Wednesday, February 13, 2019

FYI: Cal App Ct (2d Dist) Holds Former Servicer and Trustee Entitled to Recover Attorneys' Fees

The Court of Appeals for the Second District of California held that California's fee shifting statue in California Civil Code § 1717 permitted a former loan servicer and foreclosure trustee to recover their attorneys' fees authorized by the contract, even though the deed of trust was assigned to another financial institution.

However, the Court vacated the trial court's award of attorneys' fees against the borrower because the deed of trust only permitted attorneys' fees to be added to the loan balance.

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

The borrower defaulted on the mortgage and sued the loan servicer and foreclosure trustee (collectively, "defendants") to stop the foreclosure.  Her complaint asserted four causes of action: (1) violation of California Civil Code § 2923.5, (2) quiet title, (3) unlawful debt collection practices in violation of the California Rosenthal Act, and (4) declaratory and injunctive relief. 

The trial court sustained the defendants' demurrers without leave to amend.  The appellate court affirmed the trial court's ruling on appeal.  The defendants moved for attorneys' fees pursuant to the deed of trust and the Rosenthal Act.

In relevant part, section 9 of the deed of trust authorizes the lender pay "reasonable attorneys' fees to protect its interest in the Property and/or rights in the Security Instrument."  Section 9 further states that "[a]ny amounts disbursed by Lender under this Section 9 shall become additional debt of Borrower secured by this Security Instrument."

Section 14 of the deed of trust states in pertinent part:  "Lender may charge Borrower fees for services performed in connection with Borrower's default, for the purpose of protecting Lender's interest in the Property and rights under this Security Instrument, including, but not limited to, attorney fees."

The defendants argued that they were entitled to attorneys' fees pursuant to sections 9 and 14 -- even though the deed of trust had been assigned to another financial institution -- because California Civil Code § 1717 authorizes courts to enforce contractual attorney fee clauses.

The trial court granted the motion for attorneys' fees and ordered the borrower to pay the defendants $46,827.40.  The trial court did not discuss the defendants' request for fees pursuant to the Rosenthal Act.

This appeal followed.

The first issue on appeal was whether the defendants were entitled to contractual attorneys' fees under the deed of trust even though they were neither the lender nor signatories to the promissory note or deed of trust.

As you may recall, California Civil Code § 1717(a) provides that "[i]n any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney's fees in addition to other costs." 

Section 1717 has been "interpreted to further provide a reciprocal remedy for a nonsignatory defendant, sued on a contract as if he were a party to it, when a plaintiff would clearly be entitled to attorneys' fees should he prevail in enforcing the contractual obligation against the defendant."  Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124, 128.

Although the defendants were not the original lender identified in the note and deed of trust, the Court noted that the defendants were agents of the lender who had authority to enforce the lender's rights under the contracts.  The borrower sued the defendants for taking actions authorized by the deed of trust during their tenure as loan servicer and trustee.  Thus, in the Court's view the defendants stood in the shoes of a party to the contract and could recover attorney fees as provided by the contract pursuant to section 1717.

The second issue on appeal was whether the deed of trust authorized a separate award to pay attorneys' fees, as opposed to adding the fees to the loan balance.

The Court observed that section 9 of the deed of trust provides that any amounts disbursed by the lender "shall become additional debt of Borrower secured by this Security Instrument."  The Court held that the text of section 9 did not authorize a separate award of attorneys' fees.

The Court also found that the word "charge" in section 14 of the deed of trust authorizes the lender to charge the borrowers attorneys' fees it may have incurred and add those fees to the outstanding balance due under the promissory note.  In the Court's own words, "[t]here is no language in section 14 that indicates the trust deed permits a freestanding contractual attorney fees award."

The defendants argued that because they were no longer the active servicer or trustee of the deed of trust, their attorneys' fees were not amounts disbursed by the lender under section 9 and adding their attorneys' fees to the loan balance would be unjustified.

