Wake Forest Law Review

By Amanda Whorton

On December 4, 2015, the Fourth Circuit issued a published opinion in the civil case Berry v. LexisNexis Risk and Information Analytics Group. The court affirmed the district court’s approval of the Federal Rules of Civil Procedure (“FRCP”) 23(b)(2) settlement and found that the release of the statutory damages claims as part of the settlement was proper.

The Class Action Lawsuit

LexisNexis Risk and Information Analytics Group (“Lexis”) is a data broker that sells an identity report to debt collectors that is used to locate people and assets, authenticate identities, and verify credentials. This report is called Accurint for Collections. The Fair Credit Reporting Act (“FCRA”) regulates the sale of “consumer reports” that contains consumer information dealing with credit eligibility. Based on the theory that Accurint is not a “consumer report” within the FCRA, Lexis sold the report without complying with the FCRA provisions. The underlying lawsuit in this case was the third class action lawsuit brought by counsel against Lexis alleging that Lexis violated the FCRA by selling Accurint without abiding by the FCRA. Lexis argued that Accurint does not constitute a “consumer report.”

Counsel also argued that Lexis “willfully” violated the FCRA. If a court were to find that Lexis acted “willfully,” they would face liability not only for actual damages, but for statutory damages as well. However “willfulness” is hard to prove—unless Lexis was “objectively unreasonable” in concluding that Accurint reports were not “consumer reports” under the FCRA, they would not face liability for statutory damages.

After extensive discovery and litigation, the parties finally reached a settlement agreement. There were two classes that the settlement agreement called for: a class under 23(b)(3), not at issue in the appeal, and one under 23(b)(2).

FRCP 23(b)(2)

If requirements of 23(a) are met, the proposed class must fit into one of the three types of classes in 23(b). At issue was 23(b)(2), which allows certification as a class where “the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.” These classes are mandatory and do not provide “opt-out rights.” The 23(b)(2) class in this case covered all individuals in the U.S. whom the Accurint database contained information about during a certain time frame. While the individuals in this class retain the right to individually seek actual damages under the FCRA, they waive any statutory damages claim, as well as punitive damages.

The Relief Sought Applies Uniformly to All Class Members

The Fourth Circuit agreed with the district court’s reasoning that certification of a settlement class under 23(b)(2) was proper because the relief sought was not monetary, but rather injunctive and would apply to every class member. Each class member retained the individual right to seek actual damages, but rather only waived the non-individualized statutory damages, which is uniform across all class members. If Lexis was liable for a willful violation and therefore subject to statutory damages, each class member would be entitled to the same amount of damages. Furthermore, the statutory damages claims released by the settlement agreement were incidental to the injunctive relief.

The district court also reasoned that the recovery of statutory damages for a willful violation was “speculative at best,” making the waiver of statutory damages claims fair and adequate.

The Fourth Circuit Affirmed

The Fourth Circuit affirmed the district court’s approval of the FRCP 23(b)(2) settlement in finding no error in the release of the statutory damages claims.

 By Whitney Pakalka

On January 11, 2016, the Fourth Circuit issued a published opinion in the civil case of Askew v. Hampton Roads Finance Company. The District Court for the District of Maryland granted Hampton Roads Finance Company (“HRFC”) summary judgment on all of Dante Askew’s borrower-creditor claims. The Fourth Circuit affirmed the grant of summary judgment as to Askew’s claims that HRFC violated the Maryland Credit Grantor Closed End Credit Provisions (“CLEC”) and was in breach of contract for failing to properly notify him that the interest rate exceeded the statutory maximum within sixty days of when it “should have” known of the error. However, the Court found that genuine issues of material fact existed as to Askew’s claim that HRFC violated the Maryland Consumer Debt Collection Act (“MCDCA”), and reversed and remanded the district court’s grant of summary judgment as to that claim.

The Used Car Contract and Dispute Between Askew and HRFC

 In 2008, Askew entered into a contract with a car dealership for financing to purchase a used car. The dealership assigned the contract to HRFC, which discovered in August 2010 that the contract’s interest rate of 26.99% exceeded CLEC’s maximum allowable rate of 24%. The next month, HRFC sent Askew a letter informing him that the interest rate was “not correct” and credited his account $845.40. However, the letter did not specify the new interest rate, which was set at 23.99%.

