Archive for May 2017

9th Cir. Amends, Reinforces Its Ruling that Foreclosure Trustees Are Not FDCPA ‘Debt Collectors’

The U.S. Court of Appeals for the Ninth Circuit recently amended its opinion in Ho v. ReconTrust Co., maintaining and affirming its prior ruling that the trustee in a California non-judicial foreclosure did not qualify as a debt collector under the federal Fair Debt Collection Practices Act (FDCPA).

The amendments to the prior ruling among other things add that a California mortgage foreclosure trustee meets the FDCPA’s exclusion from the term “debt collector” for entities whose activities are “incidental to … a bona fide escrow arrangement” at 15 U.S.C. § 1692a(6)(F).

The Ninth Circuit also removed its prior discussion of Sheriff v. Gillie, 136 S. Ct. 1594 (2016), replacing it with a discussion of foreclosure being a “traditional area of state concern” not to be superseded by federal law without “clear and manifest purpose of Congress,” which the Court found lacking here.

Splitting from the Fourth and Sixth Circuits and ruling against the position argued by the CFPB in an amicus curiae brief, the Ninth Circuit explained that the California foreclosure trustee defendant was not attempting to collect money from the plaintiff when it sent her a notice of default and notice of sale so that its activities did not qualify as debt collection.

This holding affirms the leading case of Hulse v. Owen Federal Bank, 195 F. Supp. 2d 1188 (D. Or. 2002), which has been the subject of much debate concerning whether non-judicial foreclosure constitutes debt collection.

The Ninth Circuit also vacated the trial court’s dismissal of the TILA rescission claim based on its recent ruling that a claim for rescission under the Truth in Lending Act does not require that a plaintiff allege the ability to repay the loan.

A link to the amended opinion is available at:  Link to Opinion.

The plaintiff took out a loan to buy a house and the loan was secured by a deed of trust. There are three parties to a deed of trust: (i) the lender, who is the trust beneficiary, (ii) the borrower, who as the trustor holds equitable title to the property, and (iii) the trustee, who is an agent for the lender and the borrower, holds legal title to the property, and is authorized to sell the property if the borrower fails to pay the loan.

The plaintiff missed payments on her mortgage and the trustee initiated a non-judicial foreclosure under California law. As required by the statute, the trustee mailed the plaintiff a notice of default stating how much she owed on the loan, that she had the right to bring the account into good standing, and that it could be sold without any court action.

When the plaintiff didn’t pay, the trustee mailed a notice of sale informing the plaintiff that the house would be sold if she did not pay.  The sale never took place because the plaintiff received a loan modification.

However, she sued the trustee anyway claiming that it had violated the FDCPA by misrepresenting the amount of the debt and sought to rescind the mortgage transaction under TILA for purported fraud.

The trial court granted the trustee’s motion to dismiss, and the plaintiff appealed arguing that the notice of default and notice of sale were attempts to collect a debt because both threatened foreclosure unless the plaintiff paid the mortgage.

As you may recall, the FDCPA defines the term “debt” to mean “any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment.” 15 U.S.C. § 1692a(5).

The Ninth Circuit interpreted this to be “synonymous” with the word “money” such that the trustee would only be liable if it attempted to collect money, directly or indirectly, from the plaintiff.  The Court found that the trustee did not do so because the “object of a non-judicial foreclosure is to retake and resell the security, not to collect money from the borrower” as California’s non-judicial foreclosure law does not permit deficiency judgments following the foreclosure.  Thus, the non-judicial foreclosure extinguishes the debt, and any action taken to advance the non-judicial foreclosure is not an attempt to collect a debt as defined by the FDCPA.

The Ninth Circuit rejected the plaintiff’s argument that the possibility of repossession of the property may induce the debtor to pay off the debt explaining that such an “inducement exists by virtue of the lien, regardless of whether foreclosure proceedings actually commence.”  This is contrary to the Sixth Circuit’s ruling in Glazer v. Chase Home Fin. LLC, 704 F.3d 453 (6h Cir. 2013) (holding that all “mortgage foreclosure is debt collection” under the FDCPA), and the Fourth Circuit’s ruling in Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373 (4th Cir. 2006) (similar).

The Ninth Circuit noted that the Fourth Circuit “was more concerned with avoiding what it as viewed a ‘loophole in the [FDCPA]’ than with following the [FDCPA’s] text,” and that the Sixth Circuit’s ruling “rests entirely on the premise that ‘the ultimate purpose of foreclosure is the payment of money.’”

The Ninth Circuit distinguished its reasoning by pointing out that the FDCPA defines “debt” as an “obligation of the consumer to pay money,” whereas a trustee in a California non-judicial foreclosure collects money from the purchaser, not the consumer, so that the money is not “debt” as defined by the FDCPA.

Rather, the Court held, sending notices of default and sale under California’s non-judicial foreclosure law fits into the FDCPA’s exception of enforcement of a security interest, at 15 U.S.C. § 1692a(6)(F). The Ninth Circuit explained that entities whose principal purpose is the enforcement of security interests can be debt collectors under the FDCPA but that “the enforcement of security interests is not always debt collection.” This is consistent with the Fourth and Sixth Circuits’ premise that an entity does not become a “debt collector” where its “only role in the debt collection process is the enforcement of a security interest.”

The Ninth Circuit also differentiated its reasoning by pointing out that the trustee’s right to enforce the security interest as a non-debt collector under the 1692a(6)(F) exception necessarily implied that the trustee must also be able to take the statutorily-required steps leading up to the sale as a non-debt collector, including sending the notice of default and notice of sale.  Such communications are necessary to effect the enforcement of the security interest and do not convert it into debt collection.

The Court further held that a trustee’s role under California law as the holder of legal title means that the trustee functions as an escrow, which further satisfies the 1692a(6)(F) exclusion from “debt collector” of an entity whose activities are “incidental to …a bona fide escrow arrangement.” The Ninth Circuit also pointed out that the notices of default and sale protect the debtor by informing her of her rights and of the impending foreclosure and are not for the purpose of harassing the debtor into paying a debt she might not otherwise pay.

Concerning the TILA claim, the Court held that after the plaintiff’s TILA claims had been dismissed, it had ruled that a mortgagor did not need to allege her ability to repay the loan in order to state a rescission claim under TILA. Thus, the plaintiff’s TILA claims were reinstated.

The Ninth Circuit’s holding distinguishes debt collection from the actions taken to initiate and facilitate a non-judicial foreclosure by pointing out that those actions do not constitute an attempt to collect money from the consumer because the purpose of a non-judicial foreclosure in California is to retake and resell the security on the loan resulting in collection of money from the purchaser of the property.

Thus, non-judicial foreclosure under California law falls under the FDCPA’s 1692a(6)(F) exclusion from the definition of “debt collector.”

