California Consumer Finance Litigation

9th Circuit Holds that FAA Preempts Broughton-Cruz Rule

Kathleen L. Ford — Wed, 14 Mar 2012 16:41:25 -0800

In its first post-Concepcion case involving the enforceability of arbitration clauses, the U.S. Court of Appeals for the Ninth Circuit reversed the district court's denial of the plaintiffs' motion to compel arbitration, holding that the Federal Arbitration Act (FAA) preempts California's exemption of public injunctive relief for arbitration.

In Kilgore v. KeyBank, the plaintiffs brought a putative class action against KeyBank and other defendants for violations of California's Unfair Competition Law (UCL) in connection with private student loans extended to plaintiffs for flight instruction at Silver State Helicopters, LLC (SSH), a private helicopter vocational school. The Plaintiffs filed suit against KeyBank after SSH closed its doors and filed for bankruptcy, leaving plaintiffs without a diploma, certificate, or other accreditation for their training.

Plaintiffs and each putative class member borrowed between $50,000 and $60,000 from KeyBank and signed loan contracts which contained an arbitration clause informing plaintiffs that they could opt out of the clause and if they did not, that they would waive their rights to litigate any claim in court and proceed with any claim on a class basis. The Notes also contained several conspicuous statements warning plaintiffs of the consequences of signing the agreement and cautioning them to read it thoroughly.

Plaintiffs complaint, which was initially filed in California state court, sought injunctive relief in the form of an order enjoying KeyBank from: 1) reporting any default by the plaintiffs/class to any credit reporting agencies, 2) enforcing the Notes against plaintiffs/class, or 3) engaging in false and deceptive acts and practices with respect to consumer credit contracts involving purchase money loans. Plaintiffs also claimed that the arbitration clause was unconscionable.

KeyBank removed the case to federal court and moved to compel arbitration. The district court denied the motion, holding that the Broughton-Cruz rule, as established by Broughton v. Cigna and Cruz v. Pacificare, prohibited the arbitration of plaintiffs' claims for public injunctive relief and that therefore, the arbitration clause was unenforceable. KeyBank appealed.

On appeal, the Ninth Circuit held that the FAA preempted California's Broughton-Cruz Rule and that the plaintiffs could not opt out of the arbitration agreement. The Court that the Broughton-Cruz rule does not survive the Supreme Court's landmark decision in AT&T Mobility LLC v. Concepcion because the Rule "prohibits outright the arbitration of a particular type of claim", specifically, claims for broad public injunctive relief, in violation of Concepcion's mandate that state law cannot prohibit arbitration of certain types of claims. The Court noted that although the plaintiffs were correct in their argument that the Concepcion opinion did not address the question of arbitrability of a public injunction remedy, the policy arguments justifying the Broughton-Cruz rule, however worthy, could not invalidate an otherwise enforceable arbitration agreement. The Court reasoned that in enacting the FAA, "Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration."

Regarding plaintiffs' claim that the arbitration clause was unconscionable, the Court held that the arbitration clause in the Note withstood scrutiny. The Court reasoned that the clause was not buried within the document, contained more than one statement setting forth in plain language the rights that plaintiffs would waive if they did not opt-out of the arbitration clause, and was conspicuous and appeared in its own section of the Note. The Court held that the plaintiffs must be held to their decision to sign the Note-and accept at least a portion of the benefit of their contract with KeyBank-without opting out of the arbitration agreement.

The Court reversed the district court's denial of KeyBank's motion to compel arbitration and remanded the case with instructions to stay the case and compel arbitration.

"No Conflict Exists" Approach to FCRA Preemption Continues in California

Kathleen L. Ford — Sun, 26 Feb 2012 13:01:34 -0800

The "no conflict exists" approach to reconciling sections 15 U.S.C. § 1681t(b)(1)(F) and §1681h(e) of the Fair Credit Reporting Act adopted by the Seventh Circuit in Purcell v. Bank of America and the Second Circuit in Macpherson v. JP Morgan Chase Bank continues as the emerging trend in federal preemption analysis under the FCRA.

In El-Aheidab v. Citibank, the plaintiff filed suit in California Superior Court alleging causes of action for negligence and statutory violations of Section 17200 of the California Business & Professions Code and Section 1785.25 of the California Civil Code.

Specifically, plaintiff alleged that defendant Citibank wrongfully reported to credit reporting agencies that he owed an outstanding loan balance, even though no such balance was in fact owed, which ruined plaintiff's credit and prevented him from purchasing a home at favorable terms. Defendant Citibank removed the action to federal court and then moved to dismiss plaintiff's complaint on the basis that plaintiff's statutory and common law claims were preempted by the FCRA.

In considering the plaintiff's statutory claim pursuant to Section 17200 of the Bus. & Prof. Code, the court noted that "every district court to consider the question has held that such a claim is preempted at least insofar as it is predicated on violations of the FCRA or other statutory claims that are also preempted." However, the court granted plaintiff leave to amend his complaint to the extent his 17200 claim is based solely on violations of section 1785.25(a), which prohibits the furnishing of credit information to any consumer reporting agency if the person knows or should know the information is incomplete or inaccurate, because 15 U.S.C. § 1681t(b)(1)(F) of the FCRA expressly exempted this provision from preemption. The court also dismissed plaintiff's 1785.25 claim with leave to amend as it was unclear whether the claim was brought under 1785.25(a), and therefore exempted from preemption by the FCRA, or under other sections of 1785.25 which are preempted.

