Friday, April 25, 2014

FYI: Cal Sup Court Rules Consumer May Sue for Violation of TISA Under UDAP Statute, Despite No Private Right of Action Under TISA

Thursday, August 8, 2013

The Supreme Court of California recently ruled that a state UDAP claim may be based upon a federal statute, even after Congress repealed a provision of the federal statute authorizing private actions for damages, where Congress has also indicated that state laws consistent with the federal statute are not superseded.

A copy of the opinion is available at:http://www.courts.ca.gov/opinions/documents/S199074.PDF.

After the expiration of 12 U.S.C. § 4310, plaintiffs filed a class action against defendant bank ("Bank"), alleging unlawful and unfair business practices based on alleged violations of federal Truth in Savings Act ("TISA") disclosure requirements.  The plaintiffs sought restitution, injunctive relief and attorneys' fees.

The Bank demurred, arguing that Congress had expressly prohibited private rights of action under TISA.  The trial court sustained the demurrer.  The plaintiffs appealed and the California Court of Appeal affirmed, reasoning that Congress's repeal of former section 4310 reflected its intent to bar any private action to enforce TISA.

As you may recall, TISA allowed for civil damages to be sought for failure to comply with its requirements until the provision authorizing lawsuits was repealed in 1996, effective September 30, 2001.  Omnibus Consolidated Appropriations Act of 1997, Pub.L. No. 104-208.
Former section 4310(a) stated:

"Except as otherwise provided in this section, any depository institution which fails to comply with any requirement imposed under this Act or any regulation prescribed under this Act with respect to any person who is an account holder is liable to such person in an amount equal to the sum of —

(1) any actual damage sustained by such person as a result of the failure;

(2)(A) in the case of an individual action, such additional amount as the court may allow, except that the liability under this subparagraph shall not be less than $100 nor greater than $1,000; or

 (B) in the case of a class action, such amount as the court may allow, except that —

  (i) as to each member of the class, no minimum recovery shall be applicable; and

  (ii) the total recovery under this subparagraph in any class action or series of class actions arising out of the same failure to comply by the same depository institution shall not be more than the lesser of $500,000 or 1 percent of the net worth of the depository institution involved; and

(3) in the case of any successful action to enforce any liability under paragraph (1) or (2), the costs of the action, together with a reasonable attorney's fee as determined by the court."

Section 4312, TISA's savings clause, provides:

"The provisions of this subtitle do not supersede any provisions of the law of any State relating to the disclosure of yields payable or terms for accounts to the extent such State law requires the disclosure of such yields or terms for accounts, except to the extent that those laws are inconsistent with the provisions of this subtitle, and then only to the extent of the inconsistency. The Bureau [of Consumer Financial Protection] may determine whether such inconsistencies exist."

Also, the California unfair competition law ("UCL") sets out three different kinds of business acts or practices that may constitute unfair competition: the unlawful, the unfair, and the fraudulent.  Bus. & Prof. Code, § 17200; Cel-Tech Comm., Inc. v. Los Angeles Cellular Telephone Co., (1999) 20 Cal.4th 163, 180.

Relying extensively on the effect of TISA's savings clause, the Supreme Court of California analyzed the plaintiff's position that the savings clause preserves the authority of the states to regulate bank disclosures so long as state law is consistent with TISA, and Bank's position that Congress's repeal of § 4310 ruled out any private enforcement of TISA.

The Court rejected Bank's argument that the UCL may not be employed to borrow directly from a federal statute if Congress has decided not to allow private enforcement of the federal law.  The Court noted when Congress permits state law to borrow the requirements of a federal statute, it matters not whether the borrowing is accomplished by specific legislative enactment or by a more general operation of law.  Bates v. Dow Agrosciences LLC (2005) 544 U.S. 431, 447; In re Jose C. (2009) 45 Cal. 4th 534, 546.

The California Supreme Court also found that the plaintiffs were not suing to enforce TISA.  Rather, by proscribing any unlawful business practice, section 17200 borrows violations of other laws and treats them as unlawful practices that the UCL makes independently actionable.  The Court asserted that the Bank made a similar analytical error as did the defendant in Stop Youth Addiction, Inc. v. Lucky Stores, Inc. (1998) 17 Cal.4th 553, 570, where UCL claims were brought for violation of the Penal Code, and the Court held that such claims were not barred because the plaintiff was enforcing the UCL, and not the underlying statutes.  By borrowing requirements from other statutes, the Court held, the UCL does not serve as an enforcement mechanism because it provides its own unique and limited remedies for unlawful business practices.

The Supreme Court of California emphasized that Plaintiffs were not seeking damages under TISA.  Instead, the Court noted that the plaintiffs sought equitable remedies of restitution and injunctive relief, which the Court found consistent with the Congressional intent reflected in the terms and history of TISA.  Because the savings clause remained intact, the Court held, Congress expressly permitted private actions under state laws consistent with TISA.

Next, the Court distinguished a series of cases relied upon by the Bank. The Bank argued that a section 1983 action may not be premised on violations of a federal statute that does not authorize private suits; however, the California Supreme Court noted that the UCL, unlike section 1983, is meant to provide remedies cumulative to those established by other laws.  The Court noted that the existence of a separate statutory enforcement scheme does not preclude a parallel action under the UCL.  Stop Youth Addition, 17 Cal. 4th at 572-573.

The California Supreme Court also rejected the Bank's argument that Gunther v. Capital One, N.A. (E.D. N.Y. 2010) 703 F. Supp. 2d 264, applied and should bar the plaintiffs' claims where the U.S. District Court for the Eastern District of New York dismissed a claim for breach of contract alleging TISA requirements had been incorporated into the subject contract as barred by the repealing of former section 4310.  The Court distinguished Gunther on the basis that there was no attempt to incorporate TISA into the plaintiffs' contract to support a damage claim.  Instead, the plaintiffs here pursued a distinct restitutionary and injunctive remedies provided by the UCL.

Accordingly, the Supreme Court of California reversed the Court of Appeal's ruling, and held that TISA poses no impediment to the plaintiffs' UCL claim.



Eric Tsai
McGinnis Wutscher Beiramee LLP
 
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