Fla. Court (19th Jud Cir) Holds Periodic Statements Sent to Borrower Following Dismissal of Foreclosure Not Actionable Under FCCPA

The County Court of the Nineteenth Judicial Circuit in and for St. Lucie County, Florida recently dismissed a borrower’s amended complaint against a mortgage servicer alleging violations of the Florida Consumer Collection Practices Act (FCCPA) for sending mortgage statements to the borrower following involuntary dismissal, without prejudice, of a foreclosure action.

In dismissing the action with prejudice, the Court held that the statements sent by the defendant mortgage servicer were not attempts to collect a debt, and therefore not actionable under the FCCPA.

In addition, the Court held that the plaintiff borrower failed to state a cause of action because res judicata did not apply to the dismissal of the foreclosure action, the debt was not barred by the statute of limitations, and any alleged expiration of the statute of limitations would not change the balance due on the mortgage loan.  A copy of the order in Merritt v. Seterus, Inc. is available at:  Link to Order.

The predecessor mortgagee filed a foreclosure action in 2013, which was involuntarily dismissed without prejudice in September 2015 for failing to appear at trial.  Following the dismissal of the foreclosure, the successor servicer of the mortgage mailed two periodic mortgage statements to the borrower.

The borrower filed suit against the servicer alleging that the statements purportedly sought to collect amounts that were barred by the statute of limitations, and therefore supposedly violated the FCCPA, Fla. Stat. § 559.55, et seq., by claiming, attempting or threatening to enforce a debt it knew was not legitimate or asserting a legal right it knew did not exist.  Fla. Stat. § 559.72(9).  The servicer moved to dismiss for failure to state a cause of action under the FCCPA.

First, the Court considered whether or not the statements themselves even constituted debt collection under the FCCPA.

The Court acknowledged that sending periodic statements for residential mortgage loans is required by the federal Truth in Lending Act (TILA) and Regulation Z.  See 15 U.S.C. § 1638(f); 12 C.F.R. § 1026.41.  The Court held that excluding periodic statements from the reach of the FCCPA is consistent with the Consumer Financial Protection Bureau’s (CFPB) interpretation of the analogous federal statute, the federal Fair Debt Collection Practices Act (FDCPA), which regards the animating purpose of sending periodic statements as compliance with federally mandated informational disclosures, and not the collection of a debt.

The Court rejected the borrower’s argument that the inclusion of “mini-Miranda” language (“[t]his is an attempt to collect a debt.  All information will be used for that purpose,”) transformed the statement into an attempt to collect a debt, as courts throughout the country have held that such language is not probative to the animating purpose of the letter.  See e.g. Maynard v. Cannon, 401 Fed. Appx. 389, 395 (10th Cir. 2010); Lewis v. ACB Bus. Services, Inc.,135 F.3d 389, 399 (6th Cir. 1998); Gburek, 614 F.3d at 386; Goodson v. Bank of Am., NA., 600 Fed. Appx. 422, 432 (6th Cir. 2015); Muller v. Midland Funding, LLC, 14-CV-81117-KAM, 2015 WL 2412361, at *9 (S.D. Fla. May 20, 2015).

The Court noted that the FDCPA, in fact, requires the inclusion of the “mini-Miranda” disclaimer in various communications whose animating purpose is not to collect a debt.  See 15 U.S.C. 1692e(l l); Lewis, 135 F.3d at 399; Maynard, 401 Fed. Appx. at 395; Gburek, 614 F.3d at 386; Goodson, 600 Fed. Appx. at 432.

Accordingly, the Court held that the periodic statements did not attempt to collect a debt, and were not subject to the FCCPA.

Next, the Court considered the borrower’s arguments that the statements sought to collect amounts barred by res judicata and the statute of limitations.

The Court found that res judicata does not bar collection of the amounts due on the loan because: (i) res judicata does not apply to dismissals without prejudice, because such dismissals are not an adjudication on the merits (See Tilton v. Horton, 137 So. 801, 808 (Fla. 1931) and Markow v. Am. Bay Colony, Inc., 478 So. 2d 413, 414 (Fla. 3d DCA1985)), and; (ii) the doctrine of res judicata would not preclude the collection of these amounts in an acceleration and foreclosure premised on a new and different default even if the initial dismissal were with prejudice. See Singleton v. Greymar Associates, 882 So. 2d 1004, 1006 (Fla. 2004); Bartram v. US. Bank Nat. Ass’n, 41 Fla. L. Weekly S493, 2016 WL 6538647 (Fla. Nov. 3, 2016); Desylvester v. Bank of NY Mellon (Fla. App., 2017).

In addition, the Court rejected the borrower’s argument that the statements sought to collect amounts barred by the statute of limitations for mortgage foreclosure.

Primarily, the Court held that the borrower’s argument was flawed because the debt had not been accelerated, such that the statute of limitations had not begun to run.  See Locke v. State Farm Fire & Cas. Co., 509 So. 2d 1375, 1377 (Fla. 1st DCA 1987); Greene v. Bursey, 733 So.2d 1111, 1115 (Fla. 4th DCA 1999).  Even if the debt were once accelerated, the dismissal of the prior foreclosure unwound any prior acceleration, and the mortgagee is not time-barred by the statute of limitations from filing a new foreclosure which accelerates the debt.  See Bartram v. US. Bank Nat. Ass’n, 41 Fla. L. Weekly S493, 2016 WL 6538647, *1 (Fla. Nov. 3, 2016).

Lastly, the Court held that even if the statute of limitations had in fact run, it would have no effect on the content or disclosures within the periodic statement.   See Danielson v. Line, 135 Fla. 585, 185 So. 332, 333 (1938).

Because the statute of limitations is merely procedural in character, and has no bearing on the substance of the underlying contract and mortgage lien, the Court held the appropriate measure of the truthfulness of figures set forth in the statements would be governed by the Florida statute of repose, not the statute of limitations.  Id; Garrison v. Caliber Home Loans, Inc., 616CV9780RL37DCI, 2017 WL 89001, at *3 FN 19 (M.D. Fla. Jan. 10, 2017).

Accordingly, the servicer’s motion to dismiss was granted, and the borrower’s amended complaint was dismissed with prejudice.

2nd Cir. Upholds Dismissal of Data Breach Action for Lack of Standing, Distinguishes 7th Cir. Rulings

The U.S. Court of Appeals for the Second Circuit recently affirmed the dismissal of a “data breach” lawsuit against a retailer, holding that the plaintiff lacked standing for failure to allege a cognizable injury.

A copy of the opinion in Whalen v. Michaels Stores, Inc. is available at:  Link to Opinion.

The plaintiff made credit card purchases at a retail store and, two weeks later, her credit card information was fraudulently presented to make purchases in a foreign country. The plaintiff immediately cancelled her credit card and the fraudulent charges were not incurred on the card, nor was she liable for them.

Shortly thereafter, the retailer issued a press release concerning a possible data breach in its computer system that involved the theft of customers’ credit card and debit card data and later confirmed the breach. The retailer offered 12 months of identity protection and credit monitoring services to affected customers.