The Court found the argument unpersuasive because the defendants' right to seek attorneys' fees in the first place, despite being non-parties to the contracts, depended on their assertion that they acted as the lender's agents and stood in the lender's shoes.  As the Court explained, the defendants "must take the bitter with the sweet." 

Thus, the Court concluded that the deed of trust permitted the defendants to recover their attorneys' fees but did not authorize a separate fee award against the borrower.

The loan servicer also argued that it was entitled to attorneys' fees under the Rosenthal Act, as an independent basis for a fee award against the borrower.

As you may recall, the Rosenthal Act includes a provision authorizing a court to award reasonable attorneys§ fees to a "prevailing creditor upon a finding by the court that the debtor's prosecution or defense of the action was not in good faith."  Civil Code § 1788.30(c).

The Court determined that the borrower advanced a colorable argument in her complaint, and therefore the Rosenthal Act did not authorize an award of attorneys' fees to the loan servicer under these circumstances.

Accordingly, the Court reversed the order compelling the borrower to pay $46,827.40 in attorneys' fees and remanded for further proceedings consistent with its opinion.  

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

Admitted to practice law in California, Nevada and Oregon


Monday, January 21, 2019

FYI: 9th Cir Holds Debtor Who Successfully Challenges Automatic Stay Fee Award Also Entitled to Appellate Fees

In a case of first impression, the U.S. Court of Appeals for the Ninth Circuit recently held that a debtor who successfully challenges -- as opposed to a debtor who defends -- an award of attorney’s fees and costs for violations of the automatic stay under § 362(k) of the Bankruptcy Code is entitled to an award of appellate fees and costs.

In so ruling, the Court reversed the trial court’s order denying the debtor’s motion for appellate attorney’s fees and costs, and remanded the matter to the trial court with instructions to remand to the bankruptcy court to calculate reasonable attorney’s fees and costs on appeal. 

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

Husband and wife debtors filed a petition under Chapter 13 of the Bankruptcy Code in October of 2012, which triggered the automatic stay under section 362 of the Code. The debtors listed a $3,535 unsecured, nonpriority debt in their schedules owed to a medical services company. The debt, however, had previously been assigned to a collection agency in July of 2012.

The collection agency, which did not receive notice of the bankruptcy, filed a collection action against the wife in July 2013. The parties entered into a payment plan, but the debtor defaulted.

The collection agency served a writ of garnishment on the debtors in April of 2014. The debtor’s counsel demanded that the garnishment be dissolved, but the wife’s wages were garnished for several more weeks before stopping.

In June of 2014, debtors filed a motion for contempt in the bankruptcy court against the collection agency for violating the automatic stay. The motion was unopposed and the bankruptcy court granted it in August of 2014, awarding $1,295 in damages and $1,277 for attorney’s fees and costs. The debtors appealed both awards, arguing that “the bankruptcy court erred in failing to account for several days of attorneys’ work needed to end the stay violation.”

While the appeal was pending, the Ninth Circuit held in In re Schwartz-Tallard that section 362(K)(1) of the Bankruptcy Code authorized an award of reasonable attorney’s fees and costs incurred on appeal in defending a judgment under section 362(k).

The trial court affirmed the damages award, “but remanded to the bankruptcy court the attorneys’ fees calculation in light of Schwartz-Tallard. The bankruptcy court then awarded attorneys’ fees and costs of $16,324.40, in addition to the $1,277 initially awarded[, but] refused to award attorneys’ fees and costs incurred on appeal, claiming it lacked jurisdiction due to a pending application for these fees before the trial court.”

In June of 2017, the trial court denied the debtors’ motion for appellate attorney’s fees and costs because debtors failed to file a memorandum of “points and authority” required by the court’s local rules. In the alternative the trial court held that section 362(k) “does not allow for recovery of appellate work when a party is prosecuting, and not defending, the judgment on appeal.” The debtors appealed to the Ninth Circuit.

The Ninth Circuit first addressed the trial court’s applicable local rule, which provides relevant part that “[t]he failure of a moving party to file points and authorities in support of the motion constitutes a consent to the denial of the motion….”

