23
(based on the property‘s appraised value for purposes of the plan) is
reduced by fifty percent, this constitutes a significant decline in the
value of the dwelling for purposes of § 226.5b(f)(3)(vi)(A).
Thus, in order to state a claim for violation of TILA and Regulation Z, Plaintiff
must sufficiently allege that (i) the bank reduced his HELOC (ii) during a period
in which the value of his property did not decline to ―significantly less than the
original appraised value of the dwelling.‖ 15 U.S.C. § 1647(c)(2)(B); 12 C.F.R. §
226.5b(f)(3)(vi)(A).
Because the bank did not dispute the fact that it reduced the HELOC, the Court‘s
focus centered upon whether the plaintiff was required to make specific factual
allegations in his complaint regarding the value of his home in order to survive a
motion to dismiss. The court found that Federal Rule 8 did not impose such a
burden and that ―Plaintiff will have the opportunity to demonstrate the factual
basis for his allegation that the value of his home has not declined significantly
during the discovery process.‖
The Court did dismiss plaintiff‘s claim that the bank failed to provide him with an
adequate disclosure of the reason why his HELOC was reduced. Regulation Z
states that ―[i]f a creditor . . . reduces the credit limit applicable to a home equity
plan . . . the creditor shall mail or deliver written notice of the action to each
consumer who will be affected. The notice must be provided not later than three
business days after the action is taken and shall
contain specific reasons for the action. If the creditor requires the consumer to
request reinstatement of credit privileges, the notice also shall state that fact.‖ 12
C.F.R. § 226.9(c)(3).
The notice that the bank sent to Plaintiff informing him of the reduction in his
HELOC stated that the bank was ―lowering the credit limit of [Plaintiff‘s]
Account to $31,039.83 due to a substantial decline in the value of the property
securing the Account.‖ The court held that this was sufficient; Regulation Z lists
six specific scenarios under which a lender may reduce a borrower‘s credit limit,
including ―any period in which . . . [t]he value of the
dwelling that secures the plan declines significantly below the dwelling‘s
appraised value for purposes of the plan.‖ 12 C.F.R. § 226.5b(f)(3)(vi)(A). The
bank‘s letter specifically identified a statutorily permissible reason for reducing
Plaintiff‘s HELOC. Neither TILA, Regulation Z, nor the Official Commentary
require a bank to provide more information.
The Court also dismissed plaintiff‘s claim that shifting the cost to the borrower of
obtaining an appraisal in order to obtain a reinstatement of the original credit line
violated TILA. The Court found that ―neither the statute, regulations nor Official
Commentary contain any provisions prohibiting Defendant from ―shifting the
burden of obtaining and paying upfront for a property appraisal‖ to borrowers.
24
The Court also took up a number of state law claims, including a cause of action
under the Illinois Consumer Fraud Act.
Plaintiff filed an Amended Complaint on February 15, 2010.
11. Thomas v. US Bank, (Case No. 08-3302, United States Court of
Appeals for the Eighth Circuit).
Issues and Potential Significance
This suit takes up the issue of whether a state statute governing the type and amount
of closing costs and fees that a lender can charge on residential second mortgage
loans secured by real estate are preempted by the Depository Institutions
Deregulation and Monetary Control Act (DIDA), 12 U.S.C. § 1831d.
On August 7, 2009, the Eighth Circuit issued an opinion concluding that DIDA
did not completely preempt state law because the language of DIDA ―does not
reflect Congress' intent to provide the exclusive cause of action for a usury claim
against a federally-insured state-chartered bank.‖ The court concluded that
DIDA does completely preempt state law because, by its own terms, the
proscriptions and remedies provided by federal law do not apply where the
interest rate allowed by state law exceeds the interest rate set forth in DIDA. The
Court concluded that because the usury limit provided by Missouri law exceeded
the interest rate permitted under DIDA, the federal law did not apply.
This result is at odds with the Fourth Circuit‘s decision in Vaden, and is
inconsistent with the Supreme Court's decision in Beneficial National Bank v.
Anderson, 539 U.S. 1 (2003), which held that the similar provisions in the
National Bank Act, 12 U.S.C. §§ 85-86, completely preempted state law usury
claims against national banks. A petition for rehearing was denied on November
24, 2009, and it is likely that the Supreme Court will be asked to resolve the split
in the Circuits.
Proceedings/Rulings
On August 7, 2009, the United States Court of Appeals for the Eighth Circuit
ruled that DIDA does not create an exclusive federal remedy for usury claims
against federally-insured, state-chartered banks. The court concluded that DIDA
only preempted state usury laws in situations where the state laws set a lower
allowable interest rate than that allowed by federal law. This conclusion conflicts
with Fourth Circuit‘s decision rendered in Discover v. Vaden, where the court held
that DIDA preempted a Maryland usury law claim.
Plaintiffs, who are Missouri homeowners, obtained "high loan-to-value" second
mortgages (reflecting a total debt of 125% of the appraised value) on their homes.
These loans were originated by FirstPlus Bank, a now-defunct FDIC-insured
25
California lending institution. The loans were subsequently purchased by the
defendants.
Plaintiffs originally brought their claims against a number of banks and lending
institutions who purchased FirstPlus loans in Missouri state court, alleging that
the loans violated the Missouri Second Mortgage Loans Act (MSMLA), Mo.
Rev. Stat. §§ 408.231-.241. That statute places limits on the type and amount of
closing costs and fees a lender can charge on residential second mortgage loans
secured by Missouri real estate. Plaintiffs argued that the subject loans violated
Missouri law because (1) the borrowers were charged nonrefundable finder's fees
or broker's fees which were not allowed by or in excess of the fees allowed by the
MSMLA; and (2) FirstPlus charged certain closing costs and fees on behalf of
third parties which were in excess of the bank‘s actual cost, with FirstPlus
keeping the mark-up for itself.
The defendants removed the case to federal court, arguing that the state law
claims were completely preempted by federal law in the form of the exclusive
remedies provided by DIDA. On August 7, 2009, the Eighth Circuit remanded
the case back to state court, finding that DIDA did not completely preempt state
law, and that DIDA did not provide an exclusive remedy.
The court found that ―complete‖ preemption, as opposed to ordinary or conflict
preemption, is rare, and only applies if the "federal statutes at issue provide[] the
exclusive cause of action for the claim asserted and also set forth procedures and
remedies governing that cause of action." The Eighth Circuit concluded that
DIDA did not completely preempt state law because the language of DIDA ―does
not reflect Congress' intent to provide the exclusive cause of action for a usury
claim against a federally-insured state-chartered bank.‖ The court concluded that
DIDA does completely preempt state law because, by its own terms, the
proscriptions and remedies provided by federal law do not apply where the
interest rate allowed by state law exceeds the interest rate set forth in DIDA. The
Court concluded that because the usury limit provided by Missouri law exceeded
the interest rate permitted under DIDA, the federal law did not apply.
This result is at odds with the Fourth Circuit‘s decision in Vaden, and is
inconsistent with the Supreme Court's decision in Beneficial National Bank v.
Anderson, 539 U.S. 1 (2003), which held that the similar provisions in the
National Bank Act, 12 U.S.C. §§ 85-86, completely preempted state law usury
claims against national banks.
On August 21, 2009, the defendants filed a petition for rehearing en banc. That
petition was denied on November 24, 2009.
Defendants filed a motion to stay the mandate pending a petition for writ of
certiorari. The Court denied this motion on December 11, 2009, and issued its
mandate on the same date.
26
On March 3, 2010, the Supreme Court extended the time within which to file
a petition for a writ of certiorari. The deadline is now March 24, 2010.
12. Vallies v. Sky Bank, Case No. 08-4160 (Third Circuit). This case
takes up the issue of whether detrimental reliance is a prerequisite for recovering
actual damages for violations of the Truth In Lending Act (―TILA‖).
Issues and Potential Significance
The class plaintiffs, customers of Sky Bank (an Ohio-chartered institution doing
business in Pennsylvania) to received car loans from the institution, failed to receive
disclosures regarding charges associated with cancellation of the debt. The
plaintiffs, however, did receive the missing disclosure directly from the car dealer.
Faced with a technical violation of TILA, the bank agreed to pay statutory damages
in the amount of $500,000. Class plaintiffs, however, are pressing a much larger
claim for actual damages.
At issue is whether plaintiffs may pursue actual damages under TILA despite the
fact that the missing notice was provided by the dealer, leaving the customers no
worse off. An adverse decision would allow plaintiffs to easily circumvent the
statutory limitations on liability imposed by Congress, creating potentially massive
liability for technical violations of TILA.
Proceedings/Rulings
The United States District Court for the Western District of Pennsylvania dismissed
plaintiffs‘ claims, finding that TILA requires that a plaintiff establish reliance as a
part of a claim for actual damages under 15 U.S.C. § 1640(a). In granting summary
judgment in favor of the bank, the district court followed six circuit courts in
concluding that the ―actual damage‖ provision of the TILA‘s civil liability section
necessarily requires a showing of detrimental reliance. These decisions maintain the
balance Congress created in fashioning a remedy that enables consumers to recover
for injuries actually sustained as a result of inaccurate disclosures without subjecting
their creditors to ruinous liability for innocuous disclosure violations.
