WHAT’S INSIDE Litigation News and Analysis • Legislation • Regulation • Expert Commentary BANK & LENDER LIABILITY Westlaw Journal 41561202 VOLUME 20, ISSUE 8 / SEPTEMBER 8, 2014 ELECTRONIC FUND TRANSFER ACT 6 Debt collection firm failed to obtain written permission for account debits, suit says Vanover v. Progressive Fin. Servs. (C.D. Cal.) FAIR CREDIT REPORTING ACT 7 Class certified in suit claiming Trans Union wrongly flagged consumers as criminals Ramirez v. Trans Union (N.D. Cal.) FAIR DEBT COLLECTION PRACTICES ACT 8 Class action targets debt collector’s use of prosecutor letterhead Cavnar v. Bounceback Inc. (E.D. Wash.) CRIMINAL LAW 9 USDA claims Ohio winemaker sold collateral stock, lied to officials United States v. Kraus (N.D. Ohio) CLAIMS PAYMENT 10 Improperly cashed claims checks don’t relieve insurer’s duty to pay bank ViewPoint Bank v. Allied Prop. & Cas. Ins. Co. (Tex. App.) SECURITIES FRAUD 11 Fraud suit against bank remanded based on Halliburton ruling Local 703, I.B. of T. Grocery & Food Employees Welfare Fund v. Regions Fin. Corp. (11th Cir.) SEE PAGE 3 CONTINUED ON PAGE 14 COMMENTARY Foreclosure issues in the wake of the subprime/financial crisis Philip V. Martino and Valerie P. Vidal of Quarles & Brady discuss the issues lenders should keep in mind when pursuing mortgage foreclosures in the post-financial crisis environment. APPROPRIATION OF FUNDS Children of 95-year-old man claim bank lost their inheritance A Puerto Rican bank wrongfully appropriated three siblings’ inheritance by coercing their 95-year-old father into transferring their dead mother’s money from “stable” mutual funds into risky bonds, a federal lawsuit claims. Veve et al. v. OFG Bancorp, No. 14-cv-01601, complaint filed (D.P.R. Aug. 4, 2014). In a complaint filed Aug. 4 in the U.S. District Court for the District of Puerto Rico, Denise and Robert B. Veve accuse OFG Bancorp of improperly transferring their mother’s accounts to their father, Robert, despite her will’s instructions and without their consent. The third sibling, Mary Ann, is not a plaintiff in the case.
6 Debt collection firm failed to obtain written permission for account debits, suit says
Vanover v. Progressive Fin. Servs. (C.D. Cal.)
FAIR CREDIT REPORTING ACT
7 Class certified in suit claiming Trans Union wrongly flagged consumers as criminals
Ramirez v. Trans Union (N.D. Cal.)
FAIR DEBT COLLECTION PRACTICES ACT
8 Class action targets debt collector’s use of prosecutor letterhead
Cavnar v. Bounceback Inc. (E.D. Wash.)
CRIMINAL LAW
9 USDA claims Ohio winemaker sold collateral stock, lied to officials
United States v. Kraus (N.D. Ohio)
CLAIMS PAYMENT
10 Improperly cashed claims checks don’t relieve insurer’s duty to pay bank
ViewPoint Bank v. Allied Prop. & Cas. Ins. Co. (Tex. App.)
SECURITIES FRAUD
11 Fraud suit against bank remanded based on Halliburton ruling
Local 703, I.B. of T. Grocery & Food Employees Welfare Fund v. Regions Fin. Corp. (11th Cir.)
SEE PAGE 3
CONTINUED ON PAGE 14
COMMENTARY
Foreclosure issues in the wake of the subprime/financial crisisPhilip V. Martino and Valerie P. Vidal of Quarles & Brady discuss the issues lenders should keep in mind when pursuing mortgage foreclosures in the post-financial crisis environment.
APPROPRIATION OF FUNDS
Children of 95-year-old man claim bank lost their inheritanceA Puerto Rican bank wrongfully appropriated three siblings’ inheritance by coercing their 95-year-old father into transferring their dead mother’s money from “stable” mutual funds into risky bonds, a federal lawsuit claims.Veve et al. v. OFG Bancorp, No. 14-cv-01601, complaint filed (D.P.R. Aug. 4, 2014).
In a complaint filed Aug. 4 in the U.S. District Court for the District of Puerto Rico, Denise and Robert B. Veve accuse OFG Bancorp of improperly
transferring their mother’s accounts to their father, Robert, despite her will’s instructions and without their consent. The third sibling, Mary Ann, is not a plaintiff in the case.
Westlaw Journal Bank & Lender Liability (ISSN 2155-0700) is published biweekly by Thomson Reuters.
Thomson Reuters175 Strafford Avenue, Suite 140Wayne, PA 19087877-595-0449Fax: 800-220-1640www.westlaw.comCustomer service: 800-328-4880
For more information, or to subscribe,please call 800-328-9352 or visitwest.thomson.com.
For the latest news from Westlaw Journals, visit our blog at http://blog.thomsonreuters.com/westlawjournals.
Reproduction AuthorizationAuthorization to photocopy items for internal or personal use, or the internal or personal use by specific clients, is granted by Thomson Reuters for libraries or other users regis-tered with the Copyright Clearance Center (CCC) for a fee to be paid directly to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923; 978-750-8400; www.copyright.com.
How to Find Documents on WestlawThe Westlaw number of any opinion or trial filing is listed at the bottom of each article available. The numbers are configured like this: 2014 WL 000000. Sign in to Westlaw and on the “Welcome to Westlaw” page, type the Westlaw number into the box at the top left that says “Find this document by citation” and click on “Go.”