With respect to plaintiff's negligence claim, the court found that this claim was completely preempted by the plain language of § 1681t(b)(1)(F). In noting that the majority of courts in the district have also adopted the total preemption approach, the court agreed with the Seventh and Second Circuits inPurcell v. Bank of America and Macpherson v. JP Morgan Chase Bank, respectively, that § 1681t(b)(1)(F) is not inconsistent with §1681h(e). The court reasoned that there was no logical or policy reason why Congress would enact a comprehensive preemption scheme applicable to state statutes but not to common law and observed that under a contrary interpretation, the prescription of § 1681t(b)(1)(F) could be easily circumvented by characterizing a claim as a common law claim rather than a statutory one even where the underlying conduct is identical. Accordingly, the court dismissed plaintiff's negligence claim with prejudice.

California Courts Narrowly Construe Concepcion

Jessica E. Hawk — Mon, 20 Feb 2012 06:00:00 -0800

Nine months now have passed since the U.S. Supreme Court’s landmark decision in AT&T Mobility LLC v. Concepcion (2011) 131 S.Ct. 1740, 179 L.Ed.2d 742. Concepcion held that section 2 of the Federal Arbitration Act (“FAA”) preempts California’s so-called “Discover Bank rule,” under which certain class arbitration waivers in consumer contracts were unenforceable as unconscionable. Since the decision, California courts have grappled with the scope of Concepcion’s holding. Several decisions considering trial court orders denying arbitration based on the unconscionability of a class action waiver have affirmed those decisions on other grounds, and thus avoided addressing the Concepcion issue.

Those decisions that have squarely addressed Concepcion have interpreted it narrowly. Not a single California appellate case decided since Concepcion has involved an application of Concepcion’s holding to find that an arbitration provision containing a class action waiver was valid and enforceable. Meanwhile, more than one federal district court has now held that an arbitration agreement with a class action waiver was enforceable under Concepcion. (See Blau v. AT&T Mobility (N.D. Cal. Jan. 3, 2012) No. C 11–00541 CRB, 2012 WL 10546; Estrella v. Freedom Financial (N.D. Cal. July 5, 2011) No. C 09–03156 SI, 2011 WL 2633643.)

Several recent cases have declined to address a trial court’s finding that a class arbitration waiver was unenforceable, and thus avoided the question of the scope of Concepcion. In Sanchez v. Valencia Holding Co., LLC (2011) --- Cal.Rptr.3d ---, 11 Cal. Daily Op. Serv. 14, the Second District instead found that the entire arbitration provision in a form automotive retail installment contract was “permeated by unconscionability and [thus] unenforceable.” Applying the analysis set forth in Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, the court found that four clauses in the arbitration provision were unconscionable, including clauses permitting an appeal only from an award exceeding $100,000 or that included injunctive relief, requiring the appealing party to pay appeal costs subject to an apportionment of those costs by the arbitrators, and exempting repossession from arbitration while requiring that requests for injunctive relief be arbitrated. The court found that the provisions “ha[d] the effect of placing an unduly oppressive burden on the buyer.” Thus the appellate court affirmed the trial court’s denial of the motion to compel arbitration, but on grounds that did not directly implicate the holding of Concepcion. Nonetheless, the court did not analyze whether its unconscionability findings constituted applications of “defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue,” which Concepcion states are impermissible under the FAA.

A recent Fourth District case similarly avoided the applicability of Concepcion to a trial court’s order denying a petition to compel arbitration on the ground that the class arbitration waiver was unconscionable. In Roberts v. El Cajon Motors, Inc. (2011) 200 Cal.App.4th 832, the appellate court instead affirmed the trial court’s ruling on the ground that the defendant had waived its right to arbitration by waiting five months to notify the plaintiff of its intent to arbitrate and by other actions.

Some early commenters on the Concepcion decision wondered whether Armendariz would fully survive in its aftermath. But California courts are continuing to apply the unconscionability analysis set forth in Armendariz, which they appear to unanimously conclude has not been affected by the decision in Concepcion. (See Buzenes v. Nuvell Financial Services, et al. (Cal.Ct.App. Jan. 25, 2012) No. B221870, 2012 WL 208051 [affirming trial court’s pre-Concepcion finding that automotive retail installment agreement’s arbitration provision was unconscionable as a whole, and rejecting argument that Concepcion altered outcome]; Moran v. Superior Court (Cal. Ct. App. Nov. 16, 2011) No. F061801, 2011 WL 5560178 [denying petition for writ of mandate after trial court granted motion to compel arbitration, and noting that Concepcion did not invalidate Armendariz]; Mission Viejo Emergency Med. Assoc. v. Beta Healthcare Group, et al. (Cal.Ct.App. Jun. 29, 2011) 197 Cal.App.4th 1146 [finding that arbitration provision in malpractice insurance contract was not unconscionable, and reversing trial court order denying motion to compel arbitration]; Macintosh v. Powered, Inc. (Cal.Ct.App. June 8, 2011) No. A129063, 2011 WL 2237938 [finding that unconscionable unilateral provision in employment arbitration agreement was severable, and reversing trial court order denying motion to compel arbitration].

Several decisions have issued in the employment law realm, where Concepcion’s application is arguably unclear. Most notably, last July, the Second Appellate District held that Concepcion does not apply to waivers of arbitration of another kind of representative action, those brought under California’s Private Attorney General Act under the Labor Code, or PAGA. (See Brown v. Ralph’s Grocery Company (2011) 197 Cal.App.4th 489, as modified (Jul. 20, 2011), rehearing denied (Jul. 29, 2011), review denied (Oct. 19, 2011).) While the court stated that Concepcion “does not apply” to such waivers, it based its decision not on Concepcion’s analysis but on an analysis of the public policy arguments in favor of private attorney general actions under the PAGA. The court distinguished PAGA actions from class actions on the grounds that “an employee suing under the PAGA ‘does so as the proxy or agent of the state’s labor law enforcement agencies,’” and “the relief [sought] is in large part ‘for the benefit of the general public rather than the party bringing the action.’” (Recoveries of civil penalties in PAGA actions are apportioned 75% to the Labor and Workforce Development Agency for Enforcement of Labor Laws and Education, and 25% to the aggrieved employees.) The court also noted that PAGA actions do not require certification formalities as class actions do, and found that many of the concerns about class arbitration articulated in Concepcion are thus inapplicable to PAGA actions. Nonetheless, the court did not squarely address section 2 of the FAA, which states that arbitration agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”