Plaintiffs have appealed the dismissal to the United States Court of Appeals for the
Third Circuit. On May 5, 2009, ABA (joined by several other amici) filed a brief
urging that the court affirm the dismissal.
The Third Circuit affirmed the lower court‘s dismissal of the claim. In an opinion
issued on December 31, 2009, the Court concluded that:
The plain meaning of § 1640(a) requires causation to recover
actual damages. In the context of TILA disclosure violations, a
creditor‘s failure to properly disclose must cause actual damages;
27
that is, without detrimental reliance on faulty disclosures (or no
disclosure), there is no loss (or actual damage).
The Court concluded that such an interpretation was consistent with the purposes
of TILA:
By providing for statutory and actual damages, the statute achieves
its dual purpose of deterrence and compensation. The compensatory
remedy of actual damages is permitted only in cases where the
violation caused harm—where harm was ―sustained by [the
consumer] as a result of‖ the violation. 15 U.S.C. § 1640(a)(1).
Without detrimental reliance, only statutory damages are available.
The court declined to ―evaluate which specific facts and circumstances constitute
detrimental reliance‖ because plaintiffs did not plead that they had in fact relied on
Sky Bank‘s disclosure violations.
The Third Circuit issued its mandate on January 27, 2010.
13. Sola v. Washington Mutual Bank, F.A., (CV 03-2566, Central District
of California; Ninth Circuit Case No. 08-55606). This case presents a variety of
claims invoking the Truth in Lending Act, Home Owners Loan Act, and
Washington state law based on the contents of Washington Mutual‘s (WAMU‘s)
promotional materials advertising its overdraft protection products.
Issues and Potential Significance
This case is an excellent reminder that financial institutions (like all businesses)
should be mindful of the plaintiffs class action bar when advertising their products.
WAMU promoted its overdraft protection products with a campaign that contained
statements such as ―Don‘t worry, we‘ll cover you‖ and ―Automatic Protection.‖
Like most banks offering these products, the deposit account agreement and the
monthly customer account statements preserved the ability of WAMU to exercise
discretion in its payment of overdrafts.
Proceedings/Rulings
On April 26, 2004, the U.S. District Court for the Central District of California
dismissed a complaint filed by a consumer class alleging a variety of claims
invoking the Truth in Lending Act, Home Owners Loan Act, and Washington state
law based on the contents of Washington Mutual‘s (WAMU‘s) promotional
materials advertising its overdraft protection products.
The district court granted WAMU‘s motion to dismiss after ruling that the overdraft
charges were not ―interest‖ under the HOLA and not ―finance charges‖ under TILA
and, therefore, was outside of the reach of the statute. Plaintiffs appealed the
28
dismissal to the Ninth Circuit on May 17, and a coalition of consumer groups filed
as amici on September 23, 2004. OTS filed an amicus brief on November 19; ABA
and California Bankers Association filed an amici brief on November 29. The case
was argued in Pasadena on February 9, 2006.
On April 28, 2006, the Court directed the parties to file briefs addressing the
question of what deference, if any, this court owes to statements issued by the
Federal Reserve (and cited in the parties' initial briefs) regarding Truth in
Lending. Additionally, the Federal Reserve was invited to file an amicus brief
discussing Trust in Lending Act coverage, and the question of what deference, if
any, the court owes to the Federal Reserve statements regarding Truth in Lending.
The Federal Reserve filed its brief on June 5, 2006. The Court granted the parties
permission to file a short reply brief in response to the amici submission by the
Federal Reserve.
In an unpublished summary decision, on September 7, 2006, the Ninth Circuit
affirmed in part and reversed in part the district court‘s decision.
The Court found that the district court properly dismissed the plaintiffs‘
claims under TILA for allegedly failing to disclose the terms of credit and
for failing to disclose the annual percentage rate applicable to credit cards.
The Court ruled that the charges in question do not satisfy the definition of
―finance charges‖ because they are not incident to extensions of credit.
Rather, they are incident to overdrawn accounts.
The court, however, reversed the district court‘s dismissal of plaintiffs‘
other claims under TILA and 12 C.F.R. § 226.12, for unsolicited issuance
of credit cards and off-setting without an agreement to do so. The Court
found that the complaint filed in the case by the Plaintiffs does not
necessarily imply the existence of a formal, written deposit agreement.
Rather it alleges that a credit agreement governing the ATM cards exists
based on the promotional materials and the parties‘ courses of conduct.
Because the cards may fall within the definition of ―credit cards‖ court
remanded the case to provide plaintiffs with an opportunity to prove the
facts that are alleged. If the defendants introduce evidence of a written
deposit agreement with terms contrary to the promotional materials, the
cards may well not satisfy the definition of ―credit cards.‖
The Court affirmed the district court‘s dismissal of the plaintiffs‘ claim
under HOLA on the ground that the plaintiffs conceded that they could not
state a claim because California, not Washington, law applied.
The case was remanded back to the District Court for further proceedings.
On March 17, 2008, the Court granted WAMU’s motion for summary judgment
and dismissed the case. The Court found that the brochures and promotional
29
materials relied upon by Plaintiffs did not constitute a credit agreement and as a
result TILA and Regulation Z did not apply to the overdraft fees because they
were not an extension of credit. The Court also dismissed Plaintiffs state law
claims (California‘s Business & Professions Code § 17200, California Consumer
Legal Remedies Act, Cal. Civ. Code § 1750 et seq., and a common law claim for
unjust enrichment) were preempted by the Home Owner‘s Loan Act (―HOLA‖)
and regulations issued by the Office of Thrift Supervision, 12 C.F.R. §§ 557.11
and 560.2.
Sola filed a Notice of Appeal with the Ninth Circuit on April 7, 2008.
The proceeding at the Ninth Circuit has been stayed as a result of the appointment
of a receiver for WAMU on September 25, 2008. The FDIC as receiver for
WAMU filed motion to stay the case while plaintiffs attempt to pursue their claims
through the FDIC‘s administrative claims process mandated by 12 U.S.C. §§
1821(d)(3) through (13). On January 26, 2009, the court granted the motion in part
and stayed the appeal till May 8, 2009.
On July 6, 2009, the court continued the stay of proceeding originally granted to the
FDIC (as receiver for WAMU) in January.
On December 11, 2009, the FDIC completed its review of Plaintiffs administrative
claim. The administrative claim was disallowed by the FDIC, giving Plaintiffs sixty
days from the date of review (December 11), pursuant to 12 U.S.C. § 1821 (d)(6), to
continue with litigation.
14. Jordan v. Paul Financial, LLC et al., (Case No. 07-04496, Northern
District of California). This case is a putative class action suit involving
payment-option ―Option ARM‖ mortgages issued Paul Financial in order to
finance a purchaser‘s primary residence.
Issues and Potential Significance
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 has dismissed a significant portion of plaintiffs‘
case. The court dismissed plaintiff‘s TILA claim for damages as being outside
30
the one-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 under California‘s Unfair Competition Law
(―UCL‖), Cal. Bus. & Prof. Code §§ 17200 et seq., 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.
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 the 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 issued. 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 March 11, 2009, the court denied most of Plaintiff‘s motion
pursuant to defer the Court‘s consideration of Paul Financial‘s motion for
summary judgment. In the interim, Plaintiff sought leave of the Court to file a
Third Amended Complaint.
31
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.
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 annual 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.
32
The court also allowed claims under California‘s Unfair Competition Law
(―UCL‖), Cal. Bus. & Prof. Code §§ 17200 et seq., 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.
Finally, plaintiffs were granted leave to file an amended complaint, which added
two additional plaintiffs. A fourth amended complaint has also been filed against
HSBC. HSCB has filed an answer, while others have moved to dismiss the
amended complaint.
The case management conference and the hearing on RBS’s motion to
dismiss have been continued to until March 12, 2010.
15. Gorman v. Wolpoff & Abramson, LLP, (Case No. 06-17226, Ninth
Circuit). This case takes up the issue of a credit card issuer‘s duty of care to
investigate a dispute between a customer and a retailer in a transaction where the
card was used.
Issues and Potential Significance
The customer in this case sued the credit card issuer, MBNA, alleging that it
breached its duty under the Fair Credit Reporting Act by failing to adequately
investigate the dispute prior to reporting adverse information regarding the
dispute to a credit reporting agency.
This case fleshes out the requirements for a legally-sufficient investigation into a
customer dispute involving credit card. The Ninth Circuit ruled that a creditor has
a duty under the Fair Credit Reporting Act to conduct an investigation once
receives a notice of consumer dispute. Section 681s-2(b)(1)(A) of the FCRA
mandates that once creditor/furnisher receives notice of a dispute over the
inaccuracy of information furnished to a credit reporting agency, the
creditor/furnisher must ―conduct an investigation with respect to the disputed
information.‖ The investigation cannot be cursory – it requires ―some degree of
careful inquiry‖ and diligence on the part of the creditor/furnisher. This, the court
said, is because the creditor/furnisher is in a better position than the credit
reporting agency to investigate a disputed debt. The Ninth Circuit upheld the
District Court‘s grant of summary judgment in favor of MBNA, finding that it had
done an adequate investigation.
