Wednesday, November 16, 2016

FYI: Cal App Ct Holds Consumer Properly Rejected Pre-Suit Offer With General Release and Confidentiality Clauses

The California Court of Appeal, Fourth Appellate District, recently held that a successful consumer plaintiff was entitled to $185,000 in attorney fees and costs, even though she rejected a settlement offer containing an appropriate remedy before she filed suit.

In so ruling, the Court held that rejecting the pre-litigation settlement offer was not unreasonable, as the offer required the consumer to agree to a broad release of claims and a confidentiality clause, and especially as the confidentiality provision in particular was unlawful as to the consumer's Song-Beverly Consumer Warranty Act, Cal. Civ. Code § 1790, et seq. ("Song-Beverly Act") claims.

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

A car buyer filed a complaint against a car dealer and manufacturer for violations of the Song-Beverly Act and other statutes, alleging the used vehicle she purchased had numerous defects that the dealer and manufacturer were unable to repair. After the parties settled the lawsuit as to all issues except attorney fees, the trial court awarded the buyer over $185,000 in attorney fees and costs.

The dealer and manufacturer appealed, contending that the buyer was not entitled to attorney fees or costs because she could have avoided litigation by settling the matter earlier. The dealer had made a prelitigation offer in response to a notice required by the Consumers Legal Remedies Act, Cal. Civ. Code, § 1750 et seq., for the buyer's claim under that statute. The dealer and manufacturer argued that they had offered the buyer an appropriate remedy before she filed her complaint, but that she unreasonably refused to agree to a general release and a confidentiality clause.

As you may recall, the Song-Beverly Act generally provides that a prevailing buyer may recover reasonable attorney fees.  See Cal. Civ. Code § 1794.

Relying on McKenzie v. Ford Motor Co. (2015) 238 Cal. App. 4th 695, the Court of Appeal noted that under the Song-Beverly Act, the dealer's requirement of a confidentiality provision was unlawful, and the dealer's and manufacturer's appeals were premised on their mistaken belief the buyer should have accepted the settlement offer with the conditions notwithstanding statutory and case law.

The Court therefore held that the buyer's rejection of the dealer's pre-litigation settlement offer was reasonable and the failure to resolve the case earlier was not attributable solely to her obstinacy or a desire to generate fees.

The dealer and manufacturer additionally contended that the fee award should have been reduced because there was insufficient evidence to show that her attorney's hours and hourly rate were reasonable given the litigation's lack of risk and complexity, and because the buyer ignored repeated offers of restitution, filed an unnecessary lawsuit, and engaged in unnecessary litigation activity. They further argued that the buyer's counsel should not be compensated at a higher rate than the $300 per hour that the dealer paid its counsel.

The Court of Appeal disagreed, noting that until the case actually settled, the buyer had to conduct discovery and prepare to prove liability on her varied claims with their varied elements. She also had to be prepared to counter the affirmative defenses asserted by the dealer and manufacturer.

Because the trial court, which considered the evidence and observed the buyer's counsel's lawyering skills firsthand, determined that he charged an appropriate hourly rate, the Court of Appeal concluded that the trial court did not abuse its discretion in basing its fee award on a rate of $575 per hour.

Accordingly, the Court of Appeal affirmed the trial court's award of the buyer's attorney fees and awarded her costs on appeal.


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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Saturday, November 12, 2016

FYI: 9th Cir Holds Debtor's Acknowledgement of Debt Does Not Excuse Untimely Proof of Claim

The U.S. Court of Appeals for the Ninth recently held that if a creditor wishes to participate in the distribution of a debtor's assets under Chapter 13, it must timely file a proof of claim, and the debtor's acknowledgment of the debt owed to the creditor does not relieve the creditor of this affirmative duty.

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

The debtor filed a Chapter 13 bankruptcy petition.  The bankruptcy court issued a notice with a deadline for creditors to file a proof of claim.  The creditor was sent a copy of the notice with the deadline, as well as all versions of the debtors' Chapter 13 plan which was amended several times. 

Four months after the deadline to file proof of claims passed, the creditor filed one secured and two unsecured claims with the bankruptcy court.  After a hearing on the late filed claims, the bankruptcy court disallowed the claims because the proof of claims were not timely filed.