TABLE OF CONTENTS
Appropriation of Funds: Veve v. OFG BancorpChildren of 95-year-old man claim bank lost their inheritance (D.P.R.) ..........................................................1
Commentary: By Philip V. Martino, Esq., and Valerie P. Vidal, Esq., Quarles & BradyForeclosure issues in the wake of the subprime/financial crisis ...................................................................... 3
Electronic Fund Transfer Act: Vanover v. Progressive Fin. Servs.Debt collection firm failed to obtain written permission for account debits, suit says (C.D. Cal.) .................6
Fair Credit Reporting Act: Ramirez v. Trans UnionClass certified in suit claiming Trans Union wrongly flagged consumers as criminals (N.D. Cal.) ................ 7
Fair Debt Collection Practices Act: Cavnar v. Bounceback Inc.Class action targets debt collector’s use of prosecutor letterhead (E.D. Wash.) ............................................8
Criminal Law: United States v. KrausUSDA claims Ohio winemaker sold collateral stock, lied to officials (N.D. Ohio) ...........................................9
Claims Payment: ViewPoint Bank v. Allied Prop. & Cas. Ins. Co.Improperly cashed claims checks don’t relieve insurer’s duty to pay bank (Tex. App.) ................................ 10
Securities Fraud: Local 703, I.B. of T. Grocery & Food Employees Welfare Fund v. Regions Fin. Corp.Fraud suit against bank remanded based on Halliburton ruling (11th Cir.)......................................................11
Insider Trading: SEC v. CañasEx-Banco Santander official to pay $1.9 million for insider trading (S.D.N.Y.) ...............................................12
Mortgage-Backed SecuritiesBofA’s record settlement shows lingering effects of 2008 financial crisis .....................................................13
News in Brief .....................................................................................................................................................14
Case and Document Index ...............................................................................................................................15
Foreclosure issues in the wake of the subprime/financial crisisBy Philip V. Martino, Esq., and Valerie P. Vidal, Esq. Quarles & Brady
Foreclosures surged after the recent financial crisis. These cases remain pending and raised various issues that courts are still addressing. This commentary summarizes the main issues that arose during the aftermath of the crisis and which are relevant in today’s post-crisis foreclosure environment.
FEDERAL VS. STATE COURT
Many practitioners file foreclosure cases in state court as a matter of course. However, there are several reasons to consider filing a foreclosure action in federal court instead.1
Generally speaking, federal courts have smaller case loads, more judicial resources and tend to impose scheduling orders to move cases along. As a result, a foreclosure case may proceed more quickly in federal court than in state court.
Additionally, the standard for summary judgment disposition in federal court may benefit the party seeking to foreclose. In most state courts, the standard requires the moving party to designate sufficient evidence to eliminate any genuine issues of material fact and rebut reasonable inferences favoring the non-moving party. Once the moving party has made a sufficient showing, the burden then shifts to the non-moving party to demonstrate the existence of a genuine issue of material fact for trial.
real property after entry of judgment. State courts may have an advantage over federal courts in this regard.
In state court, sales are generally conducted by the county sheriff or the county clerk. These officials regularly conduct such sales and have established processes for it. The same isn’t true in the federal context. Following a federal foreclosure, the sale is referred to the U.S. marshal, a receiver or a special master appointed by the court. These officials do not regularly conduct foreclosure sales and do not have established protocol, which may give rise to confusion and/or additional delay.
Lenders pursuing foreclosure in federal court should consider filing a motion to appoint a special master — experienced in the sale procedures of the state where the real property is located — either concurrently with (or as part of) the motion for summary judgment on the foreclosure count of the complaint. The special master will then handle the actual foreclosure sale process with essentially no involvement from the judge, clerk or marshal.
State courts often require participation in mandatory mediation programs, which have appeared in both judicial and non-judicial foreclosure states. In some states, courts refer residential foreclosures to their existing alternative dispute resolution system, where parties follow established mediation protocols. Other programs facilitate court-supervised settlement conferences. Some programs are even less formal, merely directing the lender or servicer to contact borrowers to discuss settlement options before proceeding with foreclosures.
Even in states with non-judicial foreclosures, there are often statutes permitting judicial foreclosure. These statutes authorize the state court to play a role in supervising mediations. For example, Nevada and Michigan are non-judicial foreclosure states that have adopted legislation providing for court involvement in foreclosures that otherwise would proceed without judicial involvement.
In federal court, the movant need only inform the court of the basis of the motion and identify relevant portions of the record which it believes demonstrate the absence of a genuine issue of material fact. The key difference: In federal court, the moving party does not need to rebut the arguments that might be asserted by the non-moving party before the burden shifts.
The federal standard is more favorable to disposing of cases on summary judgment. Therefore, it is more likely that a case will be decided on summary judgment motions in federal rather than state court.
There are several reasons to consider filing a foreclosure
action in federal court.
Federal courts also tend to be less tolerant of unsubstantiated defenses, which borrower’s counsel recite in abundance. For example, while asserting the lender acted with unclean hands may provide grounds for a state court judge to deny summary judgment, federal judges are more likely to dispose of unsupported defenses. 2
Regardless of where the foreclosure case is initially filed, there must be a sale of the
Philip V. Martino (L) is a partner at Quarles & Brady in Tampa, Fla., where he concentrates his practice in commercial bankruptcy litigation. Since January 1990, Martino has been a member of the panel of bankruptcy trustees for the Northern District of Illinois. As trustee and attorney for the trustee, he has been involved in virtually all aspects of Chapter 11 and Chapter 7 bankruptcies. He can be reached at [email protected]. Valerie P. Vidal (R) is an associate in the commercial litigation group at Quarles & Brady in Milwaukee. Vidal represents a variety of clients in complex civil disputes and defends financial institutions against Truth in Lending, Real Estate Settlement Procedures Act, Home Ownership and Equity Protection Act, lender liability and consumer fraud claims. She can be reached at [email protected].
Attorneys representing borrowers have devised numerous ways to delay foreclosure. As previously mentioned, borrower’s counsel often assert laundry lists of meritless counterclaims and affirmative defenses resulting in time-consuming motion practice and scheduling issues. For example, some attorneys have begun to argue that mortgage notes are not “negotiable instruments” and the uncertainty regarding the transfer, possession and ownership of the note, and of the foreclosing party’s standing to foreclose, precludes judgment. Many courts have rejected this theory, finding that mortgage notes are unconditional promises to pay.
Some borrowers’ counsel have devised ways to benefit from delaying the foreclosure process as long as possible for their clients. In some instances, attorneys have advised clients to stop paying their mortgage and instead pay a monthly legal retainer fee. The fee is somewhat less than what the borrowers were paying for their mortgage.
