Friday, April 22, 2016

Federal Court Strikes CFPB's Investigation of For-Profit College Accreditor

Yesterday was a bad day for the CFPB.  The case is CFPB v. Accrediting Council for Independent Colleges and Schools (ACICS).   The CFPB issued a Civil Investigative Demand (CID) to ACICS in August.  After ACICS's lawyers objected, the CFPB sued ACICS in DC federal district court for enforcement of the CID.  ACICS responded that it would not comply with the CID on grounds that investigation of college accreditation processes is outside the scope of the CFPB's authority. The court agreed with ACICS.

A court's role in deciding whether to order compliance with an administrative CID is limited to determining whether the information requested in the CID is relevant to an investigation for "a lawfully authorized purpose."  The court must accord the agency that issued the CID with deference as to the scope of their authority and their estimation of the relevance of the information they request.

The court applied the provisions of the Dodd-Frank Act that set out the authority of the CFPB, inter alia, to take action "to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service."  The Act authorizes the CFPB to issue a CID to a person it believes possesses or controls information relevant to a violation of federal consumer financial laws. The CID must specify both the conduct the CFPB believes is a violation and the federal consumer financial law that conduct would violate.

In the CID it issued to ACICS, the CFPB identified the purpose of its investigation:  "to determine whether any entity or person has engaged or is engaging in unlawful acts and practices in connection with accrediting for-profit colleges."(Emphasis added.)  ACICS argued that none of the federal consumer financial laws within the CFPB's authority address or implicate the process of accrediting for-profit colleges.  The CFPB argued that because it has statutory authority to investigate for-profit schools in relation to their lending and financial advisory services (activity covered by consumer financial laws), it also has authority to investigate whether an accreditor of a for-profit school engaged in any unlawful act relating to accreditation of such a school.

The court called the CFPB's assertion of authority "a bridge too far."  ACICS asserted that is not involved in the financial aid decisions of the schools it accredits. Although the CFPB may be entitled to investigate whether this assertion is true, the CFPB's stated purpose and the information it demanded was not limited to the narrow question of ascertaining the existence or scope of ACICS's role in accredited schools' financial aid decisions.  Rather, the CFPB's investigation of ACICS was directed to its accreditation process generally, a subject outside the CFPB's statutory enforcement authority.

Senator Elizabeth Warren (D) has publicly criticized ACICS for approving accreditation of several for-profit colleges, including Corinthian, which has since closed.  Senator Lamar Alexander (R) Chair of the Senate Comimttee on Health, Education,Labor, & Pensions wrote to CFPB director Richard Cordray reuqesting that the CFPB withdraw the CID and asserting that "[determining the role of accreditors for federal purposes is a congressional responsibility, not yours."  Of the 14 campuses formerly owned by Corinthian that were the subject of the CFPB investigation, many were purchased by Zenith Education Group, with the support of the Department of Education.

Friday, February 12, 2016

Lawyers are the Big Winners in "No-Injury" Class Actions

In a no-injury class action case, the plaintiff class alleges that the defendant violated a legal requirement under a statute (typically a consumer protection statute), and sues for "statutory damages"-- provided as the penalty for violation, even though the violation doesn't cause any actual injury or loss to anyone.  Law professor Joanna Shepherd studies 432 no-injury class action settlements and trial awards from 2005-2015.  Her study showed that about 60% of the total monetary award paid by defendants in these cases was allocated to the plaintiff class, and 39.7% to attorneys fees.  But, much of the money allocated to members of the plaintiff class is never claimed.  Actual consumers typically receive less than 9% of the total. The unclaimed money goes to a "cy pres" fund which gets distributed to not for profit organizations.   Lawyers for the plaintiff class recover over 4 times the amount actually distributed to the class.  Professor Shepherd concludes:  "A result in which plaintiffs recover less than 10 percent of the award, with the rest going to lawyers or unrelated groups, clearly does not achieve the compensatory goals of class actions.  Instead, the costs of no-injury class actions are passed on to consumers in the form of higher prices, lower product quality, and reduced innovation."