The creditor appealed, and the Ninth Circuit Bankruptcy Appellate Panel ("BAP") affirmed the decision.  This appeal followed.

As you may recall, in a bankruptcy proceeding, a debtor must file a schedule of assets and liabilities and a statement of financial affairs. Fed. R. Bankr. P. 1007(b)(1). In order to participate in and receive distributions through a Chapter 13 bankruptcy, a creditor must file a valid "proof of claim" and go through the allowance process set forth in 11 U.S.C. § 502. In re Blendheim, 803 F.3d at 484–85.  A secured creditor that does not wish to participate in a Chapter 13 plan, or that fails to file a timely proof of claim, does not forfeit its lien.  Id.

A bankruptcy court may disallow a claim for many reasons, including if the proof of claim was untimely. 11 U.S.C. § 502(b)(9); In re Blendheim, 803 F.3d at 485. Here, the creditor admitted it filed its proof of claims late. 

However, the creditor argued that the court should allow it take part in the plan because its debt was listed on the bankruptcy schedules.  The Ninth Circuit BAP disagreed.

The Federal Rules of Bankruptcy Procedure provide that, in a Chapter 13 plan, "[a]n unsecured creditor or an equity security holder must file a proof of claim or interest for the claim or interest to be allowed." Fed. R. Bankr. P. 3002(a). The Ninth Circuit previously made clear that the language in the statute should be given its "plain meaning" and enforced accordingly. Gardenhire v. IRS (In re Gardenhire), 209 F.3d 1145, 1148 (9th Cir. 2000).

The Ninth Circuit noted that the debtor's schedules are used by bankruptcy courts to determine whether debtors are eligible for relief, and by creditors to determine if they want to participate in the plan. See Guastella v. Hampton (In re Guastella), 341 B.R. 908, 918 (B.A.P. 9th Cir. 2006); Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 785 (9th Cir. 2001). A creditor may chose not to pursue a claim after evaluating all of a Chapter 13 debtor's debts and the proposed repayment plan. Perry v. Certificate Holders of Thrift Sav., 320 F.2d 584, 589 (9th Cir. 1963).

The Court also noted that "[t]he proof of claim plays the important role of 'alert[ing] the court, trustee, and other creditors, as well as the debtor, to claims against the estate,' and the creditor's intention to enforce the claims."  See In re Daystar of Cal., Inc., 122 B.R. 406, 408 (Bankr. C.D. Cal. 1990); see also Adair v. Sherman, 230 F.3d 890, 896 (7th Cir. 2000); Perry, 320 F.2d at 589.

The Ninth Circuit agreed with other courts that disallowed late filed claims even where the debt is listed on the debtor's bankruptcy schedules.  See, e.g., Bowden v. Structured Invs.
Co. (In re Bowden), 315 B.R. 903, 907 (Bankr. W.D. Wash. 2004); In re Greenig, 152 F.3d 631, 632–34 (7th Cir. 1998).

The creditor argued that by listing the debt on her schedule, the doctrine of judicial admissions applies, and the debtor is required to pay all debts listed. 

Judicial admissions are formal admissions in court pleadings which have the effect of withdrawing a fact from issue and dispensing wholly with the need for proof of the fact.  Judicial admissions are conclusively binding on the party who made them.

The Ninth Circuit held that it has recognized the judicial admissions doctrine, but that it has never held that a bankruptcy schedule qualifies as a formal admission under the doctrine.  The Court did not reach that issue here either.  

Instead, the Court held that listing a debt on the bankruptcy schedules, even if it is a judicial admission, does not remove the requirement that a proof of claim be filed.  The Ninth Circuit explained "Congress chose to require Chapter 13 creditors to file proofs of claims that demonstrate their intent to enforce their claims; a judicial admission by a debtor does not fulfill this strict requirement or its purpose."

The creditor tried to argue that listing the debt on the schedules was an informal proof of claim.  "Creditors, failing to file a timely formal proof of claim, often assert that an informal proof of claim can function to establish the creditor's claims."  See Cty. of Napa v. Franciscan Vineyards, Inc. (In re Franciscan Vineyards, Inc.), 597 F.2d 181, 183 (9th Cir. 1979).

