Source: http://updates.mwbllp.com/2015_08_16_archive.html
Timestamp: 2019-04-19 22:32:44+00:00

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The U.S. Circuit Court of Appeals for the Fourth Circuit recently held that, in order for a borrower to recover under Maryland's Credit Grantor Closed End Credit Provisions ("CLEC"), the borrower must have repaid more than the original principal balance of his or her loan.
Additionally, the Court held that a motion under Federal Rules of Civil Procedure 23(d)(1)(B) to provide notice to putative class members can (and in most cases should) be denied at the pre-certification stage because ordinarily there was little danger of prejudicing "absent class members" unless there is substantial evidence of "reliance interest" even at that early stage. It also expressed doubts that Rule 23(d)(1)(B) permitted notice to class members before a class has been certified.
The two putative class plaintiffs each entered into retail installment sales contracts to finance the purchase of automobiles. Both contracts were drafted by the finance company, and designated the CLEC, Md. Code Com. Law § 12-1001 et seq., as the applicable law.
After making some payments (but nowhere near the principal amount owed on either loan), the plaintiffs defaulted. The finance company repossessed their cars and provided the plaintiffs with notice that their cars would be "sold at public sales." The finance company sold the cars for less than the amount owed under the contracts and issued post-sale notices to the plaintiffs explaining the deficiency.
Later, the plaintiffs filed separate class action complaints against the finance company, alleging counts for: (1) CLEC violations; (2) breach of contract; (3) declaratory judgment and injunctive relief; (4) restitution/unjust enrichment; and (5) violation of Maryland's Consumer Protection Act, Md. Code. Com. Law § 13-101 et seq. ("MCPA"). They also moved to provide notice to class members under Rule 23(d)(1)(B).
More specifically, the plaintiffs alleged that the finance company's pre-sale notices "mischaracterized the sales as public, when in fact they were private, due to a $1,000 refundable cash entrance fee required to view the sale." Additionally, they alleged that because of that "mischaracterization" the finance company's post-sale notices lacked certain disclosures required under CLEC for "private sales."
Accordingly, because of the allegedly defective post-repossession notices, the plaintiffs claimed they were entitled to a refund of (1) the funds collected after repossessing their cars and (2) payments during the life of their loans to cover interest, costs, fees, and other charges.
The plaintiffs based their breach of contract, unjust enrichment, and MCPA claims on the damages alleged under CLEC. Additionally, as to the breach of contract claim, they argued alternatively, that even if they were not entitled to damages under CLEC, they still had a claim for nominal damages. Also, in support of their MCPA claim, they asserted that the defective notices "constitute unfair and deceptive trade practice(s)."
Prior to deciding this appeal, the Fourth Circuit had certified a question to the Maryland Court of Appeals as to whether the sales were public or private under Maryland law. The Maryland Court of Appeals definitively held that the sales were private. Thus, for this appeal and the purposes of its analysis, the Fourth Circuit treated the sales as private.
Nonetheless, the Fourth Circuit held that even if the sales were private, the borrowers could not recover under CLEC.
There were two CLEC provisions at issue on appeal. First, the civil remedies section which provides that "except for a bona fide error of computation, if a credit grantor violates any provision of this subtitle the credit grantor may collect only the principal amount of the loan and may not collect any interest, costs, fees, or other charges with respect to the loan." See Md. Code Com. Law § 12-1018(a)(2).
Second, the CLEC repossession section provides that if "the provisions of this section, including the requirement of furnishing a notice following repossession, are not followed, the credit grantor shall not be entitled to any deficiency judgment to which he would be entitled under the loan agreement." See id.at § 12-1021(k)(4).
As it had in previous cases, the Fourth Circuit interpreted § 12-1018(a)(2)'s "plain language" to "limit a debtor's relief" under CLEC to amounts paid in excess of the principal.
Importantly, the Fourth Circuit also noted that unlike statutes such as the federal Fair Debt Collection Practices Act ("FDCPA"), CLEC does not provide a fixed statutory damages award. This, it held, was fatal to the plaintiffs' CLEC claim because without statutory damages, the plaintiffs could not alleged any actual damages at all given that they had not paid anything "in excess of the principal amount due" which is all they could possibly have recovered under CLEC.
Rather, applying even the most generous analysis of their payments where "all of the borrowers' payments during the life of the loan were credited to the principal [and none to interest]" the Court held that the plaintiffs "each still owe roughly $11,000 in principal on their loans."
Additionally, the Fourth Circuit rejected the plaintiffs' claim that they were entitled to a refund of (1) funds the lender collected post-repossession and (2) payments to interest, etc. during the life of the loan.
