Will Industry Feel Impact of Supreme Court's Madden Rejection?
By Brian S. Korn | Richard E. Gottlieb
In a disappointing move, the U.S. Supreme Court has denied the petition for certiorari by Midland Funding to hear the case Madden v. Midland Funding. But could the inaction by the Supreme Court be much ado about nothing?
What happened
The denial leaves in place the decision of the Second Circuit Court of Appeals that the National Bank Act (NBA) does not provide a shield against state law usury claims even though the loan, as originated by a national bank, was not usurious. Despite the strong objections of industry lobbying forces, the Justices declined to hear the case, a move that was made less surprising when the Solicitor General failed to support the cert petition despite being openly critical of the decision on the merits.
The Supreme Court, by not hearing the case, allows the precedent of the appeals court to stand. The Justices passed up the opportunity to opine on whether the power to sell loans is a fundamental power under the NBA linked to the power to originate loans. This was a key argument by Midland and the amicus petitions filed by the Structured Finance Industry Group, the Clearing House Association, the American Bankers Association and ACA International, and their brief cosponsors.
But it does not stand for a wider approval or precedent in any other circuit other than the Second Circuit, which covers Connecticut, New York, and Vermont. Moreover, the denial of certiorari does not mean that the Supreme Court has rejected Section 85 of the NBA, Section 27 of the Federal Deposit Insurance Act, or the rights of banks to sell valid loans into the marketplace, or principles of federal preemption, generally.
That said, within at least the Second Circuit, the denial of certiorari strikes a small but significant blow at the long-standing "valid when made" doctrine, under which courts have long concluded that a non-usurious loan remains non-usurious even if assigned or sold to another. At least three other circuits—the Fifth (in FDIC v. Lattimore, 656 F.2d 139 (5th Cir. 1981)), Seventh (Olvera v. Blitt & Gaines, PC, 431 F.3d 285 (7th Cir. 2005)) and Eighth—have ruled to the contrary, and the denial preserves the circuit split. As Judge Posner wrote for the Seventh Circuit, "once assignors were authorized to charge interest, the common law kicked in and gave the assignees the same right, because the common law puts the assignee in the assignor's shoes, whatever the shoe size."
In some respects this is a positive for marketplace lending platforms that might have faced the prospect of an eight-member Supreme Court accepting the case and siding with Madden. This would have effectively "nationalized" the case. By denying certiorari, the Court has localized the damage caused. Platforms will begin to mitigate the effects of Madden, but in the short term, credit availability in the affected areas to the affected borrowers will be relatively scarce. In fact, a recent study by professors at Columbia, Fordham and Stanford Universities has shown that the Madden case has already had a chilling effect on credit availability.
It is also important to remember that the preemption argument is only one part of a three-part argument by Midland Funding. The case is now remanded to the district court to decide the two remaining claims relating to whether the "valid when made" doctrine applies under state law.
There are two arguments that could preserve "valid when made" and result in a Midland Funding victory. First, both parties elected Delaware as their choice of law. Delaware recognizes the "valid when made" doctrine and therefore Midland Funding would win despite the preemption ruling from the Second Circuit. Second, even if the district court rejects Delaware as the mutual choice of law, which is plausible in a case involving a consumer's election in a fine-print credit card agreement, New York law would then govern. New York also recognizes the "valid when made" doctrine, although this is less clear than in Delaware.
The other big unanswered question is how the court will apply two competing state laws: valid when made vs. usury. The judge will play a critical role here. If choice of law is honored or if the home-state law honors "valid when made" as many, including the Solicitor General, expect, the preemption case we have been following all this time will become somewhat of a troubling academic exercise, like Dorothy waking up in Kansas and realizing it was all a dream. It is also possible legislation is passed in the interim to resolve this issue.
Outside of the courtroom, the refusal to hear the case will cause nonbank assignees to avoid purchasing certain loans made in the three states affected by the Second Circuit ruling to the extent that the loans would not have been valid if originated by such assignees. It will also cause national banks that originate loans largely to sell them to reposition their operations and strategies. Worse yet, those entities that have already purchased loans under the assumption that they would be valid in the affected states (and that may no longer be valid) may seek to undo these sales on the basis that the banks breached representations and warranties.