The Ninth Circuit reasoned that, although “[o]nly in rare cases will we question the exercise of jurisdiction in connection with the application of local rules[,]” the case before it was “one of those rare cases.” It then concluded that the trial court abused its discretion because the debtor’s motion “clearly indicated that the attorney’s fees and costs requested pertained solely to the appeal, and did not need to be further segregated.”

Turning to the issue of appellate attorney’s fee and costs, the Court began by explaining that section 362(k)(1) of the Bankruptcy Code provides in relevant part that “an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.”

The Ninth Circuit then disagreed with the trial court’s reading of its Schwartz-Tallard ruling, explaining that “[p]reviously, [in Sternberg v. Johnston] we interpreted § 362(k)(1) as limiting attorneys’ fees and costs awards to those incurred in stopping a stay violation. ‘Once the violation has ended, any fees debtor incurs after that point in pursuit of a damage award would not be to compensate for ‘actual damages under § 362(k)(1),’ and thus fees incurred pursuing damages for a stay violation were not recoverable under the statute. … However, Schwartz-Tallard overruled Sternberg in 2015.”

The Court reasoned that, as it explained in Schwartz-Tallard, “’Congress undoubtedly knew that unless debtors could recover the attorney’s fees they incurred in prosecuting an action for damages, many would lack the means or financial incentive (or both) to pursue such actions.’ … Allowing for attorneys’ fees and costs while prosecuting an action for damages is likely the only way debtors in bankruptcy can afford to pursue damages. As is the case here, damages themselves may be too limited to justify an action if attorneys’ fees and costs in pursuit of those damages are not recoverable.”

The Court noted that “[u]nlike most fee-shifting statutes, the language does not explicitly refer to a ‘prevailing party.’ … Still, § 362(k)’s ‘phrasing signals an intent to permit, not preclude, an award of fees incurred in pursuing a damages recovery.’ … The statute clearly provides for damages and attorney’s fees and costs for an injured debtor when a creditor violates the automatic stay. … Section 362(k)(1) also serves a deterrent function much like many fee-shifting statutes.”

In addition, the Ninth Circuit continued, “fee shifting statutes allow for recovery of attorneys’ fees incurred in establishing a party’s claim for fees. … This principle ensures that the fee award is not diluted by the time and effort spent on the claim itself, … and includes appellate attorney’s fees when a party successfully challenges the trial court’s award or when a party successfully defends a favorable judgment on appeal.”

“Most fee-shifting statute cases that award appellate attorneys’ fees do so for successfully defending a judgment on appeal. … Significantly, Schwartz-Tallard also reached this outcome after carefully considering the purpose of § 362(k). If a creditor unsuccessfully appeals a bankruptcy court’s judgment in favor of a debtor, it stands to reason that the party who violated the stay should continue to pay for its harmful behavior by compensating the debtor for its appellate attorneys’ fees and costs.”

The Ninth Circuit then noted that “courts also grant appellate attorneys’ fees in fee-shifting statute cases when, as here, parties successfully challenge initial judgments on appeal. … Indeed, we are not aware of any authority suggesting that, although fees may be awarded under a fee-shifting statute for defending a judgment on appeal, they are not available for successfully challenging the judgment as inadequate. As note, the firmly established principle is that ‘attorneys fees may be awarded for time devoted in successfully defending appeals of or challenges to the trial court’s award of attorney’s fees.’”

The Court concluded that although it was “unaware of any previous case that has analyzed § 362(k)’s application of this principle, the purpose of § 362(k) strongly favors the outcome we now reach.” Because the Ninth Circuit found that § 362(k) is meant to protect debtors when a creditor violates the automatic stay and “thus seeks to make debtors whole, as if the violation never happened, to the degree possible[,] [t]his reasonably includes awarding attorney’s fees and costs on appeal to a successful debtor, even when the debtor must bring the appeal.”

Accordingly, the trial court’s order refusing to award the debtors their attorneys’ fees and costs incurred on appeal was reversed, and the case remanded to the trial court, with instructions to remand to the bankruptcy court to determine the amount of reasonable appellate attorney’s fees and costs.