FORECLOSURE ‘MILLS’
Unfortunately, many lenders used “foreclosure mill” law firms to prosecute a huge volume of residential foreclosures. To keep fees down, these firms often relied upon inadequately supervised paralegals and support staff to hastily file foreclosure actions without the necessary attention to detail. Among other issues, these “mills” have been accused of:
• Failingtoproperlyservetheborrowers,or engaging shady process servers who filled out fraudulent affidavits regarding service attempts, and then filing for a default judgment.
• “Robo-signing”documentstoestablishthe proper transfers to have standing to foreclose.
Even in cases where the errors weren’t fraudulent or intentional, these “mills” often made negligent mistakes that were devastating to the homeowners involved, the interests of the entity attempting to collect on the debt and the public image of financial institutions. Such errors included:
• Foreclosing on the wrong propertybecause of sloppy errors.
• Violating the Soldiers and SailorsCivil Relief Act with respect to military personnel.
• Attaching unendorsed copies of thenote to the complaint, or asserting that the original note was lost, which created factual issues regarding the filing party’s standing to foreclose and/or ownership issues.
• Inadequatelyreviewingloandocumentsand misstating who holds the original documents.
• Notreviewingdefaultnoticeproceduresto assure compliance with loan documents and applicable law.
• Notanalyzingbalanceduecalculationsto assure the accuracy of the figures.
• Not responding to counterclaims ordocument requests.
• Not attending court-ordered hearingsor depositions.
• Not responding to reasonablesettlement offers.
• Producing unprepared witnessesfor depositions to authenticate loan documents, default notices or balance due calculations.
• Filing conclusory and bare-bonesaffidavits in an attempt to substantiate records in support of motions for summary judgment.
Some individuals’ misconduct has resulted in substantially greater judicial, legislative and press scrutiny on all foreclosures. The questions that foreclosure counsel have to address are no longer limited to whether the borrower signed the note and mortgage, and when the last payment was made. Instead, courts are closely examining submissions (complaints, motions, proposed judgments, etc.) to ensure every procedural and substantive requirement was satisfied completely.
PROOF PROBLEMS
All courts have focused greater scrutiny on affidavits submitted in support of motions for summary judgment. Courts are rejecting affidavits that do not illustrate the affiant’s personal knowledge to substantiate records (such as the payment history) pursuant to the hearsay exception for business records. This has become particularly challenging in circumstances where the lender or servicer has changed since the loan was originated.
An employee from the current servicer cannot substantiate the records of a
predecessor entity. Often, the records were maintained electronically, and no one from the information technology department is able to explain software modifications or how data was transitioned. Identifying an appropriate affiant(s) from the prior servicer and securing their cooperation may be challenging, if not impossible.
This situation arose frequently during the “Great Recession” as lenders sold loan portfolios to raise capital to avoid a forced
Following a federal foreclosure, the sale is
referred to the U.S. marshal, a receiver or a special
master appointed by the court.
closure by the Federal Deposit Insurance Corp. Often, the acquiring institution did not retain personnel to substantiate the payment records of the selling institution.
As borrowers’ counsel demanded an accurate accounting of the balance due, judges became more attentive to what previously had been a set of perfunctory statements in an affidavit supporting summary judgment. To substantiate a balance due, some lenders were ill prepared to show with admissible evidence a payment history from the day the loan was made.3
DEFICIENCY JUDGMENTS
Courts are averse to awarding deficiency judgments, especially in residential foreclosure actions. This is true even though most loan documents (notes as well as guarantees) expressly allow the lender to pursue remedies independently and in its discretion.
In some states, lenders (by statute, tradition, judicial preference or the need for time-consuming and expensive expert testimony to determine the collateral’s value) cannot pursue a deficiency claim until the property securing the debt has been sold. A lender must then bring a motion claiming the property’s value at the time it sold was less than the note balance.
Borrowers often defend against the deficiency claim by contesting the lender’s valuation. If a borrower raises that defense,
the court will often hold a hearing on the deficiency amount. At the hearing, lenders are required to introduce expert testimony to show the property’s value on the foreclosure date. On the other hand, borrowers can base their value position on an independently obtained appraisal, use the government’s tax assessment or state their own non-expert opinion.
Regardless, the pursuit of deficiency judgments often adds significant legal costs and may result in a meaningless judgment that is unenforceable because the borrower and/or guarantors are considered uncollectable or they file bankruptcy to avoid collection.
ZOMBIE PROPERTIES
Some lenders with valid first mortgages have walked away from low-value properties to avoid foreclosure expenses and carry costs. Often, the borrower/owner has moved out of these “zombie” properties after receiving notice of the foreclosure action.4 The lender may choose to abandon efforts to take title, thereby leaving the uninsured and unmaintained property in limbo.
This has been especially problematic for cities, neighborhoods, condo associations and homeowner associations with large developments that were finished around the time the Great Recession began. It began a downward spiral.
Buyers did not close, or defaulted soon after closing. Lenders were overwhelmed and not prepared to own and manage massive
quantities of foreclosed properties. Many properties were neglected and ultimately abandoned. These vacant homes caused substantial declines in real estate values and in the operating income that cities, condo or homeowner associations needed to maintain the neighborhood and the abandoned property.
The resultant neglect caused more owners and lenders to walk away from properties, which further strained budgets, caused
NOTES1 In order for a federal court to have jurisdiction over a foreclosure action, the plaintiff must establish diversity jurisdiction pursuant to 28 U.S.C. § 1332. Federal court may not be an option for a state-based bank seeking to foreclose on real property within the same state, absent a counterclaim based in federal law. In this case, the entire action may be removed to federal court pursuant to 28 U.S.C. § 1331. If the federally based counterclaims are dismissed before the court enters judgment of foreclosure, the federal question is resolved and the federal judge may remand the case back to state court for completion of the foreclosure.
