Thursday, May 10, 2018

FYI: 9th Cir Rejects FDCPA Claim That Collector Did Not "Meaningfully Participate" in Collection

The U.S. Court of Appeals for the Ninth Circuit recently rejected a so-called “flat-rating” claim, holding that a company that sent letters demanding that hospital patients pay their overdue medical bills did not create a false or misleading impression that the company was actually participating in collecting the debts in violation of the federal Fair Debt Collection Practices Act (FDCPA), because the company meaningfully participated in the hospital’s efforts to collect debts.

A copy of the opinion is available at:  Link to Opinion

The plaintiff received treatment at a hospital but failed to pay the medical bills.  After the plaintiff ignored multiple requests for payment, the hospital referred her delinquent accounts to a collection agency.

The hospital and the collection agency operated together under a Subscriber Agreement where the hospital would refer delinquent patient accounts to the collection agency. For a fixed fee, the collection agency would send letters requesting payment by check, credit card, or online at the hospital’s website.

The collection agency sent three demand letters to the plaintiff.  In response to the third letter, the plaintiff disputed the debt and the collection agency marked the account as disputed and returned the account to the hospital.

In March 2014, the plaintiff filed a putative class action against the collection agency and hospital alleging violations of the federal Fair Debt Collection Practices Act (FDCPA), including but not limited to 15 U.S.C. §§ 1692e and 1692j.

The plaintiff alleged that the letters she received “created a false or misleading belief that [the collection agency] was meaningfully involved in the collection of a debt prior to the debt actually being sent to collection” -- a practice commonly known as flat-rating.

The hospital and collection agency moved for summary judgment.  In response to the motions, the plaintiff argued that even if her flat-rating claim failed, the defendants’ practices violated 15 U.S.C. § 1692e(5) by falsely threatening to take further action against her if she refused to pay her debt.  The plaintiff argued that the collection agency had no actual authority to take any action against her outside of sending the demand letter.

The trial court granted the defendants’ motion for summary judgment.  It ruled that the evidence established that the collection agency meaningfully participated in the collection of the plaintiff’s debt, thereby precluding any flat-rating claim.  The trial court also struck the section 1692e(5) claim because it was raised too far into the litigation, plaintiff did not formally amend her complaint, and the claim was barred by the FDCPA’s one year statute of limitations.

The plaintiff appealed and challenged the trial court’s rejection of both her flat-rating and § 1692e(5) claims.  The plaintiff also argued that she had a viable claim under §1692e(10) for the collection agency’s allegedly deceptive acquisition of her information.

The Ninth Circuit began its analysis by reviewing the flat rating claim.

As you may recall, § 1692j prohibits “flat-rating -- the practice where a third party (usually for a flat rate) sells form letters to a creditor -- which creates the false impression that someone (usually a collection agency) besides the actual creditor is ‘participating’ in collecting the debt.”  See White v. Goodman, 200 F.3d 1016, 1018 (7th Cir. 2000).  Flat-rating essentially involves a creditor using a third party’s name for intimidation value.

Because it was undisputed that the collection agency furnished form letters to create the belief that it was participating in the collection of debts owed the hospital, the question presented to the Ninth Circuit was whether there was sufficient evidence in the record to support the plaintiff’s contention that this impression was false.

Section 1692j does not define what it means for a person to participate in the collection of or in an attempt to collect a debt.  The statute makes it unlawful to:

design, compile, and furnish any form knowing that such form would be used to create the false belief in a consumer that a person other than the creditor of such consumer is participating in the collection of or in an attempt to collect a debt such consumer allegedly owes such creditor, when in fact such person is not so participating.

15 U.S.C. § 1692j(a).

The plaintiff argued that the collection agency must do more than merely mail form letters to “participate” sufficiently in debt-collection efforts.  For example, the plaintiff argued that the collection agency did not have authority to negotiate or to process payments from debtors, it received no proceeds from payments that were made, and it was not involved in any further action that was pursued against debtors whose accounts remained delinquent.

The Ninth Circuit noted that meaningful participation in the debt collection process may take a variety of forms.  It considered the amount of control the entity exercised over the collection letters it sends, the amount of contact the entity had with the debtors, whether the entity invited and responded to debtor inquiries, whether the entity received or negotiated payments, whether the entity received or retained full debtor files, and whether the entity was involved in further collection activities if the debt remained unpaid. 

Above all, the Ninth Circuit stated that the key is whether the entity genuinely contributed to an effort to collect another’s debt. 