The plaintiff sued the retailer alleging breach of implied contract and New York’s deceptive business practices act, N.Y. General Business Law § 349, and the retailer filed a motion to dismiss.

The trial court granted the motion to dismiss holding that the plaintiff’s allegations did not establish Article III standing because she did not incur any actual charges on her credit card and she did not allege with any specificity that she had spent time or money monitoring her credit to prevent identity theft or fraudulent credit activity.   The plaintiff appealed from the dismissal.

On appeal, the Second Circuit explained that Article III standing requires that a plaintiff allege an injury that is “concrete, particularized, and actual or imminent; fairly traceable to the challenged action; and redressable by a favorable ruling.”

The plaintiff’s theory of liability asserted that she faced a risk of future identity fraud, and that she had lost time and money resolving attempted fraudulent charges and monitoring her credit.  The Second Circuit found that such a “future injury” had to be “certainly impending,” not speculative.

The Court pointed out that the plaintiff’s credit card had been cancelled, such that no further fraudulent charges were possible, and that none of her personal identifying information, such as her birth date or Social Security number were alleged to be stolen; such future identity theft was not alleged.

In addition, the plaintiff admitted that she had not paid any fraudulent charges, and she did not allege any specific facts about the time or effort she purportedly spent monitoring her credit. Instead, the Court noted, she made general allegations about consumers expending “considerable time” on credit monitoring to avoid fraud and asserted class damages and did not seek leave to amend her complaint to add more specific allegations to sustain her claims.

The Second Circuit found the plaintiff’s allegations insufficient to establish concrete, particularized injury, and therefore that the plaintiff failed to achieve Article III standing.

The Court noted that the plaintiff’s lack of sufficient allegations distinguished her complaint from other retailer data breach cases, such as Remijas v. Neiman Marcus Grp., LLC, 794 F.3d 688 (7th Cir. 2015), and Lewert v. P.F. Chang’s China Bistro, Inc., 819 F.3d 963 (7th Cir. 2016), in which the personal information of the class members was stolen such that a risk of future identity theft was possible, and the named plaintiffs asserted specific factual injuries concerning their expenses to monitor their credit reports for fraudulent activity. In each of those cases, the Seventh Circuit found that the plaintiffs had established Article III standing as their allegations supported the conclusion that their future informational injuries were “certainly impending.”

Accordingly, the trial court’s order granting the defendant retailer’s motion to dismiss was affirmed.

8th Cir. Holds Removal Proper Where Absence of CAFA Jurisdiction Not ‘Established to a Legal Certainty’

The U.S. Court of Appeals for the Eighth Circuit recently held that the requirements for the federal Class Action Fairness Act (CAFA) were met and the matter was properly removed to federal court, where the plaintiffs could not “establish to a legal certainty” that their claims were for less than the requisite amount.

A copy of the opinion in Dammann v. Progressive Direct Insurance Company is available at:  Link to Opinion.

The plaintiff insureds purchased automobile insurance from the insurer.

The insureds’ policies required deductible payments of $100 for medical expense payments and $200 for economic loss payments.  Both policies provided only the minimum coverage required by Minnesota law: $20,000 for medical expenses, and $20,000 for economic losses.

The insureds both suffered covered losses and incurred more than $20,100 in medical expenses as a result. Because their policies included the $100 deductible for medical expense payments and a maximum coverage of $20,000, each insured received a payment of just $19,900 from the insurer.

The insureds subsequently filed suit in Minnesota state court alleging that the insurer’s practice of selling policies with deductibles that reduced benefit payments below $20,000 for medical expenses and for economic losses violated Minnesota law.  The insureds sought to represent a class of all similarly situated individuals.

The insurer timely removed the case to federal court and the insurers moved to remand to state court on the ground that CAFA’s jurisdictional requirements were not met because the amount in controversy did not exceed $5 million. After the trial court denied the motion to remand, the insurer moved to dismiss the case for failure to state a cause of action, which motion was granted.  The insureds appealed.

On appeal, the insureds first argued that the trial court should have remanded the case to state court because it lacked jurisdiction because the requirements of CAFA were not met.

As you may recall, under CAFA, federal courts have original jurisdiction over class actions “where, among other things, 1) there is minimal diversity; 2) the proposed class contains at least 100 members; and 3) the amount in controversy is at least $5 million in the aggregate.”

The insureds argued that the trial court erred when it determined that the amount in controversy exceeded $5 million because as plaintiffs were “the master of the complaint,” the trial court therefore should have restricted its analysis of the amount in controversy to what could be recovered by the class of individuals identified in the complaint, which was only individuals who had actually made claims for covered losses and were paid less than the statutory minimum.

The insurer stated some 600 individuals fell within that class.  However, when the trial court calculated the amount in controversy, it relied on premiums collected on all the insurer’s policies, which included the challenged deductibles regardless of whether the policyholders had made claims that led to application of the deductibles.  The insureds argued this figure was overinclusive.

In ruling against the insureds, the Eighth Circuit first noted that where the party seeking to remove has shown CAFA’s jurisdictional minimum by a preponderance of the evidence, “remand is only appropriate if the plaintiff can establish to a legal certainty that the claim is for less than the requisite amount.”

The Eighth Circuit then held that the insureds “failed to show that it is legally impossible for them to recover more than $5,000,000. While they put [the insurer’s] sales practices at issue and seek a refund of their premium payments, they have not offered evidence to establish the amount they collectively paid in premiums. Without such information, we cannot determine whether it would be legally impossible for them to recover $5,000,000. We therefore conclude that the district court properly denied the motion for remand.”

The Eighth Circuit also affirmed the trial court’s ruling granting the insurer’s motion to dismiss, finding that the insured did not allege a violation of the Minnesota No Fault Act.

SCOTUS Holds Cities Have Standing Under FHA for ‘Subprime Nuisance’ Claims

The Supreme Court of the United States recently held that a city qualifies as an “aggrieved person” under the federal Fair Housing Act, 42 U.S.C. § 3601 et seq., and thus that the plaintiff city in this action had standing to assert claims under the FHA against banks the city believed were engaging in unlawful discriminatory lending practices.

According to the city, the unlawful lending practices caused, among other damages, a disproportionate number of foreclosures and vacancies in majority-minority neighborhoods, which impaired the city’s effort to assure racial integration, diminished the city’s property-tax revenue, and increased demand for police, fire, and other municipal services.  The Court concluded that such alleged damages are within the “zone of interests” designed to be protected by the FHA, and the city had the right to assert its claims.

The Court also concluded that although the alleged damaging consequences of the banks’ supposed discriminatory lending practices were foreseeable, that, alone, was insufficient for the city to establish proximate cause under the FHA, as required.

The Court remanded the case to the trial court for that court to establish the parameters for sufficiently demonstrating proximate cause.

A copy of the opinion in Bank of America Corp. v. City of Miami is available at:  Link to Opinion.