The Court also held that the plaintiffs' claim for a refund of post-repossession funds was erroneously based on a "misreading" of Maryland law because it was premised on only part of a sentence in a Maryland Court of Appeals decision. In the Complaint and briefs, the plaintiffs quoted that section out of context to argue that the lender "is now limited to the proceeds of the sale as satisfaction of the debt" because it violated CLEC.
However, as the Fourth Circuit noted, the full sentence provides important context. In full it reads: "If the debtor can show that the creditor failed to abide by the requirements of CLEC in selling the collateral, the creditor may be barred from a deficiency judgment and limited to the proceeds of the sale [itself] as satisfaction of the debt." The Fourth Circuit held that in this sentence, the Maryland Court of Appeals was "merely acknowledging" the reality that a creditor who violates CLEC would likely be unable to collect anything after a repossession sale because a creditor who violates CLEC is barred from seeking a deficiency judgment for any principal still remaining unsatisfied.
Moreover, and contrary to the plaintiffs' assertion, the Fourth Circuit held that "[n]owhere does the court's opinion or CLEC itself say that creditors who violate CLEC cannot try to collect the deficiency by means other than a judgment," or apply any funds they collect or receive after and apart from the sale, to the principal. Indeed, the Court held that the borrowers argument "read[s] 'judgment' right out of Section 12-1021(k)(4) and ignore[s] the fact that Section 1018(a)(2) expressly permits creditors who violate CLEC to [still] collect the principal amount of the loan."
In addition, the Fourth Circuit held that the plaintiffs' claim for a refund of fees, interest, etc. collected during the life of the loan was similarly misplaced. To support that claim, the plaintiffs attempted to analogize CLEC to the Maryland Mortgage Lender Law ("MMLL"), Md. Code Fin. Inst. § 11-501 et seq.
As you may recall, similar to CLEC, a provision in the MMLL provides that violators "may collect only the principal amount of the loan and may not collect interest, costs, finder's fees, broker fees, or other charges with respect to the loan." See id. at § 11-523(b).
Based on this similar language and a single administrative decision interpreting the MMLL, the plaintiffs argued they were entitled a refund of the fees, costs, and other relief. In relevant part in the administrative decision based on the MMLL, the Maryland Commissioner of Financial Regulation awarded reimbursement of "all amounts collected other than principal" to a debtor. Thus, the plaintiffs argued that the same result must occur under CLEC.
The Fourth Circuit disagreed because that administrative decision was easily distinguishable. In the MMLL case, the lender violated the MMLL at "the time the loan was originated" and thus the lender collected "interest etc. after the violation," whereas here, the lender's "pre-repossession collection of interest, etc. occurred before any violation" and that this "difference in timing" rendered the MMLL case "inapposite."
Additionally, the Fourth Circuit rejected the plaintiffs' claim for declaratory and injunctive relief. Under this claim, the plaintiffs sought an injunction barring the finance company from seeking a deficiency judgment against them based upon the allege CLEC violations and CLEC provisions barring deficiency judgments by violators. However, while the case was still pending at the trial court level, the finance company had explicitly abandoned its deficiency claims. Accordingly, the Fourth Circuit held that there was "no case or controversy" and thus the declaratory and injunctive relief claim had been properly dismissed.
The Fourth Circuit also held that declaratory and injunctive relief barring all attempts to collect on the deficiency was inappropriate because CLEC only bars creditor violators from seeking a "deficiency judgment." Thus, the lender could still pursue the deficiency balance of their loans using "out-of-court" collection methods.
Next, the Fourth Circuit summarily dealt with the plaintiffs' breach of contract, unjust enrichment and MCPA claims. As explained above, the Court held that the plaintiffs had sustained no "actual damages" because the lender had not "unlawfully collected" any of the principal, fees, or other amounts Accordingly, the finance company was not unjustly enriched either.
Likewise, the Court held that even assuming a breach of the loan agreement by lender based upon the defective notices, no actual damages flowed from that breach. It also declined to allow the claim to proceed on the basis of "nominal damages." Accordingly, it held that the plaintiffs failed to state a claim for breach of contract.
The Fourth Circuit also held that the MCPA claim lacked merit because, in relevant part, the MCPA requires "claimants to show they were actually injured by the defendant's violation of the Act." The Court held that here, even assuming that the defective notices were an "unfair and deceptive trade practice" as alleged by the borrowers, there was no injury or loss post-notice. Therefore under the plain terms of the MCPA the plaintiffs failed to state a claim.