The U.S. Supreme Court may well view the Brown court’s finding that California public policy provides sufficient grounds to invalidate a provision in a valid arbitration agreement as outside of the authority granted by the FAA, and at odds with Concepcion. Certainly, this idea conflicts with Justice Thomas’s reading of section 2 as stated in his concurrence: “[Section 2] require[s] enforcement of an agreement to arbitrate unless a party successfully asserts a defense concerning the formation of the agreement to arbitrate, such as fraud, duress, or mutual mistake. [Citation] Contract defenses unrelated to the making of the agreement—such as public policy—could not be the basis for declining to enforce an arbitration clause.” Some indication of the high court’s view of the scope of Concepcion may be found in its recent order granting certiorari in Sonic-Calabasas A, Inc. v. Moreno and remanding the case to the California Supreme Court for further consideration in light of Concepcion. In Sonic-Calabasas, the California Supreme Court held unconscionable an arbitration provision in an employment contract that waived the right to a Berman hearing. This at least implies, if not clearly indicates, that the high court considers its decision in Concepcion to extend beyond the context of class action waivers in consumer contracts. A petition for certiorari was filed in Brown on January 13, 2012.

At least three federal district courts have pointedly disagreed with Brown’s limited interpretation of Concepcion and holding with respect to PAGA, and declined to apply it. (Quevado v. Macy’s, Inc. (C.D. Cal. Oct. 31, 2011) No. CV 09-01522 GAF (MANx), 2011 WL 6961598 at pp. *3-*4; Nelson v. AT & T Mobility, LLC (N.D.Cal. Aug. 18, 2011) No. C10—4802, 2011 WL 3651153 at p. *4; Grabowski v. Robinson (S.D.Cal. Sept. 19, 2011) No. 10cv1658, 2011 WL 4353998 at pp. *18-*20.) However, one federal district court has agreed with its reasoning and applied it to deny a motion to compel arbitration of PAGA claims. (Plows v. Rockwell Collins, Inc. (C.D. Cal. 2011) --- F.Supp.2d ---, 2011 WL 2011 WL 3501872.)

A recent First District case relying, in part, on Brown, in turn explicitly rejected the reasoning of the three federal district court cases, and thus implicitly rejected the proposition that a Concepcion analysis is applicable to a PAGA claims analysis in the arbitration context. In Reyes v. Macy’s Inc. (Dec. 21, 2011) --- Cal.Rptr.3d ----, 2011 WL 6416432, the First District found that Macy’s could not appeal from the trial court’s order granting its motion to compel arbitration of the plaintiff’s individual claims but denying its motion to dismiss the plaintiff’s class allegations. The trial court had not compelled arbitration of the plaintiff’s PAGA claims, and had instead ordered them stayed along with the class claims. The First District rejected Macy’s argument that that they were appealing from the trial court’s denial of the part of their motion seeking to compel arbitration of the PAGA claims. Citing Brown and Arias v. Superior Court, 46 Cal.4th 969 (2009), the court reasoned that PAGA claims cannot be and are not brought as individual claims, and thus Reyes’s PAGA claim was not within the scope of the “individual claims” of which Macy’s sought to compel arbitration in its trial court motion.

Thedecision in Brown was also notable in that it confronted the trial court’s decision that the class action waiver was unconscionable and unenforceable under Gentry v. Superior Court (2007) 42 Cal.4th 443, 64 Cal.Rptr.3d 773, 165 P.3d 556 (Gentry ), which addresses class arbitration waivers in employment actions. Because the court found that the plaintiff had not submitted sufficient evidence to meet her evidentiary burden under Gentry, it did not reach the issue of whether the Gentry rule was preempted by the FAA under Concepcion.

Three unpublished decisions from the Second District, which decided Brown, similarly have avoided confronting the Gentry issue. In Collins v. Contemporary Services Corp. (Cal.Ct. App. Aug. 18, 2011) No. B227951, 2011 WL 3630516, the court did state, however, that on remand either the trial court or the arbitrator would be required to determine the continuing viability of Gentry in light of Concepcion, which the appellate court made clear had addressed a consumer contract rather than an employment contract.

And in both Lewis v. 24 Hour Fitness USA, Inc. and Lawler v. 24 Hour Fitness USA, Inc., the Second District found that the respective plaintiffs had not presented sufficient evidence of substantive unconscionability to support the trial court’s rulings that the class arbitration waivers were unenforceable under Gentry. Both decisions resulted in the reversal of the trial courts’ orders denying 24 Hour Fitness’s motions to compel arbitration. While both decisions mention Concepcion, neither acknowledges any potential conflict between that decision and Gentry.

While the federal district courts in California have embraced Concepcion, California state courts appear to desire to avoid the application of Concepcion to arbitration provisions in both consumer and employment contracts. Some initial commenters on the Concepcion decision noted that it appeared to abrogate the Armendariz analysis at least to some extent, but state courts are still applying Armendariz, and may in some cases do so very broadly in order to invalidate arbitration clauses without implicating Concepcion. The state courts seem to be carving employment law cases out of the reach of Concepcion altogether, and it would not be surprising if some courts begin to apply Brown’s PAGA arguments in other contexts where possible. The fate of Gentry remains to be seen, although one federal district court decision has concluded that it remains the law in California. (See Plows v. Rockwell Collins, Inc. supra.) It will be interesting to see whether the U.S. Supreme Court decides to clarify any of these issues by granting certiorari in Brown or a future case.