As you may recall, the FHA makes it unlawful to “discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith, because of race . . . .” See 42 U. S. C. §3604(b).  The statute also prohibits “any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race . . . .” See 42 U.S.C. §3605(a).

The FHA allows any “aggrieved person” to file a civil action seeking damages for a violation of the statute. See 42 U.S.C. §§3613(a)(1)(A), 3613(c)(1).  It defines an “aggrieved person” to include “any person who . . . claims to have been injured by a discriminatory housing practice.” 42 U.S.C. §3602(i).

Here, the city sued two different banks, alleging that they intentionally issued riskier mortgages on less favorable terms to minority customers than they issued to similarly-situated white, non-Latino customers, in violation of 42 U.S.C. §§3604(b) and 3605(a).

The city alleged that the discriminatory practices “adversely impacted the racial composition of the city,” “impaired the city’s goals to assure racial integration and desegregation,” “frustrate[d] the city’s longstanding and active interest in promoting fair housing and securing the benefits of an integrated community,” and disproportionately “cause[d] foreclosures and vacancies in minority communities.” The city further alleged that the increased foreclosures and vacancies caused (1) a reduction of the property tax revenues to the city, and (2) the city to spend more on municipal services it had provided for the vacant and dangerous properties.

The banks moved to dismiss the complaints, contending that the injuries the city alleged did not fall within the zone of interests the FHA was designed to protect and, as a result, the city does not qualify as an “aggrieved person” under the FHA.  The second argument the banks made in support of dismissing the complaints was that the city had not adequately alleged a proximate cause connection between the conduct complained of and the alleged damages.

The trial court granted the banks’ motions to dismiss.  On appeal, the Eleventh Circuit reversed the trial court, finding that the city qualified as an aggrieved person under the FHA, and that the complaints adequately established proximate cause by asserting the alleged damages were foreseeable.

On appeal, the Supreme Court analyzed the two issues addressed by the Eleventh Circuit: (1) whether the city qualified as an aggrieved person under the FHA, and (2) what a plaintiff needed to establish in order to satisfy the proximate cause requirement of its claim.

As to the first issue, the Supreme Court, relying on its own precedent, concluded that the definition of “person aggrieved” in the original version of the FHA “showed ‘a congressional intention to define standing as broadly as is permitted by Article III of the Constitution,’” and that the FHA permits suits by parties similarly situated to the city. The Court then determined that “Congress did not materially alter the definition of person ‘aggrieved’ when it reenacted the current version” of the FHA.

The Court referenced several similar cases in which it allowed entities or organizations or both to bring claims under the FHA alleging discriminatory lending practices that allegedly caused the same damages the city claimed in this matter.  The Supreme Court relied on those prior cases to provide examples of the “zone of interests” the FHA protects.

In comparing those cases to the city’s allegations, the Court determined that the city’s allegations of reduced property values, diminished property-tax revenues, and increased demand for municipal services were all within the protected zone of interests, and that stare decisis compelled the Court’s adherence to those precedents.  As a result, the Court concluded the city was entitled to bring its claims against the banks under the FHA.

As to the second issue of proximate cause, the Court concluded that the Eleventh Circuit erred in ruling that the city’s complaints met the FHA’s proximate-cause requirement based solely on the finding that the alleged financial injuries were foreseeable results of the banks’ misconduct.  According to the Court, foreseeability, standing alone, is insufficient to establish the required proximate cause element of an FHA claim.

The Supreme Court first established that a claim under the FHA is akin to a tort claim, which requires the plaintiff to establish that the defendant’s alleged conduct proximately caused the plaintiff’s alleged damages. According to the Court, alleged injuries that are “too remote” from the alleged unlawful conduct will not satisfy the requirement.

In attempting to define proximate cause, the Supreme Court held that the FHA proximate cause analysis addresses “whether the harm alleged has a sufficiently close connection to the conduct the statute prohibits.”

The Court then took issue with the Eleventh Circuit’s holding that “the proper standard for proximate cause is based on foreseeability.”  According to the Court, “in the context of the FHA, foreseeability alone does not ensure the close connection that proximate cause requires. The housing market is interconnected with economic and social life. A violation of the FHA may, therefore, ‘be expected to cause ripples of harm to flow’ far beyond the defendant’s misconduct.”

The Supreme Court held that, under the FHA, proximate cause “requires some direct relation between the injury asserted and the injurious conduct alleged.”

The Court, however, declined the opportunity to set the precise boundaries of proximate cause under the FHA.  According to the Supreme Court, the Eleventh Circuit used the wrong standard, such that the Supreme Court did not have the benefit of its judgment on how the established principles apply to the FHA.

The Supreme Court concluded that it should be the lower courts that establish the contours of proximate cause under the FHA.  Accordingly, the Court reversed the Eleventh Circuit’s ruling and remanded the case to the trial court.

4th Cir. Vacates $11M FCRA Class Action Judgment Citing Spokeo

Relying on Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), the U.S. Court of Appeals for the Fourth Circuit recently vacated and remanded for dismissal a trial court’s summary judgment ruling in favor of the plaintiff in an $11 million, 69,000 member class action under the federal Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681 et seq., where the defendant credit reporting agency listed the name of a defunct credit card issuer instead of the name of the servicer as the source of information on the plaintiff’s credit report.

In so ruling, the Fourth Circuit held that the plaintiff had not suffered an injury-in-fact arising from alleged incomplete or incorrect credit report information, and thus had not satisfied the constitutional standing requirements to pursue a claim.

A copy of the opinion in Dreher v. Experian Information Solutions, Inc. is available at:  Link to Opinion.

During a background check for security clearance the plaintiff claimed that he first discovered that his cousin had opened a credit card in his name and had run up a substantial balance. The plaintiff requested credit reports from three credit reporting agencies to clear up the problem.

One of those reports listed the tradeline under the name of the original creditor with a P.O. Box address. Plaintiff sent letters to the original creditor requesting verification of the debt and received a response on the creditor’s letterhead along with a statement showing the outstanding balance and a copy of the online credit card application with his name and social security number.

The plaintiff then wrote to the creditor requesting that it stop reporting the account as inaccurate but did not receive a response. He then contacted the credit reporting agency directly to make the same request but without result.

The plaintiff alleged that caused him stress and wasted his time, but the credit reporting error did not affect his security clearance, which was approved.

Later, the account was deleted from his credit file. The original creditor had gone out of business during the 2008 financial crisis and the FDIC had become the receiver and appointed a servicing company to collect the outstanding balances on the portfolio of accounts. The servicer conducted its work using the original creditor’s name, phone number, and website and furnished account information to credit reporting agencies under the original creditor’s name so as not to be confusing to account holders who might not recognize the name of the servicer but would know the name of the creditor with whom they had opened their accounts.

The plaintiff sued the servicer and the credit reporting agency asserting class claims and individual claims alleging that they violated the FCRA by failing to include the servicer’s name in the tradelines as the source of the information.