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

Admitted to practice law in California, Nevada and Oregon


Wednesday, January 9, 2019

FYI: 9th Cir Holds "Unlawful Information Collection and Sharing" Class Action Improperly Removed Under CAFA

In a 2-1 decision, the U.S. Court of Appeals for the Ninth Circuit held that a putative class action against state entities and a private contractor for allegedly collecting and sharing personal data without authorization was essentially a local controversy and was therefore correctly remanded to state court under an exception in the federal Class Action Fairness Act ("CAFA").

Accordingly, the Ninth Circuit affirmed the ruling of the trial court remanding the matter to state court. 

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

The plaintiffs ("Plaintiffs") sought to maintain an action in state court on behalf of a class of users of a bridge against two entities of the State of California ("State Entities") and a private company ("Company") that contracted with the State Entities to operate the bridge's toll system.

Plaintiffs' principle claims alleged the defendants violated the California privacy statutes prohibiting collection of personal data when they collected personally identifiable information from people driving over toll bridges and then shared the information with various unauthorized third parties.

The Company removed the action to federal court under CAFA.  Plaintiffs then moved to remand arguing, among other things, that removal was precluded under 28 U.S.C. § 1332(d)(5)(A) because the Company was acting on behalf of the state even though it is a private company.

The trial court concluded that the Company qualified as a state entity because it was exercising the authority of the state with respect to the alleged violation of the Plaintiffs' privacy rights.

The trial court held that the Company had the burden of satisfying section 1332(d)(5)(A) and because the burden was not met, removal was improper.  The trial court therefore remanded the matter to state court. 

The Company then appealed.

As you will recall, under CAFA, a trial court shall have jurisdiction over a class action when: (1) the amount in controversy exceeds five million, and (2) any class member is a citizen of a state different from any defendant. 28 U.S.C. 1332(d)(2). 

However, CAFA creates an exception from federal court jurisdiction for cases targeting state, local and other government entities that may claim immunities.  See 28 U.S.C. § 1332(d)(5)(A). 

On appeal, the Company argued that the trial court erred because it relied on 42 U.S.C. § 1983 case law to determine that it was a state actor, and that the trial court failed to address the language of CAFA's statutory exception relating to "other governmental entities against whom the trial Court may be foreclosed from ordering relief."

The Company's position was that it was a private entity outside the scope of 28 U.S.C. § 1332(d)(5)(A).  It further "accurately point[ed] out that Section 1983 cases are not controlling because the § 1983 state actor analysis looks to an actor's role and conduct while the CAFA inquiry goes to the nature of the entity itself." 

Thus, the Company argued, the "trial court's exclusive reliance on § 1983 was not appropriate," rather the "issue is whether [the Company] may be considered an instrumentality of the state." 

The Ninth Circuit disagreed, noting that "[th]he trial court's analysis, however, also focused to some extent on the relationship between [the Company] and the state entities ultimately responsible under California law for collecting bridge tolls.  [The Company] is an entity acting on behalf of the state to perform toll related functions required by the statute."

As you may recall, the Eleventh Amendment of the United States Constitution provides that "[t]he Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State," which means private individuals may not sue non-consenting state entities in federal court. 

Moreover, the Ninth Circuit noted, the state need not be named as a defendant, rather "[t]he Supreme Court has held that 'the reference to actions 'against one of the United States' encompasses not only actions in which a State is actually named as a defendant, but also certain actions against state agents and state instrumentalities.'"

"To determine whether an entity is able to invoke such immunity our Court has said we generally look to a number of factors: (1) whether a money judgment would be satisfied out of state funds, (2) whether the entity performs central government functions, (3) whether the entity may sue or be sued, (4) whether the entity has the power to take  property in its own name or only the name of the state, and (5) the corporate status of the entity."

In reviewing those factors, the Ninth Circuit ruled that the Company "satisfies the second factor of performing a central government function and it has not asserted that it lacks any of the other characteristics," but the "record does not reflect whether it may satisfy the other factors." 