The Ninth Circuit found that while the collection agency did not process payments, it participated in the attempts to collect debts owed to the hospital because: (1) it independently screened accounts for barriers to collection, (2) it drafted and mailed the collection letters without input from the hospital, (3) its letters invited the debtor to contact the collection agency and its personnel handled such inquiries, (4) it in fact received approximately 500 calls a week from debtors and received hundreds of pieces of mail from debtors, (5) it provided debtors with information about the debt and how to repay them, (6) it maintained a website where debtors could access information about their debts and submit documents, and (7) it sometimes received and forwarded to the hospital payments it received from debtors.

Therefore, the Ninth Circuit determined that the collection agency’s efforts were enough to have participated meaningfully in the attempts to collect debts like the plaintiff’s.

The plaintiff argued that the trial court’s conclusion was inconsistent with two out of circuit cases in which attorneys who mailed collection notices on a creditor’s behalf were deemed not to have participated meaningfully.

In Nielsen v. Dickerson, the Seventh Circuit considered whether certain form collection letters falsely represented that the letters came “from an attorney” in violation of 15 U.S.C. § 1692e(3).  Nielsen v. Dickerson, 307 F.3d 623, 634-35 (7th Cir. 2002).  The question in Nielsen turned on whether the attorney who composed and mailed the letters in an “assembly-line fashion” was actually involved in the debt collection process.  Id., at 635.

The Ninth Circuit noted that Nielsen only briefly addressed the attorney’s potential liability as a flat-rater under 1692j, stating that the attorney might “seem to be a natural candidate for flat-rating liability pursuant to section 1692j.”  Id., at 639.  However, the Seventh Circuit in Nielsen ultimately did not decide whether the attorney violated section 1692j because any such liability would have been redundant to the attorney’s liability under section 1692e(3).  Id., at 640.

Thus, the Ninth Circuit found that Nielsen did not support the plaintiff’s argument.

In Vincent v. Money Store, the Second Circuit considered whether a creditor that hired a law firm to mail debt collection notices could be held liable for violation of section 1692e as its own debt collector under the FDCPA’s false name exception, because the law firm was not meaningfully involved in collection efforts.  Vincent v. Money Store, 736 F.3d 88, 91 (2nd Cir. 2013). 

The Second Circuit applied the analysis in Nielsen and concluded that “a jury could find” that collection letters mailed by the law firm “falsely implied that [the firm] was attempting to collect [the creditor’s] debts and would institute legal action against debts,” when the firm “acted as a mere conduit for a collection process [the creditor] controlled.” Id., at 104.

The Ninth Circuit was not persuaded by Vincent either because the collection agency in this case participated to a greater degree in collection efforts than the law firm in Vincent did.  The plaintiffs in Vincent presented evidence that the law firm drafted the letters jointly with the creditor, directed debtors to send nearly all communications to the creditor itself, and after mailing the demand letters “performed virtually no role in the actual debt collection process” besides verifying the existence of the debt or the identity of the creditor.  Id., at 93-95, 104.

Given the greater degree of participation by the collection agency in this case, the Ninth Circuit determined that Vincent was distinguishable and did not support the plaintiff’s position.

Therefore, the Ninth Circuit held that the collection agency in this case meaningfully participated in the attempts to collect the plaintiff’s debts.

Next, the Ninth Circuit turned to the plaintiff’s arguments regarding the FDCPA’s prohibition against “threat[ening] to take any action that cannot legally be taken or that is not intended to be taken.” 15 U.S.C. § 1692e(5).

The plaintiff argued that her complaint gave the collection agency adequate notice of its need to defend against the claim, and even if it did not, she should have been given leave to amend the complaint.

However, the Ninth Circuit found that the plaintiff’s complaint focused narrowly on her flat-rating allegations.  It never cited § 1692e(5) and did not mention the FDCPA’s prohibition against threatening to take an action that is not intended or legally authorized.  And, the Ninth Circuit found that the complaint expressly disavowed such a claim by alleging that the collection agency “was not acting as a debt collector when it sent the Letters.”

Because the plaintiff’s theory of liability was that the collection agency was a flat-rater, not a true debt collector, the Ninth Circuit held that the trial court did not err in striking the claim.

The plaintiff further argued that she should have been granted leave to amend the complaint, and the amended claim should “relate back” to the date of her original complaint.

The Ninth Circuit rejected this argument because an amended complaint relates back to the date of the original complaint only where the claim arose out of the same conduct in the original pleading. 

The plaintiff’s § 1692e(5) claim, in the Ninth Circuit’s view, would not rely on the same facts and evidence because the plaintiff complaint did not allege (1) that the collection agency was a debt collector, and (2) that the collection agency threatened to take any action against her that it had no authority or intention to take.  These issues, according to the Ninth Circuit, would involve different witnesses and the trier of fact would need to determine what, if anything, the collection letters threatened to do.

