financial services litigation report
TRANSCRIPT
LexisNexis�
Financial ServicesLitigation Report
June 2012 Volume 4, Issue #4
Convicted Ponzi Schemer Stanford Sentenced To 110 Years In Federal PrisonHOUSTON — The federal judge in Texas overseeing the criminal case of convicted Ponzi scheme mastermind R. AllenStanford on June 14 sentenced Stanford to 110 years in federal prison. SEE PAGE 5.
Bear Stearns, Former Executives Agree To $275M Settlement Of Securities ClaimsNEW YORK — The Bear Stearns Cos. Inc. and certain of its former officers and directors have agreed to pay $275million to settle claims that they misrepresented the investment quality and risk profile of mortgage-backed securitiesthey issued to investors in violation of federal securities laws, according to documents filed June 6 in New York federalcourt. SEE PAGE 6.
Former Bear Stearns Auditor To Pay Nearly $20M To Settle Securities Law ClaimsNEW YORK — The former independent outside auditor for The Bear Stearns Cos. Inc. agreed June 11 to pay nearly $20million to settle shareholder claims that it failed to accurately monitor the financial giant’s internal controls with regard toBear Stearns’ issuance of risky subprime mortgage-backed securities in violation of federal securities law. SEE PAGE 6.
Judge Approves $90M Settlement With Lehman Officers, DirectorsNEW YORK — A federal judge in New York on May 24 approved a $90 million settlement between former LehmanBrothers Holdings Inc. directors and officers and a proposed class of Lehman investors, settling claims that the executivesmisled the investors about Lehman’s true exposure to subprime mortgages before its 2008 collapse. SEE PAGE 9.
Greenberg Traurig Agrees To Pay $61M To Settle Ponzi ClaimsPHOENIX — The law firm Greenberg Traurig LLP agreed June 20 to pay $61 million to settle a suit in the U.S.District Court for the District of Arizona alleging that it aided an alleged Ponzi scheme that bankrupted two companiesand led to $900 million in losses. SEE PAGE 10.
Freddie Mac, Wells Fargo Settle Telephone Consumer Protection Act SuitsSAN DIEGO — The Federal Home Loan Mortgage Corp. (Freddie Mac) and Wells Fargo Auto Finance Inc. haveagreed to pay $17 million to settle two putative class actions alleging that they illegally contacted customers on their cellphones in violation of the Telephone Consumer Protection Act (TCPA), according to a June 18 filing in a Californiafederal court. SEE PAGE 16.
Supreme Court Will Hear Appeal Of Dismissal Of Debt Collection SuitWASHINGTON, D.C. — The U.S. Supreme Court on May 29 agreed to hear an appeal of a ruling that a collectionagency did not violate the Fair Debt Collection Practices Act (FDCPA) when it contacted a debtor’s employer to verifyher employment status. SEE PAGE 20.
Divided 2nd Circuit: No En Banc Rehearing Of Validity Of AmEx Arbitration ClauseNEW YORK — The Second Circuit U.S. Court of Appeals on May 29 in a divided ruling denied rehearing en banc ofits Feb. 1 opinion affirming its prior holding that a mandatory class action waiver clause in American Express Co.’s(AmEx) standardized service contract violated the Federal Arbitration Act (FAA). SEE PAGE 32.
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LexisNexis�
Financial ServicesLitigation Report
June 2012 Volume 4, Issue #4
Cases in this Issue Page
United States of America v. Robert Allen Stanford, No. 09-342, S.D. Texas ...... 5In re Bear Stearns Companies Inc. Securities, Derivative, and ERISA Litigation,
MDL No. 08-md-1963, No. 08-2793, S.D. N.Y. ............................................. 6In re Bear Stearns Companies Inc. Securities, Derivative, and ERISA Litigation,
MDL No. 08-md-1963, No. 08-2793, S.D. N.Y. ............................................. 6American International Group, Inc., et al. v. Countrywide Financial
Corporation, Inc., et al., No. 11-10549, C.D. Calif........................................... 7Landesbank Baden-Wurttemberg v. Barclays Bank PLC, et al., No.
652030/2012, N.Y. Sup., New York Co. ........................................................... 8Landesbank Baden-Wurttemberg v. Capital One Financial Corp., et al.,
No. 652029/2012, N.Y. Sup., New York Co..................................................... 8In re: Lehman Brothers Securities and ERISA Litigation, MDL No.
09-2017, (In re: Lehman Brothers Equity/Debt Securities Litigation,No. 08-5523), S.D. N.Y. .................................................................................... 9
Robert Facciola, et al., v. Greenberg Traurig LLP, et al., No. 10-1025,D. Ariz. ........................................................................................................... 10
Robert G. Wing v. Bruce J. Dockstader, et al., No. 11-4006, 10th Cir.................... 11Securities and Exchange Commission v. Medical Capital Holdings Inc.,
et al., No. 09-00818, C.D. Calif......................................................................... 12Ralph S. Janvey, in his capacity as court-appointed receiver for The Stanford
International Bank, Ltd., et al. v. Libyan Investment Authority andLibyan Foreign Investment Co., No. 12-10240, 5th Cir. .................................. 13
Roger J. McConkie v. Rice Properties, et al., No. 09-00275, D. Utah ..................... 14Alberto Malta v. The Federal Home Loan Mortgage Corp., et al., No.
10-1290, S.D. Calif., Danny Allen Jr. v. Wells Fargo Auto Finance Inc.,No. 10-2657, S.D. Calif...................................................................................... 16
In re: Portfolio Recovery Associates, LLC, Telephone Consumer ProtectionAct Litigation, No. 11-md-02295, S.D. Calif..................................................... 16
Ashley Gager v. Dell Financial Services, LLC, No. 11-02115, M.D. Pa. .................. 18Timothy P. Harris v. American General Financial Services LLC,
No. 10-1662, D. Nev.......................................................................................... 19Olivea Marx v. General Revenue Corporation and Kevin Cobb, No.
11-1175, U.S. Sup............................................................................................... 20Norman Morse, administrator of the estate of Nancy Morse, v. Paula
G. Kaplan, et al., No. 11-2562, 3rd Cir. ............................................................ 21Christopher Ceresko v. LVNV Funding, LLC, et al., No. 11-15456,
9th Cir. ................................................................................................................ 22Joann Riggs v. Prober & Raphael, A Law Corp., et al., No. 10-17220,
9th Cir. ................................................................................................................ 23Kara A. Tzanetis v. Weinstein & Riley, P.S., No. 11-3169, 2nd Cir. ....................... 25Belinda Parker v. Midland Credit Management Inc., No. 12-110, M.D. Fla. .......... 25Anna Pawelczak v. Nations Recovery Center Inc., No. 11-3700, N.D. Ill................ 26Donald R. Williams v. Midland Funding LLC, et al., No. 11-2539,
S.D. Calif. ............................................................................................................ 28David Webb, et al. v. Premiere Credit of North America LLC, No. 12-2001,
D. Kan................................................................................................................. 29Malka Andes v. G. Moss and Associates, LLP, No. 11-14295, S.D. Fla. .................. 30
Cases in this Issue Page
Craig A. Whitney and Aubree S. Whitney v. CTX Mortgage Co. LLC, et al., No. 11-00037, D. Nev................................ 31In re: American Express Merchants’ Litigation (Italian Colors Restaurant, et al. v. American Express Travel
Related Services Company, et al.), No.06-1871-cv, 2nd Cir. ........................................................................................... 32Galen Traylor v. I.C. System Inc., et al., No. 11-02968, D. Minn......................................................................................... 34Taylor Russell v. United States of America, No. 09-03239, N.D. Calif. ................................................................................. 35Fabricia de Muebles J.J. Alvarez, Inc. v. Inversiones Mendoza, Inc., et al., No. 11-1985, 1st Cir.......................................... 37Bruce C. McDonald v. OneWest Bank, No. 11-1071, 10th Cir. ........................................................................................... 39Beal Bank USA v. The Business Bank of St. Louis, No. 11-0561, E.D. Mo.......................................................................... 40Buttonwood Tree Value Partners LP, et al. v. Jack A. Sweeney, et al., No. 10-00537, C.D. Calif. ....................................... 41Sonya Rose Lopez v. Federal Deposit Insurance Corporation, No. 10-00158, N.D. Ga. ....................................................... 42Elliott D. Levin v. William I. Miller, et al., No. 11-01264, S.D. Ind. .................................................................................... 43Justus A. Oketch v. JPMorgan Chase & Co. Inc., No. 12-0102, W.D. N.C......................................................................... 45John P. McGough v. Wells Fargo Bank NA, et al., No. 12-0050, N.D. Calif. ...................................................................... 46Harry T. Constas v. JPMorgan Chase Bank NA, No. 11-0032, D. Conn.............................................................................. 47United States of America v. Huntington National Bank, No. 10-2071, 6th Cir. ................................................................... 48Daniel Ford v. Citibank NA, No. 11-3578, D. Md. ............................................................................................................... 50United States of America ex rel. Jon H. Oberg v. Kentucky Higher Education Student Loan Corp., et al., No.