"To qualify as an informal proof of claim: (1) the document must state an explicit demand showing the nature and amount of the claim against the estate, and (2) the document must evidence an intent to hold the debtor liable." Sambo's Restaurants, Inc. v. Wheeler (In re Sambo's Rests., Inc.), 754 F.2d 811, 815 (9th Cir. 1985).

In the Ninth Circuit, establishing an informal proof of claim requires among other things an affirmative action by the creditor within the required time frame. In re Bowden, 315 B.R. at 907 (rejecting argument that debtor's schedules alone suffice to establish an informal proof of claim). Here, the creditor took no affirmative action and relied solely on the bankruptcy schedules.  The Court stated that the schedules do not demand or demonstrate the intent to hold the debtor liable. 

The creditor further argued that the debtor's bankruptcy schedules constitute a debtor's proof of claim. However, the Court again did not agree. First, the bankruptcy schedules were not filed within the time period allowed for filing proofs of claim, and did not otherwise meet the requirements of Rule 3004. Second, the schedules do not qualify as a debtor's proof of claim. "Rule 3004 requires that debtors make an additional showing of their desire to include an unasserted claim in their Chapter 13 plan after receiving notice of which creditors intend to enforce their claims." No such additional showing was made by the debtor.

Finally, the creditor argued it would be inequitable if its claims are not allowed.  The Ninth Circuit stated that even though it might not be fair, it noted that it previously "has repeatedly held that the deadline to file a proof of claim in a Chapter 13 proceeding is rigid, and the bankruptcy court lacks equitable power to extend this deadline after the fact." In re Gardenhire, 209 F.3d at 1148.  Further explaining, the Court noted that it would be difficult for creditors to get a fresh start if creditors are able to continuously add claims after the deadlines expire. In re Goodwin, 58 B.R. at 77).

Accordingly, the Court held that in order to participate in distributions of a debtor's assets under her Chapter 13 plan, the creditor was required to file a proof of claim by the prescribed deadline, and the bankruptcy court properly rejected them.



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, October 31, 2016

FYI: 9th Cir Holds Foreclosure Trustee Not FDCPA "Debt Collector"

The U.S. Court of Appeals for the Ninth Circuit recently held that the trustee of a California deed of trust securing a real estate loan was not a "debt collector" under the federal Fair Debt Collection Practices Act (FDCPA), because the trustee was not attempting to collect money from the borrower. 

In so ruling, the Court held that "actions taken to facilitate a non-judicial foreclosure, such as sending the notice of default and notice of sale, are not attempts to collect "debt" as that term is defined by the FDCPA."

The Court also vacated the dismissal of the borrower's federal Truth In Lending Act claim, confirming its prior ruling in Merritt v. Countrywide Fin. Corp., 759 F.3d 1023 (9th Cir. 2014), that a mortgagor need not allege the ability to repay in order to state a TILA rescission claim.

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

A borrower sought damages under the FDCPA, alleging that the foreclosure trustee initiated a California non-judicial foreclosure and sent her a notice of default and a notice of sale that misrepresented the amount of debt she owed.  The borrower also sought to rescind her mortgage transaction under TILA.

The trial court granted the servicer's motion to dismiss the borrower's FDCPA claims, and dismissed her TILA claim.

The borrower appealed, arguing that the foreclosure trustee was a "debt collector" under the FDCPA because the notice of default and the notice of sale constituted attempts to collect debt and threatened foreclosure unless she brought her account current.

The Ninth Circuit disagreed, holding that the California foreclosure trustee would only be liable if it had attempted to collect money from the borrower.

As you may recall, the FDCPA imposes liability on "debt collectors."  Under the FDCPA, the word "debt" is defined as an "obligation . . . of a consumer to pay money."  15 U.S.C. § 1692a(5).  The FDCPA's definition of "debt collector" includes entities that regularly collect or attempt to collect debts owed or due or asserted to be owed or due to another.

Distinguishing rulings from the Fourth and Sixth Circuits, and agreeing with the California Courts of Appeal, the Ninth Circuit held that a California foreclosure trustee was not a "debt collector" subject to the FDCPA because the foreclosure trustee was not attempting to collect money from the borrower.