Additionally, the Ninth Circuit determined that the plaintiff waived her claim under § 1692e(10) because the claim in nowhere to be found in the complaint, and she did not argue the claim in opposing the defendants’ motions for summary judgment.

Accordingly, the Ninth Circuit affirmed the trial court’s grant of summary judgment in favor of the defendants.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Monday, April 9, 2018

FYI: 9th Cir Holds "Increased Risk of Future Identity Theft" Sufficient for Standing in Data Breach Class Action

In a data breach putative class action, the U.S. Court of Appeals for the Ninth Circuit recently held that the plaintiffs sufficiently alleged Article III standing based on an alleged "increased risk of future identity theft."

In so ruling, the Ninth Circuit rejected the defendant's argument that Clapper v. Amnesty International USA, 568 U.S. 398 (2013), in which the Supreme Court of the United States held the "an objectively reasonable likelihood" of injury was insufficient to confer standing, required dismissal.

A copy of the opinion is available at:  Link to Opinion

In January 2012, hackers breached the servers of an online retailer and allegedly stole the names, account numbers, passwords, email addresses, billing and shipping addresses, telephone numbers, and credit and debit card information of more than 24 million customers.

Several of these customers filed putative class actions in federal courts across the county, and the cases were consolidated for pretrial proceedings.  Although some of the plaintiffs alleged that hackers used stolen information about them to make financial transactions, the plaintiffs of this appeal ("Plaintiffs") did not allege that they suffered financial losses of any kind from identity theft.

The trial court dismissed the Plaintiffs' claim for lack of Article III standing.  This appeal followed.

On appeal, the Ninth Circuit had to determine whether the Plaintiffs had standing to sue based on alleged risk of future harm.  As you may recall, to have Article III standing:

a plaintiff must show (1) it has suffered an "injury in fact" that is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical; (2) the injury is fairly traceable to the challenged action of the defendant; and (3) it is likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.

Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 528 U.S. 167, 180-81 (2000).

A plaintiff threatened with future injury has standing to sue "if the threatened injury is certainly impending,' or there is a "substantial risk that harm will occur.'"  Susan B. Anthony List v. Driehaus, 134 S. Ct. 2334, 2341 (2013).

The Ninth Circuit addressed Article III standing of victims of data theft in Krottner v. Starbucks Corp., 628 F.3d 1139 (9th Cir. 2010).  In Krottner, a thief stole a laptop containing personal information of approximately 97,000 employees.  Krottner, 628 F.3d at 1140.  Some employees sued and the only harm that most alleged was an "increased risk of future identity theft."  Id., at 1142.  The Ninth Circuit held that this was sufficient for Article III standing, holding that the plaintiffs had "alleged a credible threat of real and immediate harm" because the laptop with their personal information had been stolen.  Id., 1143.

The retailer argued that the Supreme Court of the United States's more recent ruling in Clapper v. Amnesty International USA, 568 U.S. 398 (2013) meant that Krottner did not control this case. 

In Clapper, the plaintiffs challenged surveillance procedures authorized by federal law, and argued that they had Article III standing "because there [was] an objectively reasonable likelihood that their communications [would] be acquired "at some point in the future."  Clapper, 568 U.S. at 401.  The Supreme Court held that "an objectively reasonable likelihood" of injury was insufficient because the plaintiffs in Clapper relied on a multi-link chain of inferences that was "too speculative" to constitute a cognizable injury in fact.  Id.

However, in the Ninth Circuit's view, the plaintiffs' alleged injury in Krottner did not require a speculative chain of inference.  See Krottner, 628 F.3d at 1143.  Rather, the Ninth Circuit explained that the laptop thief in Krottner had all the information he needed to open accounts or spend money in the plaintiffs' names.  Id., at 1142. 

Moreover, the Ninth Circuit noted that Clapper's standing analysis was "especially rigorous" because the case arose in a sensitive national security context involving intelligence gathering and foreign affairs, and because the plaintiffs were asking the courts to declare actions of the executive and legislative branches unconstitutional.  Clapper, 568 U.S. at 408.

Therefore, the Ninth Circuit held that Krottner was not clearly irreconcilable with Clapper, and remained binding law.

Next, the Ninth Circuit applied Krottner to Plaintiffs' allegations.  Specifically, the Ninth Circuit compared the sensitivity of the stolen data in this case to that in Krottner.