After receiving the letter, Askew fell behind on his payments and HRFC took steps to collect on the account. Over a period of seventeen months, HRFC contacted Askew five times by letter or telephone to seek repayment. Askew alleged that HRFC made false and threatening statements, including that it had reported him to state authorities for fraud for failing to insure his car and attempting to conceal it from repossession agents, that a replevin warrant had been prepared, and that his complaint in this case had been dismissed.

Askew filed the present suit in state court, alleging violations of CLEC, the MCDCA, and breach of contract based on the alleged failure to comply with CLEC. After HRFC removed the case to federal court, the district court granted HRFC’s motion for summary judgment on all claims.

Askew’s Claim that HRFC Violated CLEC and Accordingly Was in Breach of Contract

Under Maryland’s CLEC, credit grantors can elect to make a loan governed by CLEC that sets a maximum interest rate of 24%, which “must be expressed in the agreement as a simple interest rate.” Md. Code § 12-1013.1. If a creditor violates this provision, it may generally only collect the principal of the loan, but not interest, costs, fees, or other charges. Md. Code § 12-1018(a)(2). However, CLEC, also has two safe harbor provisions. One allows creditors to avoid liability “for any failure to comply with CLEC” through self correction “if, within 60 days after discovering an error . . . the credit grantor notifies the borrower of the error and makes whatever adjustments are necessary to correct the error.” Md. Code § 12-1020. The second safe harbor offers protection from liability where a creditor “unintentionally and in good faith” failed to comply with CLEC. Md. Code § 12-1018(a)(3).

Askew argued that HRFC violated CLEC by failing to expressly disclose in the contract an interest rate below the statutory maximum. The district court rejected the argument, finding that CLEC’s disclosure requirement only mandated that the interest rate be expressed as a simple interest rate. The Fourth Circuit agreed, stating that Askew’s interpretation would create a “meaningless technical requirement while doing little to protect consumers.”

Askew further argued that the “discovery rule” usually applicable in the statute of limitations context should apply to CLEC’s 12-1020 safe harbor, which would mean that HRFC “should have” known of the error when it took assignment of the contract because parties to a contract are presumed to have read and understood its terms.   The meaning of “discovery” in § 12-1020 was an issue of first impression, and the Fourth Circuit determined that “discovering an error” means when the creditor actually uncovers the mistake that violated CLEC. The Court reasoned that this reading better comports with CLEC’s text and purpose, as well as public policy. The Fourth Circuit reasoned that Askew’s reading of the safe harbor would give creditors little incentive to self-correct their mistakes and would work “to exacerbate one of the harms CLEC seeks to avoid—the charging of usurious interest.” Because HRFC discovered its error and attempted to cure the mistake within sixty days of that discovery, the Fourth Circuit affirmed the district court’s finding that HRFC is not liable under CLEC.

The Fourth Circuit also rejected Askew’s contention that because the contract incorporated CLEC’s provisions, HRFC is liable for breach of contract for any deviation, regardless of whether HRFC properly cured the violation. The Court found that the contract incorporated all of CLEC’s provisions, safe harbors included, and that to find differently would lead to an anomalous result by nullifying the safe harbor provisions.

Askew’s MCDCA Claim that HRFC Attempted to Collect Debt Through Improper Threats and Harrassment

 MCDCA § 14-202(6) provides that a debt collector may not “[c]ommunicate with the debtor or a person related to him . . . in any other manner as reasonably can be expected to abuse or harass the debtor.” Askew contended that HRFC violated the MCDCA by making false representations about legal action it had not actually taken by falsely suggesting it had obtained a replevin warrant, reported a notice of complaint to the Maryland Motor Vehicle Administration fraud division for failure to insure his vehicle and hiding the car from the lien holder, and that the present case had been dismissed when it was still pending.

The Court made a distinction between “truthful or future threats of appropriate legal action,” which would not violate MCDCA, and “false representations that legal action has already been taken.” Based on Askew’s allegations, the Fourth Circuit concluded that a reasonable jury could find that HRFC had engaged in conduct reasonably expected to abuse or harass. Accordingly, The Fourth Circuit reversed and remanded the district court’s grant of summary judgment on Askew’s MCDCA claims.

The Fourth Circuit Affirmed in Part and Reversed and Remanded in Part 

Because the Fourth Circuit found that the correct meaning of “discovering an error” in the context of Maryland’s CLEC means when the credit grantor in fact realizes a mistake has been made, the Court affirmed the district court’s grant of summary judgment as to Askew’s claims that HRFC violated CLEC. Similarly, the Court rejected Askew’s breach of contract claim, because to subject a credit grantor to liability for violating CLEC when its conduct falls within a safe harbor of CLEC would be anomalous. However, the Fourth Circuit found that a reasonable jury could find that HRFC engaged in abusive and harassing conduct in violation of MCDCA, and reversed and remanded for further proceedings on that count alone.