2 Judicial treatment of substantiated allegations of fraudulent lending practices and/or other violations of federal or state law is beyond the scope of this article. However, the authors’ experience is that federal judges require admissible evidence to substantiate these allegations to defeat a lender’s motion for summary judgment. State court judges are more willing to accept borrowers’ counsel’s argument that admissible evidence will be developed before trial and then deny summary judgment.
3 Federal law, including the Financial Institutions Reform, Recovery and Enforcement Act, protects financial institutions that acquired debt through Federal Deposit Insurance Corp. sale. In simple terms, the originating institution’s records are deemed accurate and complete (which arguably defies logic as the originating institution is now defunct) and the acquiring institution need only establish the payment history from the date of the assignment.
4 The reasons for, and impact of, a borrower’s strategic default are also beyond this article’s scope.
Attorneys representing borrowers have devised numerous ways to delay
foreclosure.
deeper cuts in services and created the perception (and perhaps a reality) of a community in decline.
In response to these zombie properties, some local governments have passed legislation designed to force banks to complete foreclosures and take title to properties even if the institution wishes to walk away. The legality and efficacy of these requirements are unclear, to say the least.
CONCLUSION
Lenders and their counsel must critically analyze the procedural and evidentiary viability of each new case that comes before them, regardless of the substantive area of law. Clearly, even “simple” foreclosure cases now require consideration of a number of issues before suit is filed. WJ
Debt collection firm failed to obtain written permission for account debits, suit saysA Los Angeles man has filed a class-action lawsuit alleging an Arizona debt collection agency has withdrawn money from his bank account without first obtaining written permission as required by federal law.
Vanover v. Progressive Financial Services Inc., No. 2:14-cv-05954, complaint filed (C.D. Cal. July 30, 2014).
Joseph Vanover says Progressive Financial Services Inc. failed to obtain his signature on any agreement authorizing account debits in violation of the Electronic Fund Transfer Act, 15 U.S.C. § 1693.
Vanover alleges the company has similarly debited others, and he seeks certification of a plaintiff class, according to the complaint filed in the U.S. District Court for the Central District of California.
The Electronic Fund Transfer Act, 15 U.S.C. § 1693e (a) A preauthorized electronic fund transfer from a consumer’s account may be authorized by the consumer only in writing, and a copy of such authorization shall be provided to the consumer when made. A consumer may stop payment of a preauthorized electronic fund transfer by notifying the financial institution orally or in writing at any time up to three business days preceding the scheduled date of such transfer. The financial institution may require written confirmation to be provided to it within 14 days of an oral notification if, when the oral notification is made, the consumer is advised of such requirement and the address to which such confirmation should be sent.
(b) In the case of preauthorized transfers from a consumer’s account to the same person, which may vary in amount, the financial institution or designated payee shall, prior to each transfer, provide reasonable advance notice to the consumer of the amount to be transferred and the scheduled date of the transfer.
firm’s legitimacy. A company representative allegedly refused and threatened that wage garnishment would begin in April if Vanover did not provide the information.
Based on that threat, Vanover says, he reluctantly gave the representative his banking information and set up a nine-month payment plan where Progressive would automatically withdraw funds from his account each month. The company has taken $144 from the account on four separate occasions as of July, according to the complaint.
Vanover says the defendant never provided and he never signed any written or electronic agreement authorizing the deductions even though the EFTA requires that account holders preauthorize electronic funds transfers in writing.
The law also requires that consumers be provided a copy of the authorization, according to the complaint.
Vanover is proposing a plaintiff class of anyone who entered into a similar debiting agreement with Progressive within one year of the complaint’s filing. He also seeks statutory damages of $1,000 per class member, actual damages, attorney fees, costs and interest.
The plaintiff also seeks a jury trial.
As of press time, the defendant had not filed a response to the suit. WJ
Attorney:Plaintiff: Todd M. Friedman, Beverly Hills, Calif.
Related Court Document: Complaint: 2014 WL 4063727
See Document Section B (P. 21) for the complaint.
Joseph Vanover says debt collection firm Progressive
Financial Services threatened to garnish his wages if he did not
provide his bank account information over the phone.
Vanover says Progressive contacted him in March about an overdue student loan and demanded he provide his banking information over the phone so the company could immediately begin making automatic withdrawals to satisfy the debt.
The complaint says Vanover initially refused to provide the information and requested that Progressive send him written correspondence so he could confirm the
Class certified in suit claiming Trans Union wrongly flagged consumers as criminalsA California federal judge has certified a class of about 8,000 people in a lawsuit accusing credit reporting agency Trans Union LLC of improperly identifying consumers as criminals or persons on a government-maintained list of terrorists.
Ramirez v. Trans Union LLC, No. 12–CV–00632, 2014 WL 3734525 (N.D. Cal. July 24, 2014).
U.S. Magistrate Judge Jacqueline S. Corley of the Northern District of California certified the class of proposed plaintiffs in the action, saying they met the requirements of numerosity and commonality, and that a class will efficiently adjudicate the suit.
“A class action here would certainly achieve economies of time, effort and expense and promote uniformity,” Judge Corley wrote in her order.
“The court is not persuaded that whether each class member read the letters at the same time, or two hours apart,
or two days apart is legally significant,” the judge wrote.
He also claimed that the company failed to provide reasonable procedures for him to dispute the inaccuracy.
The order says Trans Union used only consumers’ first and last names to search the OFAC data provided to it by a third party and did not attempt to filter the list with additional information in its possession, such as birth date and address.
Ramirez moved to certify and represent a proposed class of plaintiffs who received a separate letter from Trans Union advising of a potential match with the OFAC in violation
Sergio L. Ramirez brought the suit against Trans Union after he tried to buy a car in 2011 at a Nissan dealership and was told his name was on the U.S. Treasury Department’s Office of Foreign Assets Control list.
The OFAC list names terrorists, drug traffickers and other individuals not allowed to conduct business in the U.S. According to the order, Trans Union offers a product based on the OFAC list as an add-on to credit reports, so that its customers can avoid doing business with people named on the list.
Ramirez later requested a copy of his credit report from Trans Union, which sent him the report and, in a separate letter, notified him that his name was similar to a name that appeared on the OFAC list but he was not that person, the order says.