The Plaintiffs alleged that the information stolen from the retailer can be used to commit identity theft, including by placing them at higher risk of "phishing" and "pharming," which were ways for hackers to exploit information they already have to obtain even more personal information.  Plaintiffs also alleged that their credit card numbers were stolen.  Although there was no allegation in this case that the stolen information included social security numbers, as there was in Krottner, the Ninth Circuit found that the information taken in the data breach gave hackers the means to immediately commit fraud or identity theft.

Additionally, the Ninth Circuit noted that there were other plaintiffs in this case who alleged that the hackers had already commandeered their accounts or identities using information taken from the data breach.  While those plaintiffs' claims were not at issue in this appeal, according to the Ninth Circuit, their alleged harm undermined the retailer's assertion that the stolen data cannot be used for fraud or identity theft. 

The Court also noted that two plaintiffs whose claims were at issue in this appeal claimed that the hacker took over their AOL accounts, and sent advertisements to people in their address books.  Though not a financial harm, as the Ninth Circuit explained, "these alleged attacks further support Plaintiffs' contention that the hackers accessed information that could be used to help commit identity fraud or identity theft."

Thus, the Ninth Circuit concluded that the Plaintiffs had sufficient alleged an injury in fact under Krottner.

The Court then turned to the remaining Article III requirements:  whether the alleged risk of future harm is "fairly traceable" to the conduct challenged, and whether the injury will be redressed by the litigation.

In Remijas v. Neiman Marcus Group, LLC, 794 F.3d 688 (7th Cir 2015), the Seventh Circuit recognized "[t]he fact that some other store might have caused the plaintiffs' private information to be exposed does nothing to negate the plaintiffs' standing to sue" and their injury were nonetheless "fairly traceable" to the defendant's data breach.  Remijas, 794 F.3d at 697.

Relying on Remijas, the Ninth Circuit determine that even if the Plaintiffs suffered identity theft or fraud caused by data stolen in other breaches (rather than the data stolen from the vendor in this case), it would not negate their standing to sue.  As the Ninth Circuit explained, those issues were more about the merits of causation and damages and less about standing.

The Ninth Circuit also found that the risk of identity theft was redressable by relief that could be obtained through this litigation.  Namely, if the Plaintiffs succeeded on the merits, any proven injury could be compensated through damages.  See Remijas, 794 F.3d at 696-97.

Accordingly, the Ninth Circuit reversed the trial court's judgment as to the Plaintiffs' standing and remanded to the trial court for further proceedings.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Sunday, March 25, 2018

FYI: 9th Cir Holds No NBA Preemption for State Law on Escrow Accounts, TILA Escrow Account Rules Not Retroactive

The U.S. Court of Appeals for the Ninth Circuit recently held that that the National Bank Act did not preempt California's state escrow interest law, which requires financial institutions to pay at least 2 percent simple interest per annum on escrow account funds.

In so ruling, the Court also held that the federal Truth In Lending Act provisions for escrow accounts, at 15 U.S.C. § 1639d, did not apply to loans originated before the 2013 effective date of the provisions.

A copy of the opinion is available at:  Link to Opinion

In July 2008, the plaintiff purchased a home in California with a mortgage loan from a lender.  As a condition for obtaining a mortgage, the plaintiff was required to open a mortgage escrow account into which he paid $250 per month.  A bank purchased the lender and assumed control over the plaintiff's mortgage loan and escrow account. 

The plaintiff's mortgage loan provided that it "shall be governed by federal law and the law of the jurisdiction in which the Property is located."  The parties agreed that the terms of the mortgage loan documents required the bank to pay interest on escrow funds if required by federal law or state law that was not preempted.

The plaintiff sued the bank on behalf of himself and a putative class of similarly situated customers, alleging that the bank violated the "unlawful" prong of the California Unfair Competition Law ("UCL"), because the bank supposedly violated both California state law, Cal. Civ. Code § 2954.8(a), and federal law, 15 U.S.C. § 1639d(g)(3), by failing to pay interest on his escrow account funds.  The plaintiff also brought a breach of contract claim, alleging that the bank's failure to pay interest violated his mortgage agreement. 

The bank filed a motion to dismiss on the ground that California Civil Code § 2954.8(a) was preempted by the National Bank Act ("NBA").  The trial court granted the bank's motion to dismiss, concluding that California's escrow interest law "prevent[ed] or significantly interfere[d] with" banking powers and was preempted by the NBA.  This appeal followed.