Specifically, the Court noted that the Fourth Circuit's ruling in Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373, 378–79 (4th Cir. 2006), "was more concerned with avoiding what it viewed as a 'loophole in the [FDCPA]" than with following the [FDCPA]'s text," which the Ninth Circuit found improper. 

The Court also noted that the Sixth Circuit's ruling in Glazer v. Chase Home Fin. LLC, 704 F.3d 453, 461 (6th Cir. 2013), "rests entirely on the premise that 'the ultimate purpose of foreclosure is the payment of money," but "the FDCPA defines debt as an 'obligation of a consumer to pay money."  The Ninth Circuit emphasized that "[f]ollowing a trustee's sale, the trustee collects money from the home's purchaser, not from the original borrower. Because the money collected from a trustee's sale is not money owed by a consumer, it isn't 'debt'" as defined by the FDCPA."

The Ninth Circuit held that the object of a non-judicial foreclosure in California is to retake and resell the security on the loan, and thus actions taken to facilitate a non-judicial foreclosure, such as sending the notice of default and notice of sale, are not attempts to collect "debt" under the FDCPA.

Accordingly, the Ninth Circuit concluded that the foreclosure notices at issue were an enforcement of a security interest, rather than debt collection under the FDCPA. 

The Ninth Circuit found it significant that California expressly exempts trustees of deeds of trust from liability under the California Rosenthal Act, Cal. Civ. Code. § 2924(b), the state analogue of the FDCPA, observing that holding California foreclosure trustees liable under the FDCPA would subject them to obligations that would frustrate their ability to comply with the California statutes governing non-judicial foreclosure.

The Ninth Circuit agreed with the foreclosure trustee, and, citing Sheriff v. Gillie, 136 S. Ct. 1594, 194 L. Ed. 2d 625 (2016), in which the U.S. Supreme Court instructed that the FDCPA should not be interpreted to interfere with state law unless Congress clearly intended to displace that law, the Ninth Circuit affirmed the district court's dismissal of the FDCPA claim, declining to create a conflict with state foreclosure law in its interpretation of the term "debt collector."

Turning to the borrower's TILA claims, which the trial court had dismissed without prejudice, the Court noted that it recently held in Merritt v. Countrywide Fin. Corp., 759 F.3d 1023, 1032-33 (9th Cir. 2014), that a mortgagor need not allege the ability to repay the loan in order to state a rescission claim under TILA. However, this was the basis of the trial court's dismissal of the TILA claim.

Accordingly the Ninth Circuit vacated the dismissal of the borrower's TILA claim and remanded it to the trial court for reconsideration.  The Court also affirmed the dismissal of the borrower's FDCPA claims, vacated the dismissal of her TILA claims, and remanded the TILA claims for reconsideration.



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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Tuesday, October 25, 2016

FYI: 9th Cir Holds Car Dealer Failed to Provide "Completed Inspection Report" as to "Certified" Used Car

The U.S. Court of Appeals for the Ninth Circuit recently held that a car dealership inspection certificate violated California statutory law that required that a vehicle seller provide a "completed inspection report" prior to the sale of any "certified" used car.

In so ruling, the Court held that the term "inspection report" was a term of art in the auto industry and in other state statutes, and that the California Legislature must have been aware of its usage.

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

An individual purchased a vehicle from a car dealership.   The individual alleged that he was drawn to the car dealership after hearing advertisements regarding the benefits of purchasing a "certified" vehicle that had passed the car dealership's rigorous "125-point" certification inspection.  The individual alleged that he would have paid less, or possibly not even purchased the car, had it not been a "certified" vehicle. 

According to the individual, it is the car dealership's policy to simply provide purchasers of used vehicles with a pre-printed car dealership "Quality Inspected Certificate" ("Certificate") listing the vehicle components that were inspected.  The individual received two versions of the Certificate: a one-sided Certificate provided to him prior to sale, and a two-sided Certificate, which was placed in the glove compartment before he took possession of the vehicle. 