However, the court also held that section 1681s-2(b) of the FCRA permits the
Plaintiffs to bring a private claim against MBNA alleging that it failed to inform
the Credit Reporting Agencies that, despite the outcome of the bank‘s
investigation, the customer continued to dispute the charge. The Ninth Circuit
33
also affirmed the district court‘s grant of summary judgment dismissing the
plaintiff‘s libel claim, but it recognized plaintiff‘s right to bring a private action to
enforce a California credit reporting law, California Civil Code section
1785.25(a), ruling that it is not preempted by the FCRA.
It appears likely that MBNA will seek review of this ruling to the United States
Supreme Court. An application for an extension of time within which to file a
petition for a writ of certiorari to the United States Supreme Court was granted by
Justice Kennedy on January 12, 2010. MBNA has until March 15, 2010, to file
its petition.
Proceedings/Rulings
Plaintiff in this case purchased a satellite television using his MBNA Visa credit
card. After having the TV delivered and installed in his house, Plaintiff later felt
unsatisfied with the merchandise and attempted to seek a refund of the $760
charge to his credit card. The seller declined to refund the credit card unless the
merchandise was returned. Plaintiff in turn notified MBNA of the disputed
charge. MBNA removed the charges, but later reinstated them on the grounds
that it could not act unless the merchandise had been returned. MBNA informed
major credit reporting agencies that the account was a ―charge off,‖ and in later
communications with the reporting agencies stated that the delinquency was not
erroneous. Plaintiff sued MBNA on the basis of FCRA violations and libel.
On January 12, 2009, the Ninth Circuit ruled that a creditor has a duty under the
Fair Credit Reporting Act to conduct an investigation once receives a notice of
consumer dispute. Section 681s-2(b)(1)(A) of the FCRA mandates that once
creditor/furnisher receives notice of a dispute over the inaccuracy of information
furnished to a credit reporting agency, the creditor/furnisher must ―conduct an
investigation with respect to the disputed information.‖ The investigation cannot
be cursory, but requires ―some degree of careful inquiry‖ and diligence on the part
of the creditor/furnisher. This, the court said, is because the creditor/furnisher is
in a better position than the credit reporting agency to investigate a disputed debt.
On granting summary judgment to the plaintiff, the court found that Plaintiff had
presented enough evidence to prevail on summary judgment and that Plaintiff had
a private right of action to go after MBNA for failing to notify the credit reporting
agencies that the matter was disputed after MBNA received notification under
Section 1681s-2(b) of the consumer‘s dispute. The court also granted summary
judgment to MBNA on the libel claim.
On February 24, 2009, MBNA filed a petition for rehearing en banc with the
Ninth Circuit.
On October 21, 2009, the Court amended its January 12, 2009 opinion and denied
Appellee‘s petition for rehearing and petition for rehearing en banc. The Court
34
also denied Appellee‘s petition for panel rehearing and petition for rehearing en
banc.
The amended decision, consistent with the Fourth and Seventh Circuits, held that,
when notified of a disputed charge, the FCRA requires that furnishers of credit
information to a credit reporting agency must first undertake ―an inquiry likely to
turn up information about the underlying facts and positions of the parties, not a
cursory or sloppy review of the dispute. ― This is because the purpose of the
FCRA is to protect consumers against inaccurate and incomplete credit
reporting.‖ The court concluded that the district court‘s finding that MBNA‘s
investigation was reasonable was a matter for the finder-of-fact, and that summary
judgment was appropriate. The Court also held that section 1681s-2(b) of the
FCRA permits plaintiff to bring a private claim against MBNA alleging that it
failed to inform the CRAs that the information about his delinquency was
―incomplete or inaccurate‖ after investigating the December 2004 notice from the
CRAs because he continued to dispute the charge; and that plaintiff submitted
sufficient evidence to survive summary judgment on this claim.
The Ninth Circuit also affirmed the district court‘s grant of summary judgment
dismissing the plaintiff‘s libel claim, but it recognized plaintiff‘s right to bring a
private action to enforce a California credit reporting law, California Civil Code
section 1785.25(a), ruling that it is not preempted by the FCRA.
MBNA filed a motion to stay the court‘s mandate on October 28, 2009 pending
the filing of a petition for writ of certiorari in the Supreme Court.
On November 4, 2009, the Ninth Circuit granted the motion and stayed its
mandate until January 19, 2010. An application for an extension of time
within which to file a petition for a writ of certiorari to the United States
Supreme Court was granted by Justice Kennedy on January 12, 2010.
MBNA has until March 15, 2010, to file its petition.
16. McCoy v. Chase Manhattan Bank, Case No. 09-329 (U.S. Supreme
Court). This case takes up the issue of whether the notice requirements of the
Truth in Lending Act (―TILA‖) and Regulation Z, 12 C.F.R. § 226, as interpreted
by the Federal Reserve Board‘s Official Staff Commentary, apply to discretionary
interest rate increases that occur because of consumer default.
Issues and Potential Significance
In March of 2009, the Ninth Circuit ruled that a credit card customer has a valid
cause of action under TILA/Regulation Z if the bank failed to give him notice of
an interest rate increase ―because of the consumer‘s delinquency or default‖ or if
his credit card contract with the bank ―allows the creditor to increase the rate at its
discretion but does not include the specific terms for an increase.‖ 12 C.F.R. §
226.9(c)(1). This result directly conflicts a interpretations of Regulation Z offered
35
by the Federal Reserve, as well as a contemporaneous decision by the United
States Court of Appeals for the Seventh Circuit in Swanson v. Bank of America.
While the prospective regulatory issue has been dealt with by recent amendments to
Regulation Z, the issue of lingering retrospective liability for complying with the
Federal Reserve‘s own guidance regarding Regulation Z has provided impetus for
an appeal to the United States Supreme Court.
Proceedings/Rulings
Plaintiff, a cardholder at Chase Manhattan bank, alleged that the bank increased
his interest rates without notice, applied retroactively to the beginning of his
payment cycle, after his account was closed to new transactions as a result of a
late payment. The cardholder argued that the rate increase violated TILA and
Delaware law because Chase gave no notice of the increase until the following
periodic statement, after it had already taken effect. The district court dismissed
McCoy‘s complaint with prejudice, holding that because Chase discloses the
highest rate that could apply due to McCoy‘s default in its card member
agreement with McCoy no further notice was required.
The Bank argued that the Federal Reserve‘s Official Staff Commentary interprets
Regulation Z to require no notice to a cardholder where the agreement permits the
bank to increase the interest rate. The Court disagreed.
The Court‘s analysis focused on the fact that the staff commentary permitted the
bank to forego notice of a change in terms where a specific change is set forth
initially. The Court found that the cardholder agreement in question did not
disclose in advance the specific changes that would be made – such as the actual
amount of the increase and whether it will occur. The Court reasoned that
[t]he Card member Agreement states that Chase ―may‖ change
McCoy‘s interest rate and impose a non-preferred rate ―up to‖ the
maximum rate described in the pricing schedule. The agreement
further states that McCoy‘s account ―may‖ lose its preferred rates
if he defaults. Although the agreement defines what constitutes a
―default‖ triggering Chase‘s ability to exercise this discretion, a
default is only one of the conditions required for an increase; it
may be necessary, but apparently it is not sufficient. Chase
outlines several other criteria it ―may‖ obtain and use to review
McCoy‘s account ―for the purposes of determining its eligibility
for Preferred rates,‖ including McCoy‘s consumer credit reports,
his payment history and level of utilization over the life of his
account, and his other relationships with Chase and its affiliates.
Chase does not disclose to McCoy how it may use this information
and provides McCoy with no basis for predicting in advance what
retroactive interest rate Chase will choose to charge him if he
36
defaults. Under the agreement, when McCoy defaults, he will not
know whether his rate will stay the same, increase slightly, or rise
to the maximum default rate until he receives his next periodic
statement listing the new rate. Worse yet, this new rate would then
apply retroactively.
The Court rejected arguments that the terms for an increase are adequately
specified because the concept of a ―default‖ is defined and because consumers are
aware of the maximum rate they might pay in the ―worst case scenario.‖ The
Court also declined to consider Federal Reserve clarification of the Commentary
that is contained in an Advance Notice of Proposed Rulemaking that was issued
in 2007.
On April 27, 2009, Appellee Chase Manhattan Bank filed a petition for rehearing,
and a petition for rehearing en banc. The court has issued an order for Appellant‘s
response.
On May 7, 2009, the ABA and the Consumer Bankers Association filed an amici
brief in support of Chase Bank USA, N.A.‘s Petition for Panel Rehearing and
Rehearing En Banc.
On June 16, 2009, the court denied the petition for rehearing and the petition for
rehearing en banc.
On June 23, 2009, Appellee Chase Manhattan Bank filed a motion seeking the
court to stay the mandate for 90 days, in anticipation of seeking a Writ of
Certiorari with the United States Supreme Court.