The decision may likewise expose some debt purchasers and others to liability under New York's criminal usury statute. If New York law is deemed to apply to Midland Funding, then Midland Funding may find itself potentially liable as New York usury law restricts annual interest rate charges to 25 percent and the annual interest charge is 27 percent in Madden. If on remand the court applies New York law, Midland Funding's debt collection attempts could render it liable under the New York criminal usury law, including for felonies if it were placed in the shoes of the lender.
In addition, nonbank purchasers cannot buy loans from banks operating under the NBA in the Second Circuit that exceed applicable state usury caps. In New York, the largest state in the Second Circuit, the usury cap is 16 percent without a state lending license and 25 percent with a license. Such loans may be deemed uncollectible and credit for the over-16 percent borrower in covered states will continue to be tight from originators that rely on loan sales or securitization, including subprime consumer and auto loans.
Other implications include serious challenges to the securitization of loans in the Second Circuit, as many securitization trusts purchase loan assets from national banks.
Marketplace lenders generally do not purchase loans from banks operating under the NBA, so Madden technically does not apply to them. Both Madden and Midland made this argument in their briefs to the Court. However, the factual analogy is compelling enough to spook investors and therefore could scare platforms away from originating loans in the Second Circuit. Small business and real estate lending platforms that do not purchase loans from originating banks are not directly impacted by the decision.
Platforms have already started reshaping their legal relationships with banks to be factually distinct from the facts in Madden. This may mean keeping more loans on bank balance sheets, appointing the bank as the master servicer, adding "skin in the game" by banks investing in loans, or deferring compensation to banks until the borrower performs on the loan for some or all of the term. Alternative coping strategies include becoming licensed in various states to avoid the need to rely on a bank funding partner.
Other cases may also have an impact on how Madden continues to play out. A recent putative class action filed against LendingClub in New York federal court could have implications on the "true lender" doctrine. Unlike Madden, which deals with the power of a bank to sell its assets, the plaintiffs in true lender cases have the view that there never really was a bank involved. This case will also be a test of the platforms' mandatory arbitration clauses contained in every consumer loan agreement.
Why it matters
The full impact of the Madden decision remains to be seen, but lenders are already tweaking their relationships in the Second Circuit to survive in the wake of the opinion. Future challenges to the Madden case are likely to arise given the strong negative view of the Solicitor General and the significance of the case to the industry.
This article was originally published on Law360.com on June 27, 2016. To read the full article, click here.
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CFPB Releases Supervisory Report
In a special edition of its Supervisory Highlights publication, the Consumer Financial Protection Bureau (CFPB) detailed its Supervision findings regarding the mortgage servicing industry's compliance with CFPB regulations. While the CFPB found shortcomings in some servicers' compliance positions, particularly with regard to purported technological failures to ensure communication with defaulted borrowers compliant with Regulation X, the CFPB also praised servicer compliance improvements over the last few years and encouraged the industry to continue on that path.
What happened
In January 2014, new regulations promulgated by the CFPB took effect outlining certain information consumers must receive from mortgage servicers and providing additional protections for consumers during loss mitigation interactions with servicers. Over the last two years, the CFPB's supervisory examinations of mortgage servicers have focused on reviewing servicers' compliance with these regulations, commonly referred to as the CFPB Mortgage Servicing Rule, or MSR (part of Regulation X, 12 C.F.R. Part 1024, promulgated by the CFPB pursuant to 12 U.S.C. §§ 2603-2605, 2607, 2609, 2617, 5512, 5532, and 5581).
The latest edition of Supervisory Highlights details exams between January 2014 and April 2016, which exams the Bureau claims revealed that mortgage servicers' use of obsolete technology platforms leads to consumer harm. While the report acknowledged that some members of the industry sufficiently have invested in new compliance technology platforms, it also challenged servicers with continued compliance issues to consider ways to use technology as a tool to address those issues.
"Mortgage servicers can't hide behind their bad computer systems or outdated technology. There are no excuses for not following federal rules," said CFPB Director Richard Cordray. "Mortgage servicers and their service providers must step up and make the investments necessary to do their jobs properly and legally."