10-2320, 4th Cir. .............................................................................................................................................................. 51Higher Education Loan Authority of the State of Missouri v. Wells Fargo Bank NA, No. 10-1230, E.D. Mo. ................... 53United States of America v. David P. Schafer, No. 11-00802, W.D. Texas............................................................................ 54Edward G. Shlikas v. United States Department of Education, No. 09-02806, D. Md. ........................................................ 55United States of America v. Cynthia Allen-Williams, No. 11-1001, D. Md........................................................................... 57Harold Lasserre Jr. v. Educational Credit Management Corp., No. 12-0091, M.D. La. ........................................................ 58Kamlesh Banga v. Experian Information Solutions, et al., No. 10-15913, 9th Cir. ................................................................ 58Flagship Credit Corp. v. Indian Harbor Insurance Co., No. 11-20408, 5th Cir. ................................................................... 59Peoples State Bank v. Progressive Casualty Insurance Company, No. 11-30731, 5th Cir. ..................................................... 61John C. McLemore, et al. v. Regions Bank, Nos. 10-5480, 10-5491, 6th Cir. ...................................................................... 61Automotive Industries Pension Trust Fund v. Textron Inc., et al., No. 11-2106, 1st Cir. ..................................................... 64Jarek Charvat v. First National Bank of Wahoo, No. 12-00097, D. Neb............................................................................... 65Daniel E. Ballard v. Branch Banking and Trust Co., No. 11-1327, D. D.C.......................................................................... 67Local 703, I.B. of T. Grocery and Food Employees Welfare Fund v. Regions Financial Corp., et al., No.
10-2847, N.D. Ala. ........................................................................................................................................................... 68Ohio Public Employees Retirement System v. Federal Home Loan Mortgage Corp., et al., No.
08-00160, N.D. Ohio....................................................................................................................................................... 69Isaiah Nichols v. Navy Federal Credit Union, No. 12-790, D. Md. ....................................................................................... 70Theresa M. Passmore v. Discover Bank, et al., No. 11-1347, N.D. Ohio .............................................................................. 71In re Municipal Derivatives Antitrust Litigation, No. 08 MDL No. 1950, Master No. 08-02516, S.D. N.Y....................... 72In re Optimal U.S. Litigation, No 10-4095, S.D. N.Y............................................................................................................ 74Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, (In re Bernard
L. Madoff), No. 08-1789, S.D. N.Y. Bkcy....................................................................................................................... 75In re Merrill Lynch Auction-Rate Securities Litigation, No. 09-md-2030, (Iconix Brand Group Inc. v.
Merrill Lynch, Pierce, Fenner & Smith Inc., No. 10-0124), S.D. N.Y. .......................................................................... 76Michael J. Hummel v. David W. Hall, t/a Country Motor Sales, No. 11-0012, W.D. Va. .................................................. 79
Published document is available at the end of the report. For other available documents from cases reported on in this issue,visit www.mealeysonline.com or call 1-800-MEALEYS.
LexisNexis� Financial Services Litigation Report Vol. 4, #4 June 2012
Cite as LexisNexis� Financial Services Litigation Report, Vol. 4, Iss. 4 (6/12) at p.___, sec.___. 3
In this Issue
Stanford Ponzi SchemeConvicted Ponzi Schemer Stanford SentencedTo 110 Years In Federal Prison........................................ page 5
Mortgage-Backed SecuritiesBear Stearns, Former Executives Agree To $275MSettlement Of Securities Claims ....................................... page 6Former Bear Stearns Auditor To Pay Nearly $20MTo Settle Securities Law Claims ....................................... page 6Judge Dismisses AIG’s Claims TargetingCountrywide Mortgage-Backed Securities ........................ page 7Barclays Bank Sued By Bank OverMortgage-Backed Securities Losses ................................... page 8German Bank Hits Capital One, Others WithLawsuit Over Securities Losses ......................................... page 8
Lehman Brothers BankruptcyJudge Approves $90M Settlement With LehmanOfficers, Directors ............................................................ page 9
Ponzi SchemeGreenberg Traurig Agrees To Pay $61M To SettlePonzi Claims .................................................................. page 1010th Circuit Affirms Ruling In Favor Of ReceiverIn Ponzi-Related Action ................................................. page 11Wells Fargo, BNY Mellon To Pay $106M InMedCap Ponzi Settlement ............................................. page 125th Circuit Affirms Denial Of Stanford Receiver’sInjunction Request......................................................... page 13Judge: Receiver Can’t Void Commissions OnProperties Sold To Ponzi Operator ................................ page 14
Telephone Consumer Protection ActFreddie Mac, Wells Fargo Settle TelephoneConsumer Protection Act Suits ...................................... page 16Federal Judge Refuses To Remand ConsumerProtect Act Suit From MDL.......................................... page 16Federal Judge: Act Doesn’t Let Consumers RevokeConsent to Contact........................................................ page 18Federal Judge: Telephone Consumer ProtectionAct Claim Falls Short ..................................................... page 19
FDCPASupreme Court Will Hear Appeal Of DismissalOf Debt Collection Suit................................................. page 203rd Circuit: Consumer Failed To ShowDebt Collection Letter Was Misleading ......................... page 219th Circuit Upholds Attorney Fees Award InDebt Collection Suit ...................................................... page 22Notice Did Not Violate Debt Collection Act,9th Circuit Affirms......................................................... page 23Panel: Consumer Failed To Provide EvidenceOf Debt Collection Law Violation................................. page 25Letter Not A Debt Collection Demand Letter,Federal Judge Rules........................................................ page 25
Debt Collector Failed To Provide RequiredDisclosures, Federal Judge Rules .................................... page 26Judge: Attorney Fees Sought In Debt CollectionCase Are Reasonable ...................................................... page 28Judge: Consumers Met Specificity RequirementsIn Debt Collection Suit ................................................. page 29Settlement Earns Partial Approval In DebtCollection Suit ............................................................... page 30Nonjudicial Foreclosures Are Not Debt Collection,Federal Judge Rules........................................................ page 31
Credit Card IssuesDivided 2nd Circuit: No En Banc Rehearing OfValidity Of AmEx Arbitration Clause ............................ page 32Judge Says Bank Did Not Show That CardholderAgreed To Arbitration Agreement .................................. page 34Class Certified In Military Credit CardOvercharge Action ......................................................... page 35
Failed Banks1st Circuit Affirms Dismissal Of Corruption SuitAgainst Puerto Rico Bank .............................................. page 3710th Circuit Affirms Dismissal Of Suit AllegingWrongful Foreclosure..................................................... page 39Bank Earns Partial Summary Judgment In LoanParticipation Dispute ..................................................... page 40Judge: Investor Failed To Plead Subjective FalsityIn Failed Bank Suit ........................................................ page 41Federal Judge Bars Suit Against Bank Due ToPlaintiff’s Intent To Mislead .......................................... page 42FDIC Can Intervene In Suit Against FailedBanks’ Former Officers .................................................. page 43Chase Did Not Assume Liability From WaMu,Federal Judge Rules........................................................ page 45Federal Judge Dismisses Most Of Suit ArisingFrom Home Foreclosure ................................................ page 46Federal Judge Dismisses Complaint Arising FromWaMu’s Pre-Failure Conduct ........................................ page 47
Line Of CreditIn Reversal, 6th Circuit Orders Return OfForfeited Funds To Bank ............................................... page 48Citibank Escapes Suit Arising From RejectionOf Loan Application ...................................................... page 50
Student Loan Issues4th Circuit Remands Student Loan Suit For‘State Agency’ Analysis ................................................... page 51Wells Fargo’s Counterclaim Survives In StudentLoan Bond Remarketing Suit ......................................... page 53Federal Judge Vacates Summary Judgment InStudent Loan Suit .......................................................... page 54Student Loan Due Process Suit AgainstGovernment Survives ..................................................... page 55
Vol. 4, #4 June 2012 LexisNexis� Financial Services Litigation Report
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News
Convicted Ponzi SchemerStanford Sentenced To110 Years In Federal PrisonHOUSTON — The federal judge in Texas overseeingthe criminal case of convicted Ponzi scheme master-mind R. Allen Stanford on June 14 sentenced Stanfordto 110 years in federal prison (United States ofAmerica v. Robert Allen Stanford, No. 09-342, S.D.Texas; See March 2012, Page 5).