Moreover, "the Mitchell factors are not particularly useful when applied to a private entity because a private entity cannot be an arm of the state when the relationship to the sovereign is by contract only," and "[o]ur case law provides not clear answer as to whether [the Company] qualifies as a governmental entity within the meaning of CAFA."

Nevertheless, the Ninth Circuit continued, "[w]e need not decide whether the trial court erred in remanding on the 'other governmental entit[y]' ground pursuant to § 1332(d)(5)(A) because there is a further justification for remand.  The plaintiffs correctly content that the result is required by provisions of CAFA calling for local actions to be heard in state court.  The local controversy exception is one of several exceptions to CAFA removal jurisdiction."

Under this exception, "a trial court is required to decline jurisdiction over a class action when: (1) more than two-thirds of the proposed plaintiff class(es) are citizens of the state in which the action was originally filed, (2) there is at least one in-state defendant against whom 'significant relief' is sought and 'whose alleged conduct forms a significant basis for the claims asserted' by the proposed class, (3) the 'principal injuries' resulting from the alleged conduct of each defendant were incurred in the state of filing, and (4) no other class action 'asserting the same or similar factual allegations against any of the defendants' has been filed within three years prior to the present action."

In analyzing these factors, the Ninth Circuit determined that "[m]ost of these requirements are met."

In so ruling, the Court held that "[t]his is essentially a dispute between those who use the bridge to travel between Marin County, California and San Francisco, California, and defendants who are charged with operating the bridge on behalf of the State of California.  The trial court properly ruled that the case against [the Company], a toll collector, belongs in state court with the California entities that manage the bridge's maintenance and operation." 

Accordingly, the ruling of the trial court was affirmed. 

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

Admitted to practice law in California, Nevada and Oregon


Monday, December 24, 2018

FYI: 9th Cir Holds State Contract Law SOL Applies to TILA Rescission Claims Following Timely Cancellation

The U.S. Court of Appeals for the Ninth Circuit recently held that Washington’s six-year statute of limitations governing contracts instead of the Truth in Lending Act’s (“TILA”) one-year statute of limitations applies to claims to enforce rescission under TILA, after a notice of right to cancel was timely submitted.

The Ninth Circuit also held that the trial court should have given the borrowers leave to amend the complaint because the borrower’s rescission claim under TILA was not time-barred, and amending the complaint would not be futile.

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

Husband and wife borrowers obtained a refinance mortgage loan in April of 2010, but the bank that extended the loan (“Bank”) allegedly failed to provide notice of the borrowers’ right to rescind the loan under TILA. As a result, the borrowers could rescind the loan within three years after the loan was made in April of 2010 under TILA section 1635(f). Two weeks prior to the expiration of the three-year period, the borrowers sent the Bank a notice of intent to rescind the loan. The Bank did not respond.

In February of 2017, the Bank filed a non-judicial foreclosure action. The borrowers responded by filing suit in the U.S. District Court for the Western District of Washington, seeking rescission of the loan under TILA section 1635(f), declaratory and injunctive relief, and damages under Washington’s Consumer Protection Act (“WCPA”).

The Bank moved to dismiss the complaint, arguing that the claims were time-barred because the borrowers failed to sue within 3 years after the loan was made.

The trial court found that the borrowers “timely rescinded the loan by sending the notice of rescission to the Bank within three years of the loan’s consummation[,]” but still granted the motion to dismiss because the borrowers did not file suit within one year as required by section 1640 of TILA, which applies to claims for damages.

The trial court “acknowledged that the limitations period applicable to TILA rescission enforcement claims is an ‘unsettled issue of law’” after the Supreme Court’s decision in Jesinowski v. Countrywide Home Loans in 2015 but, because “some statute of limitations must apply … borrowed the limitations period for monetary damages under TILA, 15 U.S.C. § 1640(3)…. [,]” concluded that all of the borrowers’ claims were time-barred and dismissed the complaint without leave to amend. The borrower’s appealed.