The central issue for the Ninth Circuit Panel was whether the NBA preempted California Civil Code 2954.8(a).  As you may recall, section 2954.8(a) provides:

Every financial institution that makes loans upon the security of real property containing only a one- to four-family residence and located in this state or purchases obligations secured by such property and that receives money in advance for payment of taxes and assessments on the property, for insurance, or for other purposes relating to the property, shall pay interest on the amount so held to the borrower. The interest on such amounts shall be at the rate of at least 2 percent simple interest per annum. Such interest shall be credited to the borrower's account annually or upon termination of such account, whichever is earlier.

California Civil Code § 2954.8(a).

Section 1639d(g)(3) of the federal Truth in Lending Act, 15 U.S.C. 1601, et seq., ("TILA"), states:

(3) Applicability of payments of interest
If prescribed by applicable State or Federal law, each creditor shall pay interest to the consumer on the amount held in any compound, trust, or escrow account that is subject to this section in the manner as prescribed by that applicable State or Federal law.

15 U.S.C. § 1639d(g)(3).

The plaintiff borrower argued that TILA's plain language -- which requires creditors to pay interest on escrow fund accounts like his if "prescribed by applicable" state law -- made clear that Congress perceived no conflict between state laws like California Civil Code § 2954.8(a) and the powers of national banks, and therefore Congress did not intend for these state laws to be preempted by the NBA.

The bank countered that such state laws were preempted because they prevent or significantly interfere with the exercise of its banking powers, and a preempted law cannot be an "applicable" law under section 1639d(g)(3).

The Ninth Circuit Panel began its analysis by examining Dodd-Frank's amendments to the NBA preemption framework.  As you may recall, Dodd-Frank addressed the preemptive effect of the NBA in several ways.

First, it emphasized that the legal standard for preemption set forth in Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996), applied to questions of whether state consumer financial laws were preempted by the NBA.  12 U.S.C. § 25b(1)(B).

Second, it required the Office of Comptroller of the Currency ("OCC"), which regulates national banks, to follow specific procedures in making any preemption determination.  12 U.S.C. § 25b(1)(B), 25b(b)(3)(B).

Third, it clarified that the OCC's preemption determinations were entitled only to Skidmore deference.  12 U.S.C. § 25b(b)(5)(A); Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944) (explaining that an agency 's views were "entitled to respect" only to the extent that they had the "power to persuade").

Before Dodd-Frank, as the Ninth Circuit explained, the Supreme Court of the United States held in Barnett Bank that states were not "deprive[d] " of the power to regulate national banks, where "doing so does not prevent or significantly interfere with the national bank's exercise of its powers" under the NBA.  Barnett Bank of Marion County, N.A., 517 U.S. at 33.

Following Barnett Bank, the OCC issued in 2004 its interpretation of the NBA preemption standard:  "Except where made applicable by Federal law, state laws that obstruct, impair, or condition a national bank's ability to fully exercise its Federally authorized real estate lending powers to not apply to national banks."  12 C.F.R. § 34.4(a) (effective Jan. 13, 2004).

Thus, according to the Ninth Circuit, only the Dodd Frank Act amendment that required the OCC to follow specific procedures in making preemption determinations was a change in the law.  The Court further notes that the other amendments merely codified existing law as set forth by the Supreme Court.

Although the Panel had never addressed whether the OCC's interpretation was inconsistent with Barnett Bank, or whether the regulation was owned deference while it was in effect, the Panel acknowledged that the Supreme Court has ruled that the regulations of this kind should receive, at most, Skidmore deference -- and even then, only as to a conflict analysis, and not as to the legal conclusion on preemption.  See, e.g., Wyeth v. Levine, 555 U.S. 555, 576-77 (2009).

The Panel determined that under Skidmore, the OCC's regulation was entitled to little, if any, deference in light of Barnett Bank, even before the enactment of Dodd-Frank.  In other words, the OCC simply adopted the Supreme Court's articulation of the applicable preemption standard in prior cases, but did so inaccurately according to the Panel, because it did not conduct its own review of the specific potential conflicts on the ground. 

The Ninth Circuit explained that in Dodd-Frank, Congress underscored that Barnett Bank continued to provide the preemption standard; that is, state consumer financial law is preempted only if it "prevents or significantly interferes with the exercise by the national bank of its powers" under the NBA. 12 U.S.C. § 25b(b)(1)(B).  Thus, the Panel determined that the bank must demonstrate that the state law prevented or significantly interfered with its national banking powers.

The Court then turned to the issue of whether section 2954.8(a) prevented the bank from exercising its national bank powers or significantly interfered with the bank's ability to do so.

The Ninth Circuit noted that TILA requires banks to pay interest on escrow account balances "[i]f prescribed by applicable State [] law."  15 U.S.C. § 1639d(g)(3).  The Supreme Court recently explained that "applicable" meant "capable of being applied: having relevance" or "fit, suitable, or right to be applied: appropriate."  Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 69 (2011). 