(Judgment in Section A. Document #88-120625-021X.)
U.S. Judge David Hittner of the Southern District ofTexas’ judgment of 1,320 months, or 110 years, cameafter a jury on March 6 found Stanford guilty of 13 of14 counts of wire fraud, mail fraud, conspiracy to com-mit wire fraud and mail fraud, conspiracy to obstruct aSecurities and Exchange Commission proceeding andobstruction of an SEC proceeding. He was found notguilty on one charge of wire fraud.
Stanford received 240 months, or 20 years, in prison forhis convictions on the wire fraud and conspiracy tocommit wire fraud and mail fraud counts; 60 monthseach on the conspiracy to obstruct an SEC investigationand obstruction of an SEC investigation counts, to beserved consecutively; and another 240 months each forfive counts of mail fraud and a count of conspiracy tocommit money laundering, to be served concurrentlywith each other and with the previous counts.
Judge Hittner recommended to the Bureau of Prisons(BOP) that Stanford be ‘‘imprisoned in the most securefacility that the BOP finds is commensurate with hissecurity needs up to and including a U.S. Penitentiary’’and remanded Stanford to the custody of U.S. marshals.
Criminal Proceeding
The verdict brought to an end a criminal proceedingthat took nearly three years to bring to trial due to anumber of issues.
After a federal grand jury in the District Court issued a21-count indictment charging Stanford with conspir-ing to commit securities fraud and money launderingand conspiring to obstruct and obstructing an investi-gation of the SEC in connection with his alleged opera-tion of the Ponzi scheme, the court granted thegovernment’s motion for revocation of release and com-mitted Stanford to pretrial detention on June 30, 2009,concluding that he was a flight risk.
On Jan. 26, 2011, Judge Hittner granted in part anddenied in part Stanford’s motion for relief and medi-cal treatment after Stanford suffered a head injury dur-ing an altercation with another inmate and had surgeryto repair facial fractures. Stanford was committed tothe custody of the U.S. attorney general after JudgeHittner heard testimony from three psychiatrists whocited a number of contributing factors that couldhave led to Stanford’s mental condition as a result ofthe injuries.
Expert Testimony
Then, on June 21, 2011, Judge Hittner issued an orderdelaying the start of Stanford’s criminal trial, which wasslated to begin Sept. 12, until January 2012. Stanfordmoved for a continuance on Dec. 28, which JudgeHittner denied as ‘‘unwarranted,’’ and in a Jan. 5order, the judge refused to strike certain expert testi-mony finding Stanford competent to stand trial andordered Stanford’s defense team to prepare for trial.
On March 8, the jury returned a special verdict requir-ing Stanford to forfeit $330 million held in 29 financialinstitutions abroad, and on March 20, Stanford movedfor a new trial, claiming that he was deprived of hisSixth Amendment right to a fair trial. Judge Hittnerdenied the motion on March 22.
Stanford appealed his conviction to the Fifth CircuitU.S. Court of Appeals on June 14.
LexisNexis� Financial Services Litigation Report Vol. 4, #4 June 2012
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Counsel
Stanford is represented by Robert A. Scardino Jr. andAli R. Fazel of Scardino Fazel in Houston and Lee H.Shidlofsky of Visser Shidlofsky in Austin, Texas.
The U.S. government is represented by U.S. AttorneyKenneth Magidson in Houston, Assistant U.S. Attor-ney Gregg Costa in Houston and William Stellmachand Andrew H. Warran of the U.S. Department ofJustice in Washington, D.C.
(Additional documents available: Verdict. Document#88-120326-074V. Jury instructions. Document#88-120326-075X.) n
Bear Stearns, Former ExecutivesAgree To $275M SettlementOf Securities ClaimsNEW YORK — The Bear Stearns Cos. Inc. and certainof its former officers and directors have agreed to pay$275 million to settle claims that they misrepresentedthe investment quality and risk profile of mortgage-backed securities they issued to investors in violationof federal securities laws, according to documents filedJune 6 in New York federal court (In re Bear StearnsCompanies Inc. Securities, Derivative, and ERISA Liti-gation, MDL No. 08-md-1963, No. 08-2793, S.D.N.Y.; See February 2011, Page 11).
(Motion for preliminary approval of settlement.Document #57-120611-080B. Stipulation of settle-ment. Document #57-120611-079X.)
Lead plaintiff State of Michigan Retirement Systemfiled both a motion for preliminary approval of settle-ment and stipulation of settlement in the U.S. DistrictCourt for the Southern District of New York.
Under the terms of the settlement, which are subject tocourt approval and benefit plaintiffs in five securitiesclass actions that were transferred to the District Courtby the Judicial Panel on Multidistrict Litigation in2008, in exchange for the $275 million payment,claims for violation of Sections 10(b), 20(a) and 20Aof the Securities Exchange Act of 1934 and Securitiesand Exchange Commission Rule 10b-5 will be droppedagainst The Bear Stearns Cos. and former officers anddirectors James E. Cayne, Alan D. Schwartz, Warren J.
Spector, Alan C. Greenberg, Samuel L. Molinaro Jr.,Michael Alix and Jeffrey M. Farber.
JPMDL Transfer Order
After the JPMDL issued its Aug. 18, 2008, order trans-ferring a number of securities class action, shareholderderivative and Employee Retirement Income Security Act(ERISA) lawsuits to the District Court, the retirementsystem was named lead plaintiff and filed a consolidatedamended class action complaint on behalf of all pur-chasers of Bearn Stearns common stock purchasersfrom Dec. 14, 2006, to March 14, 2008.
On Jan. 19, 2011, Judge Robert W. Sweet denied thedefendants’ motion to dismiss the amended complaint;soon after, the parties began settlement discussions.
The retirement system is represented by Jeffrey C.Block, Patrick T. Egan and Justin Saif of BermanDeValerio in Boston, Joseph J. Tabacco Jr. and JulieJ. Bai of Berman DeValerio in San Francisco and Tho-mas A. Dubbs, James W. Johnson and Michael W.Stocker of Labaton Sucharow in New York.
The defendants are represented by Eric S. Goldstein,Brad S. Karp, Lewis R. Clayton and Douglas M. Pravdaof Paul, Weiss, Rifkind, Wharton & Garrison in NewYork and Paul J. Ondrasik and F. Michael Kail ofSteptoe & Johnson in Washington, D.C.