 

 

By Amanda Whorton

On January 15, 2016, the Fourth Circuit issued a published opinion in the civil case McFarland v. Wells Fargo Bank. The court agreed with the district court that, under West Virginia law, the amount of a mortgage loan alone cannot show substantive unconscionability. However, the court disagreed with the district court in that a claim for “unconscionable inducement” is proper even if the substantive terms of a contract are not unfair.

The Mortgage Agreement

Philip McFarland (“McFarland”) bought his house in West Virginia for roughly $110,000 in 2004. In June 2006, two short years later, McFarland, with an interest to consolidate his $40,000 in student and vehicle debt with his mortgage, sought to refinance. Greentree Mortgage Corporation (“Greentree”) informed McFarland that the market value of his home had increased to $202,000. McFarland entered into secured loan agreements with Greentree and Wells Fargo Bank (“Wells Fargo”).

For a year, McFarland paid his Wells Fargo loan without issue. However, he began to fall behind on his mortgage payments in 2007. In 2010, Wells Fargo and McFarland entered into a loan modification, but even under this arrangement, McFarland faced an unaffordable mortgage. Wells Fargo initiated foreclosure on McFarland’s home in 2012.

With the looming foreclosure, McFarland brought suit against Greentree and Wells Fargo, along with U.S. Bank National Association, the trustee of the Wells Fargo loan. McFarland settled with Greentree, leaving Wells Fargo and U.S. Bank National Association the defendants in the present suit (“the Banks”).

McFarland alleged that Wells Fargo granting him a loan that was far in excess of his home’s actual value constituted a “substantive unconscionability” contract under the West Virginia Consumer Credit and Protection Act (“WVCCPA”). McFarland stated that the excess loan made his mortgage unaffordable and put his home at risk. McFarland alleged alternatively that even if the loan itself was not unconscionable, that it was “unconscionably induced,” focusing on the bargaining process and alleged misrepresentations by Wells Fargo.

The District Court Granted Defendants’ Motion for Summary Judgment

The Banks filed a motion for summary judgment, which the district court granted because it did not find any evidence of substantive unconscionability. The district court did not discuss the “unconscionably induced” claim. It reasoned that there was no need to consider the bargaining process because West Virginia law requires a finding of some substantive unconscionability.

West Virginia’s Unconscionability Doctrine

West Virginia’s traditional unconscionability doctrine requires both a showing of substantive unconscionability (unfairness in the contract and the loan terms themselves) and procedural unconscionability (unfairness in the bargaining process). McFarland stated that the loan was unconscionable in two ways: (1) that the loan exceeded the value of the home and (2) that it provided no “net tangible benefit” to McFarland.

A contract is substantively unconscionable only if it is “one-sided” with an “overly harsh effect on the disadvantaged party.” The Fourth Circuit agreed with the district court that a mortgage agreement is not substantively unconscionable only because it provides a borrower with more money than the home is worth. The bank, not the borrower, is typically the one disadvantaged by an under-collateralized loan. McFarland argued that it is this widespread practice of overvaluing homes and excess lending that contributed to the foreclosure crisis, of which his loan is an example. It is the harm to borrowers that makes the loan unconscionable. The Fourth Circuit agreed that consumers may be harmed when they take on more mortgage debt than their homes are worth, but noted that a harmful practice alone did not make it substantively unconscionable under West Virginia law. An under-collateralized loan will benefit the borrower at least in some ways, even if it ultimately causes harm to the borrower. Excess loans carry risk for all parties involved, the Fourth Circuit reasoned.

The Fourth Circuit further determined that the “net tangible benefit” theory McFarland raised is irrelevant to the substantive unconscionability inquiry because that test appears in West Virginia’s anti-predatory lending statute and McFarland did not allege that Wells Fargo violated that statute.

However, the Fourth Circuit, in disagreement with the district court, found that the WVCCPA plainly authorizes a stand-alone unconscionable inducement claim. This claim does not require substantive unconscionability, but may be based only on procedural unconscionability and the bargaining process. The WVCCPA authorizes a court to not enforce an agreement if that agreement was “unconscionable at the time it was made, or [that was] induced by unconscionable conduct.” The Fourth Circuit determined that the legislature including “or” in that context meant that there were two stand-alone claims for unconscionability under the WVCCPA: one for traditional unconscionability, which requires substantive and procedural unconscionability and one for unconscionable inducement, which only looks to conduct that causes a party to enter into a loan.