In addition to the two Certificates that the car dealership provides to purchasers of used vehicles, the car dealership also uses a third document known as a "CQI/VQI Checklist."  This checklist contains 236 points of inspection and is filled out by a technician during the inspection process.

The CQI/VQI Checklist, unlike the Certificates, indicates the condition of each individual component inspected. Rather than provide the CQI/VQI Checklist to consumers, the car dealership destroys the document after the inspection results are entered into its electronic system, and no copy of the checklist is retained.

Shortly after purchasing the vehicle, the individual experienced some difficulty with the car. The individual filed suit in state court alleging violation of California consumer protection laws -- (1) the Consumer Legal Remedies Act ("CLRA"); (2) the Song-Beverly Consumer Warranty Act ("Song-Beverly"); (3) common law fraud and deceit; and (4) the Unfair Competition Law ("UCL"). 

The individual's central theory was that the car dealership violated state law by failing to provide him with a "completed inspection report" prior to the sale of the "certified" vehicle.

The car dealership removed to federal court asserting diversity jurisdiction. A week after removal, the car dealership filed a motion to dismiss, as well as a motion to strike the individual's punitive damages claim.
The following month, while the motion to dismiss the first amended complaint was pending, the district judge issued an order to show cause regarding subject matter jurisdiction, noting that he had "serious doubts" as to whether the case met the amount-in-controversy requirement.

After the parties responded to the order to show cause, the district judge found that the car dealership had shown by a preponderance of the evidence that the amount in controversy was over $75,000 and thus the action was properly removable.

The district court then granted the car dealership's motion to dismiss on all claims except for the CLRA and UCL claims. Following discovery, the car dealership filed a motion for summary judgment on the CLRA and UCL claims. The district court granted the motion, holding that there was no material legal difference between the one-sided form and the two-sided form, and that both forms were legally sufficient. 

The individual appealed the district court's dismissal and summary judgment orders.  In this opinion, the Ninth Circuit only considered the appeal of the summary judgment.

The Court of Appeals for the Ninth Circuit first addressed the potential lack of subject matter jurisdiction. As you may recall, to establish original jurisdiction based on diversity of parties, the amount in controversy must exceed the sum or value of $75,000, exclusive of interest and costs.  The Ninth Circuit explained that the amount in controversy is the amount at stake in the underlying litigation and includes damages, the cost of complying with an injunction, as well as attorney's fees awarded under fee shifting status.  The Court of Appeals held that the amount in controversy in this matter exceeded the minimal required when the potential cost of complying with injunctive relief was considered along with the individual's claims for compensatory and punitive damages.  

Next, the Court of Appeals considered the individual's claims under the California CLRA and UCL claims.

Section 11713.18 of the California Vehicle Code prohibits a car dealer from either advertising for sale or selling a used vehicle as "certified" under nine circumstances, including if:  "[p]rior to sale, the dealer fails to provide the buyer with a completed inspection report indicating all the components inspected."  Cal. Veh. Code §11713.18(a)(6).  The statute further provides that a violation of any of these provisions is actionable under the CLRA, the UCL, false advertising statutes, or any other applicable state or federal law. Cal. Veh. Code § 11713.18(b).

Applying the state law, the Ninth Circuit held that the car dealership's Certificates did not satisfy the requirements of § 11713.18.  The Court found support for its ruling in the plain meaning of the statutory language, as the statute requires a completed "inspection report."

The Court explained that, while the term is not defined in the statute, an "inspection report" is a term of art in the automobile industry.  Specifically, the Ninth Circuit noted, the term "inspection report" is understood to mean a report that lists the components inspected, with a space corresponding to each component in which the inspector designates whether or not that component is functional.

The Ninth Circuit also noted that a "completed inspection report" is one in which those spaces have been appropriately marked so as to indicate the result of the inspection.  The Court further noted that these terms are common in California state statutes, regulations, and everyday usage in the auto industry, and other states also use such a term of art for a document that requires an area for marking the components for defects.

The Court held it had to assume that the California legislature was aware of the meaning of "inspection report" and intended the meaning to control.  In disregarding this meaning, the Court would have improperly make the word "completed" superfluous. 