Ramirez filed suit in the District Court, claiming Trans Union violated the Fair Credit Reporting Act, 15 U.S.C. § 1681, and California law by not including the OFAC list information with the consumer report.
of the FCRA between January 2011 and July 26, 2011.
Trans Union opposed the motion, arguing that different plaintiffs could view the separate letters as one report, requiring different facts and questions of law for each proposed member of the class.
Judge Corley rejected the argument, saying the significant question is the same for each member of the class.
“It is plaintiff’s contention that even if the consumer read the file disclosure and separate letter at the same time, the failure to include the OFAC information in the disclosure of the file itself violated FCRA,” she wrote.
“The court is not persuaded that whether each class member read the letters at the same time, or two hours apart, or two days apart is legally significant,” Judge Corley added. WJ
Related Court Document:Order: 2014 WL 3734525
See Document Section C (P. 26) for the order.
WestlaW Journal
bankruptcy
this reporter offers com-prehensive coverage of significant issues in both business and consumer bankruptcy proceedings. the editors track dock-ets, summarizing recent developments and their implications for the debtor, its creditors, officers and directors, employees, and other parties. this reporter covers a wide range of top-ics regarding business and consumer bankruptcies and includes analysis of the most noteworthy case law and legislation. Important litigation documents are also included.
Call your West representative for more information about our print and online subscription packages,
Class action targets debt collector’s use of prosecutor letterheadBounceback Inc., a debt collector that sends payment demands on letterhead allegedly “rented” from local prosecutors’ offices in Washington state, is violating debt collection laws by creating a false threat of criminal prosecution, a proposed class-action complaint says.
Cavnar et al. v. Bounceback Inc. et al., No. 14-cv-00235, complaint filed (E.D. Wash. July 18, 2014).
“What primarily distinguishes the Bounceback business from lawful check collection is its use of official prosecutor letterhead,” according to the complaint, filed in U.S. District Court for the Eastern District of Washington.
The plaintiffs, Washington residents Wodena Cavnar, Rosaline Terrill and Linda Parks, received a series of letters from Bounceback that they said threatened them with criminal prosecution unless they paid debts arising from unpaid checks for small retail purchases, the complaint says.
Missouri-based Bounceback operates a “check enforcement program” in more than a dozen Washington counties, according to the complaint.
Each of the letters bore the seal of a county prosecutor and contained a warning of criminal charges.
The prosecutors allegedly receive a cut of the collection fees recovered by Bounceback, “thereby cloaking ordinary civil debt collection under a sham ‘criminal diversion’ program,” the plaintiffs say.
The letters also advised the plaintiffs that it was still possible for them to avoid a conviction if they paid the amount of the dishonored check plus up to $180 in additional fees, the complaint says.
The plaintiffs claim they were left with the impression the letters were from a prosecutor and that the threat of prosecution was real when the letters were nothing more than an attempt by Bounceback, a for-profit company, to collect a debt.
“Despite Bounceback’s use of the county prosecutor’s name and authority to coerce payments, the prosecutors exercise no meaningful control over Bounceback’s day-to-day collection activities,” the complaint says.
The suit alleges Bounceback is violating the federal Fair Debt Collection Practices
“Despite Bounceback’s use of the county prosecutor’s name and authority to coerce payments, the prosecutors
exercise no meaningful control over Bounceback’s day-to-day collection activities,” the complaint says.
Act, which prohibits debt collectors from using false, deceptive or misleading communications to collect a debt, or from using unfair or unconscionable means to collect. It also claims Bounceback’s practices run afoul of Washington consumer protection laws.
The plaintiffs seek compensatory and exemplary damages on behalf of a proposed class of more than 7,000 people who allegedly received a collection demand from Bounceback within the past four years that purported to be from a county prosecutor. WJ
Attorney:Plaintiff: Beth E. Terrell and Erika L. Nusser, Terrell Marshall Daudt & Willie, Seattle
USDA claims Ohio winemaker sold collateral stock, lied to officialsThe owner of a Sandusky, Ohio, winery is facing charges that he defrauded a U.S. Department of Agriculture loan program out of pledged collateral and misreported his income for six years.
United States v. Kraus, No. 3:14-cr-00256, indictment filed (N.D. Ohio, W. Div. Aug. 6, 2014).
David J. Kraus, 52, of New York, has also been charged with making false statements to USDA officials in 2009 and 2010 about the winery’s viability and making false statements on a loan application submitted to Citizens Bank in 2010, according to an indictment filed in the U.S. District Court for the Northern District of Ohio.
“This defendant is charged with defrauding a program designed to help struggling or family farmers by, among other things, unlawfully pocketing millions of dollars from the sale of wine and grapes,” U.S. Attorney Steven M. Dettelbach said in a statement. “Those who seek federal assistance must follow the rules, whether they are food stamp recipients or want to own a winery. These programs are for the public good, not personal enrichment.”
Prosecutors say Kraus established Hermes Winery Inc., also known as Hermes Vineyards, Kraus Vineyards, Kraus Winery and Sand Hill Winery, in January 2002. He then allegedly
secured temporary loans from the USDA Farm Service Agency under the Farm Loan Program, which is intended to help farmers or ranchers who are unable to secure commercial loans to establish or expand family farms.
Between January 2006 and November 2012, Kraus allegedly sold more than $2 million worth of grapes and wine that had been
grape sales and sold more than $271,000 in wine.
Kraus is additionally accused of providing a USDA-FSA official with a phony 2008 federal tax return indicating the winery had a net loss of $99,000 that year. Prosecutors say he later filed a return with the Internal Revenue Service showing a loss of about $41,000 for 2008.
“This defendant is charged with defrauding a program designed to help struggling or family farmers by, among other things, unlawfully pocketing millions of dollars from the sale of
wine and grapes,” U.S. Attorney Steven M. Dettelbach said.
pledged to repay some $595,000 in loans secured through the USDA-FSA, but failed to remit the proceeds to the government, according to prosecutors.