On July 14, 2009, the Ninth Circuit granted Appellee‘s motion for a stay of the
mandate in order for facilitate the filing of a writ of certiorari at the United States
Supreme Court. The mandate was stayed until September 14, 2009.
On September 14, 2009, Appellee Chase Manhattan Bank filed a Petition for a
Writ of Certiorari with the United States Supreme Court. The ABA submitted an
Amicus Curiae brief on October 16, 2009.
On January 25, 2010, the Supreme Court invited the Solicitor General to file a
brief in this case expressing the views of the United States.
17. State of California v. Wells Fargo Investment, LLC et al., (Case
No. CGC-09-487641, San Francisco Superior Court). On April 23, 2009,
California Attorney General Edmund Brown filed suit in Superior Court against
three Wells Fargo affiliates, alleging that the affiliates sold auction-rate securities
to several investors based on ―false and deceptive‖ advice in violation of
California law. The securities, it is alleged, were sold on the basis that they were
as ―safe and liquid‖ as cash.
37
Issues and Potential Significance
The complaint alleges that Wells Fargo violated California law by:
1. Misrepresenting auction-rate securities as safe, liquid, and cash-like
investments, similar to certificates of deposit or money market funds, in
violation of Corporation Code section 25401
2. Knowingly offering for sale auction-rate securities by means of using
untrue and misleading statements that were manipulative, deceptive and
fraudulent in violation of Corporation Code section 25216(a)
3. Marketing and selling auction-rate securities to investors for whom these
investments were unsuitable, in violation of Corporation Code section
25216(c), and Cal. Code of Regs., tit 10, section 260.218.2
4. Failing to supervise and provide adequate training to sales agents on
auction-rate securities, in violation of Corporation Code section 25216(c)
and Cal. Code Regs., tit. 10, section 260.218.4
The complaint seeks to enjoin any future violations, require Wells Fargo to
restore the cash value of the securities, disgorge its profits tied to the securities,
and to impose civil penalties in the amount of $25,000 per violation.
Proceedings/Rulings
On May 14, 2009, the State of California filed an amended Complaint against all
defendants.
A case management conference initially scheduled for September 25, 2009 was
held on November 6, 2009.
On January 4, 2010, the parties filed a notice with the Court announcing that they
had reached a conditional settlement, and asked the Court for a five month stay of
proceedings in order to execute the terms of the agreement. The granted the stay.
Under the terms of the settlement, WFI and Wells Fargo Institutional Broker-
Dealers will buy back certain Auction Rate Securities purchased at WFI or Wells
Fargo and subsequently failed at auction at least once since February 13, 2008.
18. Patco Construction Company Inc v. Peoples United Bank d/b/a
Ocean Bank, (Case No. 09-CV-00503; United States District Court for the
District of Maine).
Issues and Potential Significance
This issue takes up the issue of whether and under what conditions a bank may be
liable to a customer when an account has been illegally accessed and funds stolen.
Specifically, the case involves the issue of whether a password-only form of
38
security is sufficient to authorize sizable ACH transfers from a business account
via the internet, without a manual form of additional authorization such as a token
or confirming phone or fax.
Originally filed in state court, the suit alleges that Ocean Bank didn‘t comply with
Maine law, 11 M.R.S.A. § 4-1201 et. seq., governing funds transfers. The
complaint also alleges various common-law causes of action including
negligence, breach of contract, and breach of fiduciary duty.
Proceedings/Rulings
Plaintiff Patco Construction is a family-owned business operating out of Sanford
Maine. In May 2009, Plaintiff apparently was the victim of identity theft when an
unknown third party used the user ID and employee password to initiate a series
of ACH transfers. Nearly $600,000 was withdrawn from Patco‘s account before
the fraud was brought to a halt. Ocean Bank was able to recover and block about
$244,000 of the transfers leaving Plaintiff‘s total loss of funds at about $345,000,
plus the interest paid on the withdrawal on Patco‘s line of credit to cover the
outgoing fraudulent transfers that were in excess of the funds that were on
deposit.
The complaint was originally filed in late 2009 in state court. The matter was
subsequently removed to federal court in October of 2009.
Ocean Bank filed a motion to dismiss the suit on November 3, 2009. In their
motion, the Bank argues that it Ocean Bank followed the security procedures
contractually agreed upon by the parties with respect to electronic funds transfers.
As a result, they argue that Patco cannot now claim that Ocean Bank was
negligent under a duty of care not contained in the parties‘ agreements. In
addition, the Bank argues that, under the express exculpatory provisions in the
eBanking, Bill Payment, and Automated Clearing House agreements acquiesced
to by Patco, the Bank it is liable only for conduct rising to the level of gross
negligence and willful misconduct.
Regarding the alleged violation of Maine statutes, 11 M.R.S.A. § 4-1201 et. seq.,
governing funds transfers, the Bank argues that the choice of law provision in the
Bank‘s customer agreements selects Connecticut law – the location of the bank‘s
main office – as being applicable to the agreement.
On January 13, 2010, the Court heard arguments on a motion to dismiss and
issued an oral order denying the motion that same day. Defendant argued, in its
motion to dismiss Plaintiff‘s complaint that Plaintiffs attempt to shift
responsibility for its losses from third party cybercriminals to Ocean Bank is a
disregard of the express agreement entered into by both parties that prevent
Plaintiff‘s claims.
39
Plaintiffs have since filed an Amended Second Complaint against People‘s United
Bank. The bank has answered the amended complaint, and filed a counterclaim
action against Patco for breach of contract. Under the terms of the bank‘s
eBanking, Bill Payment, and ACH Agreements, Patco agreed to assume all
liability and responsibility to monitor its commercial checking account on a daily
basis. Patco also agreed that it would indemnify Ocean Bank from any suits
arising from its failure to abide by the terms of the Modified eBanking Agreement
and the ACH Agreement. The bank is seeking reimbursement of its costs and fees
in defending the action brought by Patco.
19. PlainsCapital Bank v. Hillary Machinery, Inc. (Case No. 09-
00653, E.D. Texas)
Issues and Potential Significance
This case presents one litigation strategy for banks who may be in a dispute with a
customer who‘s account has been hacked: file a preemptive action in court to
declare that the institution‘s remote banking security systems are sufficiently
secure. The case could also test the extent to which customers should be held
responsible for protecting their online accounts from compromises.
Last November, a customer at PlainsCapital Bank was the victim of a cybertheft
incident. Hackers based in Romania and Italy initiated a series of unauthorized
wire transfers from the customer‘s bank accounts, draining it of approximately
$800,000. About $600,000 of the amount was later recovered by PlainsCapital.
The customer made demand on the bank that it should reimburse the customer for
the rest of the stolen money. The customer alleges that the theft occurred
because PlainsCapital had failed to implement adequate security measures.
The bank responded by filing suit in the U.S. District Court for the Eastern
District of Texas. Styled as a declaratory judgment action, the complaint asks the
court to rule that the bank‘s systems are reasonably secure. The bank seeks no
relief against the customer.
Proceedings/Rulings
The complaint was filed on December 31, 2009. Defendants filed an Answer
and a Counterclaim to the Complaint on February 15, 2010. In its answer,
Hillary Machinery asserts that the bank failed to protect its customers
against theft by failing to monitor transactions of its customers. Defendant
also asserts that Plaintiff failed to properly secure its internet banking
transactions. Hillary Machinery also asserts that Plaintiff violated FFIEC
regulations by failing to adhere to FFIEC guidelines, which suggest that a
bank should use multi-factor identification in an internet banking
transactions.
40
* 20. Weintraub v. Quicken Loans, Inc., (Case No. 08-2373; United
States Court of Appeals for the Fourth Circuit). This case takes up the issue
of loan rescission under the Truth in Lending Act (“TILA”), U.S.C. §
1635(a).
Issues and Potential Significance
This case clarifies the rules for when consumers may apply TILA’s rescission
remedy to obtain a refund of application fees and deposits on abandoned
mortgage loans.
Proceedings/Rulings
Plaintiffs Rita and Barry Weintraub applied for a loan from Quicken Loans
to refinance their home in February of 2008. After receiving a Good Faith
Estimate and an Interest Rate Disclosure forms, the Weintraubs paid
Quicken Loans a $500 deposit along with the signed documents. An
appraisal of their home provided a value that was $32,000 less than the
estimate used to prepare the loan application. As a result, Quicken Loans
added a half-point adjustment which included a TILA statement, along with
a “Notice of Right to Cancel.” The Plaintiffs decided not to go through with
the refinancing and requested a refund of the $500 deposit according to the
terms of the Notice of Right to Cancel.
Quicken Loans, inc refused to return the deposit on the grounds that the
Deposit Agreement between the two parties provided that “the deposit will
not be refunded if you … choose to withdraw your application, or choose not
to close the transaction for any reason ….” The Weintraubs sued Quicken
Loans.
The District Court ruled in favor of Quicken Loans on the grounds that
Plaintiffs had withdrawn the loan application prior to closing, meaning that
the loan was never consummated. As a result, there was no “consumer credit
transaction” that would support a right to rescind under TILA.