The MSR requires that, under certain circumstances, if a servicer receives a loss mitigation application 45 days or more before a foreclosure sale, it must notify the borrower in writing within 5 days to acknowledge receipt of the application and provide the borrower with an opportunity to engage in the loss mitigation process.
CFPB examiners claim to have found multiple violations related to these process requirements, with one or more servicers failing to send any loss mitigation acknowledgement notices due to a repeated loss mitigation processing platform malfunction over a significant period of time. In addition, the examinations revealed some instances in which notices represented that homes would not be foreclosed on before the deadline passed for submitting missing documents, but the foreclosure proceeded before the deadline.
Deficiencies with regard to timeliness and content of the acknowledgement notices were also found, according to the report, including letters requesting documents that borrowers already submitted or insufficient specificity in listing the additional documentation borrowers needed to provide to complete an application.
The CFPB also purports to have found what it characterizes as deceptive and abusive practices concerning fees. Some servicer examinations found inadequate disclosure of fee amount and timing of assessment in proprietary loan modification agreements. The report did not say whether such information was provided to the borrower in other correspondence. The report also cited instances of loss mitigation offer letters sent with response deadlines that had already passed or were about to pass by the time the borrower received the letter. The CFPB ordered the affected servicers to correct these problems through remedial action.
As for loan modification denial notices, servicers are required by the MSR to provide the specific reason(s) for denying the borrower a trial or permanent loan modification. However, examinations found that denial notices at one or more servicers failed to state the correct reason(s) for the denial and one or more servicers sent notices stating "Not Available" as the reason for denying loss mitigation applications. Denial notices that failed to communicate a borrower's specific right to appeal a denial were also cited by examiners.
The policies, procedures, and requirements of some mortgage servicers also failed the scrutiny of the CFPB, with one or more servicers failing to provide accurate and timely information and documents in response to the borrower's requests for information about a mortgage loan, neglecting to properly evaluate a loss mitigation application for all options that a borrower might be eligible for, and not promptly identifying and facilitating communication with the successor in interest upon the death of a borrower.
Finally, as in past supervisory reports, the CFPB expressed a heightened concern about servicing transfers occurring in the middle of the default and loss mitigation stage. "While Supervision has observed more attention to pre-transfer planning by transferor and transferee servicers since 2014, Supervision found that at one or more servicers incompatibilities between servicer platforms led, in part, to transferees failing to identify and honor in-place loss mitigation after receiving the loans," the CFPB said.
Some borrowers who completed trial payments with a new servicer encountered substantial delays before receiving a permanent loan modification, examiners found, while one or more servicers failed to honor the terms of in-place trial modifications after transfer.
On a more positive note, the CFPB concluded by recognizing that some servicers have made "significant improvements" over the last several years, "by enhancing and monitoring their servicing platforms, staff training, coding accuracy, auditing, and allowing for greater flexibility in operations." The CFPB also praised servicers who are actively reviewing consumer complaints and creating complaint governance committees with a mandate to ensure appropriate attention to consumer concerns.
Such actions demonstrate that "improvements and investments in servicing technology, staff training, and monitoring can be essential to achieving an adequate compliance position," the CFPB wrote. To help mortgage servicers achieve compliance, the CFPB published an update to its Supervision and Examination Manual to provide additional guidance on what the CFPB will be looking for in future exams.
To read the CFPB's Supervisory Highlights report on mortgage servicers, click here.
To read the updated Supervision and Examination Manual, click here.
Why it matters
The CFPB's invocation of unfair, deceptive or abusive practices is still a relatively new phenomenon. Examining instances, like this one, where the CFPB does so (in a fee context), is always of interest to assist in guiding industry expectations for CFPB supervisory and enforcement action. The lesson from this report appears to be that technical compliance with the MSR is a necessary but not sufficient condition to avoid adverse examination findings.
The CFPB's continued emphasis on technology platform improvements, especially with regard to servicing transfers, should come as no surprise. But in this latest report, the CFPB was more specific about its expectations going forward: "A growing point of emphasis for Supervision in achieving needed improvements in servicer compliance will be to require servicers to submit specific and credible plans describing how changes in their information technology systems will offer assurance that they can systematically and effectively implement the changes made to resolve the issues identified by Supervision," according to the report.
