Sunday, September 17, 2017

FYI: 9th Cir Holds Creditor in Fraudulent Transfer Action May Recover Amounts Above Collateralized Debt

The U.S. Court of Appeals for the Ninth Circuit recently held that, where husband and wife debtors fraudulently transferred assets, the creditor was entitled to the full sum the creditor would have recovered and was not limited to the amount of the collateralized debt. 

In so ruling, the Ninth Circuit reversed a bankruptcy court and trial court judgment in the creditor's favor that the debt was non-dischargeable due to the debtor's fraud, but improperly limiting the non-dischargeable debt to only the collateralized amount.

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

A bank (Lending Bank) made a commercial loan to husband and wife borrowers. The husband borrower was the sole member and manager of a cash advance business, which purchased five insurance agencies with the $1.7 million loan from the Lending Bank,

The cash advance business executed a promissory note for the loan and gave the Lending Bank a blanket security interest in all of its assets, including intangibles, and the debtors personally guaranteed the note.  The Lending Bank in turn financed the loan under a credit and security agreement with another bank (Financing Bank) in which the Financing Bank was granted a security interest in the loan to the business.

Ten months later, the Lending Bank defaulted on the security agreement with the Financing Bank and filed for bankruptcy. The Financing Bank and the Lending Bank agreed to transfer the cash advance business's note and the personal guarantee to the Financing Bank.  The cash advance business formally acknowledged the assignment and agreed to pay the balance on the note to the Financing Bank.

Over the next several years the cash advance business repeatedly requested loan modifications and entered into several forbearance agreements with the Financing Bank. The cash advance business also executed an elaborate series of transfers and sales to place their assets beyond their creditors' reach.

The cash advance business transferred $123,200 of assets to a closely-held business of which the husband owned 100% of the shares. The husband and wife created a family trust, of which they were the beneficiaries. The closely-held business then transferred its total assets, valued at $385,000, to another company that the husband purchased from a friend for $200. The trust then purchased that company and the company agreed to pay its $385,000 in assets to the husband. The result left all of the businesses and the trust insolvent.

The cash advance business defaulted on the loan and the debtors defaulted on the guarantee.

The Financing Bank filed a lawsuit against the cash advance business and husband and wife. The husband and wife then filed for bankruptcy. The Financing Bank's lawsuit against the husband and wife was stayed but the lawsuit against the cash advance business proceeded and resulted in a judgment of $1.7million.  The Financing Bank could not collect, however, because the cash advance business was insolvent.

The Financing Bank then filed an adversary action against the husband and wife in bankruptcy court alleging that they had fraudulently transferred assets under the Washington Uniform Fraudulent Transfer Act, Wash. Rev. Code § 19.40.041 ("WUFTA"), and thus the debt was non-dischargeable under 11 U.S.C. §523(a). As you may recall, section 523(a) excepts from discharge debts obtained by actual fraud, which includes fraudulent conveyance. 11 U.S.C. § 523(a)(2)(A).

The bankruptcy court ruled in favor of the Financing Bank on the fraudulent transfer claim but limited the judgment to $123,200, which was the amount that was traceable to the Financing Bank's security interest in the cash advance business's assets.

The Financing Bank appealed and the trial court affirmed on different grounds, explaining that the Financing Bank could not maintain a fraudulent transfer claim on "non-collateral assets" because the Financing Bank could only recover assets that were the property of the debtors, meaning legally titled in the debtors' name.

Thus, the lower court held, the Financing Bank could not recover any assets from the family trust or the closely-held businesses involved in the fraudulent transfers, and, do to so under WUFTA, the Financing Bank would have had to obtain a ruling that those entities were the alter egos of the debtors, which it had failed to do.

The Financing Bank appealed.

On appeal, the Ninth Circuit reversed explaining that the purpose of WUFTA is "to provide relief for creditors whose collection on a debt is frustrated by the actions of a debtor to place the putatively satisfying assets beyond the reach of the creditor," which is also known as fraud.

The Court compared the facts of this case to others around the country under identical or similar fraud laws and concluded that, through the series of transfers, the husband "depleted the value of his assets to the detriment of his creditors" while he continued to receive payments from the trust even after he filed for bankruptcy, thereby preventing the Financing Bank from collecting the debt he owed. Thus, the Ninth Circuit agreed with the bankruptcy court's finding that the debtors had engaged in actual fraud.