The United States Court of Appeals for the Fourth Circuit affirmed the
District Court on February 5, 2010. The Court of Appeals held that a
consumer cannot exercise the right to rescind a loan created by § 1635(a)
until after the loan has been consummated. The Court called it a “common-
sense” reading of TILA which supported that the right to rescind applies in a
“consumer credit transaction,” which only exists when a loan has been
consummated. Until consummation takes place, a consumer is seen to have
incurred no binding legal obligation from which legal protection is required.
A copy of the opinion is attached as a PDF file.
41
FEDERAL PREEMPTION
21. Capital One Bank, N.A. et al. v. Darrel V. McGraw, (Case No. 08-
CV-00165; United States District Court for the Southern District of West
Virginia).
Issues and Potential Significance
In the aftermath of the Supreme Court‘s opinion on preemption in Clearinghouse v.
Cuomo, banking practitioners have been waiting for the dust to settle in order to get
a better sense of how the lower courts will interpret the court‘s ruling and whether
state law enforcement officials will ramp up their attempts to exert regulatory
oversight over national banks.
On June 26, 2009, the Attorney General for the State of West Virginia was
enjoined from ―issuing subpoenas or demanding the inspection of the books and
records‖ of Capital One Bank (USA), N.A., in connection with the Attorney
General‘s investigation into credit card lending. Relying upon the Supreme
Court‘s decision in Wachovia Bank v. Watters and the OCC‘s preemption
regulations, the court concluded that the Attorney General, in subpoening Capital
One and its servicing subsidiary, was ―attempting to exercise visitorial power‖ in
violation of the National Bank Act.
Three days later, on June 29, 2009, the United States Supreme Court issued its
opinion in Cuomo v. Clearing House Association, which permits Attorneys
General to issue subpoenas to national banks in the context of litigation.
On January 4, 2010, the Attorney General of West Virginia obtained relief from
the prior injunction prohibiting it from issuing subpoenas to Capital One and to
allow the state to proceed with its case against Capital One Bank. The Attorney
General moved swiftly, filing suit against Capital One bank later in the month
(see below, McGraw v. Capital One Bank (USA) N.A., et al., (Case No. 10-cv-7;
Circuit Court of Mason County, West Virginia)).
Proceedings/Rulings
On October 5, 2009, the Court denied the Attorney General‘s motion for a
hearing.
On January 4, 2010, the court issued an order granting the Attorney General‘s
motion. The Court ruled that the prior ruling is vacated ―insofar as it prohibits the
Attorney General from bringing lawsuits to enforce non-preempted, substantive
42
state laws.‖ This ruling essentially mirrors the result reached by the Supreme
Court in Cuomo v. Clearing House Association.
22. State of West Virginia, ex rel. Darrell V. McGraw v. Capital One
Bank (USA) N.A., et al., (Case No. 10-cv-7; Circuit Court of Mason County,
West Virginia).
Issues and Potential Significance
This is the follow-up action to the Capital One Bank, N.A. et al. v. Darrel V.
McGraw, (Case No. 08-CV-00165; United States District Court for the Southern
District of West Virginia), which is reported above.
On June 26, 2009, the Attorney General for the State of West Virginia was
enjoined from ―issuing subpoenas or demanding the inspection of the books and
records‖ of Capital One Bank (USA), N.A., in connection with the Attorney
General‘s investigation into credit card lending. Relying upon the Supreme
Court‘s decision in Wachovia Bank v. Watters and the OCC‘s preemption
regulations, the court concluded that the Attorney General, in subpoening Capital
One and its servicing subsidiary, was ―attempting to exercise visitorial power‖ in
violation of the National Bank Act.
Three days later, on June 29, 2009, the United States Supreme Court issued its
opinion in Cuomo v. Clearing House Association, which permits Attorneys
General to issue subpoenas to national banks in the context of litigation.
On January 4, 2010, the Attorney General of West Virginia obtained relief from
the earlier injunction, allowing the state to proceed with its case against Capital
One Bank. The Attorney General moved swiftly, filing this suit against Capital
One bank later in the month. The complaint alleges that
Capital One Bank and four other defendants engaged in ―unlawful debt
collection‖ practices that violate West Virginia consumer protection laws.
Proceedings/Rulings
The complaint alleges that Capital One lured consumers into debt repayment
plans that were disguised as offers of new credit. The offer was sent to
consumers who had charged-off accounts with Capital One or other creditors,
meaning the bank had already written off the accounts as uncollectible. It is
alleged that, under the terms of the offer, Capital One agreed to provide the
consumer $1 of new credit in exchange for an agreement to transfer the entire
account balance of a charged-off account to the new credit card account. The
attorney general alleges that the consumer was required to make payments on the
old debt in order to receive further increases in the credit limit on their new credit
card. By transferring the old debt onto a new credit card, it is alleged that Capital
One was able to charge interest, late fees and over-the-limit fees on debt that was
43
deemed uncollectable. The complaint alleges that the arrangement allowed
Capital One to re- age the debts so that the applicable statute of limitations period
started anew.
23. Monroe Retail, Inc., et al. v. RBS Citizens, N.A., f/k/a/ Charter One
Bank, N.A., et al., (United States Court of Appeals for the Sixth Circuit; Case No.
07-4263).
Issues and Potential Significance
This case examines the interplay of state laws regarding garnishment and their
application to federally chartered institutions, specifically national banks. A class-
action suit was brought against a number of defendant banks by a class of companies
and individuals who sought to garnish bank accounts belonging to debtors in the
state satisfy court judgments. Ohio statue, specifically Ohio Revised Code §
2716.12, provides that a garnishment action must be accompanied by a one dollar
fee to the garnishee, in this case, the banks who hold the debtors‘ funds in
customer accounts. The banks also frequently charge an additional $25 to $80
service fee to the customer whose account is being garnished. When debtors have
insufficient funds to satisfy both the service fee and the garnishment order, the
Banks extract the service fees from the garnished funds before releasing the
remainder of the funds sought by the creditor who is garnishing the account.
This suit, brought as a class action, challenged the right of banks in Ohio –
particularly national banks - to charge more than the one dollar fee provided by the
statute. The Sixth Circuit‘s decision affirming the dismissal of the suit demonstrates
that federal preemption is not totally dead post-Cuomo. It also provides some
guidance to national banks in a particularly thorny area of operations – the treatment
of state garnishment law.
Proceedings/Rulings
Initially filed in the Court of Common Pleas, this case was removed to the United
States District Court for the Northern District of Ohio, whereupon it was dismissed.
In dismissing the claim, the district court found that the National Bank Act
―preempted the Plaintiffs claims‖ as to national banks but not as to state banks.
Plaintiffs appealed the decision to the Sixth Circuit.
Affirming the district court‘s dismissal, the Sixth Circuit found that while the
National Bank Act does not preempt general state laws governing the rights of all
entities, Plaintiffs‘ specific conversion claim under the Ohio statute is preempted by
the National Bank Act‘s grant of authority to banks chartered under the statute to set
and collect fees. Under the OCC‘s regulations, national banks have explicit
―[a]uthority to impose charges and fees.‖ 12 C.F.R. § 7.4002(a). Interestingly, the
Court found that while there is a ―presumption against preemption‖ with respect to
the interplay of federal and state law, it found that general presumption does not
44
apply with respect to national banks, citing Watters v. Wachovia Bank, N.A. 550
U.S. 1, 12 (2007).
In a vigorous dissent, Circuit Judge Cole opined that majority‘s decision
begs the central question when it states that the garnishment law
―‗significantly interfere[s]‘ . . . with the Banks‘ ability to collect
their service fees.‖ No one disputes that. In fact, it does not just
significantly interfere with their ability to collect garnishment
fees—it forbids it.
Judge Cole concluded that ―[t]he garnishment law at issue is a law of general
applicability that only incidentally affects national banks, with negligible effect
on their ability to perform their business‖ and that ―[b]oth Supreme Court
precedent and the plain language of the OCC regulation‘s savings clause strongly
suggest that preemption is inappropriate here.‖
Plaintiffs have filed a motion requesting an extension of time to file a petition for
rehearing en banc until January 19, 2010. The motion was granted on December
23, 2009 and the petition was filed on January 19, 2010.
PATENT/INTELLECTUAL PROPERTY
24. Bilski v. Doll, (United States Supreme Court No. 08-964). This fall the
United States Supreme Court will take up a variant of an age-old query: can you
own an idea? The case, Bilski v. Doll, will decide the legal question of whether
an “idea” – in this case a method for predicting and hedging risk in commodities
markets – is properly patentable under United States law. By agreeing to grant
certiorari in Bilski, the Court has positioned itself to decide the fate of a relatively
new species of intellectual property – the business method patent (BMP).
Issues and Potential Significance
The case, In re Bilski, 545 F.3d 943 (Fed. Cir. 2008) (en banc) takes up the issue
of patent eligibility for business methods and non-tangible products. At issue is
an application for a ―business method‖ patent covering a strategy for hedging
risks in commodities trading. The Federal Circuit in Bilski rejected patent claims
involving a method of hedging risks in commodities trading, concluding that the
applicable test for determining patent eligibility is the ―machine-or-transformation
test‖ – a process qualifies for patent protection only if (1) it is implemented with a
particular machine, that is, one specifically devised and adapted to carry out the
process in a way that is not concededly conventional and is not trivial; or else (2)
it transforms an article from one thing or state to another.