(Additional document available. Amended complaint.Document #57-120611-081C.) n
Former Bear Stearns AuditorTo Pay Nearly $20M ToSettle Securities Law ClaimsNEW YORK — The former independent outside audi-tor for The Bear Stearns Cos. Inc. agreed June 11 to paynearly $20 million to settle shareholder claims that itfailed to accurately monitor the financial giant’s internalcontrols with regard to Bear Stearns’ issuance of riskysubprime mortgage-backed securities in violation of fed-eral securities law (In re Bear Stearns Companies Inc.Securities, Derivative, and ERISA Litigation, MDL No.08-md-1963, No. 08-2793, S.D. N.Y.; See February2011, Page 11, and related story in this issue).
Vol. 4, #4 June 2012 LexisNexis� Financial Services Litigation Report
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(Motion for preliminary approval of settlementavailable. Document #88-120625-007B.)
Lead plaintiff State of Michigan Retirement Systemfiled the motion for preliminary approval of settlementin the U.S. District Court for the Southern District ofNew York.
The proposed settlement comes less than a week afterthe other defendants in the multidistrict litigation, BearStearns and certain of its former executive officers anddirectors, agreed to pay $275 million to settle all claimsagainst them.
Both proposed settlements are subject to courtapproval.
Actions Transferred
After the JPMDL issued its Aug. 18, 2008, order trans-ferring a number of securities class action, shareholderderivative and Employee Retirement Income SecurityAct lawsuits to the District Court, the retirement sys-tem was named lead plaintiff and filed a consolidatedamended class action complaint on behalf of all pur-chasers of Bearn Stearns common stock from Dec. 14,2006, to March 14, 2008.
The retirement system alleges that the defendants vio-lated Sections 10(b), 20(a) and 20A of the SecuritiesExchange Act of 1934 and Securities and ExchangeCommission Rule 10b-5 by misrepresenting the invest-ment quality and risk profile of mortgage-backed secu-rities Bear Stearns issued to investors.
On Jan. 19, 2011, Judge Robert W. Sweet denied thedefendants’ motion to dismiss the amended complaint,and, soon after, the parties began settlement discussions.
Counsel
The retirement system is represented by Jeffrey C.Block, Patrick T. Egan and Justin Saif of BermanDeValerio in Boston, Joseph J. Tabacco Jr. and JulieJ. Bai of Berman DeValerio in San Francisco and Tho-mas A. Dubbs, James W. Johnson and Michael W.Stocker of Labaton Sucharow in New York.
The defendants are represented by Eric S. Goldstein,Brad S. Karp, Lewis R. Clayton and Douglas M. Pravdaof Paul, Weiss, Rifkind, Wharton & Garrison in New
York and Paul J. Ondrasik and F. Michael Kail ofSteptoe & Johnson in Washington, D.C.
Deloitte & Touche is represented by Antony L. Ryan,Max R. Shulman, Rachel G. Skaistis and Thomas G.Rafferty of Cravath, Swaine & Moore in New York.
(Additional document available. Amended complaint.Document #57-120611-081C.) n
Judge Dismisses AIG’s ClaimsTargeting CountrywideMortgage-Backed SecuritiesLOS ANGELES — A federal judge in California onMay 23 dismissed American International Group Inc.’s(AIG) federal claims in its suit targeting the underwrit-ing practices at Bank of America Corp. unit Country-wide Financial Corp. Inc., agreeing with Countrywidethat AIG filed the claims too late (American Interna-tional Group, Inc., et al. v. Countrywide FinancialCorporation, Inc., et al., No. 11-10549, C.D. Calif.).
(Order available. Document #88-120625-206R.)
U.S. Judge Mariana R. Pfaelzer of the Central Districtof California partially granted Countrywide’s motion todismiss the suit AIG filed against it and several otherfinancial institutions.
AIG and other plaintiffs initially brought the suit onAug. 8, 2011, in the New York County Supreme Courtin connection with its purchase of residential mortgage-backed securities (RBMS) originated and/or issued byCountrywide. Between 2005 and 2007, AIG allegedlypurchased $28 billion worth of RMBS certificates. AIGsays Countrywide is liable because the certificates’ offer-ing documents contain various misrepresentations.Countrywide removed the suit to the District Courton Sept. 6, 2011, and filed its motion to dismiss onFeb. 27, 2012.
Time-Barred
In dismissing with prejudice AIG’s federal claims,Judge Pfaelzer found that the claims for violations ofthe Securities Act of 1933 are barred by a three-yearstatute of repose that began to toll when the securitywas offered to the public. According to the judge, AIGfiled its August 2011 complaint more than three years
LexisNexis� Financial Services Litigation Report Vol. 4, #4 June 2012
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after Countrywide issued the certificates to the publicand AIG purchased them.
The judge also agreed with Countrywide that AIG’scommon law claims are barred under New York’s bor-rowing statute. Eight of the 22 plaintiffs in the suit havetheir primary places of business in Arizona, California,Tennessee and Texas. Judge Pfaelzer noted that Arizonaand California have a three-year statute of limitationsfor fraud and a two-year statute of limitations for neg-ligent misrepresentation.
Judge Pfaelzer allowed the claims that were part of anagreement to toll claims between Jan. 13, 2011, andAug. 5, 2011, to remain.
‘‘Plaintiffs concede that the Arizona plaintiff’s negligentmisrepresentation claim and all of the Arizona, Califor-nia and Tennessee plaintiffs’ common law claims thatare not subject to the tolling agreement are time-barred,’’ Judge Pfaelzer said. ‘‘The California plaintiff’snegligent misrepresentation claim is subject to a two-year statute of limitations and is time-barred also, apply-ing the two-year statute of limitations to Californianegligent misrepresentation claim.’’
Attorneys
AIG is represented by James R. Asperger of Quinn,Emanuel, Urquhart & Sullivan in Los Angeles andMichael B. Carlinsky and Maria Ginzburg of QuinnEmanuel in New York.
Countrywide is represented by James L. Sanders andDavid M. Halbreich of Reed Smith in Los Angeles andAmy J. Greer and Jennifer L. Achilles of Reed Smithin New York.
(Additional documents available. Motion to dismiss.Document #88-120625-207M. Opposition tomotion to dismiss. Document #88-120625-208B.Reply in support of motion to dismiss. Document#88-120625-209B.) n
Barclays Bank Sued ByBank Over Mortgage-BackedSecurities LossesNEW YORK — A German bank on June 11 suedBarclays Bank PLC and certain of its subsidiaries in
New York state court, alleging that the defendants mis-represented the investment quality of mortgage-backedsecurities (MBS) they sold to the bank (LandesbankBaden-Wurttemberg v. Barclays Bank PLC, et al.,No. 652030/2012, N.Y. Sup., New York Co.).
(Summons available. Document #88-120625-065X.)
German bank Landesbank Baden-Wurttemberg filedthe summons in the New York County SupremeCourt, alleging that Barclays Bank, Barclays CapitalInc., Sutton Funding LLC and BCAP LLC issued aseries of false and misleading statements in the offeringdocuments for the $55,273,000 in MBS ‘‘regarding thelegal validity of assignments of the mortgage loans totrusts formed to hold the pooled loans and to collectinterest and principal payments due on the loans, andthe legal validity of the trusts and their legal entitlementto receive interest and principal payments on the loans.’’
‘‘Each of the Defendants knew, or at a minimum wasnegligent in not knowing, that its representations andomissions were false and/or misleading at the time theywere made. Each Defendant made the false and/or mis-leading statements with the intent for Plaintiff to relyupon those statements,’’ Landesbank says.
Claims Made
Landesbank states claims against the defendants forcommon-law fraud, fraudulent inducement, negligentmisrepresentation, aiding and abetting fraud anddeclaratory judgment, as well as contract claims forrescission, restitution and mutual mistake.
Landesbank is represented by Joel H. Bernstein ofLabaton Sucharow in New York. n
German Bank HitsCapital One, Others WithLawsuit Over Securities LossesNEW YORK — An investor sued Capital One Finan-cial Corp. and others in New York state court onJune 11, alleging that the defendants issued a series offalse and misleading statements regarding the invest-ment quality of nearly $32 million in mortgage-backed
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securities they sold to the investor (Landesbank Baden-Wurttemberg v. Capital One Financial Corp., et al.,No. 652029/2012, N.Y. Sup., New York Co.).