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FSOC on Fintech Risks, Cybersecurity Vigilance
An annual report from the Financial Stability Oversight Council (FSOC) recently focused on the risks presented by the burgeoning fintech industry as well as the continuing "pressing concern" of cyber threats and vulnerabilities.
What happened
The 2016 Annual Report found the financial system to be in good shape generally, with members—including the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Director of the Consumer Financial Protection Bureau, the Chairman of the Securities and Exchange Commission, and the Chairperson of the Federal Deposit Insurance Corporation, among others—in agreement that "financial regulatory reforms and a strengthening of market discipline since the global financial crisis have made the U.S. financial system more resilient, as vulnerabilities remained moderate."
That being said, the Council noted that technological developments might pose threats to the current stability, particularly as many new products and services are not covered by regulation.
"New financial products, delivery mechanisms, and business practices, such as marketplace lending and distributed ledger systems, offer opportunities to lower transaction costs and improve the efficiency of financial intermediation," the FSOC wrote. "However, innovations may also embed risks, such as credit risk associated with the use of new and untested underwriting models. Financial regulators will need to continue to be vigilant in monitoring new and rapidly growing financial products and business practices, even if those products and practices are relatively nascent and may not constitute a current risk to financial stability."
For example, marketplace lending is an "emerging way to extend credit" using algorithmic underwriting that has not been tested during a business cycle, the Council wrote, "so there is a risk that marketplace loan investors may prove to be less willing than other types of creditors to fund new lending during times of stress."
In addition, financial regulators will need to keep an eye on "signs of erosion" in lending standards as the industry continues to grow. "In other markets, business models in which intermediaries receive fees for arranging new loans but do not retain an interest in the loans they originate have, at times, led to incentives for intermediaries to evaluate and monitor loans less rigorously," the FSOC cautioned. "Furthermore, given the rapid rise in the number of marketplace lenders who often compete with traditional lenders for the same borrowers, there is a risk that underwriting standards and loan administration standards of these lenders could deteriorate . . . which could spill over into other market segments."
As for distributed ledger systems, they also pose risks and uncertainties that "market participants and financial regulators will need to monitor," according to the report. "Market participants have limited experience working with distributed ledger systems, and it is possible that operational vulnerabilities associated with such systems may not become apparent until they are deployed at scale."
For example, Bitcoin trade confirmation delays have increased dramatically in recent months, the FSOC wrote, and trade failures have occurred "as the speed with which new Bitcoin transactions are submitted has exceeded the speed with which they can be added to the blockchain."
Financial regulators that have previously worked to regulate market activity will need to adapt to the changing market structure as distributed ledger systems reduce the importance of centralized intermediaries, the Council said, and coordination among regulators may be necessary to identify and address risks given that users of such systems span national boundaries and regulatory jurisdictions.
Another worry expressed by the Council: cyber threats and vulnerabilities "continue to be a pressing concern." Cybersecurity-related incidents create significant operational risk, the regulators said, and while investments in cybersecurity by the financial services sector in recent years have been critical to reducing vulnerabilities, continuing these efforts should remain a top priority.
The Council recommended information sharing, having baseline protections in place, and preparations for response to and recovery from cyber incidents.
To read the FSOC's 2016 Annual Report, click here.
Why it matters
The balance between facilitating innovation and integrating constructive regulation remains a high priority for government. The FSOC Annual Report recognized that innovation allows market participants to adapt to changing marketplace demands, exploit the benefits of new technology, and respond creatively to regulatory constraints. However, the regulators noted the flip side of that positive thinking. "Precisely because innovations are new and potentially disruptive, they merit special attention from financial regulators who must be vigilant to ensure that new products and practices do not blunt the effectiveness of existing regulations or pose unanticipated risks to markets or institutions," the report cautioned. While marketplace lending and distributed ledger systems currently play a relatively small role in financial markets, their potential for growth means members of the Council will be keeping a close eye on both. "Financial regulators should continue to monitor and evaluate the implications of how new products and practices affect regulated entities and financial markets and assess whether they could pose risks to financial stability."
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Justices Receive Another Petition on Surcharge Laws
Could the U.S. Supreme Court take up the issue of state surcharge laws? The plaintiffs challenging the Texas law banning surcharges on credit card purchases certainly hope so, having filed a certiorari petition in Rowell v. Pettijohn after their loss before the Fifth Circuit Court of Appeals.