Rethinking Expiration Dates to Reduce Food Waste

Here is an interesting op ed by a lawyer and director of the Harvard Law School Food Law and Policy Clinic.  The author explains the inconsistent ways states regulate "sell by," "best by" and "expires on" dates on food.  She supports federal regulation to make use of these labels consistent, and clearly indicate to consumers whether and when they need to worry about the safety of their food-- which in turn will reduce food waste in the US. She writes:

Date label confusion harms consumers and food companies, and it wastes massive amounts of food, which harms the planet. The U.S. wastes 160 billion pounds of food, or nearly 40% of food produced in this country, annually. Twenty-five percent of our freshwater is used to grow food we throw away. What gets tossed out goes into landfills, releasing hazardous methane into an already stressed atmosphere. Making date labels clear and uniform offers a relatively low-cost way to eliminate confusion and save consumers money, and it would make a big dent in the unnecessary waste of wholesome food.

Wednesday, December 9, 2015

Follow the Money: The Connection between Terrorism and Banking

Two developments on this topic:

1.  Yesterday the 2d Circuit handed down its decision in In re Arab Bank, PLC Alien Tort Statute Litigation,  The plaintiffs were non-US citizens who sought compensation for injuries caused by terrorist attacks in Israel between January 1995 and July 2005.   The plaintiffs brought their claims under the Alien Tort Statute (ATS), 28 U.S.C. sec. 1350 ("[t]he district courts shall have original jurisdiction of any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States and federal common law").  Their claims were against Arab Bank, PLC, which has its headquarters in Jordan and branches around the world, for its alleged role in facilitating the banking activities of organizations who caused plaintiffs' injuries.  Arab Bank's branch in New York provides clearing and correspondent banking services to foreign financial institutions.   

The Second Circuit's opinion provides fascinating details about how Arab Bank allegedly and knowingly maintained accounts that customers used to raise funds for terrorist organizations, laundered funds for a purported charitable organization that was really a front for a terrorist organization, and maintained accounts for known  terrorists and supporters.  The plaintiffs also alleged that Arab Bank knowingly and actively organized banking services to transfer funds from terrorist groups to the families of suicide bombers, routing transfers through its New York branch to convert Saudi currency to Israeli currency.  Plaintiffs allege that after the accounts were funded, the Bank provided instructions to the public on how to qualify for and collect the money.

The district court dismissed the claim against Arab Bank on grounds that under Kiobel v. Royal Dutch Petroleum Co., 621 F. 3d 111 (2d Cir. 2010)(Kiobel I), the ATS does not permit claims against corporations.  On appeal, the plaintiffs argued that the 2d Circuit's decision in Kiobel I was overruled by the Supreme Court when it affirmed Kiobel I three years later on other grounds, 133 S.Ct. 1659 (2013)(Kiobel II).  The legal issue in Kiobel I was the scope of liability recognized by the "law of nations" referred to in the ATS.  The panel concluded that the ATS does not permit claims against corporations because corporations have never been subject to any form of liability under customary international law of human rights.  One of the three judges on the panel, however, filed a separate opinion concurring in the judgment but disagreeing with the panel's conception of the "law of nations" as invariably precluding action against a corporate actor.   In his view, the ATS does not prohibit corporate liability per se.  Rather, because the "law of nations" does not specifically address the issue of corporate liability, the scope of liability under the ATS should be considered a question of remedy governed by domestic law.  The Supreme Court in Kiobel II affirmed the 2d Circuit's dismissal but on extraterritoriality grounds-- the alleged banking conduct does not sufficiently "touch and concern" the territory of the United States to invoke the subject matter jurisdiction of the federal courts.