On appeal, the Ninth Circuit explained that “TILA gives borrowers the right to rescind certain loans within 3 business days after consummation of the loan. 15 U.S.C. § 1635(a). However, if the creditor fails to make required TILA disclosures to the borrower, the window for rescission is expanded to three years from consummation of the loan. 15 U.S.C. § 1635(f). Once a borrower rescinds a loan under TILA, the borrower ‘is not liable for any finance or other charge, and any security interest given by the [borrower] … becomes void upon such rescission.’ 15 U.S.C. § 1635(b); see 12 C.F.R. § 226.23(a)(3). Within 20 days after the creditor receives a notice of rescission, the creditor must take steps to wind up the loan. 15 U.S.C. § 1635(b). ‘Upon the performance of the creditor’s obligations under this section, the [borrower] shall tender the property to the creditor … [or] tender its reasonable value.’ Id. Once both creditor and borrower have so acted, the loan has been wound up.”

The Court further explained that, until Jesinowski, it “required that borrowers effectuate TILA loan rescissions by giving lenders their notice of rescission and also bringing suit to enforce that rescission … within the three-year window set forth in 15 U.S.C. § 1635(f).”

However, the Supreme Court of the United States in Jesinowski “eliminated the need for a borrower to bring suit within the three-year window to exercise TILA rescission. Instead, ‘rescission iseffected when the borrower notifies the creditor of his intention to rescind.’” In so ruling, the Supreme Court “did not clarify when a suit to enforce the rescission must be brought after a lender’s failure to act on that notice of rescission.”

Thus, the Ninth Circuit was confronted with the following question: “when a borrower effectively rescinds a loan under TILA, but no steps are taken to wind up the loan, when must suit be brought to enforce that rescission?”

The borrowers argued that no statute of limitations applies to a rescission action given the Jesinowski, decision. The Bank argued that the applicable statute of limitations was “Washington’s two-year catchall statute of limitations.”

The Court agreed with the trial court that some statute of limitations applied, but rejected the trial court’s and the parties’ “arguments as to what that limitation period should be.”

First, the Court reasoned that where “there is no statute of limitations expressly applicable to a federal statute, … ‘the general rule is that a state limitations period for an analogous cause of action is borrowed and applied to the federal claim.’ … As a ‘narrow exception to the general rule,’ courts may ‘decline to borrow a state statute of limitations only when a rule from elsewhere in federal law clearly provides a closer analogy than available state statutes ….”

The Court concluded that because “TILA does not provide a statute of limitations for rescission enforcement claims[,] we borrow from analogous Washington state law. … Under Washington’s general contract law, the statute of limitations sets forth a six-year limitation period for an ‘action upon a contract in writing, or liability express or implied arising out of a written agreement.’”

Because the loan documents were written agreements and the right to rescind under TILA “arises out of that written agreement[,] … contract law provides the best analogy” and the Court borrowed “the general contract law statute of limitations. … There is no federal law that provides a closer analogy, nor to TILA policies at stake and the practicalities of TILA rescission litigation make federal law a more appropriate vehicle for interstitial lawmaking.”

The Court rejected the trial court’s holding that “TILA’s one-year statute of limitations  for legal damages claims” applied to the case at bar for two reasons.

First, the district court’s decision “was based primarily on a misreading of [borrowers’] complaint as requesting TILA relief rather than relief under the WCPA.”

Second, “TILA provides for both legal damages and equitable relief but only includes a statute of limitations for legal damages relief. Because the statute does not provide that the same one-year limitation applies to both damages claims and claims for equitable relief and “Congress surely know how to draft the statute [to so provide but didn’t]” the trial court erred when it refused to borrow the analogous limitations statute from state law. “Only when a state statute of limitations would ‘frustrate or significantly interfere with federal policies’ do we turn instead to federal law to supply the limitation period.

The Ninth Circuit held that applying “Washington’s longer six-year contract statute of limitations would actually further TILA’s purpose, which is to protect consumers from predatory lending practices and promote the informed use of credit. 15 U.S.C. § 1601(a).”