2nd Circuit Follows 7th Circuit on FCRA Preemption

Kathleen L. Ford — Wed, 08 Feb 2012 20:59:35 -0800

The Second Circuit Court of Appeals is the latest court to weigh in on the issue of federal preemption under the Fair Credit Reporting Act. The Second Circuit’s decision in Macpherson v. JP Morgan Chase Bank comes on the heels of the Seventh Circuit’s opinion in Purcell v. Bank of America, which upheld significant federal preemption under the Fair Credit Reporting Act.

In Macpherson, the plaintiff filed suit in Connecticut state court alleging that defendant JP Morgan Chase furnished false information about his finances to a consumer credit reporting agency which caused a reduction of his credit score. Defendant removed the case to federal court and then moved to dismiss on the basis that the plaintiff’s claims were preempted by the FCRA. The district court agreed with defendant and found that the plaintiff’s claims were preempted by § 1681t(b)(1)(F). The plaintiff appealed.

On appeal, the plaintiff argued that § 1681t(b)(1)(F) conflicts with 1681h(e) because, according to the plaintiff, 1681h(e) specifically authorizes certain state law claims while §1681t(b)(1)(F) preempts them. The plaintiff argued that the court should resolve the conflict by finding that § 1681t(b)(1)(F) preempts only state statutes, and not state common law actions such as his.

In affirming the district court’s decision, the Second Circuit specifically held that 1681t(b)(1)(F) does notconflict with § 1681h(e) and further held that § 1681h(e) does not insulate state tort actions from preemption. In arriving at this decision, the Second Circuit found the Seventh Circuit’s opinion inPurcell v. Bank of America to be persuasive and relied on its explanation that the statutory provisions do not conflict because “[s]ection 1681h(e) preempts some state claims that could arise out of reports to credit agencies, § 1681t(b)(1)(F) [simply] preempts more of these claims.” The court in Macphersonfurther agreed with the Seventh Circuit that “[s]ection 1681h(e) does not create a right to recover for willfully false reports” and that “reading the earlier statute §1681h(e) to defeat the later-enacted system in § 1681s-2 and §1681t(b)(1)(F) would contradict fundamental norms of statutory interpretation.” After determining that §1681h(e) is compatible with § 1681t(b)(1)(F), the court held that the plaintiff’s state law claims were preempted by the plain language of § 1681t(b)(1)(F).

The Second Circuit is the latest circuit to adopt the emerging “no conflict exists” approach to federal preemption under §1681h(e) and §1681t(b)(1)(F).

CFPB Proposes Simplified Card Agreement

Daniel O'Rielly — Fri, 09 Dec 2011 05:00:00 -0800

The Consumer Financial Protection Bureau this week proposed a sample simplified credit card agreement template. CFPB's stated goal is to make credit card agreements short, clear, consumer-friendly, and consistent. The proposed template contains references to key terms, defined in a separate list. CFPB seeks public comment on the proposed template, and refers the public to its card agreement database for a comparison of current card agreements. CFPB is testing the proposed template with the Pentagon Federal Credit Union.

The proposed template credit card agreement is part of CFPB’s Know Before You Owe campaign, which has also included proposed reforms related to disclosures for mortgages and student loans.

Court Rejects Citi Settlement with S.E.C.

Heather C. Parker — Thu, 08 Dec 2011 06:00:00 -0800

The U.S. district court for the Southern District of New York last week rejected a $285 million proposed settlement between the Securities & Exchange Commission and Citigroup Global Markets. The case involves a $1 billion mortgage debt deal that Citigroup sold in early 2007. The S.E.C. alleged that Citigroup’s marketing materials materially mislead investors by failing to disclose that Citigroup “exercised significant influence” over the selection of assets and retained short positions in the assets it helped to select.

In the proposed deal, the parties agreed to a consent judgment with no admissions of fact or liability, and included Citigroup’s payment of $285 million dollars to the S.E.C. The payment consisted of the return of the $160 million Citigroup profited from the 2007 deal, $30 million of interest, and a $95 million civil penalty. As part of the settlement, Citigroup also consented to injunctive relief enforced by the Court for the next three (3) years.

The Court refused to approve the settlement, asserting that the proposed deal was not reasonable, fair, adequate, or in the public interest. The Court wrote that in the absence of any proven or admitted facts, it was without a framework to determine its adequacy, and the proposed consent judgment would not serve the “overriding public interest in knowing the truth.” The Court asserted that the S.E.C. has a duty to ensure that the truth emerges, and the Court would not approve a settlement where it felt the S.E.C. has not fulfilled this duty.

The Court asserted that the $95 million civil penalty was not a material amount to Citigroup, and that the consent judgment would not commit the S.E.C. to return any of the funds to the defrauded investors. The Court wrote that the parties’ resolution of their competing interests does not equal the public interest, “especially in the absence of a factual base on which to assess whether the resolution was fair, adequate, and reasonable.” Likewise, the Court took issue with the fact that the injunctive relief provisions asked the Court to “employ its power and assert its authority when it does not know the facts,” a practice he described as, “worse than mindless, it is inherently dangerous.” In rejecting the settlement, the Court consolidated the matter with a related case, and set both for trial in July 2012.

CFPB Releases Its First Consumer Response Report

Daniel O'Rielly — Fri, 02 Dec 2011 06:00:00 -0800

The Consumer Financial Protection Bureau this week released its first Consumer Response Report, detailing consumer complaints regarding credit cards over the first three months of the CFPB's system for Consumer Response.