The Ninth Circuit reversed on the issue of the amount the Financing Bank could recover because it was only the fraudulent transfers that prevented the Financing Bank from being able to collect.

Based on 11 U.S.C. §523(a)(2)(A), if the husband had not fraudulently transferred the assets from the closely-held company, the Financing Bank would have been able to recover against it because a non-dischargeability claim based on a fraudulent transfer scheme between closely-held companies intended to defeat collection of a debt is actual fraud. 

Thus, the Ninth Circuit held, the amount of the non-dischargeable debt was not merely the $123,200 in assets from the cash advance business, but included the $385,000 in fraudulently transferred assets.
     
Accordingly, the lower court's judgment was reversed and the matter remanded.


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, September 6, 2017

FYI: 9th Cir Holds Federal Foreclosure Bar Preempts Nevada HOA Superpriority Statute

The U.S. Court of Appeals for the Ninth Circuit recently held that the Federal Foreclosure Bar's prohibition on nonconsensual foreclosure of assets of the Federal Housing Finance Agency preempted Nevada's superpriority lien provision, Nev. Rev. Stat. § 116.3116, and invalided a homeowners association foreclosure sale that purported to extinguish Freddie Mac's interest in the property.

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

In 2013, an investor ("Purchaser") purchased a home at a homeowners association foreclosure sale for $10,500 and recorded a deed in his name.  Purchaser argued that Nevada's superpriority lien provision allowed the association to sell the home to him free and clear of any other liens.  The Federal Home Loan Mortgage Corporation ("Freddie Mac") claimed it had a priority interest in the purchased home. 

As you may recall, Freddie Mac is under Federal Housing Finance Agency ("FHFA") conservatorship, meaning the FHFA temporarily owned and controlled Freddie Mac's assets.  See 12 U.S.C. § 4617(b)(2)(A)(i) (FHFA acquired Freddie Mac's "rights, titles, powers, and privileges … with respect to [its] assets" for the life of the conservatorship). 

The Federal Foreclosure Bar's prohibition on nonconsensual foreclosure protected the FHFA's conservatorship assets.  12 U.S.C. § 4617(j)(3) ("No property of the [FHFA] shall be subject to levy, attachment, garnishment, foreclosure, or sale without the consent of the [FHFA], nor shall any involuntary lien attach to the property of the [FHFA].").

Purchaser sued to quiet title in Nevada state court.  Freddie Mac intervened and counterclaimed for the property's title, removed the case to federal district court, and moved for summary judgment.  The FHFA joined Freddie Mac's counterclaim.  Together the federal entities argued that Purchaser did not acquire "clean title" in the home because the Federal Foreclosure Bar preempted Nevada law, and invalidated any purported extinguishment of Freddie Mac's interest through the association foreclosure sale.  The trial court ruled in favor of the federal entities.

On appeal, Purchaser argued that the Federal Foreclosure Bar did not apply in this case, and even if it did, Freddie Mac lacked an enforceable property interest due to a split of the note and the security instrument. 

First, Purchaser argued that the Federal Foreclosure Bar did not apply to private homeowners association foreclosures generally, because it protected the FHFA's property only from state and local tax liens.

To determine whether the Federal Foreclosure Bar applied to private foreclosures, the Ninth Circuit began by examining the statute's structure and plain language.  The section titled "Property protection" in the Federal Foreclosure Bar did not expressly use the word "taxes."  12 U.S.C. § 4617(j)(3).  The statute did not limit "foreclosure" to a subset of foreclosure types.  Id. 

In the Ninth Circuit's view, a plain reading of the statute revealed that the Federal Foreclosure Bar was not focused on or limited to tax liens, and therefore the Federal Foreclosure Bar should apply to any property for which the FHFA served as conservator and immunized such property from any foreclosure without FHFA consent.  12 U.S.C. § 4617(j)(1), (3).

Purchaser citied F.D.I.C. v. McFarland, 243 F.3d 876 (5th Cir. 2001) as support for his argument that the Federal Foreclosure Bar applied only to tax liens.

In McFarland, the Fifth Circuit interpreted 12 U.S.C. § 1825(b)(2), a provision of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") that governed Federal Deposit Insurance Corporation ("FDIC") receiverships.  The FIRREA provision is worded identically to the Housing and Economic Recovery Act of 2008's ("HERA") Federal Foreclosure Bar except that the word "Corporation" appeared in the former where "Agency" appeared in the latter.  Compare 12 U.S.C. § 1825(b)(2) with 12 U.S.C. § 4617(j)(3). The court in McFarland declined to extend § 1825(b)(2) to private foreclosures. 