Fourth Circuit’s Holding

The Fourth Circuit affirmed the district court in that West Virginia law requires a showing of substantive unconscionability in a traditional unconscionability claim. However, the Fourth Circuit reversed the district court’s dismissal of McFarland’s claim of unconscionable inducement on the grounds that substantive unconscionability is necessary under the WVCCPA. The Fourth Circuit remanded to the district court to consider whether McFarland’s loan agreement was unconscionably induced and whether this allows him to proceed in his suit against the Banks.

By Karon Fowler

Last week in FTC v. Kristy Ross, the Fourth Circuit ruled on a Federal Trade Commission (“FTC”) suit against Kristy Ross, a leader at Innovative Marketing, Inc. (“IMI”), for running a deceptive internet “scareware” scheme in violation of § 5(a) of the Federal Trade Commission Act (“FTCA”). The “scareware” scheme relies on advertisements that tell consumers that a scan of their computers had been performed and a variety of dangerous files, such as viruses and spyware, had been detected. However, no scans were actually conducted and instead simply “trick[ed] consumers into purchasing computer security software.”

The district court entered summary judgment in favor of the Commission on the issue of whether the advertising was deceptive, but it set a separate trial to determine whether Ross could be held individually liable under the FTCA as a “control person” at the company and to what extent she had authority over and knowledge of IMI’s deceptive acts. The district court concluded that Ross had actual knowledge of the deceptive marketing scheme, or was “at the very least recklessly indifferent or intentionally avoided the truth” about the scheme. It entered judgment against Ross in the amount of $163,167,539.95, and it enjoined her from engaging in similar deceptive marketing practices.

Ross appealed the district court judgment on four bases: (1) the court’s authority to award consumer redress; (2) the legal standard the court applied in finding individual liability under the Federal Trade Commission Act; (3) the court’s prejudicial evidentiary rulings; and finally, (4) the soundness of the district court’s factual findings.

The court’s authority to award consumer redress

Although the FTCA’s test does not expressly authorize the award of consumer redress, the Supreme Court has long held that when Congress invokes the federal district court’s equitable jurisdiction, it provides the court with the power to decide all relevant matters in dispute and to award complete relief. This is true even where the decree includes that which might be conferred by a court of law. The court explains that Supreme Court precedent sets forth the presumption that Congress, by statutorily authorizing the exercise of the district court’s injunctive power, it also acted with awareness of the historic power of equity to provide complete relief. This complete relief may necessarily include consumer redress. Thus, absent some countervailing indication sufficient to rebut the presumption, the court had sufficient statutory power to award “complete relief” under the FTCA, including monetary consumer redress—a form of equitable relief.

The court explained that although Ross made some strong arguments about the structure, history, and purpose of the FTCA, her arguments have been rejected by every other federal appellate court to have considered the issue. Those cases can be found here: F.T.C. v. Bronson Partners LLC, 654 F.3d 359, 365-67 (2d Cir. 2011);F.T.C. v. Amy Travel Service, Inc., 875 F.2d 564, 571 (7th Cir. 1989)F.T.C. v. Security Rare Coin & Buillion Corp., 931 F.2d 1312, 1314-15 (8th Cir. 1991)F.T.C. v. Pantron I Corp., 33 F.3d 1088, 1101-02 (9th Cir. 1994)F.T.C. v. Gem Merchandising Corp., 87 F.3d 466, 468-70 (11th Cir. 1996).

The legal standard applied in finding individual liability under the FTCA

Below, the district court rules that individual liability can be found where the individual (1) participated directly in the deceptive practices or had authority to control them, and (2) had knowledge of the deceptive conduct, which could be satisfied by showing evidence of actual knowledge, reckless indifference to the truth, or an awareness of a high probability of fraud combined with intentionally avoiding the truth (i.e., willful blindness).

Ross attacked this standard and instead asked the court to utilize a different standard found in securities fraud cases that requires an individual to have (1) “authority to control the specific practices alleged to be deceptive,” coupled with a (2) “failure to act within such control authority while aware of apparent fraud.” See, e.g.,Dellastatious v. Williams, 242 F.3d 191, 194 (4th Cir. 2001). The court rejected this proposal because it would make most FTC charges “futile” against individuals responsible for illegal practices by way of their control over “the lifeless entity of a corporation.” In other words, the standard should reflect the fact that individuals are responsible for implementing these deceptive practices and a requirement of actual awareness would thwart the goal of personal accountability.