The Report makes three observations related to the initial credit card complaint data:

"Consumer Confusion: Many complaints show consumers struggling to understand the terms of credit cards and associated products like debt protection services. These complaints show a mismatch between consumer expectations and the way the product functions.
Third-Party Fraud: The complaints show some alleged fraudulent credit card charges made by third parties. The CFPB has helped to obtain redress for defrauded consumers in these instances. In some cases, the Bureau has consulted with the appropriate criminal authorities.
Factual Disputes: There are a large volume of complaints presenting factual disputes between consumer and issuer. The Bureau has generally found that issuers have been willing to resolve these complaints."

The CFPB also released its Proposed Policy Statement on the Disclosure of Certain Credit Card Complaint Data.

U.S. Supreme Court Admonishes Courts to Enforce Arbitration

Jessica E. Hawk — Thu, 01 Dec 2011 06:00:00 -0800

In a pointed per curiam opinion, the United States Supreme Court recently reiterated that both state and federal courts must apply the "emphatic federal policy in favor of arbitral dispute resolution." State courts "have a prominent role to play as the enforcers of agreements to arbitrate."

In KPMG LLP v. Cocchi, the Court held that when a party moves to compel arbitration, "state and federal courts must examine with care the complaints seeking to invoke their jurisdiction in order to separate arbitrable from nonarbitrable claims. A court may not issue a blanket refusal to compel arbitration merely on the grounds that some of the claims could be resolved by the court without arbitration." In this respect, the FAA "leaves no place for the exercise of discretion.. ."

The plaintiffs in Cocchi were individuals and entities who purchased limited partnership interests in certain limited partnerships known as the Rye Funds. The Rye Funds were invested with Bernard Madoff and suffered significant losses as a result. The plaintiff investors sued several entities, including the auditing firm, KPMG. They alleged four claims against KPMG: (1) negligent misrepresentation; (2) violation of the Florida Deceptive and Unfair Trade Practices Act (FDUTPA); (3) professional malpractice; and (4) aiding and abetting a breach of fiduciary duty.

KPMG moved to compel arbitration based upon the audit services agreement between KPMG and the fund manager defendants. The trial court denied the motion, and the Court of Appeal affirmed. The Court of Appeal found, among other things, that two of the claims were direct rather than derivative, so that they could not be arbitrated under applicable state law. The Court of Appeal failed to address the arbitrability of the other two claims asserted against KPMG. Because of this failure, the Supreme Court vacated the Court of Appeal's judgment and remanded the case for a determination of whether either of the remaining two claims required arbitration.

The KPMG decision sends a clear message to state and federal courts that they must enforce valid agreements to arbitrate, and that the Supreme Court will continue to ensure that enforcement.

Court of Appeal Rejects UCL Action Based on Alleged TISA Violation

Heather C. Parker — Tue, 29 Nov 2011 10:52:05 -0800

In Rose v. Bank of America, N.A. (2nd App. Dist., No. B230859, Nov. 21, 2011), the California Court of Appeal held that California's Unfair Competition Law (Bus. & Prof. Code §§ 17200, et seq., “UCL”) cannot be used to redress violations of the federal Truth in Savings Act (12 U.S.C. §§ 4301, et seq., “TISA”). Although TISA originally included a “private attorney general” provision allowing private plaintiffs to sue banks for alleged TISA violations, a sunset clause repealed the private right of action in 2001.

The Rose plaintiffs alleged that Bank of America failed to properly notify them of increased fees on their deposit accounts, in violation of TISA. They brought a single cause of action under the UCL, alleging unlawful and unfair business practices arising out of the alleged TISA violations. The trial court sustained Bank of America’s demurrer to the complaint, holding that Congress intended to bar a TISA private action and that the UCL cannot be used to plead around an absolute bar to relief. Plaintiff appealed.

The Court of Appeal affirmed the trial court, stating that Congress’ express repeal of a private right of action to enforce TISA precludes an indirect suit through the UCL. As a result, California consumers may not seek injunctive relief and restitution for “unlawful” conduct when they do not have standing to enforce compliance with TISA. The Court also held that the plaintiffs did not properly plead “unfair” business practices because the allegations in the complaint established that they had notice of the increased fees, a source to obtain additional information, and an opportunity to change banks before the changes took effect.

7th Circuit Weighs in on FCRA Preemption

Daniel O'Rielly — Tue, 25 Oct 2011 12:35:12 -0800

The Seventh Circuit Court of Appeals issued an opinion this month upholding significant federal preemption under the Fair Credit Reporting Act. In Purcell v. Bank of America, the Court held that 15 U.S.C. 1681t(b)(1)(F) does not conflict with 15 U.S.C. 1681h(e) and therefore FCRA preempts all state law causes of action, whether based on statute or common law.

In Purcell, plaintiff filed a complaint in Indiana state court alleging that defendant Bank of America incorrectly reported that she was behind on loan payments. Defendant removed the case to federal court, then moved to dismiss. The district court held that plaintiff had no private right of action under 15 U.S.C. 1681s-2(a) and that plaintiff had not properly stated a cause of action under 15 U.S.C. 1681-2(b). Among other things, the district court rejected defendant's argument that 15 U.S.C. 1681t(b)(1)(F) preempts both statutory and common law claims arising out of credit reporting, and instead applied the statutory approach to FCRA preemption. Defendant appealed.

The 7th Circuit reversed, holding that 1681t(b)(1)(F) preempts all of plaintiff's state law causes of action. The Court rejected the district court's narrow interpretation of "laws" in the preemption provision of 1681t(b) to mean only state statutory claims and not state common law claims.

The Court also rejected the district court's conclusion that there is a conflict between the preemption provisions of 1681t(b)(1)(A) and 1681h(e). Specifically, the Court stated: ". . .we do not perceive any inconsistency between the two statutes. Section 1681h(e) preempts some state claims that could arise out of reports to credit agencies; §1681t(b)(1)(F) preempts more of these claims."