(Summons available. Document #88-120625-066X.)
Investor Landesbank Baden-Wurttemberg filed a sum-mons in the New York County Supreme Court, alle-ging that Capital One Financial; Capital One N.A., assuccessor-in-interest to Chevy Chase Bank F.S.B.;Chevy Chase Funding LLC and Credit Suisse Securi-ties (USA) LLC issued a series of misrepresentations inthe offering documents for the securities ‘‘regarding thelegal validity of assignments of the mortgage loans totrusts formed to hold the pooled loans and to collectinterest and principal payments due on the loans, andthe legal validity of the trusts and their legal entitlementto receive interest and principal payments on the loans.’’
‘‘Each of the Defendants knew, or at a minimum wasnegligent in not knowing, that its representations andomissions were false and/or misleading at the time theywere made. Each Defendant made the false and/or mis-leading statements with the intent for Plaintiff to relyupon those statements,’’ Landesbank says.
Claims Made
Landesbank states claims against the defendants forcommon-law fraud, fraudulent inducement, negligentmisrepresentation, aiding and abetting fraud anddeclaratory judgment, as well as contract claims forrescission, restitution and mutual mistake.
Landesbank is represented by Joel H. Bernstein ofLabaton Sucharow in New York. n
Judge Approves $90MSettlement With LehmanOfficers, DirectorsNEW YORK — A federal judge in New York onMay 24 approved a $90 million settlement betweenformer Lehman Brothers Holdings Inc. directors andofficers and a proposed class of Lehman investors, set-tling claims that the executives misled the investorsabout Lehman’s true exposure to subprime mortgagesbefore its 2008 collapse (In re: Lehman Brothers Secu-rities and ERISA Litigation, MDL No. 09-2017, [In re:
Lehman Brothers Equity/Debt Securities Litigation,No. 08-5523], S.D. N.Y.; See December 2011, Page 5).
(Order available. Document #57-120611-020R.)
U.S. Judge Lewis A. Kaplan of the Southern District ofNew York approved the settlement.
The settling defendants are former Lehman BrothersCEO Richard S. Fuld Jr., former Chief Financial Offi-cers Christopher M. O’Meara, Erin Callan and IanLowitt and former Chief Operating Officer JosephM. Gregory, as well as nine former members of theLehman Brothers board of directors: Michael Ainslie,John F. Akers, Roger S. Berlind, Thomas H. Cruik-shank, Marsha Johnson Evans, Sir Christopher Gent,Roland A. Hernandez, Henry Kaufman and JohnD. Macomber.
The lead plaintiffs represent a class of pension funds,companies and individual investors who purchasedLehman securities pursuant to offering materials thatthey allege contained misleading statements and omis-sions. They sued former Lehman directors and officers,as well as certain underwriters and auditors of Lehmansecurities, alleging that they issued a series of false andmisleading statements in the offering documents con-cealing Lehman Brothers’ true business and financialcondition in violation of Sections 10(b), 20(a) and 20Aof the Securities Exchange Act of 1934, Securities andExchange Commission Rule 10b-5 and Sections 11,12(a)(2) and 15 of the Securities Act of 1933.
Fair, Reasonable
Judge Kaplan noted that the lead plaintiffs said thatthey could recover a judgment of ‘‘many billions ofdollars’’ from the former directors and officers at trialbut nevertheless proposed to settle the claims for $90million to be paid by Lehman’s insurance policies with-out contribution from any of the former directors andofficers. At an April 12 settlement hearing, JudgeKaplan expressed concern about the proposed settle-ment and requested information concerning lead coun-sel’s ability to accurately assess the settlement offerwithout knowledge of the former directors and officers’personal assets and the adequacy and reasonableness ofthe settlement in light of the former directors and offi-cers’ allegedly enormous possible exposure and theirpersonal assets, both liquid and nonliquid.
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After receiving submissions from the officer defendantsin compliance with his request, Judge Kaplan approvedthe settlement, finding that it is substantively fair, rea-sonable and adequate.
‘Bird In The Hand’
‘‘Additionally, the parties and the Court are in agree-ment that proceeding to trial in this case would involvegreat expenditures of time and money,’’ Judge Kaplansaid. ‘‘Lead Counsel correctly argue that the class wouldface considerable ‘risks in establishing liability anddamages against the [Director and Officer] defendants,’all of whom already have succeeded in having certain ofthe claims brought against them dismissed.
‘‘Furthermore, if the Court did not approve the D&OSettlement, the $90 million in Lehman insurancemoney currently on offer quickly would be depletedor consumed entirely. This would leave only the formerdirectors and officers’ own resources in the event theclass were successful at trial.’’
Judge Kaplan went on to address potential concernsregarding the fact that the director and officer defen-dants will not be contributing to the settlement.
‘‘While some may be concerned at the lack of any con-tribution by the former director and officer defendantsto the settlement, Lead Counsel’s judgment that the$90 million bird in the hand is worth at least as muchas whatever is in the bush, discounted for the risk of anunsuccessful outcome of the case, is reasonable.’’
Attorneys
The lead plaintiffs are represented by Max W. Bergerand Steven B. Singer of Bernstein Litowitz Berger &Grossmann in New York, David R. Stickney, BrettMiddleton and Jon F. Worm of Bernstein Litowitz inSan Diego and David Kessler, John A. Kehoe and Jen-nifer L. Enck of Barroway Topaz Kessler Meltzer &Check in Radnor, Pa.
Fuld is represented by Patricia M. Hynes, Andrew RhysDavies and Todd Steven Fishman of Allen & Overy inNew York. O’Meara is represented by Guy Petrillo andJoshua Klein of Petrillo Klein. Callan is represented byDietrich L. Snell, Mark Edward Davidson and Seth D.Fier of Proskauer Rose. Lowitt is represented by MartinJoel Auerbach. Gregory is represented by AudreyStrauss and Israel David of Fried, Frank, Harris, Shri-ver & Jacobson. All are in New York.
The director defendants are represented by Adam J.Wasserman, Andrew J. Levander and Kathleen N.Massey of Dechert in New York.
(Additional documents available. Motion to approvesettlement. Document #57-120611-021M. Brief insupport of motion to approve settlement. Document#57-120611-022B.) n
Greenberg Traurig AgreesTo Pay $61MTo Settle Ponzi ClaimsPHOENIX — The law firm Greenberg Traurig LLPagreed June 20 to pay $61 million to settle a suit in theU.S. District Court for the District of Arizona allegingthat it aided an alleged Ponzi scheme that bankruptedtwo companies and led to $900 million in losses (RobertFacciola, et al., v. Greenberg Traurig LLP, et al., No.10-1025, D. Ariz.).
(Motion for preliminary approval of settlement inSection B. Document #88-120625-336M.)
The firm moved for preliminary approval of settlementin the U.S. District Court for the District of Arizona.Also yesterday, U.S. Judge Frederick J. Martone of theDistrict of Arizona granted preliminary approval ofQuarles & Brady LLP’s $26.5 million settlement ofsimilar claims in the same suit.
According to lead plaintiff Robert Facciola, MortgagesLtd. created a Ponzi scheme to conceal its insolvencyand stay in business. The plaintiff claims that thescheme entailed finding investors to buy into RadicalBunny LLC, which provided funds to conceal Mort-gages’ debt. Mortgages and Radical Bunny subse-quently filed for bankruptcy.
‘Facade Of Legitimacy’
Mortgages was represented by Greenberg Traurig, andRadical Bunny was represented by Quarles & Brady.
The plaintiffs allege that the law firms helped ‘‘create afacade of legitimacy’’ through their representation of thecompanies that enabled the Ponzi scheme and illegalsecurities sales to continue.
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The Greenberg Traurig settlement consists of twoclasses: the Mortgages class, which includes 975 inves-tors who invested $600 million, and the Radical Bunnyclass, which includes 770 individuals who invested$197 million.
The Quarles settlement was proposed May 18 and alsoincludes a Mortgages class and a Radical Bunny class.