45
It is too early to say whether Bilski will result in the invalidation of BMPs.
Financial institutions and companies that own BMPs are looking for the court to
support the Federal Circuit’s previous interpretations that permitted BMPs and
bring closure to whether business methods and software are patentable subject
matters. However, there are many who have suffered during the emergence of
BMPs and are currently licensees of business methods that are essential aspects of
their business. Check 21 processing is a good example. For these members of
this camp, an invalidation of BMPs might signal the end of licensing and fees
associated with business methods that the court declares to be invalid.
Proceedings/Rulings
The issues to be considered by the Supreme Court are:
Whether the Federal Circuit erred by holding that a "process" must be tied
to a particular machine or apparatus, or transform a particular article into a
different state or thing ("machine-or-transformation" test), to be eligible
for patenting under 35 U.S.C. § 101, despite Supreme Court precedent
declining to limit the broad statutory grant of patent eligibility for "any"
new and useful process beyond excluding patents for "laws of nature,
physical phenomena, and abstract ideas."
Whether the Federal Circuit's "machine-or-transformation" test for patent
eligibility, which effectively forecloses meaningful patent protection to
many business methods, contradicts the clear Congressional intent that
patents protect "method[s] of doing or conducting business." 35 U.S.C. §
273.
Oral arguments were heard on November 9, 2009.
PRIVACY
25. Bloomberg LP v. Board of Governors of the Federal Reserve
System, (Case No. 08-9595, United States District Court for the Southern District of
New York).
Issues and Potential Significance
The present appeal presents an attempt by the judiciary to strike a balance between
two competing public interests: the public‘s interest in transparency in government
that is reflected in the Freedom of Information Act, and the well-recognized need to
preserve confidential regulatory information pertaining to the nation‘s financial
institutions. On August 24, 2009, the U.S. District Court for the Southern District of
New York ruled that the Federal Reserve must disclose the names of companies and
banks that benefitted from its ―emergency‖ lending programs (including the
Discount Window) pursuant to a request for information filed by the Bloomberg
46
News Service under the Freedom of Information Act. Contemporaneous to this
decision, and based on essentially the same facts, the same District Court ruled to
withhold the same documents from Fox News. Fox News Network v. Board of
Governors of the Federal Reserve System, 639 F. Supp. 2d 384 (S.D.N.Y. 2009).
Both cases are now at the United States Court of Appeals for the Second Circuit.
ABA has submitted an amicus brief in the Bloomberg case, urging the Court to
withhold disclosure. The ABA submits that it is contrary to the public‘s interest to
compel the release agency documents under FOIA that could, if misinterpreted,
cause the public to lose confidence in insured depository institutions and cause a run.
Indeed, as noted by the District Court in the Fox News Network decision,
The Board's concerns, that rumors are likely to begin and runs on
banks are likely to develop, cannot be dismissed. Similarly, the
Board's concern is real that disclosure would reveal proprietary
trading information of borrowers, their trading strategies and the size
and nature of their portfolios of assets. The national economy is not
so out of danger, and the frailty of banks so different now than when
their Discount Window borrowing began, as to make the Board's
concern academic.
Fox News Network, 639 F. Supp. 2d at 401.
Oral argument was heard on January 11, 2010.
Proceedings/Rulings
The dispute arose when two Bloomberg reporters, Mark Pittman and Craig Torres,
each submitted FOIA requests to the Board of Governors that sought information
about the Federal Reserve‘s emergency loan recipients in early 2008. Their request
focused on the New York Federal Reserve Bank‘s decision to extend credit to the
Bear Sterns firm via loans and other credit to JP Morgan Chase.
The Board, in response to the request, conducted an internal search for records it
held, and identified certain documents as responsive to the FOIA requests, and
withheld other documents as protected under Exemptions 4 and 5 of the FOIA Act.
Bloomberg sued the Board, challenging the adequacy of the Federal Reserve‘s
search for documents and seeking the disclosure of all records pertinent to the
requests.
The court dismissed the Board‘s argument that the loan records should not be
subject to disclosure because doing so would inflict an ―imminent competitive
harm‖ upon institution that, for whatever reason, chooses to borrow from the Federal
Reserve System. The court concluded that the Federal Reserve had failed to meet its
burden that the documents in question – a series of reports know as ―Remaining
Term Reports‖ that shows outstanding extensions of credit to a borrower – were
47
sufficiently confidential so as to preclude disclosure under the relevant FOIA
exemptions. The court also took the Federal Reserve to task for taking the position
that documents in the possession of the Federal Reserve Banks are not necessarily
records of the agency for the purposes of FOIA.
The Federal Reserve has requested that the court stay the enforcement of its order
pending an appeal. The district court granted the stay on August 28, 2009.
On September 30, 2009, the Federal Reserve filed an appeal with the United States
Court of Appeals for the Second Circuit. The case has been combined with an appeal
involving a similar FOIA request filed by Fox News.
On November 17, 2009, the American Bankers Association was granted leave to file
(and has filed) an Amicus Curiae brief with the Second Circuit Court of Appeals.
SARBANES-OXLEY
26. Free Enterprise Fund v. Public Company Accounting Oversight
Board, Case No. 08-861 (United States Supreme Court) (D.C. Circuit, Case No. 07-5127).
Issues and Potential Significance
This is an action challenging the constitutionality of the Public Company
Accounting Oversight Board (PCAOB). The PCAOB was created by the
Sarbanes-Oxley Act to ―oversee the audit of public companies that are subject to
the securities laws.‖ In carrying out this mandate, the PCAOB is authorized to
exercise broad governmental power, including the power to ―enforce compliance‖
with the Act and the securities laws, to regulate the conduct of auditors through
rulemaking and adjudication, and to set its own budget and to fund its own
operations by fixing and levying a tax on the nation‘s public companies.
Plaintiffs argue that, notwithstanding the Act‘s effort to characterize the Board as
a private corporation, the PCAOB is a government entity subject to the limits of
the United States Constitution, including the Constitution‘s separation of powers
principles and the requirements of the Appointments Clause. They contend that
the PCAOB‘s structure and operation, including its freedom from Presidential
oversight and control and the method by which its members are appointed,
contravene these principles and requirements. As a result, they contend that the
PCAOB violates the Constitution.
This case is now at the United State Supreme Court.
48
Proceedings/Rulings
The United States intervened in the case and, on March 21, 2007, the District
Court granted the government‘s motion for summary judgment. With respect to
the challenge to the statute under the Appointments Clause of the Constitution,
the Court concluded that PCAOB members are ―inferior officers‖ and that the
Constitution permits Congress to vest the appointment of such officials in the
President, Courts of Law, or ―Heads of Departments.‖ The Court also rejected
plaintiff‘s arguments that (1) the SEC is not a ―Department‖ and (2) if the SEC is
deemed to be a Department, PCAOB members may only be appointed by the SEC
Chairman – the ―Head of the Department‖ – and not the entire Commission. The
Court found that the SEC is a ―Department‖ for purposes of the Constitution, but
declined to rule regarding whether the Constitution requires that the SEC
Chairman appoint PCAOB members, finding that plaintiffs lacked standing to
raise this claim because their injury is not traceable to this Constitutional infirmity
since the Chairman voted for each of the current PCAOB members.
The Court quickly disposed of arguments that the statute violated the separation
of powers between Congress and the Executive by stripping the President of the
ability to remove PCAOB members. SEC Commissioners may be removed by
the President ―for cause,‖ and PCAOB members can be removed by the SEC ―for
good cause shown.‖ The Court found that a facial challenge to the
constitutionality of the statute fails unless the SEC interprets its removal authority
regarding PCAOB members in a way that is unduly severe in all circumstances.
The Court also rejected arguments that Congress unconstitutionally delegated the
authority to set auditing, quality control, and ethics standards.
The Free Enterprise Fund has appealed this decision to the D.C. Circuit. Oral
argument was held on April 15, 2008.
On August 22, 2008, the D.C. Circuit affirmed the District Court’s decision,
finding that PCAOB board members are “inferior officers” subject to the direction
and supervision of the Commission and are therefore not required to be appointed
by the President. The Court held that the “for-cause” limitation on the power of
the Commission to remove board members and the power of the President to
remove Commissioners does not take away from the power of the President to
influence the PCAO board. The separation of powers doctrine embraces
independent agencies, such as the Commission, and the power of the Commission
to exercise general authority over their subordinates.
On January 5, 2009, Appellant Free Enterprise Fund filed a petition for a writ of
certiorari with the United States Supreme Court. On May 18, 2009, the Supreme
Court granted the petition for a writ of certiorari.
Oral arguments were held on December 7, 2009.
49
SUBPRIME LENDING
27. City of Memphis, et al. v. Wells Fargo Bank, N.A., et al, (Case No.
09-cv-02857; United States District Court Western District of Tennessee).
