FYI: 9th Cir Holds Supporting Evidence Not Required for CAFA Removal

The U.S. Court of Appeals for the Ninth Circuit recently reversed a trial court order remanding a case to state court for lack of jurisdiction under the federal Class Action Fairness Act (“CAFA”) because the jurisdictional allegations pled provided a short and plain statement of jurisdiction.

The Court held this was sufficient, even without supporting evidence, to confer jurisdiction.

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

A plaintiff filed a class action complaint against a defendant in California state court claiming that defendant “had engaged in unlawful business practices related to the advertisement and sale of residential internet services”  Plaintiff filed the case on behalf of himself and all California consumers that paid for defendant’s internet services within the last four years.

Defendant removed the putative class action to the federal trial court pursuant to CAFA.  In the notice of removal, defendant, a citizen of Delaware and Georgia, alleged that it met CAFA’s jurisdictional requirements “because it was a putative class action with more than 100 class members,” and “that the amount in controversy exceeded $5,000,000, exclusive of interest and costs.” Defendant also alleged that that minimal diversity existed between the parties because plaintiff and all class members were California Citizens.

Plaintiff moved to remand the case to state court by making a facial challenge to the notice of removal. Specifically, plaintiff argued that defendant had not “adequately plead the existence of minimal diversity” because defendant based the citizenship allegations solely “on information and belief.”

The trial court granted plaintiff’s motion to remand finding that defendant’s citizenship allegations were insufficient to establish minimal diversity because they were based on no more than “sensible guesswork.” This appeal followed.

The Ninth Circuit began its analysis by noting that Congress enacted CAFA with the “intent . . . to strongly favor the exercise of federal diversity jurisdiction over class actions with interstate ramifications.”  CAFA gives federal trial courts jurisdiction over class actions when, “any member of a class of plaintiffs is a citizen of a State different from any defendant.” 28 U.S.C. § 1332(d)(2)(A). In contrast to section 1332(a)’s complete diversity of citizenship requirement, the Ninth Circuit observed that CAFA only requires “minimal diversity.”

The issue in this appeal is what the “removing defendant must plead in its notice of removal.” 

The removing defendant has the burden to plead minimal diversity by including in the notice of removal “a short and plain statement of the grounds for removal.” 28 U.S.C. § 1446(a).  Congress borrowed the “short and plain statement” standard from Rule 8(a), signifying to the Ninth Circuit that courts should liberally construe removal allegations similar to other pleadings.  The Ninth Circuit also noted that the removing defendant may plead minimal diversity based on “information and belief,” without submitting evidence to support the allegations.

Defendant alleged that “all putative class members were citizens of California.”  The Ninth Circuit rejected plaintiff’s argument that defendant had to come forth with evidence to demonstrate why it believed its citizenship allegations. 

Instead, the Court held that a removing defendant may base its citizenship allegations “solely on information and belief.”  Here, defendant’s notice of removal contained the required short and plain statement that the putative class members were all California citizens necessary to confer jurisdiction under CAFA.

The Ninth Circuit also determined that the trial court erred by placing the burden on the removing defendant “to prove its jurisdictional allegations in response to” plaintiff’s facial challenge.  Instead, jurisdictional factual allegations at the pleading stage “need not be proven unless challenged.” This is especially true, the Ninth Circuit noted, because CAFA contains “no antiremoval presumption.” 

The Ninth Circuit found it significant that plaintiff’s motion to remand only facially challenged the legal adequacy of the notice of removal, instead of factually challenging the jurisdictional allegations because a facial challenge accepts the removing defendant’s allegations as true and then argues that the allegations on their face fail to confer jurisdiction.  As a result, the Appellate Court held it was improper for the trial court to require defendant “to present evidence in support of its allegation of minimal diversity.”

Thus, the Ninth Circuit held that defendant’s jurisdictional allegations, which provided a short and plain statement of the parties’ citizenships based on information and belief, met its burden to plead minimal diversity. 

The Ninth Circuit therefore reversed the trial court’s order remanding the case to state court.

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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FYI: Cal App (3rd Dist) Allows HOBR Claim for Vague Reasons for Loan Mod Denial

The Court of Appeal for the Third District of California recently affirmed in part, and reversed in part, an order granting a mortgage servicer’s motion to dismiss several causes of action brought by plaintiff borrowers for denying their requests to modify their mortgage loan.

