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This Year the 1st Circuit and Mass. Courts Tackled Consumer Contacts

telephone consumer protection act

The U.S. Court of Appeals for the First Circuit and federal and state courts in Massachusetts decided several important cases for the consumer financial services industry in 2021. Two related cases concerned the constitutionality of a Massachusetts regulation limiting telephone contact with debtors and a third ruling came from the First Circuit on a federal TCPA action.

Auto lenders in particular should pay close attention to the Massachusetts state court decision and make sure their repossession notices comply with Massachusetts law. As one company found out the hard way, it could be very costly mistake if they do not.

In the First Circuit, the Court affirmed the denial of class certification in a case where the plaintiff alleged it received unsolicited faxes in violation of the Telephone Consumer Protection Act because an examination of each class member’s individual circumstances would be required. The Court also held in this case that a rejected Rule 68 offer of judgment does not moot a plaintiff’s claims.

Credit Acceptance Corp. v. Maura T. Healy, No. 20-11572-NMG, 2021 U.S. Dist. LEXIS 109722 (D. Mass. June 10, 2021)

Credit Acceptance Corp. (“CAC”) filed suit in the U.S. District Court for the District of Massachusetts (the “federal court suit”) two days after receiving a letter from the Massachusetts Attorney General (the “AG”) signaling her intent to initiate an action against CAC to enforce certain debt collection regulations.

CAC sought to challenge the constitutionality of Massachusetts debt collection regulations prohibiting certain debt collection communications and, in particular, a regulation that prohibits a creditor from initiating communications with debtors more than twice in a seven-day period (the “Regulation”). See, 940 C.M.R. § 7.04(1)(f).

The Massachusetts Supreme Judicial Court has interpreted the Regulation as prohibiting more than two attempted phone calls within a seven-day period even if both attempts were unsuccessful. CAC argued the Regulation unconstitutionally restricts speech in violation of the First Amendment.

The AG moved to dismiss the federal court suit, arguing the doctrine of Younger abstention compelled the Court to decline jurisdiction by abstaining from interfering with the enforcement action pending in Massachusetts state court.

As set forth in Younger v. Harris, 401 U.S. 37 (1971), the Younger doctrine “counsels federal-court abstention when there is a pending state proceeding.” Moore v. Sima, 442 U.S. 415, 423 (1979).

As the Court noted, the First Circuit has identified a three-step analysis to determine whether a federal court should abstain pursuant to the Younger doctrine.

First, the pending state proceeding must fall into one of three categories:  1) criminal prosecutions; 2) civil prosecutions that are “akin to criminal prosecutions”; or 3) civil proceedings that “implicate a State’s interest in enforcing the orders and judgments of its courts.” Sirva Relocation LLC v. Richie, 794 F.3d. 185, 192-93 (1st Cir. 2015).

Second, the case must satisfy the three Middlesex factors, which are: 1) the state proceeding is ongoing; 2) it involves significant state interests; and 3) it provides an adequate opportunity for the plaintiff to raise his federal claims in state court. See, Middlesex Cty. Ethics Comm. v. Garden State Bar Ass’n, 457 U.S. 423, 432 (1982).

Third, courts must consider whether any exceptions to the Younger doctrine apply.

CAC argued the state court action does not fit into the quasi-criminal category of “state civil proceedings akin to criminal prosecutions” and that, even if the state proceedings satisfied all three prongs of the Younger analysis, abstention was unwarranted because the AG’s excessive delay in the enforcement of the Regulation has impermissibly impaired CAC’s right to free speech under the First Amendment.

The U.S. Supreme Court has described the “hallmarks” of quasi-criminal proceeds as: 1) they are characteristically initiated to sanction the federal plaintiff for a wrongful act; 2) a state actor is routinely a party to and often initiates that state court action; and 3) there is often an investigation that has culminated in a formal complaint or charges.

There was no dispute the AG, a state actor, initiated the enforcement action against CAC. The Court agreed with the AG that the state action was brought to enforce the Commonwealth’s consumer protection laws and to punish CAC for alleged violations of those laws.

The First Circuit has made clear that the availability of parallel criminal sanctions is relevant, but not a necessary element when the state proceeding otherwise sufficiently resembles a criminal prosecution. The Court noted that requiring criminal penalties be sought or criminal conduct alleged would remove civil enforcement actions from the scope of Younger. Accordingly, the Court held the Younger doctrine applied because the state enforcement action included the hallmarks of a quasi-criminal proceeding.

The Court also rejected CAC’s argument that abstention was inappropriate because the AG’s delay in filing suit so chilled its First Amendment rights as to require the court’s intervention.

Specifically, the Court held CAC was not entitled to federal judicial scrutiny of the Regulation because it has failed to show that it lacks an adequate opportunity in the state proceedings to raise its constitutional challenges as required by the third Middlesex factor. Accordingly, the Court abstained from exercising jurisdiction in the matter.

Commonwealth v. Credit Acceptance Corp., No. 2084CV01954-BLS2, 2021 Mass. Super. LEXIS 27 (MA. Sup. Ct. March 15, 2021)

In the parallel state court action, the Commonwealth of Massachusetts brought an action against CAC alleging, amongst other things, that it made unfair and deceptive loans to Massachusetts consumers and engaged in unfair acts or practices in trying to collect loans and repossess vehicles.