This language, according to the Ninth Circuit, expressed Congress's view that such laws would not necessarily prevent or significantly interfere with a national bank's operations.  

The bank relied on the OCC's pre-Dodd-Frank preemption rule, 12 C.F.R. § 34.4(a) (2004).  The bank argued that state escrow interest law necessarily prevented or significantly impaired its real estate lending authority. 

However, the Ninth Circuit noted that the OCC's rule specifically altered the language of section 34.4(b) to clarify that state laws "that [were] made applicable by Federal law" (which would include Dodd-Frank's TILA amendments) "are not inconsistent with the real estate lending powers of national banks -- to the extent consistent with [Barnett Bank]."  12 C.F.R. § 34.4(b)(9)(2011).

Thus, the Court rejected the bank's argument based on the pre-Dodd-Frank preemption rule.

Additionally, the Ninth Circuit was not persuaded by the bank's cited cases. 

Flagg v. Yonkers Savings & Loan Association, 396 F.3d 178, 182 (2d Cir. 2005), concerned the Office of Thrift Supervision's ("OTS") authority to regulate federal savings associations, and the Second Circuit based its ruling on the OTS's field preemption over the regulation of such associations.  Unlike the OTS, as the Panel noted, the OCC did not enjoy field preemption over the regulation of national banks.

First Federal Savings and Loan Association of Boston v. Greenwald, 591F.3d 417, 425 (1st Cir. 1979), concerned a direct conflict between a state regulation requiring payment of interest on certain escrow accounts and a federal regulation expressly stating that no such obligation was to be imposed on federal savings associations "apart from the duties imposed by this paragraph" or "as provided by contract."  The Panel explained that unlike the regulation in First Federal, there was no federal regulation in this case that directly conflicted with section 2954.8(a).

Because the Court held that the bank did not demonstrate that state escrow interest laws prevented or significantly interfered with its exercise of national bank powers, and because Congress in enacting Dodd-Frank indicated that they do not, the Ninth Circuit Panel concluded that the NBA did not preempt California Civil Code § 2954.8(a).

Next, the Ninth Circuit examined the plaintiff's two claims for relief. 

The bank argued that the plaintiff's UCL claim cannot proceed because his escrow account was created before section 1639d's effective date of January 21, 2013. 

As you may recall, section 1639d(a) states that "a creditor, in connection with the consummation of a consumer credit transaction secured by a first lien on the principal dwelling of the consumer … shall establish, before the consummation of such transaction, an escrow or impound account … as provided in, and in accordance with, this section."  15 U.S.C. § 1639d(a).

The Ninth Circuit held that the use of the language "shall establish, before the consummation of such transaction" indicated that Congress intended section 1639d to apply to accounts established pursuant to that section after it took effect in 2013. 

Because the plaintiff obtained the subject mortgage loan in 2008, the Ninth Circuit Panel concluded that the plaintiff cannot rely on section 1639d to prosecute his UCL claim.

However, the Panel found that the plaintiff could still obtain relief under the UCL because California Civil Code § 2954.8(a) was not preempted by the NBA.  Because the bank was required to follow the state law, the Ninth Circuit held that the plaintiff borrower could proceed on his UCL claim based on the theory that the bank violated the UCL by failing to comply with section 2954.8(a).

Additionally, the Court also held that the plaintiff may proceed on his breach of contract claim because his mortgage required the bank to pay escrow interest if "Applicable Law requires interest to be paid on the Funds." 

Accordingly, the Ninth Circuit Panel reversed the trial court's dismissal of the putative class action.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Wednesday, March 14, 2018

FYI: 9th Cir Affirms Dismissal of FCRA Putative Class Action for Lack of Standing

The U.S. Court of Appeals for the Ninth Circuit recently affirmed the dismissal of a consumer's putative class action alleging willful violations of the federal Fair Credit Reporting Act (FCRA) for lack of standing under Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016).

In so ruling, the Court held that merely printing a credit card receipt without redacting the card's full expiration date did not allege the concrete injury required, where no second receipt existed, the consumer did not lose the receipt, nobody stole the receipt, and nobody stole the consumer's identity. 

A copy of the opinion is available at:  Link to Opinion

A consumer used his credit card at a parking garage and received a receipt displaying the credit card's full expiration date.  The consumer filed a putative class action lawsuit against the garage alleging willful violation of the FCRA.  Specifically, the consumer alleged that failing to redact the card's full expiration date violated 15 U.S.C. § 1681c(g).