The appellate court affirmed the dismissal as to the borrowers’ counts for breach of contract, negligence, and intentional infliction of emotional distress.  However, it also held that the borrowers stated that a valid cause of action under California’s Homeowner Bill of Rights, section 2923.6, and reversed as to that claim.

Specifically, the appellate court concluded that the servicer’s explanation that it “do[es] not have the contractual authority to modify [the] loan because of limitations in [its] servicing agreement” was not sufficiently detailed, and that without knowing the actual reason for denial, it could not be said for certain that the failure to provide “specific reasons for the investor disallowance” as required under section 2923.6(f) was not material.

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

After falling behind on their mortgage loan, the plaintiffs-borrowers (“Borrowers”) requested loss mitigation assistance from their mortgage servicer (“Servicer”) and alleged that they were offered a loan modification in exchange for agreeing to make three trial payments of $1,633.53.  Borrowers completed the trial payments but were not offered a modification, which led to Servicer recording a notice of default three months later.  After first dismissing an action against Servicer without prejudice, the Borrowers initiated the instant litigation in early 2014.

In late 2014, Borrowers submitted a completed loan modification application with supporting documents to Servicer to review Borrowers for a Home Affordable Modification Program (“HAMP”) or a non-Hamp “Trial Payment Plan” modification.  Two months later, the Servicer denied the Borrowers for the HAMP modification, purportedly due to lack of contractual authority to modify the loan due to limitations in its servicing agreement.  However, the Borrowers were provided a non-Hamp Trial Payment Plan offer that required them to make three trial payments—the first one in the amount of $171,745.78—which was “essentially an initial payment of the past due total arrearages.”

The Borrowers appealed the Servicer’s denials, arguing that the non-Hamp Trial Payment Plan was a constructive denial and that they would have been approved if “fairly and carefully reviewed.”

The Borrowers’ operative third amended complaint alleged five causes of action against the Servicer for: (1) breach of contract, (2) violation of California’s Business & Professions Code section 17200 (not at issue on appeal), (3) negligence, (4) violation of California’s Homeowner Bill of Rights, section 2923.6, and (5) intentional infliction of emotional distress.

As was the case with the prior Complaints, the trial court sustained the Servicer’s demurrer to the third amended complaint as to all causes of action, and this time, without leave to amend. The instant appeal from the judgment of dismissal followed.

Initially, the Third District reviewed Borrowers breach of contract claim, which alleged that the Servicer had breached the written contract to extend a mortgage modification in exchange for three trial payments. 

The appellate court noted that the purported contract attached to the third amended complaint referred multiple times to the agreement Servicer offered as a “Special Forbearance Agreement,” and expressly stated that it was “not a waiver of the accrued or future payments that become due, but a period for you to determine how you will be able to resolve your financial hardship.” Further, the purported “agreement” made no promise of a loan modification, but that “[t]he lender is under no obligation to enter into any further agreement,” and completion of trial payments would result only in a review for a loan modification based on investor approval.

The Borrowers’ argument that the temporary payment plan which led them to believe a permanent modification was forthcoming was tantamount to a binding contract was rejected by the trial court.  On appeal, they argued that the trial court erred in finding that the forbearance agreement did not obligate the Servicer to modify their mortgage loan, citing the 4th District’s holding in West v. West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, which held a “Trial Plan Agreement” required the lender to offer a permanent loan modification. 

The Third District similarly found Borrowers’ argument unconvincing, and distinguished the facts from West, which offered a modification under HAMP, for the case at bar, which expressly disclaimed a promise to modify.  Whereas West was grounded in a Treasury directive and HAMP guidelines, the forbearance agreement here offered offer no comparable authority for imposing a similar obligation upon the Servicer.  Accordingly, the appellate court concluded that the Servicer’s demurrer was properly sustained as to their breach of contract claim.

Borrowers’ negligence claim argued that the Servicer owed them a general duty of care in the handling and processing of their loss mitigation review and negligently made false representations in promising a modification in exchange for trial payments. 