OCC Dodd-Frank Preemption Rule is Final

Daniel O'Rielly — Thu, 08 Sep 2011 19:25:20 -0800

The Office of the Comptroller of the Currency (OCC) recently issued a final rule regarding amendments to its regulations, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). With respect to the provisions affecting preemption and visitorial powers, the OCC concluded that Dodd-Frank does not create a stand-alone preemption standard but incorporates the Supreme Court’s Barnett Bank conflict preemption standard and the reasoning that supports it.

Earlier this Summer, the OCC issued a proposed rule that Dodd-Frank’s preemption provision be read to include “the whole of the conflict preemption analysis” in Barnett Bank. In response, the Department of the Treasury issued a comment letter, addressing concerns with the OCC’s interpretation of Dodd-Frank preemption.

The Treasury Department raised three principal concerns with the OCC’s proposed rule: 1) that the OCC inappropriately broadened the key language of Dodd-Frank’s preemption standard to encompass Barnett Bank, 2) that although the proposed rule eliminates the OCC’s current preemption standard, the rule asserts that preemption determinations based on that eliminated standard would continue to be valid, and 3) that the proposed rule could be read to preempt categories of state laws, even though the provisions of Dodd-Frank require that preemption determinations be made on a case-by-case basis.

In its final rule, the OCC acknowledged and responded to these concerns, but concluded that the proper interpretation of the preemption provision of Dodd-Frank preserves the Barnett Bank conflict preemption standard.

Editor's note: This article was co-written by Priscilla Taylor, a summer law clerk in the Firm's San Francisco office.

Ninth Circuit Affirms FDCPA Summary Judgment

Daniel O'Rielly — Fri, 22 Jul 2011 06:00:00 -0800

In McCollough v. Johnson, Rodenburg & Lauinger, LLC., No. 09-35767 (9th Cir. Mar. 4, 2011), plaintiff opened a credit card account around 1990 with Chemical Bank, which later merged with Chase. Plaintiff's account became delinquent and in 2000, Chase Manhattan charged off the $3,000 account balance and later sold the account to CACV of Colorado, Ltd. CACV filed a collection action in state court in 2005. Two weeks later, CACV dismissed the case after plaintiff pointed out that the statute of limitations had lapsed. In 2006 CACV 's parent company retained Johnson, Rodenburg & Lauinger (“JRL”), a debt collection law firm, to pursue collection of plaintiff’s debt.

JRL noticed a statute of limitations problem with plaintiff’s account and inquired to CACV, who responded that plaintiff had made a partial payment in 2004, which would extend the statute of limitations to 2009. This information was incorrect: the payment in 2004 was actually the return of court costs to CACV, and not a partial payment on the account. However, based on the incorrect information, JRL filed a collection complaint against plaintiff in state court in 2007. JRL subsequently dismissed the collection action with prejudice based on the statute of limitations.

Plaintiff then sued JRL in federal district court, alleging violations of the Fair Debt Collection Practices Act (“FDCPA”) and the Montana Unfair Trade Practices and Consumer Protection Act (“MCPA”), as well as state law claims for malicious prosecution and abuse of process. The court granted plaintiff partial summary judgment on his FDCPA claims and a jury found in favor of plaintiff on all remaining claims and awarded damages. JRL filed motions for a new trial and amendment of the judgment to reduce the emotional distress damage award. The district court denied these motions; JRL appealed. The Ninth Circuit affirmed.

The Ninth Circuit agreed with the district court that JRL’s bona fide error defense failed as a matter of law. The court found that JRL erred by relying without verification on CACV’s representation and by overlooking contrary information in its files and thus presented no evidence of procedures designed to avoid the specific errors that led to its filing and maintenance of a time-barred suit against plaintiff.

The Ninth Circuit affirmed the district court’s grant of summary judgment on plaintiff’s claim that JRL violated the FDCPA by requesting attorney’s fees in its underlying state collection complaint. The court found that JRL had produced no evidence of express authorization of its fee request and so failed to meet its burden to show a genuine issue for trial.

The Ninth Circuit affirmed the district court’s grant of summary judgment on plaintiff’s claim that JRL’s service of false requests for admission violated the FDCPA. The court first found that the FDCPA does not exclude from its coverage the service of requests for admission, but applies broadly to the litigating activities of lawyers. Applying an objective “least sophisticated debtor” standard, the court concluded that the service of requests for admission containing false information upon a pro se defendant without an explanation that the requests would be deemed admitted after thirty days constitutes “unfair or unconscionable” or “false, deceptive, or misleading” means to collect a debt.

Editor's note: This article was co-written by Priscilla Taylor, a summer law clerk in the Firm's San Francisco office.

TCPA Summary Judgment Scope Defined

Daniel O'Rielly — Tue, 19 Jul 2011 06:00:00 -0800

In Gutierrez v. Barclays Group (S.D. Cal. Feb. 9, 2011), a district court considered the scope of revoking consent to contact debtors by cell phone and text messages.

In Gutierrez, plaintiff applied for a credit card from defendant Barclays. On his application, plaintiff listed both his and his wife’s cellular phone numbers in his contact information. Plaintiff’s application was approved. Months later, plaintiff’s account became delinquent, and defendant began making collection calls and sending text messages to the two cellular numbers associated with plaintiff’s account. Plaintiff requested, via text message, that defendant stop sending text messages to his cellular phone. Plaintiff’s wife also orally requested that defendant stop calling her cellular phone.

Plaintiff and his wife subsequently filed suit, alleging violation of the Telephone Consumer Protection Act (TCPA), which prohibits making telephone calls using an automatic telephone dialing system or an artificial or prerecorded voice, subject to exemption where the called party has given prior express consent. Among other things, the TCPA also prohibits making calls to “any telephone number assigned to a paging service, cellular telephone service, specialized mobile radio service, or other radio common carrier service, or any service for which the called party is charged for the call.”