The Ninth Circuit also found support for its ruling in the purpose, history, and public policy of the statute.  The Court noted that section 11713.18(a)(6) was part of California's "Car Buyer's Bill of Rights," which, according to the author of the bill, aimed to "strengthen the protections afforded [to] California car buyers by improving laws regarding the sales, marketing, and financing of new and used vehicles."  Assembly Judiciary Comm., 2005Ð2006 Session, Analysis of AB-68 5 (March 1, 2005).

Prior to the enactment of this bill, the California legislature noted that there was no legal standard for use of the term "certified," despite the growing trend for dealers to use this term.  According to the Court, the legislature enacted this statute to protect consumers and assure that they received a fair bargain and for there to be transparency in the sale of "certified" vehicles.

The Ninth Circuit emphasized that the car dealership's certificates did not provide the status of the individual components inspected under its inspections.  Instead, the Court noted, the Certificates merely guaranteed that the vehicle's overall condition satisfied its certification program and listed the components under the program.  The Court found dispositive the fact that the consumer did not know neither the condition of the individual components nor which, or how many, components must pass the test before a vehicle is "certified." In other words, the Court explained, the individual did not know what it meant to pass the inspection.

The Ninth Circuit rejected the car dealership's argument based on the drafting history of the legislation.  In drafting the bill, the California legislature deleted the phrase "and certifies that all of the inspected components meet the express written standards of the vehicle certification program."  The Court explained that this deletion spared dealers from another substantive obligation, while leaving the requirement to provide a "completed inspection report" intact.

Accordingly, the Ninth Circuit reversed the district court's grant of summary judgment in favor of the car dealership and sua sponte granted summary judgment in favor of the individual.  



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, October 12, 2016

FYI: CD Cal Holds Non-Bank Not "True Lender" on Allegedly Usurious Loans Extended in Name of Bank

The U.S. District Court of the Central District of California recently dismissed a borrower's putative class action complaint against a non-bank that supposedly was the "true lender" for allegedly usurious student loans that were extended in the name of a bank.

In so ruling, the Court held California law requires that it must look only to the face of a transaction when assessing whether a loan falls under a statutory exemption from the usury prohibition and not look to the intent of the parties.

Under this rule, the Court held that the loans were exempt from California's usury prohibition under the California Constitution exemption for loans made by banks. 

A copy of the opinion is attached.

On October 21, 2015, the borrowers filed a putative class action complaint claiming they had been illegally charged usurious interest rates on their private student loans in supposed violation of California law. 

The borrowers obtained private student loans in 2003 and 2004 using loan applications that identified a national bank as the "lender."  The borrowers alleged that the "actual lenders" of their loans were the Student Loan Marketing Association ("SLMA"), or subsidiaries of the SLM Corporation ("SLM Corp").

The borrowers alleged that the SLMA and the SLM Corp. subsidiaries originated, underwrote, funded and bore the risk of loss as to their loans under a confidential agreement (the "Agreement") between the SLMA and bank.

The borrowers also alleged that the Agreement provided that bank was required to sell the loans to SLMA at cost within 90 days of being funded. This arrangement then allegedly enabled SLMA and the SLM Corp. subsidiaries to make high-interest private loans to students like borrowers attending for-profit schools without the scrutiny of any bank regulatory body, and without the market restraints faced by regulated lenders.

The borrowers asserted that under the Agreement, SLMA and SLM Corp. subsidiaries made thousands of loans to California borrowers using banks as the nominal lender, with either SLMA or an SLM Corp. subsidiary functioning as servicer.

The borrowers alleged the non-bank defendants had been illegally charging and collecting interest at a rate greater than 10%.  The borrowers' loans were originally assigned to SLMA or an SLM Corp. subsidiary after their disbursement and were subsequently sold to various other parties. 

The SLMA was created pursuant to federal statute and chartered by the federal government as a government sponsored enterprise. In or about 1994, Congress required the SLMA to transition to a wholly private company no later than September 30, 2008. As part of the transition, various segments and subsidiaries of the SLMA were acquired by the SLM Corp., which continued the SLMA's operations during the transition period and after the SLMA's dissolution. 