While acknowledging that a financial institution can owe a duty of reasonable care in processing loan modifications (Alvarez v. BAC Home Loans Servicing, LP (2014) 228 Cal.App.4th 941), the trial court sustained the Servicer’s demurrer as to this count on the basis that Borrowers merely alleged that a nonexistent contract was not honored, and the claim for negligence per se similarly failed for failure to reference any such violation.

On appeal, the Borrowers argued that the failed to adequately apply Alvarez, and that a per se duty of care is also owed under California's Homeowner Bill of Rights.  The appellate court disagreed. 

Even assuming that the Servicer owed a duty of care in processing the loan application, the Third District held that Borrowers’ third amended complaint failed to allege a breach or any facts that might suggest a failure to comply with any duty under Alvarez.  Thus, the trial court’s decision to sustain the Servicer’s demurrer as to Borrower’s negligence claim was affirmed.

Next, the appellate court reviewed the dismissal of the Borrower’s cause of action under California’s Homeowner Bill of Rights.  In sustaining the Servicer’s demurrer, the trial court rejected the Borrowers claims that their written denials were insufficiently detailed to comply with section 2923.6(f) on the basis that Borrowers’ allegations were vague and they failed to provide authority that anything more was required.

As you may recall, Section 2923.6 subdivision (f) of the Homeowner Bill of Rights requires a servicer, following the denial of a loan modification, to send written notice “identifying the reasons for the denial.”  Subdivision (f)(2) further requires that “[i]f the denial was based on investor disallowance, the specific reasons for the investor disallowance” must be given.  (§ 2923.6, subd. (f)(2)).

On appeal, the Third District analyzed the Servicer’s denial for a HAMP modification, which explained that “[we] do not have the contractual authority to modify your loan because of limitations in our servicing agreement.”  The appellate court concluded that the statement was ambiguous and did not suffice as an explanation – at least for the purposes of a demurrer. 

Although the Servicer argued that the purported violation was not material, as is required for a borrower to bring a claim for injunctive relief under section 2923.6 when a deed upon sale has not yet been recorded, the appellate court disagreed, reasoning that it could not determine whether the failure to provide “reasons for the disallowance” was not material without knowing the investor’s actual reason for denying the HAMP modification.

Because the appellate court concluded that Borrowers stated a claim under section 2923.6, the trial court’s order sustaining the demurrer to the Homeowner Bill of Rights claim was reversed.

Lastly, the Third District reviewed the sustained demurrer as to the Borrowers’ intentional infliction of emotional distress claim—that the Servicer’s refusal to provide a modification and offer approving modification conditioned only upon payment of $171,745.78 in arrearages constituted “extreme and outrageous” conduct.

In sustaining the demurrer, the trial court explained that creditors, such as the Servicer, enjoy a qualified privilege to protect their economic interest by asserting their legal rights—in this instance, to collect the 6-plus years of arrearages due on the loan—even though doing so may cause emotional distress. 

On appeal, the Borrowers argued that the trial court failed to adequately consider cases finding actionable conduct based on improper creditor action.  Bundren v. Superior Court (1983) 145 Cal.App.3d 784, 790 (creditor who knows the debtor is susceptible to emotional distress due to a physical or mental condition may incur liability for causing emotional distress).  The Borrowers claim that the Servicer knew its conduct was likely to cause more emotional distress than a typical debt collection because it knew they were trying to modify their loan since 2010 and could become homeless.  

While acknowledging that the Bundren court held that creditors could lose their qualified privilege to protect their economic interest if outrageous and unreasonable means are used to seek payment, the appellate court found no such conduct occurred here which “exceed[ed] all bounds usually tolerated by decent society, of a nature which is especially calculated to cause, and does cause, mental distress of a very serious kind.” ’ ” (Christensen v. Superior Court (1991) 54 Cal.3d 868, 904–905.).  Thus, the demurrer was sustained as to the Borrowers’ claims for intentional infliction of emotional distress.

For all of the foregoing reasons, the Third District reversed the trial court's order sustaining the demurrer as to the Borrowers’ claims under the Homeowners’ Bill of Rights, but affirmed as to all other counts, and remanded to the trial court for proceedings consistent with the appellate court's opinion.

Eric Tsai

Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654

Fax: (866) 581-9302

Mobile: (714) 600-6000

Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon

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FYI: Cal App (2nd Dist) Holds No Duty of Care Owed in Loan Mod Negotiations

Disagreeing with contrary rulings from the First and Sixth Districts, the California Court of Appeal for the Second District recently affirmed a trial court’s ruling that no duty of care is owed to a borrower during contract negotiations for a mortgage loan modification.