Attorneys
Facciola is represented by Andrew S. Friedman of Bon-nett Fairbourn Friedman & Balint and Jeremy JamesChristian and Richard Glenn Himelrick of Tiffany &Bosco, all in Phoenix.
Greenberg Traurig is represented by Kenneth C. Smur-zynski, Colette Tyrell Connor, Ellen E. Oberwetter,Grace O. Aduroja, Kevin M. Downey and PatrickJoseph Houlihan of Williams & Connolly in Washing-ton, D.C., and Martin Richard Galbut and MichaileJanae Berg of Galbut & Galbut in Phoenix.
Quarles & Brady is represented by Floyd P. Bienstockand Michella Kras of Steptoe & Johnson in Phoenixand Heather Condon, Jared S. Kirkwood, Robert E.Gooding Jr., Scott Garner and Shawn M. Kennedy ofMorgan Lewis & Bockius in Irvine, Calif.
(Additional documents available: Order approvingQuarles settlement. Document #88-120625-337R.Notice of Quarles settlement. Document #88-120625-338X.) n
10th Circuit AffirmsRuling In Favor Of ReceiverIn Ponzi-Related ActionDENVER — The 10th Circuit U.S. Court of Appealson June 6 affirmed a district court’s grant of summaryjudgment in favor of a corporation’s receiver, whobrought a suit seeking to void allegedly fraudulenttransfers the defendants received from the corporation,which was used to operate a Ponzi scheme (Robert G.Wing v. Bruce J. Dockstader, et al., No. 11-4006, 10thCir.; 2012 U.S. App. LEXIS 11390).
(Unpublished opinion available. Document #88-120625-262Z.)
In an unpublished opinion, the 10th Circuit panel ofCircuit Judges Michael R. Murphy, William J. Hollo-way Jr. and Neil Gorsuch affirmed the ruling of theU.S. District Court for the District of Utah in the suitRobert G. Wing, as court-appointed receiver for VescorInc., filed against Bruce J. Dockstader, Marilyn Dock-stader, Dockstader Family Trust dtd 4/24/91 andDockstader Family Truet dtd 5/8/91 (collectively, theDockstaders).
Wing’s suit, which he brought under Utah’s UniformFraudulent Transfer Act (UFTA), sought to void cer-tain transfers the Dockstaders received from Vescor,a now-defunct company controlled by Val Southwick,in the course of the Dockstaders’ dealing with thecompany.
In 2008, Southwick pleaded guilty to nine felony countsof securities fraud in connection with a Ponzi scheme heran through a complex network of corporations andlimited liability companies. The Securities and Ex-change Commission sued Southwick and Vescor, theprincipal entity through which Southwick orchestratedhis scheme, on Feb. 6, 2008, and on May 5, 2007, theDistrict Court appointed Wing as receiver for Vescor. Inthe suit brought by Wing, the District Court grantedsummary judgment in his favor on Dec. 3, 2010. Thejudgment against the Dockstaders totaled $671,702.66.They appealed to the 10th Circuit.
Statute Of Limitations
The Dockstaders argued that the UFTA does not createany remedies for receivers and that the receivership didnot empower Wing to bring claims on behalf of thecreditors or investors of Vescor. The panel disagreed,agreeing with the District Court, which cited Scholes v.Lehmann (56 F.3d 750, 753-55 [7th Cir. 1995]),which held that a receiver of an entity that was usedto perpetrate a Ponzi scheme has standing to recoverfraudulent transfers as though the receiver was a cred-itor of the scheme.
The Dockstaders also argued that the statute of limita-tions has run on any of Wing’s claims regarding trans-actions that occurred before Oct. 6, 2004, four yearsprior to the date he filed the suit. The UFTA provides:‘‘A claim for relief or cause of action regarding a frau-dulent transfer or obligation under this chapter is extin-guished unless action is brought: (1) under Subsection25-6-5(1)(a), within four years after the transfer was
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made or the obligation was incurred or, if later, withinone year after the transfer or obligation was or couldreasonably have been discovered by the claimant.’’The Dockstaders further argued that Section 25-6-10is a statute of repose, which is not subject to equitabletolling. Thus, they argued that the receiver’s rightto enforce fraudulent transfer claims runs from thetime each transfer took place, not the date of hisappointment.
The panel said that the one-year tolling period in Sec-tion 25-6-10 refers to when a transfer could reasonablyhave been discovered ‘‘by the claimant.’’ The DistrictCourt concluded that Wing’s action was timely filedbecause he could not reasonably have discovered anyfraudulent transfer prior to his appointment. BecauseWing was appointed May 5, 2008, and filed the actionjust more than five months later, the District Courtconcluded that his claims were timely brought. TheDistrict Court also concluded that Utah would likelyadopt the ‘‘adverse domination’’ theory for purposes ofcomputing the statute of limitations.
The panel agreed, saying that a contrary rule wouldperversely foreclose from recovery of early transfers ina Ponzi scheme that is successfully run for a long periodof time. Applying the adverse domination theory to thiscase, all available evidence established that Southwickused Vescor in a coordinated scheme to defraud inves-tors, the panel said. Vescor could not reasonably havebeen expected to bring claims against itself, and theDistrict Court appropriately concluded that Wing’sclaims were brought within the applicable statute oflimitations, the panel determined.
Tax Offsets
The Dockstaders further contended that they should beentitled to offset from the judgment any taxes they paidon the money they received from Vescor, citing noauthority to support the argument. The panel agreedwith the District Court, which concluded that allowingoffsets would frustrate the purposes of the UFTAbecause there is no principle by which they could belimited, it would introduce difficult problems of proofand tracing into each case and any amount offset wouldnecessarily come at the expense of other investors.
The District Court’s judgment against the Dockstadersincluded amounts Bruce Dockstader received inexchange for referring new investors to Vescor. The
Dockstaders argued that these payments, which totaled$146,140, are not voidable under the UFTA becausethey were made in good faith in exchange for reasonablyequivalent value. They argued that their good faith wasestablished because there has been no allegation thatthey were aware that Vescor was operating as a Ponzischeme. They further argued that by providing inves-tors to Vescor, Bruce Dockstader provided the com-pany with an economic benefit for which he is entitledto retain his 5 percent referral fee.
The Dockstaders relied on several bankruptcy cases forthe proposition that the determination of whether rea-sonably equivalent value was given should not take intoaccount the impact the services had on perpetuatingthe fraudulent scheme.
The panel noted that the Dockstaders did not give anyreason why to apply the bankruptcy cases in the contextof a receivership action under the UFTA. The panelexplained that outside the bankruptcy context, othercircuits have rejected the Dockstaders’ position, includ-ing the Fifth Circuit, which in Warfield v. Byron (436F.3d 551, 560 [5th Cir. 2006]), said: ‘‘It takes cheek tocontend that in exchange for the payments he received,the . . . Ponzi scheme benefited from his efforts toextend the fraud by securing new investments.’’
Wing is represented by M. David Eckersley, Jennifer R.Korb, Sally B. McMinimee and Jared N. Parrish ofPrince, Yeates & Geldzahler in Salt Lake City. TheDockstaders are represented by Shawn Terry Farris ofFarris & Utley in Saint George, Utah.
(Additional documents available: Appellant brief.Document #88-120625-263B. Appellee brief. Docu-ment #88-120625-264B. Appellant reply brief.Document #88-120625-265B.) n
Wells Fargo, BNY MellonTo Pay $106M InMedCap Ponzi SettlementSANTA ANA, Calif. — The receiver for Medical Capi-tal Holdings Inc. (MedCap) said June 11 that he hadreached a $106 million settlement with Wells FargoBank NA and Bank of New York Mellon (BNY Mel-lon), resolving allegations that the banks were complicit
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in MedCap’s alleged Ponzi scheme (Securities andExchange Commission v. Medical Capital HoldingsInc., et al., No. 09-00818, C.D. Calif.).
(Settlement available. Document #88-120625-274M. Trustee’s declaration in support of motionfor approval of settlement available. Document #88-120625-275X.)