The borrowers alleged that in an effort to circumvent federal restrictions on its ability to originate loans and to circumvent state usury laws, the SLMA, and the SLM Corp. and its wholly-owned subsidiaries entered into forward purchase agreements with national bank partners, supposedly to make it appear that the lender was a national bank.

The borrowers asserted that the SLMA was effectively the "actual lender" of the loans in a number of ways. First, according to the borrowers, the bank did not have any risk of loss with respect to the loans because the SLMA provided the funds for the loans and agreed in advance to purchase the loans from the bank.  Moreover, the borrowers asserted, the SLMA controlled all aspects of marketing loans to student borrowers, and required bank to print, package and distribute application materials in forms acceptable to the SLMA, based on a design template for such materials provided by the SLMA.

According to the borrowers, the bank was not allowed to alter the content or description of these application materials without the SLMA's express written consent.  Instead, the borrowers asserted, the bank's role was to add its name, state, logo and OE number to the applications, which made it appear as if the bank were the lender. In addition, the SLMA allegedly set the terms of the private loans; controlled the schools at which the loans could be made; determined which students would be approved for loans and for what amounts; and determined the interest rate on a borrower's loan based on proprietary credit criteria established by the SLMA.

In 2004, the SLMA was dissolved and merged into the SLM Corp.  At this time, the Agreement was amended, and the SLMA's role was assigned to two wholly-owned subsidiaries of the SLM Corp.

Based on the foregoing allegations, the borrowers asserted five state law claims: (1) unlawful and unfair business practices in violation of the California Unfair Competition Law ("UCL"); (2) usury in violation of Article XV, Section 1, of the California Constitution; (3) violation of California's Usury Law (i.e. Cal. Civ. Code § 1916-1); (4) claim for money had and received; and (5) conversion.

The borrowers' claims for money had and received and for conversion and violation of the UCL were predicated on the borrowers' theory that the non-banks had violated California's usury prohibition.  The borrowers sought restitution, compensatory and statutory damages, and injunctive relief, and sought to represent a putative class of individuals residing in California who obtained student loans and were similarly charged usurious interest rates. 

The defendant non-banks argued that the borrowers' complaint should be dismissed because: (1) the borrowers' loans are exempt from California's usury prohibition; and (2) the borrowers' claims are preempted by the National Bank Act.

The Court found that the borrowers' loans were exempt from California's usury prohibition, and did not reach the question of whether borrowers' claims were preempted by the National Bank Act. 

The borrowers' usury claims were based on Article XV § 1 of the California Constitution, which provides that interest charged on an obligation in excess of 10% is usurious and therefore cannot be collected, and the California "Usury Law," Cal. Civ. Code § 1916-1.

Because the California constitutional provisions supersede any conflicting language in the state Usury Law, the Court looked to the controlling language of the California Constitution when assessing the borrowers' usury claims.

The essential elements of a claim of usury in California are: (1) the transaction must be a loan or forbearance; (2) the interest to be paid must exceed the statutory maximum; (3) the loan and interest must be absolutely repayable by the borrower; and (4) the lender must have a willful intent to enter into a usurious transaction.

The intent sufficient to support a judgment of usury does not require a conscious attempt, with knowledge of the law, to evade it. The conscious and voluntary taking of more than the legal rate of interest constitutes usury and the only intent necessary on the part of the lender is to take the amount of interest which he receives; if that amount is more than the law allows, the offense is complete.

The usury prohibition is subject to numerous exemptions. In particular, the California Constitution exempts from the usury prohibition loans made by any bank created and operating under and pursuant to any laws of the state or of the United States of America.

The non-bank defendants argued that the borrowers' usury claims should be dismissed because the borrowers' loans fell within the California Constitution's exemption for loans made by banks.  The non-bank defendants noted that the complaint itself alleged that the borrowers' loans were originally issued by a bank.

Additionally, the non-bank defendants argued that the SLMA should not be considered the actual lender of borrowers' loans, because although the SLMA contracted with the bank to purchase the loans after they were issued and was involved in their issuance and disbursement, this does make SLMA the actual "lender" for purposes of the exemption from the usury prohibition.

The non-bank defendants also argued that under California law, the court could not consider whether the SLMA intended to circumvent the usury prohibition through its agreement with the bank when determining whether borrowers' loans were exempted from the prohibition. 