The consumer only alleged a statutory violation and the potential for actual injury.  The consumer alleged that his injury was "exposure . . . to identity theft and credit/debit fraud," because he was at "imminent risk" that his "property would be stolen and/or misused by identity thieves."  However, he did not allege that a second receipt existed, that someone stole his receipt, that he lost his receipt, or that anyone stole his identity. Instead, he claimed that "the risk of harm created in printing the expiration date on the receipt" was a "sufficiently concrete" injury.

The garage moved to dismiss the complaint arguing that the consumer lacked Article III standing. The trial court concluded that the consumer only alleged "possible risk of [identity] theft." Following Spokeo, the trial court noted that "[s]omething more is necessary" to allege a concrete injury as not every procedural violation gives rise to standing.  Thus, the trial court granted the motion and dismissed the case with prejudice finding that the consumer did not allege a sufficiently concrete injury to establish standing.

This appeal followed.

The Ninth Circuit first examined the history of the relevant statutory framework because "the doctrine of standing derives from the case-or-controversy requirement, and because that requirement in turn is grounded in historical practice." Spokeo, 136 S. Ct. at 1549.

As you may recall, the Fair and Accurate Credit Transactions Act of 2003 (FACTA) amended the FCRA by limiting printed information on receipts:

[N]o person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction.

115 U.S.C. § 1681c(g). The Ninth Circuit observed that the FCRA provides that "[a]ny person who willfully fails to comply with [that requirement] with respect to any consumer is liable to that consumer" for statutory damages of between $100 and $1,000 per violation or "any actual damages sustained by the consumer," costs and attorney's fees, and potential punitive damages.  See 15 U.S.C. § 1681n.

Additionally, since FACTA, Congress enacted the Credit and Debit Card Receipt Clarification Act (Clarification Act), which reiterated that the FCRA prohibits printing "receipts bearing a card's expiration date." Id. However, the Ninth Circuit noted that Congressional findings found "hundreds of lawsuits were filed alleging that the failure to remove the expiration date was a willful violation of the [FCRA] even where the account number was properly truncated," and "[n]one of these lawsuits contained an allegation of harm to any consumer's identity." Congress also found that "[e]xperts in the field agree that proper truncation of the card number, by itself as required by the [FCRA], regardless of the inclusion of the expiration date, prevents a potential fraudster from perpetrating identity theft or credit card fraud."

Thus, the Court noted, the Clarification Act ensures "that consumers suffering from any actual harm to their credit or identity are protected while simultaneously limiting abusive lawsuit." The Clarification Act also provided merchants with a temporary reprieve:  "[A]ny person who printed an expiration date on any receipt . . . between December 4, 2004, and [June 3, 2008]," but otherwise complied with the statute, did not willfully violate the FCRA.

The Ninth Circuit next turned to whether the consumer had standing in this case.  As you may recall, standing is "an essential and unchanging part of the case-or-controversy requirement of Article III."  Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992).  The Ninth Circuit recognized that the appeal turned on whether the consumer alleged a concrete injury in fact.

To establish standing, the consumer must allege he (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision. Spokeo. 136 S. Ct. at 1547. Further a consumer suffers an injury where there is "an invasion of a legally protected interest" that is "concrete and particularized" and "actual or imminent, not conjectural or hypothetical."  Id. at 1548 (quoting Lujan, 504 U.S. at 560).

The Ninth Circuit observed that both Spokeo and this case involved a putative consumer class action alleging willful violations of the FCRA.  In Spokeo, the Supreme Court made clear that "Article III standing requires a concrete injury even in the context of a statutory violation." Id. at 1549. The plaintiff must establish that a concrete injury "actually exist[s]", and that it is "real, and not abstract." Id. at 1548. Intangible harms and a "risk of real harm" can demonstrate a concrete injury. Id. at 1549-50. However, "a bare procedural violation, divorced from any concrete harm," does not "satisfy the injury-in-fact requirement of Article III." Id. at 1549.

Thus, "[a] violation of one of the FCRA's procedural requirements may result in no harm" -- for example, "[i]t is difficult to imagine how the dissemination of an incorrect zip code, without more, could work any concrete harm." Id. at 1550. The Supreme Court therefore remanded to resolve "whether the particular procedural violations alleged . . . entail a degree of risk sufficient to meet the concreteness requirement." Id.