In a declaration in support of his motion for approval ofthe settlement filed in the U.S. District Court for theCentral District of California, MedCap trustee ThomasA. Seaman said Wells Fargo agreed to pay $49 millionand BNY Mellon agreed to pay $57 million.
Litigation Costs, Risks
MedCap raised money by setting up special purposecorporations, known as medical provider funding cor-porations (MPFCs), which sold notes to investors. InJuly 2008, the U.S. Securities and Exchange Commis-sion sued MedCap, its entities and principals SydneyField and Joseph Lampariello, alleging that Field andLampariello engaged in a Ponzi scheme to defraudinvestors in the MPFCs.
The banks served as indenture trustees for the MPFCs.The banks were alleged to have breached the note-holder issuance and security agreements, which out-lined their control and disbursement of funds. OnOct. 12, 2010, the District Court issued an orderauthorizing Seaman to file claims against the banks ifSeaman deemed proper. He then entered settlementdiscussions with the banks. Seaman said he opted fora settlement because he was concerned about the costsand risks of litigation against the banks.
‘‘In [the] worst case scenario, if the Trustees prevailed(or if this Settlement is not consummated and theTrustees prevail in the future), the Receivership Estatewould recover nothing, and would face indemnityclaims that could well exceed $50 million, wiping outhalf of the Receivership Estate,’’ Seaman said.
Related Actions
Seaman also said the settlement is the best option inlight of related class and mass actions against the banks.
‘‘The net benefit of the Settlement is significantlygreater than $104 million, as it eliminates the risk tothe Receivership Estate of having to pay the Trustees’
legal fees should the Class Action or Mass Actions ulti-mately fail — an indemnity claim that I estimate cur-rently exceeds $25 million, and would likely exceed $50million if those cases are tried,’’ he said.
Seaman is represented by Ronald Hayes Malone andFrank A. Cialone of Shartsis Friese in San Francisco.Wells Fargo is represented by Edward T. Wahl, Ste-phen M. Mertz and Theresa H. Dykoschak of Faegre &Benson in Minneapolis, Jesse S. Finlayson of FinlaysonWilliams Toffer Roosevelt & Lilly in Irvine, Calif., andTimothy William Loose of Gibson Dunn & Crutcherin Los Angeles. Counsel information for BNY Mellonwas not available. n
5th Circuit Affirms DenialOf Stanford Receiver’sInjunction RequestNEW ORLEANS — The Fifth Circuit U.S. Court ofAppeals on June 13 upheld the denial of a request madeby the receiver for The Stanford International BankLtd. (SIB) to preliminarily enjoin Libyan investmentfunds from dissipating more than $54 million in fundsthat he says they received via fraudulent transfers as partof their alleged role in the R. Allen Stanford Ponzischeme, agreeing with the defendants that the ForeignSovereign Immunities Act (FSIA) prohibits suchinjunctions (Ralph S. Janvey, in his capacity as court-appointed receiver for The Stanford InternationalBank, Ltd., et al. v. Libyan Investment Authority andLibyan Foreign Investment Co., No. 12-10240, 5thCir.; 2012 U.S. App. LEXIS 11961).
(Unpublished opinion available. Document #88-120625-290Z.)
In an unpublished opinion, the Fifth Circuit panel ofCircuit Judges E. Grady Jolly, Harold R. DeMoss Jr.and Carl E. Stewart affirmed the U.S. District Court forthe Northern District of Texas’ ruling in the suit filedby Ralph S. Janvey, the receiver, against the LibyanInvestment Authority (LIA) and the Libyan ForeignInvestment Co. (LFICO) (collectively, the Libyaninvestment funds).
Janvey sued the Libyan investment funds on June 3,2011. Along with his complaint, Janvey moved for
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preliminary injunction enjoining the defendants fromdissipating $54,823,740.83 in funds that Janvey saysthe defendants received via fraudulent transfers. Janveyalleges that the Libyan investment funds received morethan $54.8 million in fraudulently transferred certifi-cates of deposit (CD) proceeds as part of their role inthe $7 billion Stanford Ponzi scheme. Janvey seeks aruling that the CD proceeds received by the defendantswere fraudulent transfers under the Texas UniformFraudulent Transfer Act (UFTA) or that the proceedsunjustly enriched the defendants. Janvey also seeks dis-gorgement of the proceeds and a temporary restrainingorder and preliminary injunction against the defen-dants and their accounts.
Immunity
On Feb. 29, the District Court denied Janvey’s motionfor preliminary injunction, and Janvey filed an inter-locutory appeal of the denial with the Fifth Circuiton March 2.
The Fifth Circuit panel affirmed, agreeing with thedefendants that the FSIA prevents the entry of suchan injunction. According to the FSIA (28 U.S. CodeSection 1609), ‘‘[s]ubject to existing internationalagreements to which the United States is a party atthe time of enactment of this Act the property in theUnited States of a foreign state shall be immune fromattachment arrest and execution except was providedin sections 1610 and 1611 of this chapter.’’
Janvey did not dispute that the LIA, an agency of theLibyan government, has not explicitly waived its immu-nity from attachment before a judgment on the meritsin this case. Instead, he contended that Section 1610(d)is inapplicable to the circumstances because the preli-minary injunction he seeks is not functionally equiva-lent to an attachment and the LIA does not hold legalor equitable title to any funds fraudulently transferredfrom SIB to LFICO for the ‘‘benefit’’ of the LIA.
Attachment
The panel rejected both arguments. The panel saidthe preliminary injunction sought would effectivelyfreeze the funds belonging to the LIA pending the Dis-trict Court’s resolution of the case. Accordingly, a pre-liminary injunction would serve the same purpose asan attachment, the panel said, citing Atwood TurnkeyDrilling Inc. v. Petroleo Brasileiro S.A. (875 F.2d 1174,1177 [5th Cir. 1989]). For this reason, the FSIA’s
prohibition on ‘‘attachments’’ of property belonging toa foreign sovereign prevented the District Court fromentering a preliminary injunction in Janvey’s favor, thepanel said.
With respect to Janvey’s second argument, the panelconcluded that no evidence has been presented that inthese specific circumstances the LIA received any ‘‘ben-efit’’ that would make the funds belonging to the LIAsubject to relief under the Texas UFTA. Therefore, thereceiver failed to demonstrate that the LIA does nothold legal or equitable title to the funds he seeks, thepanel said. In other words, the panel explained, Janvey’sargument that the funds are not ‘‘property of a foreignstate’’ for purposes of Section 1610(d) has no meritbecause there is no evidence that the funds at issuehave ever been the subject of a fraudulent transferby the SIB.
Janvey is represented by Kevin M. Sadler, Scott D.Powers and David T. Arlington of Baker Botts in Aus-tin, Texas. The defendants are represented by JosephM. Cox of Patton Boggs in Dallas, Henry Weisburgand Brian H. Polovoy of Shearman & Sterling in NewYork and Stephen James Marzen of Shearman & Ster-ling in Washington, D.C.
(Additional documents available. Appellant brief.Document #57-120514-507B. Appellee brief. Docu-ment #57-120514-508B. Appellant reply brief.Document #57-120514-509B.) n
Judge: Receiver Can’t VoidCommissions On PropertiesSold To Ponzi OperatorSALT LAKE CITY — In a suit in which the receiver fora company that was operated as an alleged Ponzi schemesued to recover commissions on real estate transactionsrelated to the alleged scheme, a federal judge in Utah onJune 11 granted summary judgment in favor of thedefendants, ruling that the Texas Uniform FraudulentTransfers Act (TUFTA) does not give the receiver theright to seek a judgment that would result in retentionof value above what was initially contemplated by thetransactions (Roger J. McConkie v. Rice Properties,et al., No. 09-00275, D. Utah; 2012 U.S. Dist.LEXIS 80902).
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(Opinion available. Document #88-120625-276Z.)
Ponzi, SEC Action
U.S. Judge Clark Waddoups of the District of Utahmade the ruling in the suit Roger J. McConkie, asreceiver for Madison Real Estate Group LLC and itsrelated entities (collectively, Madison), filed against realestate brokerage firm Rice Properties.