The trial court certified the class, and granted the plaintiff’s motion for summary judgment explaining that it was objectively unreasonable to exclude the servicer’s name from the tradeline. The trial court denied the credit reporting agency’s motion for summary judgment reasoning that the FCRA created “a statutory right to receive the sources of information for one’s credit report” so that if a source is not disclosed, the violated right creates “a sufficient injury-in-fact for constitutional standing.” The parties stipulated to damages of $11.7 million for the class and the credit reporting agency appealed.

On appeal, the Fourth Circuit pointed out that the trial court failed to analyze whether the injury was specific and concrete, as Spokeo requires, but merely concluded that any violation of the statute was sufficient to create an injury-in-fact.

The Appellate Court analyzed the holding in Spokeo explaining that the injury-in-fact requirement is not automatically satisfied where a statute grants a right and authorizes a person to “vindicate that right” but the person does not have any concrete harm. Put another way, a plaintiff cannot allege a “bare procedural violation, divorced from any concrete harm” and still gain standing. The Appellate Court concluded, based on Spokeo, that “a technical violation of the FCRA may not rise to the level of an injury in fact for constitutional purposes.”

The Fourth Circuit pointed out that this conclusion was in agreement with the D.C. Circuit’s conclusion that “a plaintiff suffers a concrete informational injury where he is denied access to information required to be disclosed by statute, and he suffers, by being denied access to that information, the type of harm Congress sought to prevent by requiring disclosure.”

Applying the reasoning in Spokeo, the Fourth Circuit found that the plaintiff had not suffered a cognizable and specific injury, even an intangible “informational injury,” where the credit reporting agency did not report the name of the servicer for the tradeline in addition to the creditor.

The Appellate Court also pointed out that the plaintiff had failed to demonstrate how the exclusion of the servicer’s name would have made any difference in the fairness or accuracy of his credit report or the efficiency of resolving his credit dispute, and rejected the plaintiff’s argument that there was value in “knowing who it is you’re dealing with” or that the servicer was hiding who it really was.

Instead, the Fourth Circuit found that the servicer name missing from the credit report did not have any practical effect on the plaintiff. Thus, the Appellate Court concluded that the plaintiff had merely alleged a statutory violation without concrete harm.

The Fourth Circuit held, contrary to the trial court’s holding, that “a statutory violation alone does not create a concrete informational injury sufficient to support standing,” rather, it must create a “real harm with an adverse effect.”

Therefore, the Appellate Court held that the plaintiff failed to assert Article III standing, and the trial court’s holding in favor of the plaintiff was vacated and the case was remanded to the trial court for dismissal.

MD Ala. Holds Servicer Did Not Violate Discharge By Sending Periodic Statements, NOI, Delinquency Notices, Hazard Insurance Notices

The U.S. Bankruptcy Court for the Middle District of Alabama recently held that a mortgage servicer did not violate the discharge injunction in 11 U.S.C. § 524 by sending the discharged borrowers monthly mortgage statements, delinquency notices, notices concerning hazard insurance, and a notice of intent to foreclose.

Moreover, because the borrowers based their claims for violation of the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq., on the violation of the discharge injunction, the Court also dismissed their FDCPA claims with prejudice.

A copy of the opinion in Golden et al v. Carrington Mortgage Services, LLC is available at: Link to Opinion.

In August 2010, the borrowers filed a petition in bankruptcy pursuant to Chapter 7 of the Bankruptcy Code.  In their petition, the borrowers reported a foreclosure action in their Statement of Financial Affairs but inaccurately stated its status as having been disposed of by way of a judgment.  In fact, a foreclosure action was filed against the borrowers in state court but it was still pending at the time they filed their Chapter 7 petition.

Moreover, the borrowers made no mention of the property in their Statement of Intention.  Essentially, the borrowers’ petition indicated that they were no longer the owners of the mortgaged property, which was inaccurate.

In October 2010, the prior servicer filed a motion for relief from automatic stay.  The Court granted the motion in November 2010.  Subsequently, the borrowers received a discharge in December 2010.

In December 2016, the borrowers filed a complaint alleging that their new mortgage servicer violated the discharge injunction and the FDCPA, when it mailed them monthly mortgage statements, delinquency notices, notices of lender placed hazard insurance, and a Notice of Intent to Foreclose.  The borrowers alleged that the servicer “had absolutely no legitimate reason to correspond with [them] regarding the Property” because they allegedly vacated the property before filing bankruptcy.

In rejecting the borrowers’ arguments, the Court held “that acts reasonably taken to service a mortgage or to foreclose a mortgage [did] not violate the discharge injunction, even if the debtor discharged his personal liability on the indebtedness secured by the mortgage.”

According to the Court, the servicer’s communications did not violate the discharge injunction because a creditor has a right to foreclose a mortgage after discharge.  Because the servicer was required to give the debtor certain notices either under the terms of the mortgage or applicable law, “it necessarily follows that the giving of such notices [did] not violate the discharge injunction.”

Moreover, the Court noted, until the time the mortgage is foreclosed, and for a period thereafter, a debtor has a right to redeem the property from the creditor upon the payment of the amount due.  Therefore, the Court held that a creditor who did not advise the debtor as to how much is due on the mortgage impinged upon the debtor’s right of redemption.

Additionally, the Court stated that debtors should not be permitted to “game the system” where the creditors are found to violate the discharge injunction if they gave various notices, but violate state and federal law if they do not.

Therefore, the Court concluded that “[a] creditor who acts reasonably and in good faith should not be placed in the horns of a dilemma.”  As the Court explained, “[i]f the act of providing required notices is unlawful, the mortgagee’s right to foreclose is destroyed and, by extension, the mortgage itself is destroyed as well.”

However, the Court was careful to note that a servicer can violate the discharge injunction if it did something in addition to routine mortgage servicing or foreclosure processing to prove that it “intended” to violate the discharge injunction.  But here, according to the Court, the borrowers failed to allege that the servicer did anything beyond routine mortgage loan servicing.

In addition, the fact that the borrowers allegedly moved out of the property before filing bankruptcy, the Court noted, “did not effect a transfer of title to the mortgagee, nor did it change the status of their obligation under the mortgage.”  Thus, the Court held that the servicer had a “legitimate reason” to contact the borrowers about the mortgage servicing and foreclosure.

Because the borrowers based their FDCPA claims on a violation of the discharge injunction, the Court held that the borrowers failed to allege any violation of the FDCPA.

Accordingly, the Court granted the servicer’s motion to dismiss the borrowers’ allegations with prejudice.

Calif. App. Court (3rd Dist) Holds Loan Mod Denial Letter Allowing Only 15 Days to Appeal Was ‘Material Violation’ of HBOR

The Court of Appeal of the State of California, Third Appellate District, recently held that a mortgage servicer violated California’s Homeowner Bill of Rights (HBOR), Civ. Code § 2923.6(d), when it sent a borrower a loan modification denial letter stating that the homeowner had only 15 days to appeal the denial.