The Ninth Circuit, however, distinguished McFarland and reasoned that the statutory framework in that case was different from the framework surrounding the Federal Foreclosure Bar.  Specifically, the Ninth Circuit found that the unlike § 1825, § 4617(j) did not include any language limiting its general applicability provision to taxes alone. 

Therefore, the Ninth Circuit held that the language of Federal Foreclosure Bar cannot be fairly read as limited to tax liens.

Purchaser then argued that that the Federal Foreclosure Bar did not apply in this case because Freddie Mac and the FHFA implicitly consented to the foreclosure when they took no action to stop the sale. 

The Ninth Circuit rejected this argument because the plain language of Federal Foreclosure Bar did not require the Agency to actively resist foreclosure.  See 12 U.S.C. § 4617(j)(3) (flatly providing that "[n]o property of the Agency shall be subject to … foreclosure, or sale without the consent of the Agency").

Thus, the Court concluded that the Federal Foreclosure Bar applied generally to private association foreclosures and specifically to this foreclosure sale.

Next, the Ninth Circuit addressed the issue of whether the Federal Foreclosure Bar preempted Nevada state law, which had triggered multiple lawsuits in Nevada. 

As you may recall, "[t]he Supremacy Clause unambiguously provides that if there is any conflict between federal and state law, federal law shall prevail."  Gonzales v. Rich, 545 U.S. 1, 29 (2005).  Preemption arises when "compliance with both federal and state regulations is a physical impossibility, or … state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress."  Bank of Am. v. City & Cty. Of S.F., 309 F.3d 551, 558 (9th Cir. 2002).

First, the Ninth Circuit determined that the Federal Foreclosure Bar did not demonstrate clear and manifest intent to preempt Nevada's superpriority lien provision through an express preemption clause.  Nevertheless, the Court found that the Federal Foreclosure Bar implicitly demonstrated a clear intent to preempt Nevada's superiority lien law. 

Nevada law allowed homeowners association foreclosures under the circumstances present in this case to automatically extinguish a mortgagee's property interest without the mortgagee's consent.  See Nev. Rev. Stat. § 116.3116.  Because the Federal Foreclosure Bar prohibited foreclosures on FHFA property without consent, in the Ninth Circuit's view, Nevada's law was an obstacle to Congress's clear and manifest goal of protecting the FHFA's assets in the face of multiple potential threats, including threats arising from state foreclosure law.

Therefore, as the two statues impliedly conflict, the Ninth Circuit held that the Federal Foreclosure Bar preempted the Nevada superpriority lien provision.

In addition, Purchaser argued that even if the Federal Foreclosure Bar applied to this case and was preemptive, Freddie Mac did not hold an enforceable property interest for "splitting" the note from the deed of trust, and failing to present sufficient evidence to establish its interest for purposes of summary judgment.

The Ninth Circuit rejected these arguments because Nevada law recognized that, in an agency relationship, a note holder remained a secured creditor with a property interest in the collateral even if the recorded deed of trust named only the owner's agent.  Although the recorded deed of trust here omitted Freddie Mac's name, Freddie Mac's property interest is valid and enforceable under Nevada law. 

Moreover, Freddie Mac introduced evidence showing that it acquired the loan secured by the subject property in 2007, and that the beneficiary of the deed of trust was Freddie Mac's authorized loan servicer. 

The Appellate Court concluded that the trial court correctly found Freddie Mac's priority property interest enforceable under Nevada law.  Accordingly, the Ninth Circuit affirmed the trial court's summary judgment in favor of Freddie Mac and the FHFA.


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, August 28, 2017

FYI: Spokeo Redux - 9th Cir Again Holds Plaintiff Alleged Enough to Have Standing

After remand from the Supreme Court of the United States, the U.S. Court of Appeals for the Ninth Circuit in Spokeo recently reversed the trial court's dismissal of a consumer's lawsuit alleging that the operator of a website that compiles consumer data and provides consumer information profiles willfully violated the federal Fair Credit Reporting Act (FCRA), holding that the injury to the plaintiff's statutory rights were sufficiently concrete and particularized to satisfy the injury-in-fact requirement of Article III of the United States Constitution and the plaintiff thus had standing to sue.