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

In 1998, plaintiff borrower (“Borrower”) obtained a $500,000.00 loan secured by a deed of trust (the “First Loan”).  The First Loan is not at issue.  In 2005, Borrower obtained two junior loans from defendant bank (“Bank”) in the amounts $167,820.00 (the “Second Loan”) and $82,037.00 (the “Third Loan”) (collectively, the “Junior Loans”).  Borrower subsequently encountered financial troubles leading the Bank to record a notice of default on the Second Loan in September 2009. 

In January 2010, Borrower contacted the Bank seeking to modify the Junior Loans and subsequently submitted loan modification requests to the Bank on January 29, 2010.  In March 2010, Borrower received correspondence from the Bank concerning the Second Loan, which Borrower claimed led him to believe the Second Loan had been converted into an unsecured loan. Around this time, Borrower separately alleged the Bank contacted his wife and informed her no foreclosure sale would occur and that the Bank “was simply trying to recover money through standard collection practices.”

In April 2010, Borrower received a second letter from the Bank where it offered to charge off 50% of the Second Loan’s balance if the Bank and Borrower could reach a satisfactory arrangement.  Borrower claims the letter reinforced his belief that the Second Loan had been converted into an unsecured loan.

In November 2010, the Bank sold the Second Loan to a different entity (“Note Holder”) and canceled the Third Loan in March 2014.  In August 2013, Borrower separately modified the First Loan.

In April 2014, the Note Holder recorded a notice of default as to the Second Loan leading Borrower to submit several loan modification requests.  Borrower asserted the Note Holder never responded to his modification attempts, and instead informed him in August of 2014 that the Second Loan service transferred to another entity (the “Current Servicer”).  Thus, Borrower submitted another loan modification application to the Current Servicer who rejected as a result of Borrower “having too little income.” 

Borrower subsequently filed for Chapter 7 bankruptcy relief and submitted two additional loan modification applications during the pendency of his bankruptcy.  The Current Servicer rejected both of loan modification applications again citing Borrower’s low income.  In 2014, Borrower, with the assistance of a legal aid representative, submitted a third loan modification application. The Current Servicer allegedly informed the legal aid representative that it no longer considered the Second Loan as being in “active foreclosure.”  Borrower separately contacted the Note Holder who informed Borrower that “it would consider a modification in lieu of foreclosure.” 

In October 2014, Borrower’s bankruptcy was dismissed lifting the bankruptcy stay.  Borrower subsequently learned that the property at issue would be sold in five days’ time.  Borrower immediately contacted the Current Servicer who confirmed the property’s sale date. 

The property was subsequently sold via foreclosure sale with the Note Holder being the highest bidder. 

   

Borrower subsequently instituted the instant action against Bank asserting causes of action for: (1) negligence; (2) intentional infliction of emotional distress (“IIED”); and (3) violations of Business and Professions Code section 17200 (“Section 17200”). 

Relevant to this appeal and his negligence claim, Borrower alleged the Bank owed Borrower a duty of care to: (1) “process, review, and respond carefully and completely to the loan modification applications [Borrower] submitted to [the Bank]; and (2) refrain from engaging in unfair and offensive business practices that confused Borrower and prevented him from pursing foreclosure prevention alternatives.  Borrower further alleged the Bank breached its duty of care by failing to respond to his loan modification applications and by stating it would not conduct a foreclosure, among other things. 

The Bank demurred to Borrower’s operative complaint, which the superior court granted without leave to amend.  Specifically, the trial court dismissed Borrower’s negligence claim because Borrower failed “to plead facts supporting a tort duty of care by [Bank] to Borrower regarding the loan modification.”  The trial court sustained the Bank’s demurrer to Borrower’s IIED claim for failure to plead outrageous conduct and separately dismissed the Section 17200 “for want of an underlying claim.” 

Borrower appealed the lower court’s order sustaining Bank’s demurrer without leave to amend.

On appeal, Borrower argued the Bank owed him a duty of care under the holdings of Alvarez v. BAC Home Loans Servicing, L.P. (2014) 228 Cal.App.4th 941 (Alvarez); Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150 (Daniels). 