Defendant raised three arguments in its motion for summary judgment. The court denied defendant’s motion on all three grounds. First, defendant asserted that, in listing the two cellular numbers on his credit card application, plaintiff gave “prior express consent” and so the TCPA exemption applied. The court found that although plaintiff had given prior express consent to call both cellular numbers, this consent was subsequently revoked and the exemption did not apply. There was no dispute as to the validity of the revocation, via text message, of consent to call plaintiff’s cellular number; the parties did dispute the validity of the oral revocation of consent to call plaintiff's wife's number. The court agreed with plaintiffs that prior express consent may be revoked orally and therefore, both plaintiffs had revoked their prior express consent, and the TCPA exemption did not apply.

Second, defendant contended that plaintiff’s wife was not a “called party” under the TCPA, because she was not the intended recipient of the call, and therefore lacks standing to sue. The court adopted the position that the TCPA was intended to protect telephone subscribers, and therefore subscribers, including plaintiff’s wife, have standing to sue for TCPA violations.

Third, defendant argued that because plaintiff was not charged for the calls or text messages, there could be no violation of the TCPA. The court interpreted the statute differently, holding that incurring charges for received calls is not a requisite element of a TCPA claim.

Editor's note: This article was co-written by Priscilla Taylor, a summer law clerk in the Firm's San Francisco office.

9th Circuit Defines FACTA Scope for Electronic Receipts

Daniel O'Rielly — Thu, 14 Jul 2011 07:01:15 -0800

In Simonoff v. Expedia, Inc. (9th Cir. May 24, 2010), the Ninth Circuit held that an “electronically printed” receipt under FACTA does not include an email receipt displayed on a computer screen.

Congress passed the Fair and Accurate Credit Transactions Act (FACTA) in 2003, as an amendment to the Fair Credit Reporting Act. FACTA restricts the electronic printing of more than the last five digits of a credit card number or card expiration dates, on receipts provided to the cardholder at the point of sale.
In Simonoff, plaintiff purchased travel arrangements online through Expedia’s website. Expedia subsequently emailed a receipt for the purchase to the plaintiff, which included the expiration date of plaintiff’s credit card. Plaintiff sued, claiming that the email receipt sent by Expedia violated FACTA. The district court dismissed plaintiff’s claims under Rule 12(b)(6). Plaintiff appealed.

On appeal, the court considered the plain meaning of the words “print” and “electronically printed” under FACTA. The court looked to dictionary definitions and standard modern usage of the terms to conclude that the ordinary meaning of “print” or “electronically printed” is the physical imprint onto paper or another tangible medium, and that a printed receipt is thus a receipt that exists in physical form and not one electronically displayed on a screen. Furthermore the court concluded that statutory context also confirmed that the word “print” limits FACTA to receipts printed on a tangible medium. The court cited a Seventh Circuit opinion for support and noted that the solid majority of district courts, that have addressed FACTA’s scope, are in agreement. The court affirmed the judgment dismissing plaintiff’s suit.

Editor's note: This article was co-written by Priscilla Taylor, a summer law clerk in the Firm's San Francisco office.

CFPB Proposes Scope of Non-Bank Supervision

Daniel O'Rielly — Fri, 24 Jun 2011 07:15:58 -0800

The new Consumer Financial Protection Bureau has issued a Notice and Request for Comment on the proposed scope of its Dodd-Frank supervisory authority for certain non-depository institutions. The CFPB's Notice outlines potential criteria for defining the scope of this supervisory authority and identifies six potential other markets that CFPB may supervise: (1) debt collection; (2) consumer reporting; (3) consumer credit and related activities; (4) money transmitting; (5) check cashing and related activities; (6) prepaid cards; and (7) debt relief services.

Section 1024 of Dodd-Frank grants supervisory authority to the CFPB for "covered persons" in the residential mortgage, private education lending, and payday lending markets. In other markets, CFPB would have supervisory authority only over a "larger participant." Dodd-Frank assigned CFPB the task of issuing a rule on or before July 21, 2012, to identify these other markets and to define "larger participant."

CFPB seeks public comment on the criteria and threshold to define a "larger participant" and on the data to be used in measuring these criteria. CFPB also seeks public comment on the consideration of whether the six "other markets" should be included in the initial rule and/or whether additional markets should be included.

Concepcion Impact Has Begun in California Cases

Daniel O'Rielly — Wed, 18 May 2011 06:39:10 -0800

The impact from the U.S. Supreme Court's decision last week in AT&T Mobility v. Concepcion has begun in California cases. In two orders issued after Concepcion, California federal courts have granted motions to compel arbitration on an individual basis where the subject arbitration provision contained a class action waiver. Each of these courts also held that the Federal Arbitration Act preempts California's exemption of claims for public injunctive relief from arbitration. See Arrellano v T-Mobile USA, Inc. (N.D. Cal., May 16, 2011 Order Granting Motion to Compel Arbitration and Stay Claims for Injunctive Relief); Zarandi v. Alliance Data Systems Corp. (C.D. Cal., May 9, 2011 Order Granting Defendants' Motion to Compel Arbitration and Stay Proceedings).

OCC Issues Interpretive Letter on Dodd-Frank Preemption

Daniel O'Rielly — Mon, 16 May 2011 06:00:00 -0800

The Office of the Comptroller of the Currency last week released an important interpretive letter with a comprehensive overview of the OCC's views on how Dodd-Frank affects preemption, including visitorial powers.