The Court rejected the Bank’s argument that Washington’s two-year catch-all limitations statute applied because “[i]n similar contexts, the Supreme Court previously determined that catchall statutes were not substantively analogous and declined to borrow them.” There was no need to resort to the catchall statute when Washington’s contract statute was more closely analogous.

Finally, since courts “’do not ordinarily assume that Congress intended that there be no time limit on actions at all,’ the Ninth Circuit rejected the borrowers’ “argument that no statute of limitations applies to TILA rescission enforcement claims.”

The Ninth Circuit concluded that because the borrowers’ “cause of action arose in May of 2013 when the Bank failed to take any action to wind up the loan within 20 days of receiving [the] notice of rescission[,] … the district court erred in dismissing the claim as time barred.” The trial court also erred by dismissing with prejudice because the borrowers’ rescission enforcement claim was not time barred under Washington’s six-year statute of limitations.

Thus, the order of dismissal was reversed and the case remanded 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

Admitted to practice law in California, Nevada and Oregon


Friday, December 21, 2018

FYI: 9th Cir Upholds Judgment for Deceptive Disclosures Against Online Lender

The U.S. Court of Appeals for the Ninth Circuit held that an online payday lender's "loan note" violated § 5 of the Federal Trade Commission Act ("FTC Act") because, although it was "technically accurate", the lender's online loan portal made it difficult to discern the loan terms and therefore likely to mislead consumers about the terms of the loan.

Accordingly, the Ninth Circuit affirmed the trial court's summary judgment and relief order in favor of the FTC.

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

The defendant owner ("Owner") controlled a series of companies that offered high-interest payday loans to borrowers.  The loans were offered exclusively through a number of proprietary websites. 

Potential borrowers would enter personal information into one of the Owner's websites, and approved borrowers would be directed to a webpage that disclosed the loan's terms and conditions by hyperlinking to seven documents, including the Loan Note and Disclosures ("Loan Note"), which provided the essential terms of the loan as mandated by the federal Truth in Lending Act ("TILA").

Borrowers could open the Loan Note if they chose, but they could also ignore the document and electronically sign their names by clicking a button that said: "I AGREE Send Me My Cash!"

In April 2012, the FTC filed a lawsuit against [the Owner] and his businesses alleging their business practices violated § 5 of the FTC Act prohibition against "unfair or deceptive acts or practices in or affecting commerce." 15 U.S.C. § 45(a)(1).

Specifically, the FTC alleged that the Owner violated § 5 because the terms disclosed in the Loan Note did not reflect the terms that the Owner actually enforced.  Thus, the FTC asked the court to permanently enjoin the Owner from engaging in consumer lending and to disgorge "ill-gotten monies."

The parties agreed to bifurcate the proceedings in the trial court into a "liability phase" and a "relief phase."

During the liability phase, the FTC moved for summary judgment on the FTC Act claim, which the trial court granted. 

In the relief phase, the trial court enjoined the Owner from assisting "any consumer in receiving or applying for any loan or other extension of Consumer Credit," and ordered the Owner to pay approximately $1.27 billion in equitable monetary relief to the FTC. 

The trial court then directed the FTC to direct as much money as practicable to "direct redress to customers," and then to "other equitable relief . . . reasonably related to the Defendants' practices alleged in the complaint," and then to "the U.S. Treasury as disgorgement." 

The Owner subsequently appealed both the entry of summary judgment and the relief order.

On appeal, the Owner first argued that the trial court erred in granting the motion for summary judgment finding him liable for violating § 5 of the FTC Act.

As you may recall, to prevail on a claim under § 5, the FTC must show that a representation, omission, or practice is "likely to mislead consumers acting reasonably under the circumstances."  This consumer-friendly standard does not require the FTC to provide "[p]roof of actual deception," only that the "net impression" of the representation would be likely to mislead – even if such representation "also contains truthful disclosures."  

The FTC argued that the Loan Note was likely to mislead borrowers about the terms of the loan.  Specifically, although the top third of the Loan Note contained the so-called "TILA box," which contained the "amount financed," "finance charge," total of payments," and "annual percentage rate," the fine print below the TILA box was essential to understanding the loan's terms. 