In so ruling, the Appellate Court held that the servicer’s denial letter was a material violation of section 2923.6, and therefore the homeowner alleged a valid cause of action for injunctive relief under section 2924.12.

A copy of the opinion in Berman v. HSBC Bank USA, N.A is available at:  Link to Opinion.

The borrower defaulted on his home mortgage and a notice of default was recorded.  The borrower submitted a complete application for a loan modification to the mortgage servicer and asserted a significant change in financial conditions.  The servicer denied the borrower’s request for a loan modification.  The servicer’s denial letter stated that the borrower had 15 days to file an appeal of the decision.

As you may recall, section 2923.6(d) provides:

If the borrower’s application for a first lien loan modification is denied, the borrower shall have at least 30 days from the date of the written denial to appeal the denial and to provide evidence that the mortgage servicer’s determination was in error.

Section 2923.6(f)(1) states, in relevant part:

Following the denial of a first lien loan modification application, the mortgage servicer shall send a written notice to the borrower identifying the reasons for denial, including the following … The amount of time from the date of the denial letter in which the borrower may request an appeal of the denial of the first lien loan modification and instructions regarding how to appeal the denial.

The borrower filed this action seeking injunctive relief.  In his complaint, the borrower alleged that the servicer’s denial letter was a material violation of section 2923.6(d), because it gave him only 15 days to appeal the denial, instead of 30 days, and therefore the trustee’s sale could not legally proceed.

As you may recall, section 2924.12 allows for injunctive relief if there is a “material violation” of any of various statutes, including section 2923.6.  Thus, the borrower’s complaint must allege a material violation of section 2923.6 to obtain injunctive relief.

The servicer demurred to the complaint, arguing among other things that section 2923.6 prohibited the recording of a notice of default or notice of sale, or conducting a sale, unless certain requirements are met.  Because the servicer did not actually conduct the sale within the appeal period, it argued that its denial letter did not violate section 2923.6.  The trial court sustained the servicer’s demurrer without leave to amend.

On appeal, the borrower argued that by sending a denial letter that purported to give him only 15 days to file an appeal, the servicer committed a material violation of section 2923.6, because subdivision (f) of that section provides that such a denial letter must include “[t]he amount of time from the date of the denial in which the borrower may request an appeal,” and subdivision (d) of that section specifies that “the borrower shall have at least 30 days from the date of the written denial to appeal the denial.”

Essentially, the borrower argued that a denial letter that provides a period of time that is less than the 30-day minimum the law requires violates section 2923.6 and is ineffective.  Therefore, the borrower argued, an injunction can issue under section 2924.12 to enjoin any trustee’s sale until that violation is corrected by the issuance of a new denial letter that set forth a legally adequate period for appeal.

The borrower also argued that he was not obligated to file his notice of appeal to the denial of the loan modification until the servicer provided a denial letter that fully complies in all material aspects with the mandates of section 2923.6.

The servicer argued that it did not violate section 2923.6(f) because that subdivision requires only that the denial letter include “[t]he amount of time from the date of the denial letter in which the borrower may request an appeal,” and the denial letter here did so – even if the amount of time specified in the letter was less than the minimum amount of time allowed by section 2923.6(d).

The servicer further argued that it did not violate section 2923.6 because a trustee’s sale was not held within the 30-day appeal period provided by subdivision (d), prohibited by both subdivision (c) of the statute – which applies while a “complete first lien loan modification application is pending” – and subdivision (e) of the statute – which applies once “the borrower’s application for a first lien loan modification is denied.”

Additionally, the servicer argued that the borrower did not file an appeal in the 30-day statutory period, and thus, even if the denial letter was deficient, the borrower was not prejudiced by the letter.

The Appellate Court rejected the servicer’s arguments, and held that section 2923.6 required the servicer to advise the borrower in the denial letter how much time the borrower had to appeal.  And, the Court held, HBOR required the servicer to give the borrower at least 30 days to appeal.  Thus, the Court held, to comply with the law, the denial letter must inform the borrower of an appeal period that is at least 30 days in length.

In this case, the servicer’s denial letter did not comply with the law because it advised the borrower he had only 15 days to appeal.  Because the denial letter did not give the borrower the full amount of time to appeal provided by law, the Appellate Court held that the borrower’s right to appeal was effectively diminished as a result.  Thus, the Court held, the servicer’s denial letter was a material violation of section 2923.6.

Moreover, the Appellate Court held that the borrower’s failure to allege that the servicer conducted a trial sale within the 30-day appeal period established only that the borrower did not allege a violation of section 2923.6(c) or (e).  But here, according to the Appellate Court, it was enough that the borrower alleged a violation of the 30-day appeal provisions of section 2923.6(d) and (f).

Relatedly, because the Appellate Court concluded that the servicer’s denial letter was a material violation of section 2923.6, the borrower was entitled to relief under section 2924.12.

As you may recall, section 2924.12(a) provides that “[i]f a trustee’s deed upon sale has not been recorded, a borrower may bring an action for injunctive relief to enjoin a material violation of Section … 2923.6” and “[a]ny injunction shall remain in place and any trustee’s sale shall be enjoined until the court determines that the mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent has corrected and remedied the violation or violations giving rise to the action for injunctive relief.”

Thus, according to the Appellate Court, the borrower’s failure to file an appeal from denial of his application did not invalidate his claim.  The Court held that nothing in the statutory scheme denied the borrower the right to relief under section 2924.12 because he did not file an appeal sooner.  Therefore, the Court held, the borrower’s failure to file an appeal was irrelevant.

Accordingly, the Appellate Court reversed and remanded the case with instruction to vacate the trial court’s order sustaining the servicer’s demurrer, and to enter a new order denying the demurrer.

U.S. Supreme Court Holds FDCPA Not Violated By Proof of Claim on Time-Barred Debt

In a 5-3 decision handed down on May 15, the Supreme Court of the United States held that the federal Fair Debt Collection Practices Act (FDCPA) is not violated when a debt collector files a proof of claim for a debt subject to the bar of an expired limitations period. The decision:

  • held that the filing of such a proof of claim is not false, misleading, deceptive or unconscionable in violation of sections 1692e or f of the FDCPA;
  • found that claims under the bankruptcy code need not be capable of being “enforceable” in a civil lawsuit; and,
  • does not preclude application of the FDCPA to bankruptcy litigation.

The opinion was authored by Justice Stephen Breyer, and joined by Chief Justice John Roberts and Justices Clarence Thomas, Anthony Kennedy and Samuel Alito.

The decision involved Midland Funding, LLC. The company sought review by the Supreme Court of an adverse decision it had received from the Eleventh Circuit Court of Appeals. A copy of the decision in Midland Funding, LLC v. Johnson is available here.