The OCC also provided its view on possible confusion related to the Dodd-Frank preemption provision. Although Dodd-Frank specifically references the Barnett Bank preemption standard, it also references an apparent stand-alone conflict preemption standard: whether state law "prevents or significantly interferes with the exercise by the national bank of its powers." This provision mirrors language in Barnett Bank, but the statute's separate reference to it raised the question of whether Congress intended to create a new statutory preemption regime, or whether it simply intended to incorporate the Barnett Bank standard. The OCC concluded that Dodd-Frank's preemption provision should be read to include "the whole of the conflict preemption analysis" in Barnett Bank, along with its judicial and regulatory progeny.

11th Circuit Considers Dodd-Frank Preemption Provision

Daniel O'Rielly — Mon, 16 May 2011 05:32:06 -0800

In one of the first cases to analyze the preemption standard contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, in Baptisa v. JPMorgan Chase Bank, NA, the Eleventh Circuit affirmed the district court's dismissal of plaintiff's Florida state law claims as preempted by the National Bank Act.

In Baptista, plaintiff, a non-accountholder at Chase, presented a check for $242.48 to be cashed at a Chase branch. Chase cashed the check and charged her a $6.00 fee. Plaintiff filed a putative class action asserting that Chase's imposition of a fee for cashing the check violated Florida law and alleging two causes of action: (1) violation of Florida Statute § 655.85, a so-called par-value statute, which prohibits a bank from "settl[ing] any check drawn on it otherwise than at par"; and (2) unjust enrichment.

Chase moved to dismiss on three grounds: first, that Section 655.85 did not apply to plaintiff because that statute regulated only exchange fees between banks; second, that both of plaintiff's causes of action were preempted by the National Bank Act, 12 U.S.C. § 21 et seq.; and third, that plaintiff had failed to allege the essential elements of unjust enrichment. The district court granted Chase's motion to dismiss both causes of action, holding plaintiff's claims were preempted by 12 U.S.C. § 24 (Seventh), which among other things, grants banks the power to negotiate drafts, and 12 C.F.R. § 7.4002(a), a regulation promulgated by the Office of the Comptroller of the Currency (OCC) which states that a national bank may "charge its customers non-interest charges and fees, including deposit account service charges." Subsequent OCC interpretive letters have interpreted "customer" to include "any person who presents a check for payment."

Plaintiff appealed. The Eleventh Circuit affirmed. The Court first noted that although the parties had briefed the issue of which type of preemption the Court should apply, the Dodd-Frank Act amended the applicable preemption standard under the National Bank Act. Significantly, that provision of the Dodd-Frank Act, to be codified at 12 U.S.C. § 25(b)(1), does not take effective until the "Designated Transfer Date" under the statute, which is currently July 21, 2011, but could be extended. Nevertheless, the Court interpreted this Dodd-Frank provision as a conflict preemption test.

In applying the conflict preemption analysis to plaintiff's claims, the Court adopted the analysis of a 5th Circuit case, Wells Fargo Bank of Texas N.A. v. James, 321 F.3d 491 (5th Cir. 2003), which considered a nearly identical Texas par value statute. Specifically, the Court found a clear conflict between the Florida statute's prohibition on charge fees to non-accountholders and the federal statutory authorization of such fees. Accordingly, the Court affirmed the district court's holding that both of plaintiff's causes of action are preempted.

In a footnote, the Court noted that even absent preemption, plaintiff's unjust enrichment claim was defective because it failed to allege the essential element of failure to give consideration. Chase's immediate payment of the check to plaintiff constituted sufficient consideration for the fee it charged.

US Supreme Court: FAA Preempts Discover Bank Rule

Daniel O'Rielly — Wed, 27 Apr 2011 09:04:24 -0800

The U.S. Supreme Court today issued its opinion in AT&T Mobility LLC v. Concepcion, reversing the Ninth Circuit opinion below and holding that California's Discover Bank rule is preempted by the Federal Arbitration Act, 9 U.S.C. § 2 ("FAA").

In Concepcion, plaintiffs filed suit in federal district court alleging false advertising and fraud, asserting AT&T charged sales tax on cellular telephones advertised as "free." AT&T moved to compel arbitration. The district court denied the motion, citing Discover Bank v. Superior Court, 26 Cal.App. 4th 148 (2005), which held class action waivers in most consumer arbitration agreements are unconscionable, and therefore subject to the FAA's savings clause and not preempted. The Ninth Circuit affirmed.

In its opinion reversing the Ninth Circuit, the Supreme Court first noted generally that the FAA reflects a "liberal federal policy favoring arbitration" and that anything that "stands as an obstacle to the accomplishment and execution of the full purposes and objectives" of the FAA is preempted. Specifically, the Court held that California's Discover Bank rule is preempted by the FAA because "[r]equiring the availability of class-wide arbitration interferes with fundamental attributes of arbitration and creates a scheme inconsistent with the FAA."

in its analysis, the Court identified a number of ways in which the Discover Bank rule interferes with arbitration and is therefore inconsistent with the FAA: (1) class arbitration makes the process slower, more costly, and more likely to generate procedural disputes; (2) class arbitration requires procedural formality, which is inconsistent with arbitration's essential informality; and (3) class arbitration significantly increases risks to defendants, who could be subject to a class-wide arbitration award with minimal rights to challenge errors on appeal or otherwise to overturn the award.

Fed Finalizes Rules to Expand TILA Disclosures

Daniel O'Rielly — Wed, 06 Apr 2011 14:44:58 -0800

The Federal Reserve has issued a final rule amending Regulation Z to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that would expand the coverage of consumer protection regulations to credit transactions and leases of higher dollar amounts.

Among other things, the final rules expand TILA's credit disclosure requirements to credit transactions up to $50,000 (up from $25,000) and prohibit creditors from engaging in certain practices with respect to those loans. Private education loans and mortgages are subject to TILA regardless of the transaction amount.