In In re Arab Bank, the 2d Circuit held that Kiobel II "casts a shadow" on Kiobel I.  On the question of extraterritoriality, the Court held that because corporations are "present" in many countries, corporate presence alone is not sufficient to displace the presumption against extraterritorial application of US law.  Because the Court in Kiobel II noted that mere corporate presence alone is insufficient to support subject matter jurisdiction, the obvious implications are that corporate presence plus something more may be sufficient and that the ATS does permit suits against corporations under some circumstances.  The Second Circuit noted that Kiobel I and II read together would limit application of the ATS to an extremely narrow set of circumstances-- suits against natural persons and perhaps non-corporate entities, based on conduct occurring at least in part within (or that "touches and concerns") US territory.  Because corporations are "among the more important actors on the world stage" this narrow reading of the application of the ATS may be inconsistent with the intent of Congress to provide access to US courts for injured aliens when more than two centuries ago it passed the ATS.  The Second Circuit noted that Kiobel II "may be viewed as casting doubt on Kiobel I, even though Kiobel II does not squarely address the issue of corporate liability under the ATS.  Nonetheless, it declined to conclude that Kiobel II overruled Kiobel I, setting up the question for an appeal to the court en banc and likely to the Supreme Court. 

The decision protects Arab Bank from claims under the ATS, but the protection is precarious.  Banks are intensely interested in the answers to two questions implicated in this litigation:  1) whether corporations can be liable under the ATS; and 2) whether "corporate presence" of a bank is sufficient for subject matter jurisdiction over it. The Institute of International Bankers filed an amicus brief in In re Arab Bank before the 2d Circuit in support of the defendant, arguing that bank clearing operations conducted in New York should not be enough to support jurisdiction over a foreign bank.  It noted that more than $1 trillion in foreign currency exchange transactions clear through New York City every day.  Recognizing this clearing function as "presence" in the US would subject foreign banks to suit in US courts whenever their provision of banking services to customers abroad included clearing operations in the US. 

2.  Closer to home, the gunman in the recent San Bernadino massacre had applied for and received a loan from online lender Prosper Marketplace, Inc. a few weeks before he and his wife opened fire at their office holiday party.  Criminal investigators are looking at a $28,000 deposit in the gunman's bank account likely to determine if he used it to buy weapons or ammunition.  Prosper is an online lending platform that matches up borrowers with lenders. The loans are actually provided by WebBank, a Utah-based bank.  Federal law requires both the gunman's bank and WebBank to "know their customers" and report suspicious transactions.

The online marketplace lending industry is in its infancy and federal regulators are considering how to regulate it.  It's clear that consumers who need cash fast like online lending as a faster, easier, and more anonymous alternative to traditional credit card debt or bank loans.  One capital market analyst told Bloomberg News that the connection between online marketplace lending and the San Bernadino shooter could be a "game changer" in the development of regulations.

Wednesday, October 28, 2015

Super Chapter 9: Treasury's Plan for Puerto Rico

Last week the Treasury Department provided its recommendation for a federal response to Puerto Rico's debt problem. It says that Congress should pass the chapter 9 extension bill for the benefit of Puerto Rico's municipal debtors who are responsible for about a third of the total debt. Congress should also authorize a "broader legal framework" that goes beyond relief for municipalities and that would cover all of Puerto Rico's debt. This process should be reserved exclusively for U.S. territories (states could not use it). The framework would provide the basic protections of a bankruptcy proceeding:  a stay on creditor collection action, priority for new, private short-term finance, and voting by creditor class on any proposed restructuring. Treasury does not mention cram down, but that would surely be included among the "basic protections" of bankruptcy.

Regarding a judicially supervised bankruptcy proceeding, Treasury notes that more than 20 creditor groups have already formed, making it "very difficult" for the Puerto Rican government to negotiate a voluntary restructuring in time to prevent a complete collapse. Without an orderly process, the alternative is default followed by "numerous creditor lawsuits and years of litigation" which would "depress the local economy, increase costs, and make long-term recovery harder to achieve."

The proposal has been dubbed a "super chapter 9."  One observer who is an economics professor and a Puerto Rican bondholder said that super chapter 9 legislation would be a de facto amendment of the Puerto Rican Constitution by Congressional fiat and an affront to the sovereignty of the Puerto Rican people.