The indictment also claims Kraus falsely reported to a USDA-FSA loan officer that the winery had only made a small amount of grape sales and sold no wine in 2009, when he had actually made $60,000 through
In 2009, Kraus allegedly told a USDA-FSA loan officer that the winery had grape and wine sales totaling just $288,000 for the year, when its actual sales exceeded $332,000. He is also accused of making false statements on a Citizens Bank loan application for $200,000 in July 2010.
The case is pending before U.S. District Judge Jack Zouhary. WJ
WESTLAW JOURNAL CLASS ACTION
This reportercovers the proliferation of the class action law-suit in numerous topic areas at the federal, state, and ap-peals court levels. Topics covered include consumer fraud, securities fraud, products liability, automotives, asbestos, pharmaceuticals, tobacco, toxic chemicals and hazardous waste, medical devices, aviation, and employment claims. Also covered is legislation, such as the 2005 Class Action Fairness Act and California’s Proposition 64, and any new federal and state legislative developments and the effects these have on class action litigation.
Call your West representative for more information about our print and online subscription packages, or call 800.328.9352 to subscribe.
Improperly cashed claims checks don’t relieve insurer’s duty to pay bankAn insurer must pay a mortgage lender that was a loss payee on a damaged property even though the policyholder cashed the insurer’s checks without the mortgagor’s required co-signature, a Texas appeals court has ruled.
ViewPoint Bank v. Allied Property & Casualty Insurance Co., No. 05-12-01370-CV, 2014 WL 3867810 (Tex. App., Dallas Aug. 7, 2014).
In an unpublished opinion, the Court of Appeals in Dallas said that under the state’s Uniform Commercial Code, paying the policyholder did not relieve the insurer from its duty to compensate other loss payees.
A three-judge appellate panel reversed a trial court’s ruling that favored the insurer and granted the mortgagor judgment.
ViewPoint Bank held a mortgage on property owned by Optimum Deerbrook LLC and insured by Allied Property & Casualty Insurance Co. when Hurricane Ike hit the Texas coast in 2008, according to the appeals court opinion.
The bank said the checks were effectively “lost, destroyed, or stolen” under UCC Section 3.309, which would make Allied still liable to pay the mortgagor, the opinion said.
Allied argued that it met its obligation to ViewPoint by making the checks jointly payable.
However, the appeals panel said that under the UCC the insurer remained duty-bound to pay ViewPoint, agreeing with ViewPoint that the situation was similar to having a check stolen and a forger receiving payment.
”Holding otherwise would result in ‘no assurance that all the joint payees would receive payment,’” the appeals panel said, citing McAllen Hospitals v. State Farm County Mutual Insurance Company of Texas, 433 S.W.3d 535 (Tex. May 16, 2014).
The McAllen court found a check paid to one co-payee without the endorsement of the other “does not discharge the drawer of either his liability on the instrument or the underlying obligation.”
The appeals panel said Allied would still have recourse to recover its payment to ViewPoint by taking action against the banks that wrongly paid the checks.
The UCC envisions this as the right remedy, rather than requiring an innocent loss payee to sue the policyholder or banks, the panel said.
In granting judgment to ViewPoint, the appeals panel remanded the case for the trial court to determine what attorney’s fees are owed to the bank. WJ
Attorneys:Appellant: Jim McCown, Nesbitt, Vassar & McCown, Addison, Texas
Appellee: Michael A. Yanof and Timothy E. Headley, Thompson, Coe, Cousins & Irons, Dallas
Related Court Document:Opinion: 2014 WL 3867810
REUTERS/Chris Baltimore
The suit involves property damage claims that arose after Hurricane Ike hit the Texas coast in 2008. This photo shows a neighborhood in the city of Galveston still littered with debris from the storm five months later.
Paying the policyholder does not relieve the insurer from its duty to compensate
other loss payees, the appeals court said.
Optimum submitted a damages claim to Allied, which approved it and issued checks jointly payable to Optimum and ViewPoint, the opinion said.
Optimum signed and cashed the checks without getting ViewPoint’s endorsement, and the bank never received payment, according to the opinion.
As a result, ViewPoint sued several parties, including Allied, claiming the insurer breached its insurance policy and failed to meet its obligations under the Uniform Commercial Code, Tex. Bus. & Com. Code § 3.309.
At trial, the Collin County District Court granted the insurer summary judgment. ViewPoint appealed.
Fraud suit against bank remanded based on Halliburton rulingA federal appeals court has vacated and remanded a class certification ruling in a securities fraud suit against Southern banking giant Regions Financial Corp., finding it should be reconsidered in light of the U.S. Supreme Court’s recent decision in Halliburton v. Erica P. John Fund.
Local 703, I.B. of T. Grocery & Food Employees Welfare Fund et al. v. Regions Financial Corp. et al., No. 12-14168, 2014 WL 3844070 (11th Cir. Aug. 6, 2014).
The lower court’s decision to certify the class was well-reasoned, but the court needed also to consider the defendant’s evidence that its alleged misstatements had no impact on the stock price, the 11th U.S. Circuit Court of Appeals said.
Such evidence is permitted in the wake of the ruling in Halliburton Co. v. Erica P. John Fund, 134 S. Ct. 2398 (2014), the appeals court said.
Regions was sued by shareholders who asserted it made misrepresentations about its real estate investments during the 2008 economic recession.
Subsequently, the U.S. District Court for the Northern District of Alabama certified a class of investors who bought stock from Feb. 27, 2008, through Jan. 20, 2009, finding the plaintiffs had met all the requirements for class certification under Federal Rule of Civil Procedure 23.
Regions appealed that decision to the 11th Circuit, arguing that the class should not have been certified because the plaintiffs did not prove that common questions about reliance on the alleged misrepresentations predominated over individual ones — a requirement for securities suits.
Citing Basic Inc. v. Levinson, 485 U.S. 224 (1988), the District Court said Basic allows shareholders to assert the market price of stock accurately reflects all publicly available information.
Citing Halliburton, the panel said the defendants were allowed to introduce price-impact evidence both to undermine the plaintiffs’ case for market
efficiency and to rebut the Basic presumption.
The bank announced $5.6 billion in losses Jan. 20, 2009. According to the 11th Circuit’s opinion, Regions stock dropped to $4.60 per share when it had traded at $23 per share the previous year.