Issues and Potential Significance
This case is a suit brought under the Fair Housing Act of 1968 by the City of
Memphis and Shelby County in Tennessee. It seeks redress for injuries allegedly
caused by Wells Fargo in what both the City and the County claim to be Wells
Fargo‘s ―pattern or practice‖ of discriminatory mortgage lending.
Ironically, this suit was filed shortly after two district courts dismissed similar
suits filed by the cities of Cleveland and Baltimore. The complaint alleges causes
of action very similar to those raise in the Baltimore litigation, which was
dismissed on January 6, 2010.
Proceedings/Rulings
On December 30, 2009, the City of Memphis and Shelby County, Tennessee,
brought suit against Wells Fargo Bank seeking redress for injuries allegedly
caused by Wells Fargo Bank, Wells Fargo Financial Tennessee, Inc. and Wells
Fargo Financial Tennessee LLC. The complaint alleges that Wells Fargo engaged
in a pattern of illegal and discriminatory mortgage practices in their respective
jurisdictions. Plaintiffs are suing Wells Fargo for violations of the Fair Housing
Act of 1968, as amended, 42 U.S.C. §§ 3601 et seq. The suit claims that Wells
Fargo‘s alleged pattern of ―reverse redlining‖ caused a disproportionate number
of foreclosures (and resulting blight) in minority neighborhoods.
28. Mayor and City Council of Baltimore v. Wells Fargo, (Case No. L
08-CV-062) (D. Maryland).
Issues and Potential Significance
This case presents an attempt by the city of Baltimore to recover some of the cost
(including lost tax revenue) associated with the increased number of foreclosures
within its jurisdiction. The Mayor of Baltimore and the City Council have filed
suit against Wells Fargo Bank and Wells Fargo Financial Leasing in federal
district court seeking to recover damages under the Fair Housing Act for harm
arising from the increased number of mortgage foreclosures in the city of
Baltimore. The Complaint alleges that the high foreclosure rate in Baltimore‘s
minority neighborhoods is the result of ―reverse redlining‖ by the bank – the
targeting of a specific geographic area for unfair or predatory lending practices
because of the race or ethnicity of the area‘s residents. The suit contends that the
50
result of this alleged practice was to place inexperienced borrowers into loans that
they could not afford, causing disproportionately high foreclosure rates.
On January 6, 2010, the Court dismissed the case. The Court‘s opinion cut to the
heart of the city‘s case, finding that the causal connection between the bank‘s
alleged misconduct and the city‘s claim of damages from a decline in home
values and a loss of tax revenue was ―not plausible.‖ The Court also noted that
―[t]he alleged connection is even more implausible when considered against the
background of other factors leading to the deterioration of the inner city, such as
extensive unemployment, lack of educational opportunity and choice,
irresponsible parenting, disrespect for the law, widespread drug use and
violence.‖ It will be interesting to see if this practical approach to the problem of
causation is adopted in the other ―reverse redlining‖ litigation that is currently
pending.
Proceedings/Rulings
The suit seeks a declaratory judgment pursuant to 42 U.S.C. §§ 3604 and 3605
that Wells Fargo‘s lending practices violated the Fair Housing Act. It also seeks
an award of compensatory and punitive damages. The request for compensatory
damages is based upon a claim that the increase in the number of foreclosures in
Baltimore has resulted in decreased property tax revenue and an increase in
administrative costs in dealing with abandoned and vacant homes as well as social
services for those who have lost their homes.
On March 21, 2008, Wells Fargo moved the court to dismiss the case. Wells
Fargo‘s motion argued that:
The Court does not have subject matter jurisdiction over this action. In
particular, Wells Fargo argues that the City lacks Article III standing to
bring its claims because it cannot allege it has suffered a discrete or
palpable injury that is fairly traceable to the conduct of Wells Fargo.
The Fair Housing Act (―FHA‖) does not permit disparate impact claims,
such as the City‘s claims, as a matter of law. The Supreme Court‘s
decision in Smith v. City of Jackson, 544 U.S. 228 (2005), makes clear that
disparate impact liability is available only when it is expressly authorized
by statute, and that authorization is absent in the FHA.
Even if the FHA authorized disparate impact liability, the City has failed
to plead factual allegations that plausibly support its disparate impact
claims. In particular, the complaint fails to show an actual disparate
impact or demonstrate a causal connection between the specific
challenged practices or policies and the alleged disparate impact.
In advance of the hearing on the Motion to Dismiss, the court allowed the parties
some limited discovery concerning residential mortgage loans originated by Wells
Fargo in Baltimore City from January 1, 2005 to February 15, 2009.
51
On March 6, 2009, the court scheduled a hearing for the pending motion to
dismiss for June 29, 2009. During the hearing, the court heard arguments and
evidence on the following dispositive questions:
1. Whether the City of Baltimore has Article III standing in light of the
results of the ongoing damages discovery.
2. What evidence the City has to support its claim that Wells Fargo targeted
black borrowers in the City.
3. Whether the City adequately states a claim for disparate impact. This
would require the City to establish that black borrowers received
materially less favorable loan terms than similarly situated white
borrowers.
4. What evidence does the City have in support of it generalized claim that
Wells Fargo employees, with or without authorization, engaged in
subjective or discretionary fees to loans issued to black borrowers?
On July 2, 2009, the court issued a brief four-page order denying Wells Fargo‘s
motion to dismiss and granting the City leave to file their amended complaint.
The court found that ―[b]ased on the new affidavits submitted by former Wells
Fargo employees Elizabeth Jacobson and Tony Paschal, the City has proffered
sufficient proof to proceed with its claim for disparate treatment discrimination
under the Fair Housing Act.‖ The order also noted that the City‘s ―alternative
theory of liability, disparate impact, has not yet been tested factually.
Nevertheless, because the case will proceed on liability in general, the City is
entitled to discovery on both of its theories of liability, including disparate
impact.‖ The court found that, with regard to the fundamental issue of whether
the City had appropriate standing to bring the action, the ―facts in support of the
City‘s claim of standing are sufficiently plausible and grounded in fact to permit
the case to proceed to merits discovery.‖ Moreover, the Court found that the
―hearing demonstrated that the standing questions are inextricably intertwined
with the facts central to the merits of the dispute‖ and that ―it is appropriate to
permit discovery and to revisit the standing questions later at the summary
judgment stage.‖
On September 18, 2009, Wells Fargo filed a motion to dismiss the Amended
Complaint. Wells Fargo‘s arguments are reinforced by the recent decision in City
of Birmingham v. Citigroup Inc. The City of Birmingham litigation – a ―copycat‖
suit filed after the Baltimore litigation - advanced the same Fair Housing Act
allegations made in the instant case. The court in City of Birmingham found that
the City‘s complaint required ―a series of speculative inferences . . . to connect the
injuries asserted with the alleged wrongful conduct by the Defendants‖ in light of
the fact that ―the minority borrowers in this case could have defaulted on their
mortgages for a number of reasons, none of which related to the Defendants‘
alleged ‗reverse redlining.‖ In addition, the City of Birmingham Court found, just
as is the case in Baltimore, that ―loss of tax revenue from property taxes and the
52
increase in spending, like the depreciation in home values, could have been
caused by any number of factors having nothing to do with the Defendants‘
alleged ‗reverse redlining.‘‖ Id.
On January 6, 2010, the Court dismissed the complaint. The court concluded that
the contention that Wells Fargo was solely responsible for the economic damage
done to the city as ―implausible.‖ Judge Frederick Motz held that a causal
connection between the bank‘s alleged misconduct and the city‘s claim of
damages from a decline in home values and a loss of tax revenue was ―not
plausible.‖ The Court also noted that ―[t]he alleged connection is even more
implausible when considered against the background of other factors leading to
the deterioration of the inner city, such as extensive unemployment, lack of
educational opportunity and choice, irresponsible parenting, disrespect for the
law, widespread drug use and violence.‖
The Court granted the City leave to file a second amended complaint before
February 3, 2010, if it so chooses. The deadline to file a second amended
complaint has been rescheduled for March 12, 2010.
29. City of Cleveland v. Deutsche Bank Trust Company, et. al (Case
No. 08-cv-00139, United States District Court for the Northern District of Ohio)
(Case No. 09-3608, Sixth Circuit).
Issues and Potential Significance
This case presents an attempt by the city of Baltimore to recover some of the cost
(including lost tax revenue) associated with the increased number of foreclosures
within its jurisdiction. This case is interesting because, unlike the litigation in
Baltimore and Birmingham, this suit is based upon a common law tort theory –
that the investment banks facilitating subprime loans by making funding available
to lenders are engaged in a ―public nuisance.‖
This novel theory was unsuccessful at the District Court level – the matter is now
on appeal.
Proceedings/Rulings
The plaintiff in this case, the City of Cleveland, Ohio, brought suit against a
number of investment banks that they claim have played a role in proliferating
subprime loans in the city. The complaint contends that the funding of subprime
loans by the defendants has caused an “epidemic” of foreclosures that has harmed
the city. The complaint contends that the defendants’ role in funding these loans
constitutes a nuisance under Ohio law.