As you may recall, the Alvarez and Daniels rulings held that a lender owes a borrower a duty of care in tort during mortgage modifications negotiations.  However, there is a sharp conflict among California courts as to whether a lender owes a duty of care to a borrower during mortgage loan modification negotiations, and the California Supreme Court has not resolved the conflict.

The Court began its analysis by examining Southern California Gas Leak Cases (2019) 7 Cal.5th 391 (“Gas Leak Cases”), which recently found there is no tort duty where the damages complained of purely are economic.  Specifically, the Gas Leak Cases held that economic losses flowing from “a financial transaction gone awry” are “primarily the domain of contract and warranty law or the law of fraud, rather than of negligence.’” (Gas Leak Cases, supra, 7 Cal.5th at p. 402.)

The Court further noted “a striking degree of unanimity” weighing against the Alvarez and Daniels decisions as courts in at least 23 jurisdictions refuse “to import tort duties during mortgage modifications negotiations. 

The Court next examined the Restatement of Torts (“Restatement”) and found it provided that “no liability in tort for economic loss caused by negligence in the performance or negotiation of a contract between its parties.”  Indeed, the Restatement further explained that the economic loss rule “prevents the erosion of contract doctrines by the use of tort law to work around them…[and] also reduces the confusion that can result when a party brings suit on the same facts under contract and tort theories that are largely redundant in practical effect.”

The Court separately noted “the ability of legislatures to craft remedies beyond the ken of courts…[as] through the democratic process, the Legislature can bring to bear a mix of expertise while considering competing concerns to craft a solution in tune with public demands.”  Gas Leak Cases, supra, 7 Cal.5th at p. 413.

Thus, the Court held that the trial court properly dismissed the Borrower’s negligence claim because “a lender does not owe a borrower a common law duty to offer, consider, or approve a loan modification.”

Concerning Borrower’s other causes of action, the Court found his IIED claim was frivolous and that the trial court correctly dismissed Borrower’s Section 17200 claim.

Accordingly, the Court affirmed the trial court’s order sustaining Bank’s demurrer without leave to amend.

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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FYI: 9th Cir Holds Violation of Facial Recognition Law Sufficient for Standing, Upholds Class Cert

The U.S. Court of Appeals for the Ninth Circuit recently held that the class plaintiffs alleged a concrete and particularized harm sufficient to confer Article III standing where the defendant company’s alleged collection, use, and storage of the plaintiffs’ biometric information was the substantive harm targeted by the Illinois Biometric Information Privacy Act (“BIPA”), which statute protects the plaintiffs’ concrete privacy interests. 

The Ninth Circuit further held that the district court did not abuse its discretion in certifying the class.

Accordingly, the Ninth Circuit affirmed the district court orders certifying the class, and denying the defendant’s motion to dismiss.

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

Facebook, Inc. (“Facebook”) operates one of the largest social media platforms in the world, with over one billion active users.  When a new user registers for a Facebook account, they must create a profile and agree to Facebook’s terms and conditions, which permit Facebook to collect and use data in accordance with Facebook’s policies.

In 2010, Facebook launched a feature called Tag Suggestions.  When Tag Suggestions is enabled, Facebook may use facial-recognition technology to analyze whether the user’s Facebook friends are in photos uploaded by that user. 

Facebook users living in Illinois brought a class action in a federal district court in California against Facebook claiming that Facebook’s facial-recognition technology violates Illinois law.  Specifically, the Plaintiffs alleged that Facebook violated BIPA by collecting, using, and storing biometric identifiers from their photos without obtaining a written release and without establishing a compliant retention schedule.

Under BIPA, “[a]ny person aggrieved” by a violation of its provisions “shall have a right of action” against an “offending party.”

Facebook moved to dismiss the complaint for lack of Article III standing on the ground that the Plaintiffs had not alleged any concrete injury.  While the motion to dismiss was pending, the Plaintiffs moved to certify a class under Rule 23.

The district court denied Facebook’s motion to dismiss, and certified a Rule 23(b)(3) class of “Facebook users located in Illinois for whom Facebook created and stored a face template after June 7, 2011.”  The matter was then appealed. 