At a Senate  Committe on Energy and Natural Resources hearing last Thursday, the reaction of senators was a mixed bag. Senator Warren used the occasion to urge Treasury to "step up and show more leadership," It's not clear what she had in mind for Treasury to do, but she did challenge the department to be "just as creative" in finding solutions as it was when several investment banks failed or were near failure during the 2008 financial crisis.  Senator Sanders said that Treasury should call a meeting with the unions and "all the players" in Puerto Rico including creditors (who he called "vulture funds") and just work something out.  Sanders and Warren both emphasized that any solution should not protect investors at the expense of  Puerto Rican workers.  Senator John Barasso (R.Wyo) asked about the impact of a haircut for bondholders on the people of his state-- whose pensions are invested in mutual funds that hold Puerto Rican bonds.  Short answer is if the bond investors take a hit, the pain will be felt by voters in Wyoming. The webcast of the hearing is available here.

Except for US Government Backed Debt

The Congressional budget deal includes a rider that would permit cellphone robocalls to collect debt owed to or guaranteed by the government, including federally guaranteed student loans, FHA mortgages and federal taxes.  The rider would amend the Telephone Consumer Protection Act (TCPA) that bans such calls except with the advance written consent of the borrower. The Obama administration supports the rider.  The Department of Education argues that with the ability to robocall borrowers, it will be in a better position to help borrowers avoid late payments. The FCC administers the TCPA.  It has declined to comment on the budget rider.

Friday, October 16, 2015

Losing by Winning: Campbell-Ewald v. Gomez

The Supreme Court heard argument yesterday in Campbell-Ewald v. Gomez.  The question  is whether defendants in class action litigation can make the case moot by offering the plaintiff class representatives cash for all damages they could possibly win in court.  Defendants' argued that because they've made the offer for full compensation, plaintiffs have nothing at stake in the litigation (the case is "moot") even though they reject the offer.  The Constitution in Article III limits the power of the judicial branch to deciding "cases or controversies."  Issues where the litigants have no stake in the outcome of the proceeding are neither.

The class action litigation for which Gomez is the plaintiff class representative involved alleged violation of the Telephone Consumer Protection Act.  Gomez, claims that he and 100,000 other people received text messages from one of the defendants in violation of the Act.  The Act provides damages to consumers of $500 per violation. The defendants offered to pay Gomez triple the $500 for each text he received.  That's just not good enough for Gomez's lawyers who want a right to pursue damages plus attorneys fees on behalf of the plaintiff class.  The defendants raised the mootness issue all the way to the Ninth Circuit, which held that Gomez still had the requisite stake in the case.

Based on their questions, the justices understand the significance of this case to the plaintiffs-side class action bar. Justice Sotomayor made her view clear-- the plaintiffs are entitled to their day in court and their lawyers are entitled to class certification and fees.  She quipped to counsel for defendants:  "What's an Article III determination is whether [the plaintiff] is entitled to the relief that they asked for.  May well be they're not. But they are entitled to have the Court say it, not you." Justice Breyer asked counsel for the plaintiff class why the defendant couldn't just tender cash to the court and let the court distribute the cash to people who received the improper text messages.  Plaintiffs' counsel answered that even then the case would not be moot because the plaintiff would not have a judgment.  Breyer's response was not sympathetic-- "Give him a judgment-- who cares?"  Obviously, it's the lawyer who wants the  class certified who cares.  His chance for attorneys fees, typically calculated as a percentage of the settlement, is all that is at stake.  Justice Roberts nailed it:  "Oh well, that's the whole thing, right? This is all about class certification."

Here's Ronald Mann's fascinating roundup of the argument on this issue on Scotusblog.   Mann thinks that key voters Breyer and Kennedy might favor a middle ground position which would recognize a way for a defendant to moot a class action case (and save attorneys fees) by conceding liability and paying full damages in cash into the court.  But he's not predicting how the Court will rule.

A side note on the Telephone Consumer Protection Act:  In August 2014,Capital One and three collection agencies agreed to pay $75.5 million to settle and end a class action alleging that the companies used an automated dialer to call consumer's cell phones without their consent in violation of the Act.  The proposed agreement would pay about $20-40 per class member (about 21 million people).  The class consisted of all people who received an automatic dialer call to collect credit card debt between January 2008 and June 2014.  About 30% of the fund, $22.5 million, went to the attorneys for the class.  After the Capital One case settled, the FTC enacted new rules which now require an for-profit business to acquire "prior express written consent" before making any call or text using autodialers or prerecorded voices to cellphones.