This case was originally filed on January 10, 2008, in the Cuyahoga County Court
of Common Pleas. The case was removed to Federal Court. On October 8, 2008,
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city of Cleveland filed a Second Amended Complaint. The defendants (both
individually and collectively) moved to dismiss the Second Amended Complaint
on a number of grounds, including –
Ohio law (Ohio Rev. Code Section 1.63), which prevents municipalities
from regulating lending practices ―directly or indirectly‖ by ordinance ―or
other action,‖ bars the City of Cleveland from pursuing a public nuisance
claim to attack the mortgage lending practices alleged in the complaint.
The ―economic loss doctrine‖ bars the City‘s claim for public nuisance
where it seeks recovery exclusively for alleged financial harm.
The City has failed to state a claim for public nuisance where (1)
defendants did not proximately cause the increase in defaults and related
foreclosures in Cleveland, which are the result of a complex confluence of
economic factors; (2) defendants‘ alleged conduct did not ―unreasonably
interfere‖ with a ―public right‖ because the very loan structures
challenged in the City‘s complaint were understood, regulated, and
promoted by federal banking regulators over the past decade and the
original mortgage transactions at issue (as well as any later foreclosures)
concerned contractual relationships between individual parties.
Cleveland‘s public nuisance and all of its associated allegations in the
Second Amended Complaint are preempted by the National Bank Act and
implementing federal regulations.
On December 3, 2008, the OCC filed an amicus brief on behalf of Wells Fargo
National Bank. In its brief, the OCC took the position that the defendants are
entitled to exercise federally authorized powers to engage in real estate lending,
loan securitization, and loan servicing activities subject to those federal standards,
administered under the exclusive supervision of the OCC. The city‘s cause of
action, styled as an action in public nuisance, ―would have the de facto effect of
imposing local standards upon national bank operations and is therefore precluded
by federal law and the operation of the Supremacy Clause.‖ The OCC argued that
the suit must be dismissed because (1) the cause of action would obstruct, impair
or condition the exercise of national bank powers and is preempted because it
conflicts with federal law; and (2) the cause of action constitutes the exercise of
unauthorized visitorial authority over national bank activities that is expressly
precluded by federal statute and OCC regulations.
On May 15, 2009, Judge Sara Lioi dismissed the City‘s case with prejudice. In
her opinion, Judge Lioi held that the City‘s nuisance claim fails as a matter of law
failed for several reasons. First, the claim is preempted by Ohio Revised Code §
1.63, which prohibits local jurisdictions from adopting ordinances or taking ―other
action‖ designed to regulate financial institutions. Second, the nuisance claim is
barred by the ―economic loss rule‖ – this precludes recovery in tort for economic
losses not arising from tangible physical harm to persons or property. Third, the
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court found that the complaint failed to state a ―public nuisance‖ because the
behavior at issue did not constitute an ―unreasonable interference with a public
right.‖ The funding of loans via the securitization of mortgages is subject to strict
regulation and, within that framework, is actually encouraged. Because the banks
complied with the regulatory scheme then in place, they cannot be sued for a
public nuisance under the theory that the activity was performed in a negligent
manner. Finally, the City‘s allegations were insufficient to demonstrate that
defendants‘ conduct was the proximate cause of its alleged damages.
The City filed an appeal to the Sixth Circuit on May 18, 2009. Briefing is
complete, and a date for oral argument is pending.
MISCELLANEOUS
30. In re Wells Fargo Home Mortgage Overtime Pay Litigation
(Mevorah v. Wells Fargo Home Mortgage), (06-01770-MHP, Northern District
of California).
Issues and Potential Significance
The plaintiffs in the case, persons employed as ―Home Mortgage Consultants‖ by
Wells Fargo Mortgage, contend that they were improperly classified as ―exempt‖
under the Fair Labor Standards Act and improperly denied overtime pay. Wells
Fargo Mortgage classified all of their their Home Mortgage Consultants as being
―exempt‖ employees under the Fair Labor Standards Act. The trial court (the
United States District Court for the Northern District of California, located in San
Francisco) certified the case as a class action involving all of Well Fargo‘s Home
Mortgage Consultants nationwide.
The primary issue in the case - at least with respect to whether the Court will treat
this as a class action – focuses on whether a nationwide class was appropriate.
The District Court concluded that it was appropriate to certify the litigation as a
class action because the employees worked under the same basic compensation
structure and were subject to a uniform policy at Wells Fargo that all Home
Mortgage Consultants were treated as ―exempt‖ employees. Wells Fargo argues
that the certification was inappropriate because the duties and responsibilities of
its various Home Mortgage Consultants are not uniform, meaning that a
determination of whether a position is properly exempt under the statute would
have to be made on a case-by-case basis.
Proceedings/Rulings
On November 13, 2007, the ABA and a number of other amici filed a brief in
support of Well Fargo‘s petition.
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On July 7, 2009, the Ninth Circuit reversed the district court‘s order certifying the
California class, and remanded the case for a new certification analysis. The
Ninth Circuit ruled that while it was appropriate for a court to consider a uniform
exemption policies (such as was in place at Wells Fargo) as a factor in
determining whether to certify a class under Rule 23(b)(3), it was an abuse of
discretion for the Defendants to rely on such policies to the ―near exclusion‖ of
other relevant factors. The Court was persuaded that sufficient individual
differences existed with respect to job responsibilities to justify remanding the
question back to the District Court for further proceedings.
The Court issued its mandate on July 29, 2009. A new hearing on class
certification was held in district court on November 30, 2009.
On January 13, 2010, the District Court denied Plaintiff‘s renewed motion for
class certification ruling that Plaintiff had failed to present ―any viable method for
certifying the action as a class action,‖ by failing to meet the requirement under
Rule 23(b)(3) that ―common issues of law or fact‖ would predominate in the case.
In order to adjudicate Wells Fargo‘s defenses, especially the outside sales person
exemption, a substantial quantity of individual inquiries will be necessary.
Although there are some issues in this case amenable to common proof, the court
concluded that individual inquiries will predominate over common questions.
31. Martinez v. Wells Fargo Bank, N.A., (Case No. C-06-03327 RMW
(N.D. Cal.), Case No. 07-17277 (Ninth Circuit)).
Issues and Potential Significance
This matter raises the issue of whether a bank must disclose the actual cost of any
fees or charges that the bank collects in connection with settlement on residential
mortgage loans. The plaintiff in this case alleged that Wells Fargo added a mark up
to underwriting fees and tax service fees, as well as other fees charged for other
services. The complaint also alleged that the bank failed to disclose the actual cost
to the bank of the underwriting, tax service, and other related fees.
The United States District Court for the Northern District of California granted a
partial dismissal of the case. The matter is now before the Ninth Circuit.
Proceedings/Rulings
In a decision issued July 31, 2007, the United States District Court for the Northern
District of California partially dismissed a class action against Wells Fargo Bank
alleging that the bank improperly charged and collected fees for settlement services
in connection with residential mortgage loans. According to the complaint, the bank
allegedly charged the borrower marked-up fees underwriting fees and tax service
fees, as well as other fees charged for other services. The complaint also alleged that
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the bank failed to disclose the actual cost of the underwriting and tax services and
related costs of the mortgage contract.
Wells Fargo moved to dismiss the state law claims (based upon the California
Business and Professional Code § 17200). The court had previously dismissed the
Plaintiffs‘ claims alleging unfair and deceptive business acts under California law on
the grounds that those claims were preempted by the National Bank Act and OCC
regulations. The court‘s latest order reaffirmed its prior dismissal of the unfair and
deceptive practices claims as being preempted by the National Bank Act, citing the
Watters decision. The court found that ―the [National Bank Act] explicitly confers
upon national banks such as Wells the authority to engaged in real estate lending,
and the determination of interest and non-interest charges and fees associated with
the business of real estate lending are incidental powers of that authority.‖
The District Court also dismissed the unlawful business practices or acts claim under
section 17200. Plaintiffs alleged that the bank had a duty under state and federal law
to disclose the actual cost of the services charged in connection with the mortgage.
The court rejected the notion that state law could impose a duty not to ―suppress that
which is true‖ or to disclose material facts in its sole possession which it knows are
not known to or are reasonably discoverable by the other party. The court concluded
that the requirements of state law were preempted; under the federal scheme the
bank is required to disclose its settlement charges in the HUD-1 form, but is not
required to additionally disclose its actual costs. The court also concluded that the
disclosure requirements of applicable federal regulation or the HUD-1 form did not
serve as a predicate unlawful act under section 17200. The court found that federal
regulations and the HUD-1 form do not require the bank to disclose its actual costs
of settlement services or the components that make up the actual charges that are
imposed.
In order to facilitate an immediate appeal of the decision, on September 19, 2007,
the parties stipulated to the dismissal of Count One (Violation of RESPA –
Markups) of the Second Amended Class Action with prejudice. The Court
entered final judgment on November 7, 2007, dismissing the case with prejudice.
Plaintiffs have appealed to the Ninth Circuit.
Briefing in the case is complete, and the parties are awaiting a setting on the
argument calendar.
The Ninth Circuit held an oral hearing of the case on December 9, 2009.