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

As you may recall, Spokeo "operate[d] a website that compiles consumer data and builds individual consumer-information profiles. At no cost, consumers can use  [the website] to view a report containing an array of details about a person's life, such as the person's age, contact information, marital status, occupation, hobbies, economic health, and wealth. More detailed information is available for users who pay subscription fees. [Defendant] market[ed] its services to businesses, claiming that its reports provide a good way to learn more about prospective business associates and employees."

The plaintiff viewed his profile on the defendant Spokeo's website and sued for willfully violating the FCRA, "which imposes a number of procedural requirements on consumer reporting agencies to regulate their creation and use of consumer reports. The statute gives consumers affected by a violation of such requirements a right to sue the responsible party, including the right to sue (and to recover statutory damages) for willful violations even if the consumer cannot show that the violation caused him to sustain any actual damages."

The plaintiff alleged that Spokeo violated the FCRA at section 1681e(b) by failing to "'follow reasonable procedures to assure maximum possible accuracy' of the information in [plaintiff's] consumer report" because his report "falsely stated his age, marital status, wealth, education level, and profession, and [also] included a photo of a different person." The plaintiff alleged that these inaccuracies "harmed his employment prospects at a time when has was out of work and that he continues to be unemployed and suffers emotional distress as a consequence."

The trial court dismissed the first amended complaint holding that the plaintiff "lacked standing to sue under Article III of the United States Constitution[,]" reasoning that plaintiff had "alleged only a bare violation of the statute and did not adequately plead such violation caused him to suffer an actual injury-in-fact."

The plaintiff appealed to the Ninth Circuit, which reversed ("Spokeo I"), holding that plaintiff's "allegations established a sufficient injury-in-fact—that is, that he allegedly suffered a concrete and particularized injury—because [he] alleged that [defendant] violated specifically his statutory rights, which Congress established to protect against individual rather than collective harms."  The Ninth Circuit also held that the harm to the plaintiff's statutory rights was "caused" by defendant's FCRA violations and that "statutory damages could redress such injury" and "remanded to the district court for further proceedings."

Spokeo filed a petition for writ of certiorari to the Supreme Court, which reversed and vacated the Ninth Circuit's opinion ("Spokeo II"), holding that its "standing analysis was incomplete" because while it did address whether the injury was particularized, it "did not devote appropriate attention to whether the alleged injury is sufficiently concrete as well."

On remand, the Ninth Circuit's inquiry was limited to whether the plaintiff "sufficiently pled a concrete injury under" the Supreme Court's Spokeo II rationale.

The Ninth Circuit again agreed with plaintiff's argument that Spokeo's failure to reasonably ensure the accuracy of his consumer report was itself sufficient to show concrete injury because the purpose of the FCRA is to protect a consumer's right to accurate credit and other information.

The Court summarized the Supreme Court's decision as requiring a "'real' and not 'abstract' or merely 'procedural' [injury]. … In other words, even when a statute has allegedly been violated, Article III requires such violation to have caused some real — as opposed to purely legal — harm to the plaintiff."

The Ninth Circuit then reasoned that Congressional intent "plays an important role in the concreteness inquiry, especially in cases — like this one — in which the plaintiff alleges that he suffered an intangible harm." Although such injuries "are often harder to recognize, intangible injuries — for example restrictions on First Amendment freedoms or harm to one's reputation — may be sufficient for Article III standing."

Citing the Supreme Court ruling in Spokeo II, the Ninth Circuit reasoned that "Congress may 'elevate to the status of legally cognizable injuries concrete, de facto injuries that were previously inadequate at law … [and, in addition,] Congress has the power to define injuries and articulate chains of causation that will give rise to a case or controversy where none existed before."  Finally, "Congress may likewise enact procedural rights to guard against a 'risk of real harm,' the violation of which may 'be sufficient in some circumstances to constitute injury in fact.'"

Thus, the Ninth Circuit held, while a plaintiff cannot establish injury-in-fact simply by alleging a statutory violation, "the Supreme Court also recognized that some statutory violations, alone, do establish concrete harm."

The Ninth Circuit adopted the Second Circuit's articulation of the Spokeo II concreteness requirement, which explained that Spokeo II "instruct[s] that an alleged procedural violation [of a statute] can by itself manifest concrete injury where Congress conferred the procedural right to protect a plaintiff's concrete interests and where the procedural violation presents 'a risk of real harm' to that concrete interest."