Finally, the Fourth Circuit found no abuse of discretion in the U.S. District Court for the District of Maryland's denial of the borrowers' Rule 23(d)(1)(B) motion. As you may recall, that Rule states that in "conducting an action under [Rule 23], the court [in its discretion]… may issue orders to protect class members and fairly conduct the action—[including] giving appropriate notice to some or all class members…."
The Fourth Circuit held that even "[a]ssuming for the sake of argument…that this rule permits notice to putative class members before a class has been certified" the District Court had not abused its discretion.
As the Fourth Circuit explained, a "pre-certification dismissal does not legally bind absent class members" and at the pre-certification stage a class member "has at best a mere reliance interest, the strength of which will vary from case to case." Here, the Court held, the putative plaintiff borrowers (in this pre-certification case) had not put forth any evidence demonstrating that "the reliance interest of putative class members…is so compelling that the district court's denial of notice constituted an abuse of discretion."
Accordingly, for all of these reasons, the Fourth Circuit affirmed the District Court's denial of the Rule 23 Motion and dismissal of the substantive claims in the Complaint.
The U.S. Court of Appeals for the Eleventh Circuit recently held, in a case of first impression, that a creditor violates the bankruptcy discharge injunction by filing a proof of claim on a debt that was previously discharged in another bankruptcy proceeding.
Husband and wife debtors filed a Chapter 13 bankruptcy petition in 2006. The case was converted to a Chapter 7 liquidation, and the subject debt, a deficiency of approximately $11,000 on a sales contract for a mobile home, was discharged in 2009.
In 2012, the debtors filed second Chapter 13 case, in which the creditor and its servicer filed a proof of claim for the discharged debt. The debtors objected to the claim and filed an adversary proceeding, alleging that the creditor and its servicer violated 11 U.S.C. § 524(a)(2) of the Bankruptcy Code, which provides that a discharge order operates as an injunction against further collection efforts.
The bankruptcy court sustained the debtors' objection to the claim and, after a trial in the adversary proceeding, found that the discharge injunction was violated, awarding compensatory sanctions for the debtors' emotional distress and punitive sanctions designed to persuade the creditor and servicer to fix any defects in their automated systems in order to avoid future violations.
The creditor and servicer appealed to the district court.
The district court, sitting in its appellate bankruptcy capacity, affirmed the bankruptcy court's judgment, reasoning that even though the creditor withdrew its proof of claim, the punitive sanctions were proper because the creditor acted with reckless disregard of the risk of violating the discharge injunction. The creditor appealed to the 11th Circuit.
On appeal, as a threshold issue, the Eleventh Circuit was concerned with and addressed sua sponte whether the bankruptcy court in the second bankruptcy case had jurisdiction to enforce the discharge injunction issued in the first bankruptcy case. The Appellate Court concluded that the bankruptcy court in the second action did have jurisdiction, even over a case with a different case number, because the bankruptcy court has inherent authority to punish contempt "as a means to protecting itself as an institution," not just to enforce a ruling in particular cases.
The Eleventh Circuit also pointed out that the bankruptcy court has statutory contempt power under 11 U.S.C. § 1105(a) to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of" the Bankruptcy Code.
Because the bankruptcy court had the power to enforce the discharge injunction in the first case, the Appellate Court held it also had jurisdiction to hear the motion for contempt in the debtors' second case for violating the injunction in the first case. Thus, the Eleventh Circuit concluded it had jurisdiction to hear the appeal.
Turning to the merits, the Appellate Court addressed whether the discharge injunction under 11 U.S.C. § 524(a)(2) is violated where a creditor files a proof of claim on a debt that was discharged in an earlier bankruptcy proceeding.
Finding the statutory text ambiguous, the Eleventh Circuit analyzed the legislative history and, joining other Circuits that had considered the issue, concluded that because § 524(a)(2) was designed to broadly prevent any form of harassment of a debtor, and that an action by a creditor violates the discharge injunction if "the objective effect of the creditor's action is to pressure a debtor to repay a discharged debt, regardless of the legal entity against which the creditor files its claim."
The Appellate Court rejected the creditor's argument that the discharge injunction was not violated because the filing of the proof of claim was not an attempt to collect the debt personally against the debtors, but rather from the bankruptcy estate. The creditor also argued that, by analogy to the automatic stay in 11 U.S.C. § 362(a), although that section prohibits debt collection outside of bankruptcy, it does not prohibit the filing of a proof of claim to collect an unenforceable debt within the bankruptcy process.