In their suit, the shareholders assert that Regions senior executives knew about its unstable asset portfolio but repeatedly underreported losses, misrepresented its financial health and inflated its stock price in violation of the anti-fraud provisions of federal securities laws.
But Regions argued that the District Court had not established a comprehensive analytical framework for determining whether the market for a particular stock is efficient.
The 11th Circuit rejected that argument. “It is up to the District Court to consider the nature of the market on a case-by-case basis to decide whether the totality of the circumstances supports a finding of market efficiency,” the panel said.
But Circuit Judge Beverly B. Martin, writing for the appeals panel, said the Basic inquiry does not end once the presumption of class-wide reliance has been invoked.
Citing Halliburton, the panel said the defendants were allowed to introduce price-impact evidence both to undermine the plaintiffs’ case for market efficiency and to rebut the Basic presumption.
The appeals court noted Regions had presented evidence that its stock price did not change after the alleged misrepresentations were made. But the District Court, based on the state of the law before Halliburton, did not fully consider this evidence, the appeals court wrote.
Halliburton “by no means holds that in every case in which such evidence is presented, the presumption will always be defeated,” the appeals court added.
Nevertheless, the panel vacated the class certification ruling and remanded the case so the evidence could be reconsidered.
The 11th Circuit also said the class period itself should also be reviewed as the defendants argued it should only be through Jan. 19, 2009 — the last trading day before the announcement of its losses. WJ
Ex-Banco Santander official to pay $1.9 million for insider tradingA former executive with Banco Santander will pay $1.9 million to settle charges that he used inside information to make illegal trades ahead of a mining company’s proposed acquisition of one of the world’s largest producers of fertilizer minerals.
Securities and Exchange Commission v. Cañas et al., No. 13-5299, final judgment entered (S.D.N.Y. July 21, 2014).
Cedric Cañas Maillard, a former adviser to Spain-based Banco Santander’s CEO, agreed to disgorge $960,800 in trading profits and a pay matching civil penalty in a consent order approved July 21 by U.S. District Judge Valerie E. Caproni of the Southern District of New York.
According to a complaint filed by the U.S. Securities and Exchange Commission, Cañas learned through his job that BHP Billiton Ltd. had asked Santander in 2010 to advise and help underwrite its planned takeover of Potash Corporation of Saskatchewan Inc.
The Australia-based BHP announced Aug. 17, 2010, it had made an unsolicited $38.6 billion bid to purchase all Potash’s stock at $130 per share in cash.
In the days leading up to the public announcement of the deal, Cañas bought the equivalent of 30,000 shares of Potash stock through highly leverage securities called contracts-for-difference, according to the complaint.
Cañas also allegedly tipped his friend Julio Marín Ugedo about the potential BHP deal and encouraged him to buy Potash stock as well, the suit said.
Following the Aug. 17 bid announcement, Cañas liquidated his Potash shares for an illicit profit of $917,239, according to the suit.
Marín also sold the 1,393 shares of Potash common stock he had purchased prior to the announcement, netting $43,566 in illegal profits, according to the suit.
BHP ended up withdrawing its offer for Potash in November 2010, facing resistance from Canadian regulators.
Without admitting or denying the SEC’s charges, Cañas agreed in the consent order to be permanently barred from future violations of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder.
The SEC’s charges against Marín are pending, the agency said in a statement. WJ
Related Court Document:Complaint: 2013 WL 3913581
REUTERS/Sergio Moraes
The defendant in the case is Cedric Cañas Maillard, a former adviser to Spain-based Banco Santander’s CEO. The bank is not accused of any wrongdoing.
BofA’s record settlement shows lingering effects of 2008 financial crisisBy Cory Hester, Attorney Editor, Westlaw Capital Markets Daily Briefing
Bank of America Corp. disclosed Aug. 21 that it has reached a settlement with the Securities and Exchange Commission, the U.S. Department of Justice, certain other federal agencies and six states in connection with alleged fraud charges related to mortgage-backed securities.
The settlement, which is the largest in history between the federal government and a single company, demonstrates the lingering impact of the 2008 financial crisis.
The bank is also resolving separate securities fraud charges that the SEC filed last year related to a residential mortgage-backed securities offering.
Bank of America is not the only company still feeling the sting for actions that occurred during the financial crisis. In July, McGraw Hill Financial Inc. disclosed that it was being investigated by the SEC regarding potential enforcement action against Standard & Poor’s Ratings Services LLC, which is owned by McGraw Hill. The investigation also relates to possible violations of federal securities laws with respect to mortgage-backed securities transactions towards the end of the financial crisis.
High ratings of risky mortgage-backed securities have been blamed for helping fuel the 2008 financial crisis. These high ratings made it possible for banks to sell trillions of dollars in risky investments, which ultimately lost value coinciding with the housing market decline during that period.
Pursuant to the SEC’s order, Bank of America admitted that it failed to disclose:
known uncertainties regarding potential increased costs related to mortgage loan repurchase claims stemming from more than $2 trillion in residential mortgage sales from 2004 through the first half of 2008 by the bank and certain companies it acquired.
In connection with these sales, Bank of America made certain contractual representations and warranties about the underlying quality of the mortgage loans and underwriting. If a loan buyer claimed a breach of a representation or warranty, the bank could be obligated to repurchase the related mortgage loan at its outstanding unpaid principal balance.
According to the SEC’s order, however, Bank of America violated federal securities laws by not disclosing these potential repurchase obligations and known uncertainties about the future costs of mortgage repurchase claims when filing its financial reports for the second and third quarters of 2009.
Note: 2014 data are forecasts (mean). * 2012, forecast not available. ¹Fined with five other financial institutions amounting to $2.3 billion.Sources: Thomson Reuters; U.S. Treasury; Justice Department; SEC; FSA; companies. † 2013 FY pre-tax profit/loss.