Thus framed, the Ninth Circuit's inquiry became: "(1) whether the statutory provisions at issue were established to protect [plaintiff's] concrete interests (as opposed to purely procedural rights), and if so, (2) whether the specific procedural violations alleged in this case actually harm, or present a material risk of harm to, such interests."

The Court answered both questions affirmatively.

First, the Ninth Circuit found "that Congress established the FCRA provisions at issue to protect consumers' concrete interests" in ensuring the accuracy of reported information about them and to protect their privacy. Section 1681e(b) of the FCRA does this by requiring "reporting agencies to 'follow reasonable procedures to assure maximum possible accuracy' of the information contained in an individual's consumer report."

The Court concluded that "these interests protected by the FCRA's procedural requirements are 'real,' rather than purely legal creations" because material inaccuracies on a consumer's report have "real-world implications" given the "ubiquity and importance of consumer reports in modern life—in employment decisions, in loan applications, in home purchases, and much more…."

The Ninth Circuit then likened the interests protected by the FCRA to "other reputational and privacy interests that have long been protected in the law. … For example, the common law provided remedies for a variety of defamatory statements, including those which falsely attributed characteristics 'incompatible with the proper exercise of [an individual's] lawful business, trade, profession or office."  Thus, the Court reasoned that "[j]ust as Congress's judgment about an intangible harm is important to our concreteness analysis, so is the fact that the interest Congress identified is similar to others that traditionally have been protected."

Because it found that the alleged harm resulting from inaccurate consumer reports that Congress intended to protect against is similar to the harm resulting from traditional common law causes of action like defamation, the Ninth Circuit concluded that "the FCRA procedures at issue in this case were crafted to protect consumers' (like [the plaintiff's]) concrete interest in accurate credit reporting about themselves."

The Ninth Circuit also concluded that the violations at issue actually caused the plaintiff real harm or created a material risk of harm to his concrete interest in accurate reporting about himself.

Unlike the Supreme Court's example in Spokeo II of the dissemination of a wrong zip code as an example of a bare procedural violation without any real harm or risk thereof to a concrete interest protected by the FCRA, the Ninth Circuit held that even though the plaintiff alleged that Spokeo falsely reported his marital status, age, employment, educational level and wealth as higher than they really were, "[e]nsuring the accuracy of this sort of information … seems directly and substantially related to the FCRA's goals."

This was so even though on the surface it may appear this would actually help rather hurt the plaintiff because, as pointed out by the Consumer Financial Protection Bureau in an amicus brief on the plaintiff's behalf, "even seemingly flattering inaccuracies can hurt an individual's employment prospects as they may cause a prospective employer to question the applicant's truthfulness or to determine that he is overqualified for the position sought."

Thus, according to the Ninth Circuit, the violations at issue were more than "mere technical violation[s] which are too insignificant to present a sincere risk of harm to real-world interests that Congress chose to protect with FCRA." The plaintiff's complaint thus "sufficiently alleg[ed] that he suffered a concrete injury."

Finally, the Court rejected the defendant's argument, based on the Supreme Court's 2013 decision in Clapper v. Amnesty International USA, that plaintiff's "allegations of harm are too speculative to establish a concrete injury" because he only alleged that the subject "inaccuracies might hurt his employment prospects, but not that they present a material or impending risk of doing so."

The Ninth Circuit reasoned that Spokeo's "reliance on Clapper is misplaced" because in that case, "the plaintiffs sought to establish standing on the basis of harm they would supposedly suffer from threatened conduct that had not happened yet but which they believed was reasonably likely to occur…."  The "Supreme Court  explained that a plaintiff cannot show injury-in-fact unless the 'threatened injury [is] certainly impending' as opposed to merely speculative." By contrast, in the case at bar, "both the challenged conduct and the attendant injury have already occurred" because the defendant "published a materially inaccurate consumer report about [the plaintiff]."  Likewise, the intangible but concrete injury to his interest in accurate information about himself had also already occurred and "[i]t is of no consequence how likely [the plaintiff] is to suffer additional concrete harm as well (such as the loss of a specific job opportunity)."

In sum, the Ninth Circuit found that the plaintiff "alleged injuries that are sufficiently concrete for the purposes of Article III[,] … the alleged injuries were also sufficiently particularized to [plaintiff] and … they were caused by [defendant's] alleged FCRA violation and are redressable in court".  Accordingly, the Court concluded that plaintiff had standing to sue, and reversed and remanded.