On appeal, the Ninth Circuit addressed the issue of Article III standing, noting that to establish standing a plaintiff “must have suffered an ‘injury in fact’ – an invasion of a legally protected interest which is (a) concrete and particularized; and (b) actual or imminent, not conjectural or hypothetical.”

A concrete injury need not be tangible, but in determining whether an intangible injury is concrete, courts consider both history and legislative intent. 

In determining whether the violation of a statute causes a concrete injury, the Ninth Circuit has adopted a two-step approach: “(1) whether the statutory provisions at issue were established to protect [the plaintiff’s] concrete interests (as opposed to purely procedural rights), and if so (2) whether the specific procedural violations alleged in the case actually harm, or present a material risk of harm to, such interests.”

In considering the first factor, the Ninth Circuit noted that “[p]rivacy rights have long been regarded as providing a basis for a lawsuit in English or American courts.”  Moreover, in recent Fourth Amendment jurisprudence, “the Supreme Court has recognized the potential for unreasonable intrusions into personal privacy” related to enhanced technology. 

In light of this background, the Ninth Circuit “conclude[d] that an invasion of an individual’s biometric privacy rights has a close relationship to a harm that has traditionally been regarded as providing a basis for a lawsuit in English or American courts.”

Moreover, “[t]he judgment of the Illinois General Assembly, which is ‘instructive and important’ to our standing inquiry, . . . supports the conclusion that the capture and use of a person’ biometric information invades concrete interests.”

The Ninth Circuit therefore concluded that “the statutory provisions at issue” in BIPA were established to protect an individual’s “concrete interests” in privacy, not merely procedural rights.

The Court next turned to whether the specific procedural violations alleged actually harm, or present a material risk of harm to, such interests.

In concluding that they did, the Ninth Circuit noted that the Plaintiffs alleged that a violation of the BIPA requirements allowed Facebook to create and use a face template and retain that template for all time.  Thus, “[b]ecause the privacy right protected by BIPA is the right not to be subject to the collection and use of such biometric data, Facebook’s alleged violation of these statutory requirements would necessarily violate the plaintiffs’ substantive privacy interests.”

Accordingly, the Ninth Circuit held that “plaintiffs’ have alleged a concrete injury-in-fact sufficient to confer Article III standing.”

The Court next turned to Facebook’s argument that the district court abused its discretion by certifying the class.  Specifically, Facebook argued that class certification was not compatible with Rule 23(b)(3), which requires that “questions of law or fact common to class members predominate over any question affecting only individual members.”  Facebook further argued that the Illinois extraterritoriality doctrine precludes the district court from finding predominance.

The Ninth Circuit disagreed, determining that the “threshold questions of BIPA’s applicability can be decided on a class-wide basis,” by deciding if the violation of BIPA occurred when plaintiffs used Facebook in Illinois, or if they occurred when Facebook’s servers created a face template.

Facebook additionally argued that the district court abused its discretion by certifying a class because a class action is not superior to individual actions, because the possibility of a large, class-wide statutory damages award defeats superiority.   

The Ninth Circuit rejected this argument, ruling that “nothing in the text or legislative history of BIPA indicates that a large statutory damages award would be contrary to the intent of the General Assembly.” 

Thus, the Ninth Circuit held that “the district court did not abuse its discretion in determining that a class action is superior to individual actions in this case.”

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

ALABAMA   |   CALIFORNIA   |   FLORIDA   |   ILLINOIS   |   MARYLAND   |   MASSACHUSETTS   |   NEW JERSEY   |   NEW YORK   |   OHIO   |   PENNSYLVANIA   |   TEXAS   |   WASHINGTON, D.C.  

FYI: 9th Cir Holds No FCRA Violation by CRA When Dispute Did Not Come "Directly" From Consumer

The U.S. Court of Appeals for the Ninth Circuit held that where a company sent dispute letters to a credit reporting agency (“CRA”) on behalf of a consumer, but the consumer did not identify the items to be disputed, review the letters, or otherwise play any role in preparing the letters, the letters did not come “directly” from the consumer, and the CRA was not required to conduct a reinvestigation under section 1681i of the federal Fair Credit Reporting Act (“FCRA”).

As a result, the Ninth Circuit held that the CRA did not violate section 1681i, and also did not act unreasonably and therefore did not violate section 1681e(b).