What happened
A group of merchants filed suit arguing that the Texas surcharge law violates their free speech rights. While the law permits customers to be charged different prices depending on whether they pay with cash or use a credit card, merchants are prohibited from labeling the price difference as a "surcharge" for credit cards. Instead, merchants must describe the difference as a cash discount.
For example, "a merchant who charges two different prices for a widget depending on how the customer pays (for example, $100 for cash and $102 for credit) may say that the widget costs $102 and that there is a $2 discount for paying in cash," the merchants explained in their cert petition. "But if the merchant instead says that the widget costs $100 and there is a $2 surcharge for using credit to account for the swipe fee, the merchant has run afoul of the law."
Retailers ranging from a self-storage facility to a landscaping business told the court that the law is clearly a restriction on their free speech rights because any law regulating the ability of a merchant to truthfully convey price information runs headlong into the protections of the First Amendment. A federal district court and a panel of the Fifth Circuit disagreed, upholding the law as a limitation on conduct, not speech, and therefore constitutional.
"[T]he merchants simply object to their inability to characterize price differentials as a 'surcharge,' juxtaposed with a 'discount,' " a majority of the panel wrote, noting that the Texas law allows a merchant to "dual-price as it wishes," and achieve "the same ultimate economic result" whether expressed as a cash discount or credit card surcharge, concluding that the law "does not implicate the First Amendment."
Seeking review from the U.S. Supreme Court, the merchants filed a writ of certiorari, offering the Justices the following question to answer: "Do these state no-surcharge laws unconstitutionally restrict speech conveying price information (as the Eleventh Circuit has held), or do they regulate only economic conduct (as the Second and Fifth Circuits have held)?"
In their petition, the Texas merchants emphasized that the Fifth Circuit's decision broadened a circuit split and has left the industry with a lack of clarity. Ten states have passed so-called surcharge bans. Courts in California and Florida have struck down the laws, with the Eleventh Circuit affirming the Florida decision, finding the state's law an unconstitutional restriction on speech.
However, other courts have reached the opposite conclusion. In addition to the Fifth Circuit decision, the Second Circuit affirmed a New York federal court finding that its state surcharge ban was valid.
The net result: "a state of constitutional limbo," the merchants told the Supreme Court. "Thus because of the conflict, New York and Texas merchants—unlike those in Florida and California, and the 40 states without a no-surcharge law—cannot reap the benefit of the historic national antitrust settlement protecting merchants' rights to truthfully inform customers about the cost of credit. And given the size and importance of the economies of New York and Texas, and the need for uniform pricing schemes, the reality is that national retailers are unlikely to use the surcharge label at all, even where it is permissible, as long as the split endures."
Further, the issue is important, the cert petition added. Given the need for national uniformity in the retail economy, such uncertainty "is intolerable" with "enormous stakes for our economy." U.S. merchants pay some of the highest swipe fees in the world, they wrote, and allowing them "to truthfully inform consumers of the cost of credit will also reduce the substantial 'regressive transfer of income from low-income to high-income consumers.' "
To read the writ of certiorari filed by the merchants in Rowell v. Pettijohn, click here.
Why it matters
What are the odds of the Court taking the case? With a smaller roster of Justices, the Court has decreased the already small number of cases on its docket. But the clear circuit split on the issue—with opposite conclusions from the Second, Fifth, and Eleventh Circuits and a case pending in the Ninth Circuit on California's law—and the free speech questions could push the Court to make space to consider the issue. The Texas merchants suggested that the Court grant either their petition or that of the merchants in the New York case, who similarly sought review from the Justices after their loss in the Second Circuit.
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Eighth Circuit Refuses to Open Golden Parachute for Bank Exec
A new decision from the Eighth Circuit Court of Appeals reaffirms the challenge presented by the Federal Deposit Insurance Corporation (FDIC) "golden parachute" prohibitions for boards of directors of banks in "troubled condition" when considering payments to terminated executives who may be viewed by the FDIC to have been substantially responsible for the bank's regulatory problems.