As outside counsel to RMA International, I led a team of attorneys who authored a friend of the court brief on behalf of RMA (formerly DBA International) in support of Midland. A copy of the brief is available here. The Supreme Court’s opinion cites to two earlier decisions that were obtained by me and discussed in RMA’s friend of the court brief. RMA’s briefing argued that claims need not be “enforceable” to allow creditors to file a proof of claim, as the Supreme Court held in its decision.

The Federal Trade Commission and the Consumer Financial Protection Bureau, in their joint friend of the court brief mentioned RMA, its certification program and its standards concerning collection of “time-barred” debt.

Many cases were stayed across the country (including cases before the Third and Fifth Circuit Courts of Appeals) awaiting today’s decision. This decision should resolve many of them.

4th Cir. Holds Entire Arbitration Agreement Unenforceable Due to Faulty Choice of Law Provisions

The U.S. Court of Appeals for the Fourth Circuit held that a creditor’s arbitration agreement contained unenforceable choice of law provisions rendering the entire agreement unenforceable.

Accordingly, the Fourth Circuit affirmed the trial court’s order denying the creditor’s motion to compel arbitration.

A copy of the opinion in James Dillon v. BMO Harris Bank, N.A. is available at:  Link to Opinion.

The borrower applied for and received a “payday loan” through the lender’s website.  The lender was wholly owned by a Native American tribe.

To complete the loan transaction, the borrower was required to sign an agreement containing a choice of law provision stating that tribal law would apply, and that “no other state or federal law or regulation shall apply.”  The agreement further provided that any dispute would be resolved by arbitration in accordance with tribal law.

The borrower subsequently filed a putative class action complaint alleging that the lender and other tribal payday lenders had issued unlawful loans.  However, instead of directly suing the lender, the borrower sued the financial institutions that facilitated the payday lending transactions over the ACH Network, including the defendant bank.

In the trial court, the bank sought to compel arbitration under the agreement.  Relying on the Fourth Circuit’s ruling in Hayes v. Delbert Services Corp., 811 F.3d 666 (4th Cir. 2016), the trial court concluded that the agreement was unenforceable, and denied the bank’s motion to compel arbitration.

On appeal, the bank argued that the agreement did not implicate the prospective waiver doctrine, and should be enforced because the borrower failed to show that the choice of law provision would actually deprive him of any federal remedies. Moreover, the bank argued that any ambiguities that may arise in application of the choice of law provision should be resolved by the arbitrator in the first instance.

The borrower argued that the prospective waiver issue was ripe for review because there was no uncertainty regarding the effect of the choice of law provision as that provision effects an unambiguous and categorical waiver of federal statutory rights. Therefore, the borrower argued that the choice of law provision was unenforceable under the Hayes decision.

Initially, you may recall that arbitration agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2.  However, arbitration agreements that operate “as a prospective waiver of a party’s right to pursue statutory remedies” are not enforceable because they are in violation of public policy.

Under the “prospective waiver” doctrine, courts will not enforce an arbitration agreement if doing so would prevent a litigant from vindicating federal substantive statutory rights.

In siding with the borrower, the Fourth Circuit noted that the agreement contained many of the same choice of law provisions it held were unenforceable in Hayes.  In fact, the Court noted that the language related to the agreement to arbitrate was identical apart from the name of the designated tribe.

Thus, the Fourth Circuit held that “the above provisions in [this agreement] are not distinguishable in substance from the related provisions in the [agreement] that we held unenforceable in Hayes.”

Further, the Court held that “[t]he arbitration agreement in this case implicitly accomplishes what the [agreement in the Hayes case] explicitly stated, namely, that the arbitrator shall not allow for the application of any law other than tribal law.”  Thus, “[j]ust as we did in Hayes, we interpret these terms in the arbitration agreement as an unambiguous attempt to apply tribal law to the exclusion of federal and state law.”

The bank next argued in the alternative that the Court could “effectively sever the choice of law provisions from the arbitration agreement, and accept [the bank’s] concession to the application of federal substantive law in arbitration notwithstanding the unambiguous choice of tribal law in the arbitration agreement.”

The Fourth Circuit disagreed, noting that the bank “seeks to rewrite the unenforceable foreign choice of law provision in order to save the remainder of the arbitration agreement.”  However, “[b]ecause these choice of law provisions were essential to the purpose of the arbitration agreement, [the bank’s] consent to application of federal law would defeat the purpose of the arbitration agreement in its entirety.”

Accordingly, the Fourth Circuit held that the entire arbitration agreement was unenforceable, and affirmed the ruling of the trial court.

9th Cir. Applies Anti-Deficiency Protections to Debtors’ Bankruptcy Estate Where Property of Estate is Sold in Non-Judicial Foreclosure

The U.S. Court of Appeals for the Ninth Circuit recently affirmed the Bankruptcy Appellate Panel’s determination that a creditor’s pre-bankruptcy, non-recourse lien on two debtors’ real property is extinguished following a non-judicial foreclosure sale.

A copy of the opinion in In re: Salamon is available at:  Link to Opinion.

In April 2009, two debtors purchased real property.  Rather than fund the purchase price and pay off the two existing liens on the real property, the debtors executed a wrap-around mortgage in favor of the property seller.  The debtors then funded the balance of the purchase price with a note secured by a deed of trust.

In March 2010, the real property seller filed a Chapter 11 bankruptcy petition, which was later converted into a Chapter 7 bankruptcy proceeding.

In June 2012, the debtors also filed a Chapter 11 bankruptcy petition.  The trustee of the seller’s bankruptcy estate timely filed a proof of claim for the two liens secured by the real property.

In October 2012, the bankruptcy court lifted the debtor’s bankruptcy stay to allow the most senior lienholder to foreclose on the real property.  The real property was sold at a foreclosure sale.  The foreclosure trustee sent the surplus proceeds from the sale to the trustee.  The trustee then filed an amended proof of claim for the unsecured balance of the note.

The debtors moved to disallow the amended claim on the ground that there was no longer any property in the estate on which there could be a recourse lien.  The bankruptcy court agreed.

On appeal, the Bankruptcy Appellate Panel affirmed and held that the seller’s non-recourse claim could not be transformed into a recourse claim under 11 U.S.C. § 1111(b).  The Bankruptcy Appellate Panel reasoned, “[a]lthough [the trustee’s] original proof of claim may have asserted a claim secured by liens on property of the estate, as recognized in the amended proof of claim [the trustee] filed, those liens were eliminated as a matter of law as a result of the foreclosure.”

As you may recall, 11 U.S.C. § 1111(b)(1)(A) provides in pertinent part:

A claim secured by a lien on property of the estate shall be allowed or disallowed under section 502 of this title the same as if the holder of such claim had recourse against the debtor on account of such claim, whether or not such holder has such recourse unless:

(i) the class of which such claim is a part elects … application of paragraph (2) of this subsection; or

(ii) such holder does not have such recourse and such property is sold under section 363 of this title or is to be sold under the plan.