Accordingly, the Ninth Circuit affirmed the trial court’s order granting summary judgment in favor of the defendant CRA.

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

A consumer (“Consumer”) hired a credit repair organization (“Company”) to perform “credit repair services.”  The Company thereafter sent a letter to a credit reporting agency (“CRA”) asserting that several items in the Consumer’s credit file were inaccurate, and asking the CRA to conduct a reinvestigation to verify the items’ accuracy.

The Consumer had no input on the preparation of the letter, and did not review the letter before it was sent.  

After receiving the letter, the CRA sent a letter to the Consumer stating that it had “received a suspicious request in the mail” and “determined that it was not sent by [the Consumer].”  The CRA further informed the Consumer that it would “not be initiating any disputes based on the suspicious correspondence.”  Finally, the CRA explained that the Consumer could call the CRA or visit its website if he believed the information in his credit file was inaccurate or incomplete. 

The Consumer did neither.  Instead, the Company sent several more letters to the CRA on the Consumer’s behalf.  However, the Consumer again had no input on the drafting of the letters, and did not review them before they were sent.  The CRA did not initiate a reinvestigation after receiving the letters.

The Consumer thereafter filed a complaint alleging that by failing to take action in response to the letters, the CRA supposedly violated two provisions of FCRA.  Specifically, section 1681i, which requires consumer reporting agencies to reinvestigate disputed items, and section 1681e(b), which requires CRAs to use reasonable care in preparing consumer reports.

The CRA moved for summary judgment, and the trial court granted the motion ruling that section 1681i only required the CRA to reinvestigate disputes that came from the Consumer directly.  The trial court also determined that the Agency did not violate section 1681e(b) because, in its view, that statute did not apply to reinvestigation procedures at all. 

The matter was then appealed. 

On appeal, the Ninth Circuit first analyzed the application of section 1681i, which provides in relevant part that CRAs must “conduct a reasonable reinvestigation” when an item in the consumer’s file “is disputed by the consumer and the consumer notifies the agency directly . . . of such dispute.”

The Ninth Circuit observed that the question therefore was “whether those letters came ‘directly’ from [the Consumer].”

In concluding that they did not, the Court considered the “unambiguous meaning of the word ‘directly,’” which it noted is defined by Merriam-Webster’s Third New International Dictionary as “without any intervening agency or instrumentality or determining influence.”

Thus, the Ninth Circuit determined that “to notify a consumer reporting agency of a dispute ‘directly,’ a letter must come from the consumer and be sent to the agency.” 

However, in this case the Consumer “played almost no part in submitting the dispute letter to [the CRA].”  Specifically, he “did not identify the items to be disputed,” and “did not review the letter [the Company] drafted before it sent it to [the CRA].”  Moreover, he testified that he had “absolutely no input” into the contents of the letter at all.

Under those facts, the Ninth Circuit held that “the letters did not come directly from [the Consumer].”  However, the Court cautioned that its “holding is limited to the facts before us,” and “[w]e only hold that, in this case, where [the Consumer] played no role in preparing the letters and did not review them before they were sent, the letters sent by [the Company] did not come directly from [the Consumer].”

The Ninth Circuit therefore affirmed the ruling of the district court granting the CRA’s motion for summary judgment on the section 1681i claim.

The Court next reviewed the claim under section 1681e(b), which provides in relevant part that CRAs must “follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom [a consumer report] relates.”

The appellant argued that even if section 1681i did not require the Agency to conduct a reinvestigation, its refusal to reinvestigate nevertheless violated section 1681e(b) because it was unreasonable.

The Ninth Circuit disagreed, stating that “it would make little sense to use Section 1681e(b) to impose liability on [the CRA] for conduct that satisfied Section 1681i,” because that “Section 1681i represents Congress’s determination that a consumer reporting agency is only required to initiate a reinvestigation if a consumer notifies the agency of a dispute directly.” 

Thus, “[i]t cannot be unreasonable for agencies to follow that guidance.”  The Ninth Circuit therefore held that the Agency “did not act unreasonably and, as a result, did not violate Section 1681e(b).”

Accordingly, the Ninth Circuit affirmed the trial court’s order granting summary judgment in favor of the CRA. 

Eric Tsai

Maurice Wutscher LLP 
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