The densely packed text below the TILA box set out two alternative payments scenarios: (1) the "decline-to-renew" option, and (2) the "renewal" option.

Importantly, borrowers hoping to exercise the decline-to-renew option had to navigate through an online customer-service portal and affirmatively choose to "change the Scheduled" payment, and agree to "Pay Total Balance."  This had to be done at least three business days before the next scheduled payment.

Alternatively, borrowers who did nothing would default to the "renewal" option, which would end up costing the borrow significantly more than the amount listed in the TILA box. 

Based on these facts, the Ninth Circuit agreed with the FTC "that the Loan Note was deceptive because it did not accurately disclose the loan's terms." 

In reaching its conclusion, the Court noted that "under the terms that [the Owner] actually enforced, borrowers had to perform a series of affirmative actions in order to decline to renew the loan and thus pay only the amount reported in the TILA box."

Further, "the fine print's oblique description of the loan's terms fails to cure the misleading 'net impression' created by the TILA box."

The Owner argued that the Loan Note was not deceptive because it was "technically accurate," but the Ninth Circuit explained that "the FTC Act's consumer-friendly standard does not require only technical accuracy."  

The Owner next argued that the court's narrow focus on the Loan Note failed to capture the "net impression" on borrowers.  The Court disagreed, ruling that the Owner "wrongly assumes that non-deceptive business practices can somehow cure the deceptive nature of the Loan Note."  Instead, the FTC "must show only that a specific 'representation' was 'likely to mislead.'"

Finally, the Owner argued that summary judgment was inappropriate because he demonstrated a genuine issue of material fact.  Specifically, the Owner pointed to deposition testimony from consumers that they had not read the disclosures but understood them upon reading them at their depositions, and his expert's testimony. 

The Ninth Circuit again disagreed, ruling that because proof of "actual deception" is unnecessary to establish a violation, and the Owner could be liable if the Loan Note "possesses a tendency to deceive."  The Court further ruled that the Owner's expert testimony was insufficient to create a question of fact.

Thus, the Ninth Circuit held "that the Loan Note was likely to deceive a consumer acting reasonably funder the circumstances," and therefore "the trial court did not err in entering summary judgment against [the Owner] as to the liability phase."

With respect to the relief phase, the Owner argued that the FTC improperly used § 13(b) to pursue penal monetary relief under the guise of equitable authority, because  § 13(b) provides only that trial courts may enter "injunction[s]."  15 U.S.C. § 53(b). 

Although the Ninth Circuit found the argument to have "some force," it concluded that it was "foreclosed by our precedent," which had "repeatedly held that § 14 'empowers trial courts to grant any ancillary relief necessary to accomplish complete justice, including restitution.'"

The Owner requested that the Court revisit its precedent in light of the Supreme Court's decision in Kokesh v. SEC, 137 S. Ct. 1635 (2017), wherein the Court determined that a claim for "disgorgement imposed as a sanction for violating the federal securities law" was a "penalty" within the meaning of the federal catch-all statute of limitations.

The Owner argued that Kokesh severs the line of reasoning that links "injunctions" to "equitable monetary relief." 

However, the Ninth Circuit explained that a "three-judge panel may not overturn prior circuit authority unless it is 'clearly irreconcilable with the reasoning or theory of intervening higher authority,'" which threshold the Court determined was not met. 

Further, the Owner argued that the trial court abused its discretion in calculating the amount of the award, because the $1.27 billion judgment overstated his unjust gains.  The Ninth Circuit again disagreed, ruling that "the trial court did not abuse its discretion when calculating the amount it ordered [the Owner] to pay." 

Finally, the Owner challenged the trial court's decision to enjoin him from engaging in consumer lending, but Ninth Circuit again could not "find fault with the trial court's decision to enter a permanent injunction." 

Accordingly, the Ninth Circuit affirmed the judgment of the trial court in its entirety. 

Eric Tsai
Maurice Wutscher LLP 
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