What happened
Jerry Von Rohr was an executive at Reliance Bank, serving as chairman, president, and chief executive officer. In June 2011, the bank notified Von Rohr that it would not renew his employment agreement when it terminated that September. Von Rohr countered that his contract did not expire for another year and claimed he was entitled to compensation for that year.
The bank turned to the FDIC. The regulator advised Reliance that Von Rohr was seeking a "golden parachute payment," which the bank could not make without prior FDIC approval. The bank declined to pay.
Von Rohr then filed suit against the bank and the FDIC. He alleged he was terminated in breach of his contract and requested $405,000 in damages. The Missouri federal court stayed the action while Von Rohr applied to the FDIC for a final agency determination as to whether the compensation he sought was a prohibited golden parachute under the Federal Deposit Insurance Act and its implementing regulations.
The Act defines "golden parachute payment" to include "any payment (or any agreement to make any payment) in the nature of compensation by any insured depository institution … for the benefit of any institution-affiliated party" (IAP) that is also "contingent on the termination" of the IAP and received when the institution is in "troubled condition." Once the FDIC determines a payment constitutes a golden parachute, a bank cannot make the payment without the agency's approval. However, the agency does have the authority to grant an exception under limited circumstances.
In 2013, the FDIC determined Von Rohr was an IAP seeking a golden parachute from a bank in troubled condition. In its opinion letter, the FDIC did not address whether to approve an exception because Von Rohr did "not meet even the basic application requirements prescribed."
The federal court upheld the FDIC's determination and entered summary judgment for the bank. Von Rohr appealed but a panel of the Eighth Circuit affirmed.
The agency's designation of the payment as a golden parachute was consistent with its previous positions, the court said, rejecting Von Rohr's reliance on a footnote in an FDIC guidance document stating that the restrictions "do not apply to the payment of salaries or bonuses." The agency's letter to Von Rohr barred post-termination payments to him "for services he did not render," the panel said, but nothing in the FDIC's opinion prevented him from receiving salary and bonuses owed to him for work he had performed.
As for other case law, the panel distinguished it as a ruling on statutory claims, distinct from the contract claims raised by Von Rohr. Calling the distinction "sensible," the court explained that when a terminated bank exec sues for breach of contract, the basis of the claim is an agreement, which the FDIC is authorized to restrict to prevent golden parachute payments. Alternatively, the FDIC does not have the same authority when the basis of the claim is a statute (such as a discrimination claim under Title VII), because the agency is not authorized to restrict bank employees' statutory protections.
Von Rohr also challenged the FDIC determination that he sought payment "contingent on" his termination. He would have received the same amount if he had worked for the one year left on his contract instead of being terminated, he told the court. But even if the former executive was correct, it did not mean the agency determination was arbitrary, the court said.
"One could reasonably characterize the payment obligation as contingent on either Von Rohr's termination or his continued employment," the panel wrote. "If a third event occurred, such as Von Rohr choosing to quit, the obligation would not arise. Von Rohr alleged the bank came to owe the payment because of his termination, not because of services he rendered. The agency therefore determined the payment was contingent on termination. We cannot find that this determination was arbitrary or capricious."
Von Rohr's alternative argument, that the FDIC should regulate only those arrangements that specifically contemplate compensation solely in the event of termination, "would create a giant loophole," the court said. "Banks and executives could structure their agreements to allow for post-termination payments that would function as golden parachutes but avoid the magic words triggering the FDIC's regulations."
Either Von Rohr or the bank could have attempted to render the golden parachute payment possible by applying for an exception, the court pointed out, but Von Rohr failed to meet the basic application requirements for an exception, and as a result, "the FDIC never decided whether to approve an exception.… [H]aving failed to initiate the process with the agency, Von Rohr cannot now ask the Court to examine whether he should receive an exception."
Further, Reliance maintained it did not apply for an exception because it could not meet the requirement under the regulations that the bank certify "it does not possess and is not aware of any information, evidence, documents or other materials which would indicate that there is a reasonable basis to believe … [t]he IAP is substantially responsible for … the troubled condition." In support, the bank referenced an October 2011 letter stating that among the Board of Directors' reasons for Von Rohr's termination was "the opinion that your leadership was significantly responsible for the Bank's current financial conditions."
