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6th Cir. Holds FCRA Preempts State Common Law Claims, Joins 2nd and 7th Cirs.

The U.S. Court of Appeals for the Sixth Circuit recently affirmed a judgment in favor of the furnisher of credit information in an action filed under the federal Fair Credit Reporting Act and other claims under state common law.

In so ruling, the Sixth Circuit held that the FCRA’s preemption provisions apply to state common law claims concerning a furnisher’s reporting obligations, joining similar rulings by the Seventh and Second Circuits.

A copy of the opinion in Scott v. First Southern National Bank is available at:  Link to Opinion.

The plaintiffs owned several investment properties and obtained a $300,000 commercial line of credit from a bank to further their investment efforts.

In June 2013, the plaintiffs sought a loan from the bank to convert a vacant former hotel into 26 apartment units and two commercial spaces.  The plaintiffs submitted cost estimates with their application to the bank.

On July 23, 2013, the plaintiffs and the bank executed a commercial loan agreement through which the bank extended the plaintiffs a commercial loan for the renovation project (“construction loan”).  The commercial loan agreement did not contain any promise that the bank would extend additional loans to the plaintiffs.  However, the plaintiffs believed that the bank would loan any extra funds needed to complete the renovation because they discussed the possibility of cost overruns before entering into the contract.

The plaintiffs claimed that the bank told them they could obtain additional financing because of their long standing relationship with the bank, and they relied on this assurance in deciding to finance the project through the bank.

In early November 2013, the plaintiffs informed the bank that they may need an additional $400,000 to complete the renovation.  In response to the bank’s request for a breakdown for the additional funds, the plaintiffs submitted a revised estimated cost of $1,654,648.65, or approximately $712,000 above the total cost for the project they had represented in their original loan application.

While reviewing the plaintiffs’ updated financial information, the bank discovered that the plaintiffs had incurred additional debt in the period since the bank first approved the construction loan and that the plaintiffs had failed to disclose this new debt.  The bank denied the plaintiffs’ request for an additional $650,000.

The credit line was scheduled to mature on June 24, 2014.  On June 17, 2014, the bank notified the plaintiffs that because their request to renew the credit line was still pending, the bank would not require them to repay the balance and they would only require the plaintiffs to continue to make interest payments until the bank rendered a determination about whether to renew the credit line.

Unlike the previous years, the bank failed to extend the credit line’s maturity date during the review period, and its computer system transmitted delinquency reports to the credit bureaus in July and August 2014 that allegedly damaged the plaintiffs’ credit score.

The plaintiffs obtained financing from a different lender and used the proceeds to pay off their loans with the bank and to complete the renovation project.  However, the bank’s automated computer system continued to report the plaintiffs’ entire prior payment history, including the fact that they had previously been delinquent on the loans.

The bank told the plaintiffs it would resolve the issue.

In October 2014, the bank updated its reporting to indicate the plaintiffs had paid off their loans and were no longer delinquent.  Despite the update, the bank reported that the plaintiffs were delinquent in September, October, and November of 2014, even though the plaintiffs had paid off the entire balance of their loans in early September.

In September 2015, the bank sent a second update to the credit bureaus indicating the plaintiffs had paid off the loans.  The bank told the plaintiffs it had resolved the issue.

The borrowers filed a complaint alleging that the bank: violated the FCRA, 15 U.S.C. § 1681, et seq., by willfully and/or negligently failing to investigate their complaints and to correct its reporting; breached its duty of good faith and fair dealing; tortiously interfered with the plaintiffs’ business relationships by deliberately reporting false information; and made fraudulent misrepresentations that it would loan additional funds to complete the renovation.

The bank removed the case to federal court.  After discovery, the bank moved for summary judgment on all claims.  The plaintiffs filed a motion for partial summary judgment on their claim that the bank breached its duty of good faith and fair dealing.

The trial court granted the bank’s motion for summary judgment and denied the plaintiffs’ motion for partial summary judgment.

This appeal followed.