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, August 26, 2017

FYI: 9th Cir Holds Defendant Not Vicariously Liable Under TCPA

The U.S. Court of Appeals for the Ninth Circuit recently held that a defendant could not be held vicariously liable under the federal Telephone Consumer Protection Act (TCPA) because the phone calls at issue were made by a company whose telemarketers were independent contractors, and thus were not acting as the defendant's agents under the federal common law of agency.

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

A company that sold automobile service contracts, sometimes called extended warranties, contracted with a telemarketing company to sell its products. The agreement set forth mandatory "authorized sales and marketing methodologies" and provided that the telemarketer could not use any method that violated state or federal law, including "robo-calling."

A resident of Reno, Nevada who had registered his cellular telephone number on the Federal Trade Commission's national do-not-call registry, filed a class-action lawsuit against the seller and telemarketing company, alleging that he had received 4 calls to his cellular phones from the seller using an "automatic telephone dialing system" in violation of TCPA.

The TCPA, 47 U.S.C. § 227(b)(1)(A), makes it unlawful for a person to make a phone call, except for emergency calls or calls made with the express consent of the person called, using an "automatic telephone dialing system or an artificial or prerecorded voice" to any cellular telephone number. The regulations implementing the TCPA prohibit any person from soliciting or making a sales call to any residential number registered on the national do-not-call registry. 47 C.F.R. § 64.1200(c)(2).

The trial court entered a default against the telemarketing company because its attorneys withdrew and then the company failed to retain new counsel.  The court granted the plaintiff leave to amend and the amended complaint added another Nevada resident as co-plaintiff and also added the seller as a defendant, alleging that it was vicariously liable for the telemarketer's calls.

The seller moved for summary judgment, which the trial court granted, and the plaintiffs appealed to the Ninth Circuit.

On appeal, the seller argued that it could not be held vicariously liable for the telemarking company's calls.

The Ninth Circuit explained that it had "previously clarified that 'a defendant may be held vicariously liable for TCPA violations where the plaintiff establishes an agency relationship, as defined by federal common law, between the defendant and a third-party caller.'"

The Court analyzed the distinction between an agent with actual authority, citing the Restatement (Third) of Agency, and an individual acting as an independent contractor, "who does not have the traditional agency relationship with the principal necessary for vicarious liability. … Generally, a principal is not vicariously liable for the actions of an independent contractor, because the principal does not have sufficient control over an independent contractor." While courts look to the "totality of the circumstances," the "'essential ingredient … is the extent of control exercised by the employer.'"

The Ninth Circuit then "adopt[ed] the following ten factor as relevant to the determination of whether an individual providing services for a principal is an agent or an independent contractor: 1) the control exerted by the employer, 2) whether the one employed is engaged in a distinct occupation, 3) whether the work is normally done under the supervision of an employer, 4) the skill required, 5) whether the employer supplies tools and instrumentalities [and the place of work], 6) the length of time employed, 7) whether payment is by time or by the job, 8) whether the work is in the regular business of the employer, 9) the subjective intent of the parties, and 10) whether the employer is or is not in business."

After apply the ten factors, the Court found that the telemarketing company "and its telemarketers were not acting as [the seller's] agents when they place the calls at issue in this case."

The Ninth Circuit reasoned that while the seller exercised some control over the telemarketing company by requiring that certain records be kept, reports provide, security measures taken to protect consumer information, payments collected and approval of scripts, this was insufficient. The seller "did not have the right to control the hours the telemarketers worked nor did it set quotas for the number of calls or sales the telemarketers had to make." This limited control of the telemarketers supported independent contractor status.

Next, the Court found that the telemarketing company "was an independent business, separate and apart from [the seller] … and it was engaged in the 'distinct occupation' of selling [vehicle service contracts] through telemarketing" because it sold for many clients, not just the seller, during the relevant time period. This factor strongly suggested that the "telemarketers were independent contractors rather than employees."

The calls made by the telemarketers were not directly supervised by the seller, which also weighed in favor of independent contractor status.

The Court did not address "the skill required to place the calls or sell a [vehicle service contract]" because the record was devoid of any such evidence.

Regarding tools and instrumentalities, the Ninth Circuit found that while the seller provided some, the telemarketing company "provided far more …, including its own phones, computers, furniture, and office space." This factor also supported independent contractor status.