While Von Rohr objected to the letter as unsupported hearsay, the panel said it was not admitted to prove the truth of the matter. The relevant issue was "not whether he was in fact responsible but whether the bank can certify it does not possess information giving it a reasonable basis to believe Von Rohr was substantially responsible," the court wrote. "Von Rohr failed to create a genuine dispute on this issue," and "he did not submit any evidence to rebut the bank's evidence showing it could not make the certification."
The panel affirmed summary judgment in the bank's favor.
To read the opinion in Von Rohr v. Reliance Bank, click here.
Why it matters
The decision shows there are bumps and minefields in the road for bank boards and executives facing the issue of whether a payment constitutes a "golden parachute" subject to FDIC approval. The panel affirmed the agency's determination as consistent with its prior objections to post-termination payments that were not for services rendered and found the distinction between contract claims and statutory claims to be reasonable after interpretation of the law. Boards of banks in troubled condition act at their own peril if they support what may be prohibited "golden parachute" payments to departed executives whose leadership they may have supported for years. Additionally, neither termination of troubled condition status nor the acquisition of a troubled bank by a healthy bank changes the harsh impact of the golden parachute rules. Once prohibited, golden parachute payments are forever prohibited.
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Yet Another Bank Reaches Multimillion-Dollar TCPA Deal
Following the lead of other banks facing putative class actions under the Telephone Consumer Protection Act (TCPA), JPMorgan Chase Bank agreed to pay recipients of unwanted phone calls $3.75 million.
What happened
The TCPA makes it unlawful to use an automatic telephone dialing system (ATDS) to make a call to a cellular telephone number without the prior express consent of the called party. A pair of plaintiffs filed suit in Florida federal court in October 2015 asserting that they received calls from the bank without having provided consent.
According to Michelle James and Nichole Seniuk, the bank autodialed cell phone numbers with calls intended for its own customers regarding Chase deposit accounts. However, the bank ran afoul of the statute because the calls reached parties different from those who Chase was trying to call because the cell phone numbers had been reassigned to new individuals.
For example, Seniuk told the court she received about 60 calls from Chase between March and April 2015 after purchasing a new cell phone earlier in the year. Even after she explained to the bank that it had reached a wrong number and requested that the calls stop, Chase continued to call, she alleged.
The plaintiffs noted that Chase raised a host of defenses to the lawsuit, including a one-call safe harbor for calls made to reassigned cellular telephone numbers established by the Federal Communications Commission after the settlement was reached. The bank also had a strong argument that at least some of the claims would be dismissed under the "emergency purposes" exemption of the TCPA, as discovery indicated that some of the calls were made for the purpose of notifying consumers of potential fraudulent activity on their bank accounts.
But Chase elected to reach a deal with the plaintiffs while reiterating that it acknowledged no liability under the TCPA. The settlement "is fair, reasonable, and adequate, and in the best interests of the class, particularly in light of the substantial risks and uncertainties of protracted litigation," the plaintiffs argued in their unopposed motion for preliminary approval of the deal.
The agreement requires Chase to pay $3.75 million into a settlement fund. Once the fund makes payments for administration costs, class representative awards of $5,000 each for James and Seniuk, attorneys' fees of no more than 30 percent of the fund, and $15,000 in expenses, the remainder will be divided on a pro rata basis between class members.
If each of the estimated 675,000 class members—defined as all people who received a cell phone call from Chase over the prior four years placed using an ATDS that was directed to a phone number associated with a deposit account but made to a different party than the person associated with the bank's records—submits claims, payment would be about $5.55. Adjusted for the typical rate of claims filed (approximately 4 to 6 percent in TCPA cases), class members will likely receive in the range of $45 to $75, the plaintiffs said.
The settlement provides "substantial, immediate cash relief to the class," the motion argued, and class members will receive an amount that compares favorably to TCPA settlements generally.
To read the motion in support of preliminary approval of the settlement in James v. JPMorgan Chase Bank, click here.
Why it matters
Banks have been some of the hardest-hit defendants in the rampant TCPA class action litigation that has swept the country over the last few years. Two of the three costliest settlements involved bank defendants, including HSBC paying $40 million in 2015 to end a case against it in Illinois federal court. Notably, this case evidences the dangers presented by calling reassigned numbers, an issue that was addressed far from favorably for defendants in the FCC's July 2015 ruling.
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