Countering, the borrowers argued that the court must look to the substance of the transaction rather than to its form when assessing whether a loan falls into the exemption from California's usury prohibition.  The borrowers further argued that the SLMA's intent is relevant to whether borrowers' loans were exempt from the usury prohibition.

The borrowers contended that although the bank was the lender of borrowers' loans "in form," the complaint sufficiently alleged that the SLMA was for practical purposes the actual lender and that the SLMA intended to skirt the usury prohibition through its agreement to purchase the loans from the bank. Consequently, the borrowers argued, their loans did not fall under the exemption from the usury prohibition for loans issued by banks.

The Court rejected the borrowers' arguments, noting that, even assuming the allegations in the complaint were true, the borrowers' loans fell under the California Constitution's exemption for loans issued by banks, and the borrowers' complaint alleged that the loans were issued by a bank.

Although the borrowers argued the exemption did not apply to their loans because their "lender" was effectively the SLMA, they failed to cite any authority supporting this proposition.

Instead, the borrowers cited a number of cases for the proposition that the court should look to substance over form to assess whether a loan, that on its face appears non-usurious, is in fact usurious, arguing that these decisions permitted the court to look at the "substance" of the SLMA's agreement with the bank and the SLMA's intent in order to determine whether the borrowers' loans were exempted from the usury prohibition.

The Court noted, however, that the cases cited by the borrowers only held that a court may consider the "substance" of a transaction over its "form" and the parties' intent when assessing whether a transaction satisfies the elements of usury or falls under a common law exemption to the usury prohibition, and not when assessing whether the transaction or a party to the transaction fall under a constitutional or statutory exemption from the usury prohibition. 

Because the Court found borrowers' loans were exempted from the usury prohibition, the Court concluded that borrowers' remaining claims for money had and received, conversion, and violation of the UCL were also subject to dismissal.
In reaching its decision, the Court relied upon Jones v. Wells Fargo Bank, 112 Cal. App. 4th 1527, 1539 (2003) and WRI Opportunity Loans II LLC v. Cooper, 154 Cal. App. 4th 525, 533 (2007), two California appellate decisions that held that the court must look only to the face of a transaction when assessing whether it falls under a statutory exemption from the usury prohibition and not look to the intent of the parties.

In Jones, the California Court of Appeal, considering a plaintiff's claim that a shared loan appreciation agreement was usurious, noted that cases where intent to evade the usury law is at issue typically involve situations where the lender claims a transaction is not a loan at all and that defendants' intent was irrelevant where the agreement fit within a legally authorized exception to the general usury law.

In WRI, where two plaintiffs claimed a loan provided to their company was usurious, the California Court of Appeal re-affirmed Jones, noting that when a loan meets the requirements for a statutory exemption to the usury law, courts will not look beyond those requirements.

The borrowers attempted to distinguish Jones and WRI, arguing that those cases pertained to exempt transactions – i.e., shared appreciation loans.  The borrowers contended that that when the exemption belongs to an entity in what otherwise would be a usurious transaction, the intent of the parties is critical.

The Court again rejected the borrowers' argument. The Court noted that the borrowers cited no authority supporting the proposition that the court's inquiry into a transaction subject to a usury exemption differs based on whether the exemption pertains to the character of the transaction or to that of a party to the transaction.

The Court concluded that the cases cited in support of borrowers' contentions were inapposite because they did not concern statutory or constitutional exemptions to the usury prohibition, and found Jones and WRI to be controlling.

The district court found Jones particularly on-point because it addressed a statutory exemption for certain national banks comparable to the constitutional exemption at issue in this case.  Consequently, the district court looked only to the face of the transactions at issue when assessing whether borrowers' loans were exempted from the usury prohibition.

Because borrowers' complaint alleges that the loans were issued by a bank, the district court concluded that the loans were exempted from California's usury prohibition.

Accordingly, the Court granted the non-bank defendants' motion to dismiss insofar as it contended the borrowers' loans were exempted from California's usury prohibition, and dismissed the action with prejudice.


Eric Tsai
Maurice Wutscher LLP
 
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