The Court next found that while the relationship lasted three years, the contract was for one year, with either party having the ability to cancel by giving 30-days' notice. Such "designated impermanency of the relationship supports a finding of independent contractor status."

Next, the Ninth Circuit found that because the telemarketing company "was paid a commission for each sale, rather than for the time the telemarketers worked[,] [t]his is a strong indicator that the telemarketers were independent contractors."

The Court did find, however, that because selling vehicle service contracts through telemarketers was a "regular part" of the seller's business, "this factor tends to favor finding an agency relationship."

Although the record was unclear as the "subjecting intent of the parties," the fact that the telemarketing company sold vehicle service contracts for several sellers reflected that the telemarketing company's "intent was to have its telemarketers operate as independent contractors for many different companies."

The Ninth Circuit found that the tenth and final factor, that the seller "is a business, … favors finding an agency relationship."

Adding up the factors, the Ninth Circuit concluded that it was "clear that [the telemarketing company's] telemarketers were independent contractors rather than agents."  Because the telemarketers were independent contractors and not the seller's agents, the Court held that the seller could not be held vicariously liable for the telemarketing company's calls that violated the TCPA.

Accordingly, the trial court's judgment 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
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Friday, August 4, 2017

FYI: 9th Cir Rules Mortgage Underwriters Not Exempt Under FLSA

The U.S. Court of Appeals for the Ninth Circuit recently held that mortgage underwriters were not exempt under the federal Fair Labor Standards Act ("FLSA") and were therefore entitled to overtime compensation for hours worked in excess of forty per week.

After analyzing the specific details of the underwriters' responsibilities, the Ninth Circuit panel concluded that, because the underwriters' primary job duty did not relate to their employer bank's management or general business operations, the administrative employee exemption to the FLSA's overtime requirements did not apply. 

Recognizing that there was a split between the Second Circuit and Sixth Circuit as to whether the underwriters are exempt, the Ninth Circuit adopted the Second Circuit's conclusion that "the job of underwriter falls under the category of production rather than administrative work," and, thus, the administrative exemption under the FLSA does not apply.

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

The Plaintiff and the other members of the class were mortgage underwriters for the defendant bank ("Bank").  The Bank sold mortgage loans to consumers seeking to purchase or refinance homes, and then the Bank would resell the funded loans on the secondary market. 

The mortgage loan application process was streamlined.  A loan officer or broker worked with a borrower to select a particular loan product. A loan processor then ran a credit check, gathered further documentation, assembled the file for the underwriter, and ran the loan through an automated underwriting system. The automated system then applied certain guidelines based on the information input and then returned a preliminary decision.

From there, the file went to a mortgage underwriter, who verified the information put into the automated system and compared the borrower's information against the applicable guidelines, which are specific to each loan product.  The underwriters were responsible for thoroughly analyzing complex customer loan applications and determining borrower creditworthiness in order to ultimately decide whether the Bank will accept the requested loan. The underwriters could impose conditions on a loan application and refuse to approve the loan until the borrower satisfied those conditions.

The decision as to whether to impose conditions is ordinarily controlled by the applicable guidelines, but the underwriters could include additional conditions. They could also suggest a "counteroffer" — which would be communicated through the loan officer — in cases where a borrower did not qualify for the loan product selected, but might qualify for a different loan.

Underwriters could also request that the Bank make exceptions in certain cases by approving a loan that did not satisfy the guidelines.  After an underwriter approved a loan, it was sent to other Bank employees who finalized the loan funding. According to the underwriters, whether a loan was funded ultimately depended on factors beyond their control. Another group of Bank employees then sold the funded loans in the secondary market.

Initially, the trial court denied cross motions for summary judgment and set the case for trial. But later, on the parties' joint motion for reconsideration, the trial court concluded that the underwriters qualified for the administrative exemption under the FLSA, based on the finding that their primary duty included "quality control" or similar activities directly related to the Bank's general business operations.  Thus, the trial court granted summary judgment in favor of the Bank.  Plaintiff appealed.

As you may recall, the FLSA requires employers to compensate its employees time and a half of their regular pay for all hours worked over forty in a week.  Under the FLSA, certain employees "employed in a bona fide executive, administrative, or professional capacity" are exempt from the overtime requirements. See 29 U.S.C. § 213(a)(1).