As you may recall, section 1681s-2(b) of the FCRA imposes two obligations on furnishers of information:  “(1) to provide accurate information, and (2) to undertake an investigation upon receipt of a notice of dispute regarding credit information that is furnished.” Downs v. Clayton Homes, Inc., 88 Fed. Appx 851, 853 (6th Cir. 2004)

The FCRA creates a private right of action for consumers to enforce the requirements under section 1681s-2(b) only if the consumer files a dispute with a consumer reporting agency to trigger the furnisher’s duty to investigate. Merritt v. Experian, 560 Fed. Appx. 525, 528-29 (6th Cir. 2014).

The plaintiffs never filed a dispute with a consumer reporting agency.  Instead, they argued that by dismissing their FCRA claims despite the bank’s representation that it would remedy the problem, the trial court undermined the pro-consumer purposes of the FCRA.

The Sixth Circuit disagreed, finding that “the FCRA protects both consumers and furnishers” by requiring that a consumer file a dispute with a consumer reporting agency.  The consumer reporting agency can then screen the complaint and provide notice of the dispute to a furnisher if warranted.

Thus, the Sixth Circuit held that the trial court properly granted summary judgment in favor of the bank on the plaintiffs’ FCRA claims.

The plaintiffs also argued that the trial court erred in ruling that the FCRA preempted their state common law claims.  They further asserted that the bank breached the duty of good faith and fair dealing, and tortiously interfered with their business relationships because the bank deliberately harmed their credit score.

As you may recall, the FCRA provides that “[n]o requirement or prohibition may be imposed under the laws of any State with respect to any subject matter regulated under [section 1681s-2 of this title], relating to the responsibilities of persons who furnish information to consumer reporting agencies.” 15 U.S.C. § 1681t(b)(1)(F).

Because the plaintiffs’ common law claims of breach of the duty of good faith and fair dealing and tortious interference with contractual relationships arose from the bank’s reporting incorrect information to the credit bureaus, the trial court had held that FCRA preempted these claims.

On appeal, the plaintiffs cited Miller v. Wells Fargo & Co., 2008 WL 793676 (W.D. Ky. Mar. 24, 2008), arguing that FCRA preempts state statutory claims but not state common law claims.

The Sixth Circuit observed that, although a handful of trial courts have followed this “statutory approach,” two Courts of Appeals that have addressed the issue both explicitly rejected the “statutory approach”, and held that FCRA also preempts state common law claims.  Purcell v. Bank of Am., 659 F.3d 622 (7th Cir. 2011); Macpherson v. JPMorgan Chase Bank, N.A., 665 F.3d 45 (2nd Cir. 2011).

Like the Seventh Circuit in Purcell and the Second Circuit in Macpherson, the Sixth Circuit concluded that the FCRA preempts state statutory and common law causes of action concerning a furnisher’s reporting of consumer credit information.

Thus, the Sixth Circuit held that the trial court properly dismissed the plaintiffs’ claims for breach of the duty of good faith and fair dealing and tortious interference with contractual relationships.

The Sixth Circuit noted that the FCRA did not preempt the plaintiffs’ fraudulent misrepresentation claim because it did not arise from the bank’s reporting obligations as a furnisher of consumer credit information.  However, the Court held that the plaintiffs forfeited this issue on appeal because they failed to discuss the trial court’s reasoning for granting the bank’s motion for summary judgment on this claim.

Accordingly, the Sixth Circuit affirmed the trial court’s judgment in favor of the bank.

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Eric Tsai practices in Maurice Wutscher’s Commercial Litigation and Consumer Credit Litigation groups, and in its Regulatory Compliance group. He concentrates his practice primarily on the defense of consumer and commercial financial services companies, including mortgage lenders and servicers, mortgage loan investors, third party debt collectors, and other financial services providers. He also counsels clients on regulatory compliance, licensing, and other consumer protection matters. Eric earned his undergraduate degree from the University of California, Irvine. Prior to attending law school, he worked as a loan officer for national direct lenders. He earned his Juris Doctor from California Western School of Law and thereafter obtained a Master of Laws (LLM) in Taxation from the University of San Diego School of Law. Eric publishes extensively on various issues affecting consumer lending and litigation, including both federal and California-specific developments. He is licensed to practice law in California, Nevada, and Oregon, and is admitted in all United States District Courts in the State of California, the United States District Court for the District of Oregon, the United States District Court for the District of Nevada, the U.S. Tax Court, and the Ninth Circuit Court of Appeals. He is also a licensed real estate broker in the State of California.

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