Staff, C. Inton, 21/08/2014
Biggest bank settlementsFine (in million $)Bank Reason Year Regulator
As % ofFY pre-tax
profit
FY pre-taxprofit/lossin $ million
DOJ - U.S. Department of Justice | HUD - U.S. Department of Housing and Urban Development | EC - European CommissionFHFA - Federal Housing Finance Agency | FSA - The UK Financial Services Authority | FCA - UK Financial Conduct Authority (Formerly FSA)OFAC - U.S. Office of Foreign Assets Control | CFTC - U.S. Commodity Futures Trading Commission | SEC - Securities and Exchange Commission
The company contends that the claims relate primarily to conduct that occurred at Countrywide and Merrill Lynch prior to Bank of America’s acquisition of those entities.
Bank of America stated that the settlement resolves certain actual and potential civil claims with a number of government authorities, including the DOJ; the SEC; attorneys general from California, Delaware, Illinois, Kentucky, Maryland and New York; the Federal Housing Administration; the Government National Mortgage Association (Ginnie Mae); and the Federal Deposit Insurance Corp.
The bank will pay a total of $9.65 billion in cash and provide about $7 billion worth of consumer relief to settle the charges. The cash portion consists of a $5.02 billion civil monetary penalty and $4.63 billion in compensatory remediation payments. WJ
According to the suit, Maria del Pilar Veve de Byrne’s will specified that a third of her money would go to her husband and that their three children would split the remaining two-thirds. Denise says she gave Maria’s OFG financial adviser the will in February 2010.
But instead of complying with the will, the suit says, the bank transferred all $80,000 of Maria’s money from a “stable” Oppenheimer mutual fund into Robert’s account.
A bank representative then allegedly coerced Robert into investing all of the money, plus $17,000 of his own, in risky Puerto Rican bonds.
Lost inheritanceCONTINUED FROM PAGE 1
After the bonds were downgraded to junk status, the plaintiffs’ 95-year-old father lost his investment
and their inheritance, the suit says.
The representative “decided to prey” on Robert because of his age and vulnerability, his children claim. He knew the elderly man had “blind faith” in him but that his children would have reacted more skeptically to his financial advice, the suit says.
According to the complaint, the banker persuaded Robert that the bonds would produce higher returns despite knowing the claim was false. The media had “extensively covered Puerto Rico’s debt crisis,” the suit says.
After the bonds were downgraded to junk status, Robert lost his investment and his children’s inheritance, the complaint says.
But since the initial fund transfer was illegal under Maria’s will, the bank should make the family whole, according to the suit, which seeks restitution, $250,000 in emotional damages, and costs and fees. WJ
Attorney: Plaintiffs: Jane Beckerwhitaker, San Juan, Puerto Rico
Related Court Document:Complaint: 2014 WL 4210272
See Document Section A (P. 17) for the complaint.
NEWS IN BRIEF
CASINO EXEC BANNED FROM FINANCIAL INDUSTRY OVER BSA VIOLATIONS
The Treasury Department’s Financial Crimes Enforcement Network has banned former casino official George Que from working in the U.S. financial industry and fined him $5,000, the agency said Aug. 20. According to the statement, Que admitted that while working at the Tinian Dynasty Hotel & Casino in the U.S. territory of the Northern Mariana Islands in 2012 and 2013, he willfully failed to report gamblers’ suspicious activity to regulators. Que also allegedly violated the Bank Secrecy Act by failing to notify regulators about currency transactions involving more than $10,000. That law requires financial institutions to keep records that law enforcement can use to investigate white-collar crimes.
$5.4 MILLION RECOVERED IN LOAN-FRAUD INVESTIGATION
The National Credit Union Administration announced Aug. 14 that it has recovered $5.4 million of the $14 million a mother and son stole in a loan-fraud scheme that caused the New York-based BCT Federal Credit Union to fail. According to the NCUA, which insures the nation’s credit unions, law enforcement authorities were able to trace the crime’s proceeds after defendants Laura Conarton and Scott Lonzinski pleaded guilty to using false documents in August 2012 in the U.S. District Court for the Northern District of New York. After the authorities seized seven vehicles, three bank accounts, real estate holdings and cash from the defendants, they were able to repay the NCUA for covering many of BCT’s losses. The rest of the stolen money cannot be recovered, the statement says.
TREASURY GUARANTEES $325 MILLION IN ECONOMIC DEVELOPMENT BONDS
The Treasury Department is backing a total of $325 million in bonds as part of a program to spur economic development in low-income areas and communities that lack access to affordable financial services. The agency announced Aug. 20 that it is guaranteeing the full amount of bonds various lenders issued to support a real estate investment trust, a development organization and two financial institutions. Those organizations will use the bond money to invest in small businesses, rural infrastructure, rental housing, commercial real estate, day care centers and long-term-care facilities, statement said.
Cavnar et al. v. Bounceback Inc. et al., No. 14-cv-00235, complaint filed (E.D. Wash. July 18, 2014) ................................................................................8
Local 703, I.B. of T. Grocery & Food Employees Welfare Fund et al. v. Regions Financial Corp. et al., No. 12-14168, 2014 WL 3844070 (11th Cir. Aug. 6, 2014) .......................................................................................................................................................................................................... 11
Ramirez v. Trans Union LLC, No. 12–CV–00632, 2014 WL 3734525 (N.D. Cal. July 24, 2014) ......................................................................................... 7 Document Section C .....................................................................................................................................................................................................26
Securities and Exchange Commission v. Cañas et al., No. 13-5299, final judgment entered (S.D.N.Y. July 21, 2014) ...................................................... 12
United States v. Kraus, No. 3:14-cr-00256, indictment filed (N.D. Ohio, W. Div. Aug. 6, 2014) .........................................................................................9
Vanover v. Progressive Financial Services Inc., No. 2:14-cv-05954, complaint filed (C.D. Cal. July 30, 2014) ...................................................................6 Document Section B ..................................................................................................................................................................................................... 21
Veve et al. v. OFG Bancorp, No. 14-cv-01601, complaint filed (D.P.R. Aug. 4, 2014) ............................................................................................................1 Document Section A......................................................................................................................................................................................................17
ViewPoint Bank v. Allied Property & Casualty Insurance Co., No. 05-12-01370-CV, 2014 WL 3867810 (Tex. App., Dallas Aug. 7, 2014) ...................... 10