The Fourth Circuit held that an individual may be liable under the Federal Trade Commission Act (FTCA) if he or she (1) participated directly in the deceptive practicesor had authority to control those practices, and (2) had or should have had knowledge of the deceptive practices. The second prong may be satisfied by showing that the individual had actual knowledge of the deceptive conduct, was recklessly indifferent to its deceptiveness, or had an awareness of a high probability of deceptiveness and intentionally avoided learning the truth.

Moreover, a ruling in Ross’ favor would create a serious circuit split—a result the Fourth Circuit would rather avoid. Every federal appellate court to have heard the issue has adopted the same two-prong test. Those cases can be found here: F.T.C. v. Direct Marketing Concepts, Inc., 624 F.3d 1, 12 (1st Cir. 2010)Amy Travel Service, 875 F.2d at 573-74F.T.C. v. Publishing Clearing House, Inc., 104 F.3d 1168, 1170 (9th Cir. 1997)F.T.C. v. Freecom Communications, Inc., 401 F.3d 1192, 1207 (10th Cir. 2005)Gem Merchandising Corp., 87 F.3d at 470.

The three evidentiary challenges

(1) Ross argued that the district court improperly precluded her expert from testifying about how “the advertisements linkable to Ms. Ross’s responsibilities were nondeceptive.” Yet, the district court had already decided the deceptiveness issue in favor of the Commission at the summary judgment stage. The only at issue at trial was whether Ross had the required degree of control to hold her individually liable for the company’s practices. Because the individual liability standard does not require a specific link from Ross to particular deceptive advertisements and instead looks at whether she had authority to control the corporate entity’s practices, Ellis’ testimony was immaterial, and thus irrelevant, to the issue reserved for trial. FRE 401.

(2) Ross contended that the district court erred in admitting and relying on a 2004 to 2006 profit and loss statement to calculate the amount of consumer redress. The statement was admitted under FRE 807 (the residual exception to the rule against hearsay), the Fourth Circuit explained that it may affirm the district court on the basis of any independent ground supported by the record. The court thus concluded that the profit and loss statement was admissible under FRE 801(d)(2)(B) as an adoptive admission by Ross. Ross expressly adopted the statement by agreeing with an original co-defendant’s affidavit that provided the statement as an attachment.

(3) Ross finally argued that there was insufficient evidence establishing a predicate for an email between individuals within the company to be admitted for the existence of the conspiracy under FRE 801(d)(2)(E). Ross contended that the admission of the email constituted “bootstrapping” of the existence of the conspiracy to the document’s admissibility. The court disagreed. Based on Fourth Circuit precedent, the proponent for admission of a co-conspirator’s out-of-court statement must demonstrate the existence of the conspiracy by evidence extrinsic to the hearsay exception. Here, however, that requirement was satisfied because Ross produced an affidavit during the corporate litigation in which she stated she was a Vice President and co-founder of IMI, choosing to adopt the affidavits of her co-defendants attesting to the same facts. This evidence, along with the email mentioned in the second evidence issue, provided a sufficient basis upon which the district court could conclude the existence of a conspiracy.

The “authority to control” issue

Ross lastly argued that the district court clearly erred in finding she had “control” of the company, participated in any deceptive acts, and had knowledge of the deceptive advertisements. Because it was a bench trial below, the Fourth Circuit reviewed the court’s factual findings for clear error and its legal conclusions de novo. In an affidavit in the corporate litigation, Ross swore she was a high-level business official with certain duties that provided the district court with sufficient evidence of her authority and control over the nature and quality of the advertisements. Moreover, Ross’ statements to other employees, as memorialized in chat logs between her and other employees, were evidence that she served in a managerial role, directing the design of particular advertisements. Her extensive involvement indicated in the record provided fertile ground for the district court to reasonably infer that Ross was actively and directly participating in the multiple states of the deceptive advertising scheme. As to the “actual knowledge” or “reckless indifferen[ce]” finding, the court explained that Ross acted in a way to suggest she may not have personally believed the advertisements were deceptive, Ross was clearly on notice of the various complaints received by IMI, including that they would cause consumers to automatically download their products.

The Fourth Circuit thus affirmed the district court on all issues.