Of particular interest to the consumer finance industry is CAC’s argument that the Regulation violated the Free Speech clause of the First Amendment.

In holding the Regulation did not violate the First Amendment, the court rejected CAC’s argument that any government regulation that distinguishes among categories of speech based on content is subject to strict scrutiny.

Instead, the Court held the Regulation is subject to intermediate scrutiny because it restricts commercial speech, noting that while “[t]he First Amendment…protects commercial speech from unwarranted governmental regulation,” it provides “lesser protection to commercial speech than to other constitutionally guaranteed expression.” Central Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n of New York, 447 U.S. 557, 561, 563 (1980).

The commercial speech doctrine allows governments to regulate commercial messages to protect consumers from misleading, deceptive, or aggressive sales or other business practices, and the government’s legitimate interest in protecting consumers from “commercial harms” explains why commercial speech can be subject to greater governmental regulation. Thus, regulation of commercial speech is constitutional if “the regulation directly advances the governmental interest asserted,” and the regulation “is not more extensive than is necessary to serve that interest.” Central Hudson, 447 U.S. at 566.

The Court ultimately held the Regulation was constitutional because it directly advances the Commonwealth’s substantial interest in protecting consumers from unfairly aggressive debt collection tactics and protecting residential privacy.

Similarly, the Court held the Regulation was “not more extensive than is necessary” because it was narrowly focused on preventing high-frequency telephone contact that can be harassing, but does not bar all communications between creditors and debtors, places no limit on how frequently a debtor may contact their creditor, does not impose an overall limit on how often a creditor may contact the debtor by phone or otherwise, lets a creditor initiate two contacts by telephone in any seven-day period, and does not restrict how frequently a creditor may contact a debtor by any other means (such as email or regular mail).

Auto lenders doing business in Massachusetts must pay close attention to the Court’s decision to grant summary judgment as to liability on the Commonwealth’s claims that CAC sent inadequate notices when it repossessed and sold vehicles belonging to Massachusetts consumers and that it violated the UCC and state statutes by telling debtors that they would remain liable for any unpaid loan balance or deficiency based on the amount received from selling the vehicle, rather than for a deficiency based on the vehicle’s fair market value.

The Massachusetts Supreme Judicial Court has previously held that Mass. Gen. Laws ch.  255B, § 20B requires that, when a creditor repossess a vehicle that serves as collateral, the pre-sale and post-sale notices required by the UCC “must expressly describe the deficiency as the difference between the amount owed on the loan and the fair market value of the vehicle, not the difference between the amount owed and the sale proceeds[.]” Williams v. Am. Honda Finance Corp., 479 Mass. 656, 657-658 (2018).

The Court noted that CAC’s insistence that it cannot be sued under the UCC for issuing notices that do not accurately describe any deficiency consistent with Section 20B was incorrect because the SJC has specifically held that “the notice required by the [UCC] will only be considered sufficient if it accurately describes the deficiency under G.L. c. 255B, § 20B.” Williams, 479 Mass. at 669.

Section 20B requires that any deficiency or surplus must be calculated using the fair market value of the repossessed vehicle, not the actual proceeds from a commercially reasonable sale. Thus, CAC’s notices that described the debtor’s deficiencies as the difference between the amount owed and the money received from the sale violated the UCC and Section 20B.

Significantly, the Court noted that it “is now settled that Williams applies to all notices sent before Williams was decided.” Dellorusso v. PNC Bank, N.A., 98 Mass. App. 84. Moreover, because a violation of Section 20B constitutes an unfair trade practice, the Court also held CAC violated Mass. Gen. Laws ch. 93A (the Massachusetts unfair and deceptive trade practices act), potentially exposing CAC to treble damages.

The state court action ultimately led to a $27 million settlement, the largest of its kind in Massachusetts.

Bais Yaakov of Spring Valley v. ACT, Inc., 12 F.4th 81 (1st Cir. 2021)

The First Circuit affirmed the district court’s denial of class certification of a plaintiff’s claims that it received unsolicited faxes in violation of the TCPA.

The plaintiff, a private high school, had sent a form to defendant, a testing company, indicating it wanted to administer standardized tests and receive the test scores and publications related to the ACT and SAT exams.

Seven years later, the plaintiff received allegedly unsolicited faxes from the defendant. Because evidence demonstrated that a number of schools had given prior express permission to send such faxes, the Court held that adjudicating the claims would entail examining each class member’s circumstances and communications with the defendant. Thus, common issues did not predominate as required under Rule 23 of the Federal Rules of Civil Procedure.

The Court reversed the district court’s finding that the defendant’s tendering of a check in the full amount of the plaintiff’s individual claim, along with a promise not to send further faxes, rendered the plaintiff’s claim moot. In doing so, the Court expressed its concern about the threat to meritorious class actions posed by sanctioning efforts to cut off Rule 23 certification by mooting the individual claims of the named plaintiff.

Significantly, the plaintiff had rejected the defendant’s Rule 68 offer. The Court acknowledged that the precedent was uncertain but likened the plaintiff’s situation to a rejected settlement offer, noting that the Supreme Court has held that “[a]n unaccepted settlement offer – like any unaccepted contract offer – is a legal nullity with no operative effect.” Campbell-Ewald Co. v. Gomes, 577 U.S. 153, 162 (2016).

As a result, the Court held that the plaintiff’s damage claim was not moot.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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