The Ninth Circuit noted that after Spokeo, two of its sister circuits dismissed identical consumer class actions that alleged violations of the FCRA's credit card expiration date redaction requirement for lack of standing. See Meyers v. Nicolet Restaurant of De Pere, 843 F.3d 724 (7th Cir. 2016) (consumer's allegations did satisfy the injury-in-fact requirement for Article III standing because printing the receipt did not harm the consumer and the violation did not create any appreciable risk of harm); Crupar-Weinmann v. Paris Baguette America, Inc., 861 F.3d 76 (2d Cir. 2017) (the alleged bare procedural violation did not create a material risk of harm to the underlying concrete interest Congress sought to protect in passing FACTA -- i.e., preventing identity theft and credit card fraud).

The Ninth Circuit agreed with its sister courts and found that the consumer failed to allege a concrete injury here. Specifically, the historical practice does not support the consumer's theory of injury because his alleged exposure to identity theft does not have "a close relationship to a harm that has traditionally been regarded as providing a basis for a lawsuit in English or American courts."

The Consumer argued that a close historical relationship exists between his claimed injury and privacy torts involving a wrongful disclosure of information.  The Ninth Circuit rejected this argument because the Garage did not disclose the consumer's information to anyone besides the consumer.  Thus, it doesn't matter that "[a]ctions to remedy . . . invasions of privacy . . . have long been heard by American courts, and the right of privacy is recognized by most state" because this case does not involve any such privacy-based injury.  Van Patten, 847 F.3d at 1043.

The Ninth Circuit declared that in adopting the FCRA's credit card expiration date requirement, Congress did not "elevat[e] to the status of legally cognizable injuries concrete, de facto injuries that were previously inadequate in law."  Lujan, 504 U.S. at 578. Congress's creating a prohibition "does not mean that a plaintiff automatically satisfies the injury-in-fact requirement" just because "a statute grants [him] a statutory right and purports to authorize [him] to sue to vindicate that right." Id. Thus, the consumer cannot merely allege a FCRA violation "divorced from any concrete harm, and satisfy the injury-in-fact requirement of Article III." Id. 

The Ninth Circuit also discerned that Spokeo made it clear that simply because the FCRA authorizes citizen suits and statutory damages, does not mean that allegations of a statutory violation meet the standing requirement. Although, "Congress did not eliminate the FCRA's card expiration date requirement in the Clarification Act," that does not confer standing here because "the Clarification Act's finding that a disclosed expiration date by itself poses minimal risk and the law's temporary elimination of liability for such violations counsel that [the consumer] did not allege a concrete injury."  The Ninth Circuit therefore concluded that "[o]n balance, congressional judgment weighs against" finding standing here.

The Ninth Circuit next examined the consumer's claims that his statutory violation by itself establishes concrete harm.  First, the consumer argued that the FCRA creates a "substantive right," and invading this right "is an injury that confers standing." See Eichenberger v. ESPN, Inc., 876 F.3d 979, 982-84 (9th Cir. 2017). Second, the consumer argued that the law at least "establishes a procedural right, the violation of which creates a material risk of harm sufficient to confer standing." The Ninth Circuit rejected both claims.

The Court held that the consumer's argument that Congress "created a substantive right that is invaded by a statutory violation" fails because even assuming the substantive right exists, it depends on disclosing a consumer's private financial information to third-parties.  Here, the garage only disclosed the consumer's private information to the consumer, not to any third-party. Thus, the Ninth Circuit held, printing the receipt did not invade any substantive right.

The consumer's FCRA procedural violations claim also fails to confer standing, the Court continued, because it does not "entail a degree of risk sufficient to meet the concreteness requirement."  Spokeo, 136 S. Ct. at 1550. Here, Ninth Circuit noted, the consumer did not adequately allege actual harm or a material risk of harm because no other copy of the receipt existed, he did not lose the receipt, nobody stole the receipt, and no thief stole his identity.  The consumer also failed to allege any real risk of harm that was "not conjectural or hypothetical," because he could shred the receipt and eliminate any remaining risk of disclosure. Lujan, 504 U.S. at 560.

The Ninth Circuit also held that providing a credit card receipt to the card owner with the expiration date, without more, did not create "any concrete harm." Spokeo, 136 S. Ct. at 1550. Congress found that receipts like the consumers with the expiration date and a truncated credit card number "prevent a potential fraudster from perpetrating identity theft or credit card fraud." 122 Stat. at 1565. The consumer's potential identity theft exposure theory is therefore "too speculative for Article III purposes." See Missouri ex rel. Koster v. Harris, 847 F.3d 646, 654 (9th Cir. 2017) (quoting Lujan, 504 U.S. at 564 n.2).

The Ninth Circuit therefore affirmed the trial court's dismissal of the consumer's putative class action for lack of Article III standing.


Eric Tsai
Maurice Wutscher LLP 
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