Relying on its prior rulings about the broad scope of the discharge injunction and "persuasive authorities," the Eleventh Circuit concluded the creditor violated the discharge injunction, holding that "the test for whether a creditor violates the discharge injunction under 11 U.S.C. § 524(a)(2) is whether the objective effect of the creditor's action is to pressure a debtor to repay a discharged debt, regardless of the legal entity against which the creditor files its claim."
Importantly, the Appellate Court reasoned that the filing of the proof of claim was clearly an "act to collect, recover or offset [the discharged] debt as a personal liability" of the debtors because (a) the Eleventh Circuit had previously held that the filing of a proof of claim constitutes the first step in collecting a debt in bankruptcy, at least indirectly; and (b) the filing of the proof of claim triggered an increase in the debtors' Chapter 13 plan payments, which imposed the kind of pressure on the debtors that § 524(a)(2) was designed to prevent.
Although the Eleventh Circuit concluded the creditor and servicer violated the discharge injunction, it found the sanctions were punitive rather than coercive, and the creditor was not afforded sufficient due process. Accordingly, the Eleventh Circuit reversed and vacated the sanctions awards, and remanded to the district court with instructions to vacate and remand the case to the bankruptcy court for further proceedings.
The U.S. Court of Appeals for the Second Circuit recently denied the defendant debt buyer's petition for panel rehearing, or, in the alternative, for rehearing en banc, as to its ruling (discussed in our update below) that federal National Bank Act preemption applicable to the loan originator does not allow a non-bank debt buyer to charge interest in excess of state usury limits.
In so ruling, the Second Circuit noted that, "[a]lthough it is possible that usury laws might decrease the amount a national bank could charge for its consumer debt in certain states (i.e., those with firm usury limits, like New York), such an effect would not 'significantly interfere' with the exercise of a national bank power."
The Court did not address the "valid when made" doctrine. Based on its ruling, the Court revived the consumer's claims under the federal Fair Debt Collection Practices Act and state usury law. The Court also vacated the district court's denial of the consumer's motion for class certification.
A copy of the ruling denying the petition for rehearing is attached.
The U.S. Court of Appeals for the Second Circuit recently reversed a district court's ruling that federal National Bank Act preemption applicable to the loan originator allowed a non-bank consumer debt buyer to charge interest in excess of state usury limits.
The plaintiff obtained a credit card from a national bank in 2005. The following year, the bank's credit card program was transferred to another national bank, at which point the consumer received a document amending the terms and conditions of her credit card agreement, which included a Delaware choice-of-law provision.
The consumer's debt of approximately $5,000 was "charged-off" in 2008 as uncollectable, and the transferee bank sold the debt to an unaffiliated non-bank company specializing in the purchase of consumer debts.
In November of 2010, the non-bank purchaser's affiliate and servicer of its consumer debt accounts sent the plaintiff a demand letter seeking to collect the balance owed plus interest at 27% per annum.
In 2011, the plaintiff filed a putative class action against the non-bank debt purchaser and its non-bank servicer, alleging by charging more than the 25% interest per year permitted by New York law, the defendants engaged in abusive and unfair debt collection practices in violation of the federal Fair Debt Collection Practices Act ("FDCPA"), and violated New York usury law.
The plaintiff moved to certify the class and the defendants moved for summary judgment, both of which were denied by the district court on September 30, 2013. As to the defendants' motion for summary judgment, the district court reasoned that genuine issues of material fact existed as to whether plaintiff received the cardholder agreement and change in terms, and whether the transferee bank had properly assigned the debt to the defendant non-bank debt purchaser.
As to the plaintiff's motion for class certification, the district court reasoned that because the National Bank Act applied to defendants as assignees of a national bank, a class action was inappropriate and the proposed class failed to satisfy Federal Rule of Civil Procedure 23(a)'s commonality and typicality requirements.
In May of 2014, the parties stipulated to the entry of judgment in defendants' favor for purposes of appeal. The stipulation included an agreement that the account was properly assigned to the defendants and that the plaintiff received the cardholder agreement and change in terms, thereby eliminating the two issues of material fact on which the district court had based its denial of the defendants' motion for summary judgment. The district court approved the stipulation and the plaintiff appealed.
On appeal, the plaintiff argued that the district court committed error when it held that the federal National Bank Act ("NBA") preempted plaintiff's state law usury claim.
The Court first cited to U.S. Supreme Court and Second Circuit precedent on preemption, explaining that the federal preemption doctrine derives from the Supremacy Clause of the United States Constitution. The Court further explained that "[p]reemption can generally occur in three ways: where Congress has expressly preempted state law, where Congress has legislated so comprehensively that federal law occupies an entire field of regulation and leaves no room for state law, or where federal law conflicts with state law."