On appeal to the Ninth Circuit, the trustee of the seller’s bankruptcy estate argued that the phrase “property of the estate” in Section 1111(b)(1)(A) refers to the property that existed at the time of filing the petition and that the bankruptcy court was required to fix his rights as of that date.

The Ninth Circuit rejected the trustee’s argument.  The Ninth Circuit found that what must be determined as of the date of the filing of the petition is solely the amount of the claim.  The Ninth Circuit reasoned that the plain language of Section 1111(b) mandates that it cannot apply if the lien does not exist.

The Court observed that under California law, the liens securing the trustee’s claim were extinguished following the judicial foreclosure sale.  As a result, extending the protections of Section 1111(b) to the trustee would allow the trustee to assert a deficiency claim against the debtors following the foreclosure sale, which would afford him more rights in bankruptcy than he would otherwise have under state law.

The Ninth Circuit then noted that the purpose of section 1111(b) is to put the Chapter 11 debtor who wishes to retain collateral property in the same position that a person who purchased property subject to a mortgage lien would face in the non-bankruptcy context.  The Court explained that these purposes were not at issue in the debtors’ proceeding because the debtors were not seeking to retain the collateral property.

The Court held that section 1111(b)’s requirement that a creditor hold a “claim secured by a lien on the property of the estate” means that if a creditor’s claim, for any reason, ceases to be secured by a lien on property of the estate, the creditor can no longer transform a non-recourse claim into a recourse claim.

As a result, the Ninth Circuit held that section 1111(b) had no applicability to the trustee’s claim.

SCOTUS Rules State Credit Card Anti-Surcharge Law Regulates Speech, Not Conduct

The Supreme Court of the United States recently held that a state law penalizing merchants for charging a surcharge for credit card payments did not restrict the amount that a store could collect when a buyer paid by credit card (i.e., a regulation on conduct).

Instead, the Court held that the state statute regulated how sellers may communicate their prices, and was therefore a regulation on speech subject to First Amendment scrutiny.

As you may recall, in Dana’s R.R. Supply v. AG, 807 F.3d 1235 (11th Cir. 2015), the U.S. Court of Appeals for the Eleventh Circuit held that a similar anti-surcharge statute was an unconstitutional restriction on commercial speech, because the pricing scheme sought to be employed was not misleading, the regulation did not advance any substantial state interest, and it was not narrowly tailored to meet constitutional scrutiny.

Accordingly, in this case, on remand the U.S. Court of Appeals for the Second Circuit may find that the state law at issue here is an unconstitutional content-based restriction on non-misleading commercial speech.

A copy of the opinion in Expressions Hair Design v. Schneiderman is available at:  Link to Opinion.

This case involves New York’s anti-surcharge statue for credit card payments.  When a customer makes a payment with a credit card, merchants are charged a processing fee by the card issuer.  The petitioners were five New York merchants (collectively, “Merchants”) who wanted to pass the processing fee along to their customers by employing different pricing for the use of a credit card, or by offering a discount for the use of cash.

As way of background, when credit cards were first introduced, contracts between card issuers and merchants barred merchants from charging credit card users higher prices than cash customers.  Congress put a partial stop to this practice in the 1974 amendments to the Truth in Lending Act (TILA).  The amendment prohibited card issuers from contractually preventing merchants from giving discounts to customers who paid cash.  See § 306, 88 Sta. 1515.  But, the amendment said nothing about credit card surcharges.

Subsequently, in 1976, another TILA amendment barred merchants from imposing surcharges on credit card payments.  Act of Feb. 27, 1976, §3(c)(1), 90 Stat. 197.  In 1981, Congress delineated the distinction between discounts and surcharges by defining “regular price” as the merchant’s “tagged or posted” price.  Cash Discount Act, § 102(a), 95 Stat. 144.  Because a surcharge was defined as an increase from the regular price, there could be no credit card surcharge where the regular price was the same as the amount charged to customers using credit cards.  The effect of all this was that a merchant could violate the surcharge ban by posting a single price and then charging credit card users more than that posted price.

Congress allowed the federal surcharge ban to expire in 1984.  However, the provision preventing credit card issuers from contractually barring discounts for cash remained.  This caused several states, including New York, to enact their own surcharge bans.  But, unlike the federal ban, New York’s anti-surcharge statute did not define the term “surcharge.”

As you may recall, New York prohibits its merchants from “impos[ing] a surcharge on a [customer] who elects to use a credit card in lieu of payment by cash, check, or similar means” (the “anti-surcharge statute”).  N.Y. Gen. Bus. Law. Ann. § 518 (2012).  A merchant who violates the anti-surcharge statute commits a misdemeanor and risks “a fine not to exceed five hundred dollars or a term of imprisonment up to one year, or both.”  Id.

The Merchants argued that New York’s anti-surcharge statute restricted their constitutional right to truthful commercial speech under the First Amendment.

The trial court ruled in favor of the Merchants.  It held that the anti-surcharge statute regulated speech and violated the First Amendment under the Supreme Court’s commercial speech doctrine.  See, e.g., Va. State Bd. of Pharmacy v. Va. Citizens Consumer Council, 425 U.S. 748, 764-65 (1976) (the First Amendment provides limited protection for commercial speech based on society’s “strong interest in the free flow of [truthful and legitimate] commercial information”).

The U.S. Court of Appeals for the Second Circuit vacated the trial court’s ruling with instructions to dismiss the Merchants’ claims.  In so ruling, the Second Circuit determined that the anti-surcharge statute regulated conduct rather than speech, and therefore the anti-surcharge statute did not violate the First Amendment.

The first issue before the Supreme Court was whether the anti-surcharge statute prohibited a pricing scheme that provides a cash price and a different price for credit card customers, expressed either as a percentage surcharge or a dollars-and-cents additional amount.

The Second Circuit read “surcharge” in the anti-surcharge statute to mean “an additional amount above the seller’s regular price,” and thus concluded that the statute prohibited sellers from posting a single sticker price and charging credit card customers an additional fee.  The Supreme Court did not find any clear error in this interpretation, and also concluded that the anti-surcharge statute bars the pricing regime that the Merchants wish to employ.

On the constitutional issue, the Second Circuit concluded that the anti-surcharge statute posed no First Amendment problem because the law regulated conduct, not speech.  The Second Circuit reached this conclusion with the premise that price controls regulate conduct alone.

However, the Supreme Court disagreed.  According to the Supreme Court, the anti-surcharge statute was not a typical price regulation, as it did not limit the amount that merchants can collect from a cash or credit card payer.  Instead, the Supreme Court held, the statute regulates how sellers may communicate their prices.

Because the anti-surcharge statute regulated speech, the Supreme Court held that the Second Circuit should have conducted an inquiry into whether the statute, as a speech regulation, survived First Amendment scrutiny.

Accordingly, the Supreme Court vacated the judgment and remanded for the Second Circuit to analyze New York’s anti-surcharge statute as a speech regulation.