The Ninth Circuit recognized that the exemptions under the FLSA are to be narrowly construed, and the employer bears the burden of establishing they apply.  According to the Court, the FLSA "is to be liberally construed to apply to the furthest reaches consistent with Congressional direction", and the exemptions "are to be withheld except as to persons plainly and unmistakably within their terms and spirit."

In assessing whether the administrative exemption applied, the Court relied on the Department of Labor's ("DOL") regulations interpreting the FLSA. In order for the administrative exemption to apply, the employee must (1) be compensated not less than $455 per week; (2) perform as her primary duty "office or non-manual work related to the management or general business operations of the employer or the employer's customers;" and (3) have as her primary duty "the exercise of discretion and independent judgment with respect to matters of significance." 29 C.F.R. § 541.200(a). An employee's primary duty is "the principal, main, major or most important duty that the employee performs." 29 C.F.R. § 541.700(a).

At issue in this case was the second requirement.  In order to satisfy that requirement, an employee's primary duty must involve office or "non-manual work directly related to the management policies or general business operations" of the Bank or the Bank's customers. See 29 C.F.R. § 541.200. "An employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment." 29 C.F.R. § 541.201(a).

This has commonly been referred to as the "administrative-production dichotomy." Its purpose is "to distinguish 'between work related to the goods and services which constitute the business' marketplace offerings and work which contributes to 'running the business itself.'" DOL Wage & Hour Div. Op. Ltr., 2010 DOLWH LEXIS 1, 2010 WL 1822423, *3 (Mar. 24, 2010).  According to the Ninth Circuit, "[t]his requirement is met if the employee engages in 'running the business itself or determining its overall course or policies,' not just in the day-to-day carrying out of the business' affairs."

The Court observed that the Second Circuit and Sixth Circuit had reached conflicting rulings on whether the administrative exemption applied to mortgage underwriters.  According the Second Circuit, "the job of underwriter . . . falls under the category of production rather than of administrative work."  Davis v. J.P. Morgan Chase & Co., 587 F.3d 529, 535 (2d Cir. 2009).

On the other hand, the Sixth Circuit concluded that mortgage underwriters are exempt administrators, explaining that they "perform work that services the Bank's business, something ancillary to [the Bank's] principal production activity." Lutz v. Huntington Bancshares, Inc., 815 F.3d 988, 995 (6th Cir. 2016).  The Sixth Court determined mortgage underwriters performed "administrative work because they assist in the running and servicing of the Bank's business by making decisions about when [the Bank] should take on certain kinds of credit risk, something that is ancillary to the Bank's principal production activity of selling loans." Id. at 993.

Turning the facts of this case, the Ninth Circuit agreed with the reasoning of the Second Circuit, and concluded that the underwriters "did not decide if the Bank should take on risk, but instead assess whether, given the guidelines provided to them from above, the particular loan at issue falls within the range of risk the Bank has determined it is willing to take."

The Court continued, "assessing the loan's riskiness according to relevant guidelines is quite distinct from assessing or determining the Bank's business interests. Mortgage underwriters are told what is in the Bank's best interest, and then asked to ensure that the product being sold fits within criteria set by others."

The Ninth Circuit also cited to the DOL's regulations to support its conclusion.  "The financial-services industry example also includes descriptors that do not correspond with the underwriters' primary duty, which aims more at producing a reliable loan than at 'advising' customers or 'promoting' the Bank's financial products." See 29 C.F.R. § 541.203(b).  The Court emphasized that underwriters do not "advis[e] customers at all, nor do they market[], servic[e] or promot[e] the employer's financial products."

The Court then summarized its ruling as follows:

"We conclude that where a bank sells mortgage loans and resells the funded loans on the secondary market as a primary font of business, mortgage underwriters who implement guidelines designed by corporate management, and who must ask permission when deviating from protocol, are most accurately considered employees responsible for production, not administrators who manage, guide, and administer the business."

The trial court had granted the Bank's motion for summary judgment on the basis that the underwriters performed work related to "quality control."  The Ninth Circuit, however, concluded that the record evidence did not support such a conclusion.

The Court concluded that the underwriters' primary duty did not go to the heart of the Bank's internal operations, but instead went to the marketplace offerings and were related to the production side of the Bank's business.  

Accordingly, the Ninth Circuit reversed the trial court's granting of summary judgment in favor of the bank and remanded with instructions to enter summary judgment in favor of the plaintiff class.


Eric Tsai
Maurice Wutscher LLP 
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