The Court went on to explain that the NBA expressly allows national banks to "charge on any loan … interest at the rate allowed by the laws of the State, Territory, or District where the bank is located." See 12 U.S.C. § 85. The NBA also "provide[s] the exclusive cause of action" for usury claims against national banks, and thus preempts claims under state usury laws.
The defendants argued that, as assignees of a national bank, they were effectively covered by the NBA and could legally recover interest at the rate allowed by Delaware, the state where the assignor bank is headquartered.
The Second Circuit disagreed, reasoning that, while under certain circumstances preemption under the NBA could be extended to entities that are not national banks, in order for this exception to apply, the state law at issue must "significantly interfere with a national bank's ability to exercise its powers" under the NBA. For example, the Court noted that in most of the cases where the NBA has been extended to an unaffiliated non-national bank entity, the entity was acting on behalf of a national bank in the process of conducting the bank's business.
The Second Circuit distinguished the actions of the defendants in the case at bar from agents acting on a national bank's behalf, finding that the non-bank defendants here were acting on their own behalf in attempting to collect the plaintiff's credit card debt. In so finding, the Court cited to guidance published by the Office of the Comptroller of the Currency ("OCC"), the federal agency responsible for chartering, regulating and supervising national banks, which clarified in an OCC Bulletin that third-party debt buyers are not agents or subsidiaries of a national bank for purposes of NBA preemption.
The Court further distinguished the case at bar from two Eighth Circuit decisions holding that the NBA preempted state law usury claims, which were relied upon by the district court and defendants.
In Krispin v. May Department Stores, 218 F. 3d 919 (8th Cir. 2000), the Eighth Circuit applied the NBA to preempt state law usury claims against a department store chain that issued credit cards assigned to a wholly-owned national bank. The Court explained that Krispin did not support the defendants' preemption argument because, in Krispin, the department store chain assigned its credit card accounts to a wholly owned national bank and subsequently re-purchased the accounts, but the national bank retained an ownership interest in the accounts.
According to the Second Circuit, this led the Eighth Circuit in Krispin to conclude that that the real party in interest was the national bank. Unlike in Krispin, the Second Circuit noted, the national banks in the case at bar did not retain any ownership interest in the plaintiff's account.
In Phipps v. FDIC, 417 F.3d 1006 (8th Cir. 2005), the plaintiffs sued under Missouri law to recover a "finder's fee" paid to a third party entity upon the sale of mortgage loans. The Eighth Circuit in Phipps held that the fees constituted "interest" under the NBA, and held that the originating bank, not the assignee, was the real party in interest and the claims were preempted.
The Second Circuit reasoned that in Phipps, the national bank charged the interest or "finder's fee," while in the case at bar, the interest was charged to the plaintiff by the non-bank defendants after her account was sold to defendants. In addition, the Second Circuit noted, the non-bank entity in Phipps was an agent of the national bank and 12 C.F.R. § 7.1004(a) allows a national bank to use the services of and compensate non-employees for originating loans. In the case at bar, no such relationship existed between the non-bank defendants and the originating bank or its national bank transferee.
Turning to the issue of whether Delaware or New York law applied based on the choice-of-law provision in the underlying agreement, the Second Circuit declined to address the issue because it had not been ruled upon by the district court.
However, the Second Circuit rejected the plaintiff's argument that by attempting to collect interest at a rate higher than New York law allows, the non-bank defendants supposedly made a false representation in violation of FDCPA subsections 1692e(2)(A), (5), (10) and 1692f(1).
The Court reasoned that the district court's analysis was mistakenly based on its determination that the defendant non-bank entities were entitled to the same protections as the national bank from which they acquired the plaintiff's credit card account.
In addition, the Second Circuit held that the district court mistakenly concluded that Delaware law applied if the plaintiff received the cardholder agreement and change in terms, but those facts were only established by stipulation by the parties for purposes of appeal. Because the district court never reached the issue of which state's law applied, the Court vacated the district court's judgment on the FDCPA claim.
The Court also vacated the district court's denial of class certification because its analysis was based on the same ruling that the non-bank defendants were entitled to the same protection under the NBA as the originating bank.
Thus, the Second Circuit reversed the district court's holding that the NBA preempted the plaintiff's claims, vacated the district court's judgment and denial of class certification, and remanded the case for further proceedings.

References: § 12
 § 13
 § 12
 § 12
 § 12
 § 11
 § 11
 § 524
 § 1105
 § 524
 § 524
 § 362
 § 524
 § 524
 § 85
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