According to the parties, from 2005 to 2007, Madisonwas operated as part of a Ponzi scheme. On March 28,2008, the Securities and Exchange Commission filed acomplaint against Madison and its principals to shutdown the operation of Madison and stop the Ponzischeme. On the same date, the District Courtappointed McConkie as receiver for Madison.
The instant action arose regarding two transactions inwhich Madison was the buyer: the sale of an apartmentcomplex near Lubbock, Texas, called Aspen Village andthe sale of another apartment complex near Lubbockcalled The Preserve at Prairie Point. Rice Propertiesrepresented the sellers in each transaction and earneda commission. McConkie filed his complaint to recoverthe commission received by Rice Properties after it wason inquiry notice of Madison’s scheme pursuant toTUFTA. McConkie and the defendants each movedfor summary judgment.
Section 24.009(a)
Because Madison was operating as a Ponzi scheme, anytransfer made by Madison would be a fraudulent trans-fer under TUFTA, and when a transfer is fraudulentunder TUFTA, creditors who are harmed by the trans-fer are entitled to obtain, among other remedies, anavoidance of the transfer in the absence of certaindefenses specified by the statute, Judge Waddoupssaid. Therefore, McConkie is entitled to obtain anavoidance of the transfer of funds for the purchase ofthe properties in question in the absence of a legitimatedefense from Rice Properties.
Rice Properties argued that Texas Business and Com-mercial Code Annotated Section 24.009(a) must beread to create two separate defenses: first, that a frau-dulent transfer is not voidable if it is made to ‘‘a personwho took in good faith and for a reasonably equivalentvalue,’’ and second, that a fraudulent transfer is notvoidable if it is made to ‘‘any subsequent transferee oroblige.’’ Rice Properties claims to be a subsequent trans-feree that is entitled to an absolute defense against this
action. Jude Waddoups said that Rice Properties iscorrect that Section 24.009(a) creates two separatedefenses but that it incorrectly identifies the scope ofthe subsequent transferee defense. The judge said thatfor Rice Properties to take advantage of Section24.009(a)’s subsequent transferee defense, it mustprove that it is a subsequent transferee and that ittook from an initial transferee ‘‘in good faith and for areasonably equivalent value.’’
Subsequent Transferee
Judge Waddoups agreed with Rice Properties that it is asubsequent transferee of the sellers, saying he finds bothHooker Atlanta Corp. v. Hocker (In re Hooker Inv.Inc.) (155 B.R. 332 [Bankr. S.D. N.Y. 1993]) andMcCarty v. Richard James Enter. Inc. (In re Presiden-tial Corp.) (180 B.R. 233, 239 [B.A.P. 9th Cir. 1995])persuasive.
Once all the conditions of transfer of the propertieswere accomplished, the funds that had been placed inescrow to purchase the properties immediately cameunder the dominion and control of the sellers, hesaid. At that point, the escrow agent, who had physicalpossession of the funds, became the sole agent of thesellers, and it was only at the direction of the sellers thatfunds were then transferred to Rice Properties by theescrow agent, he said. The fact that the sellers’ direc-tions to the escrow agent were memorialized in a con-tract made irrevocable without the consent of RiceProperties does not negate the status of the sellers asinitial transferees, and therefore, Rice Properties is asubsequent transferee of the sellers, Judge Waddoupsdetermined.
Judge Waddoups further determined that the sellers ofthe properties took the sale proceeds from Madison ingood faith and for value. There is no evidence in therecord that the Alpine Village and The Preserve trans-actions were executed pursuant to a secret agreementwith Madison, he said. The transactions appear to bethe result of arms-length negotiations between the par-ties, and there is no indication that the properties weresold above or below the market price.
As a subsequent transferee of the sellers, Rice Propertiesis entitled to an absolute defense to the plaintiff’s avoid-ance action pursuant to Section 24.009(a) regardless ofwhether they should have known of Madison’s fraud,Judge Waddoups ruled, denying McConkie’s motion
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for summary judgment and granting Rice Properties’motion for summary judgment.
Attorneys
McConkie is represented by himself, James W.McConkie III and James C. Bergstedt of PrinceYeates & Geldzahler in Salt Lake City.
Rice Properties is represented by Ronnie L. Agnew ofThe Agnew Law Firm in Lubbock and Isaac D. Pax-man of Stepan Lewis & Paxman in Sandy, Utah.
(Additional documents available: Plaintiff’s motionfor summary judgment. Document #88-120625-277M. Brief in support of plaintiff’s motion forsummary judgment. Document #88-120625-278B.Defendant’s motion for summary judgment. Docu-ment #88-120625-279M. Brief in support of defen-dant’s motion for summary judgment. Document#88-120625-280B. Opposition to defendant’smotion for summary judgment. Document #88-120625-281B.) n
Freddie Mac, Wells FargoSettle Telephone ConsumerProtection Act SuitsSAN DIEGO — The Federal Home Loan MortgageCorp. (Freddie Mac) and Wells Fargo Auto Finance Inc.have agreed to pay $17 million to settle two putative classactions alleging that they illegally contacted customerson their cell phones in violation of the Telephone Con-sumer Protection Act (TCPA), according to a June 18filing in a California federal court (Alberto Malta v. TheFederal Home Loan Mortgage Corp., et al., No. 10-1290, S.D. Calif.; Danny Allen Jr. v. Wells FargoAuto Finance Inc., No. 10-2657, S.D. Calif.).
(Motion for settlement. Document #88-120625-312M.)
The settlement would resolve the suit Albert Malta,individually and on behalf of all others similarly situ-ated, filed against Freddie Mac, and the suit DannyAllen Jr., individually and on behalf of all others simi-larly situated, filed against Wells Fargo. The motion forsettlement was filed by Malta and Allen and unopposedby the defendants. Both actions are in the U.S. DistrictCourt for the Southern District of California.
According to the complaints, both filed in 2010, WellsFargo violated the TCPA by contacting account holderson their cell phones without prior express consent,using an automatic telephone-dialing system andusing a prerecorded voice. Wells Fargo made the allegedphone calls to provide account services for its ownhome mortgages, auto loans and Freddie Mac homemortgages, according to the plaintiffs. According tothe complaints, the calls caused potential class membersto incur cell phone charges or reduced their prepaidcell phone time.
‘Fair And Reasonable’
The settlement includes two subclasses. One includesthe residential mortgage customers, and the otherincludes the auto finance customers.
As part of the settlement, the defendants do not admitany wrongdoing.
‘‘Because of the costs, risks to both sides, and delays ofcontinued litigation, the settlement presents a fair andreasonable alternative to continuing to pursue the liti-gation as a class action for alleged violations of theTCPA,’’ the plaintiffs say in their motion.
While the ‘‘Plaintiffs are confident of a favorable deter-mination on the merits,’’ the settlement ‘‘provides sig-nificant benefits to the Class Members and is in the bestinterests of the Settlement Class,’’ they say.
The plaintiffs are represented by Joshua B. Swigart andRobert L. Hyde of Hyde & Swigart and Douglas J.Campion of the Law Offices of Douglas J. Campion,all in San Diego, and Abbas Kazerounian of the Kazer-ounian Law Group in Santa Ana, Calif. The defendantsare represented by Eric J. Troutman in Irvine, Calif.,and Mark D. Lonergan in San Francisco, both of Sever-son and Werson. n
Federal Judge RefusesTo Remand ConsumerProtect Act Suit From MDLSAN DIEGO — In a multidistrict litigation in which adebt recovery firm is alleged to have violated the Tele-phone Consumer Protection Act (TCPA) by makingunauthorized phone calls to collect credit card debt, a
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federal judge in California on May 24 denied one set ofplaintiffs’ request to remand, disagreeing with theircontention that their case does not benefit from inclu-sion in the MDL and the only issues remaining to bedecided in their case are case-specific (In re: PortfolioRecovery Associates, LLC, Telephone Consumer Pro-tection Act Litigation, No. 11-md-02295, S.D. Calif.;2012 U.S. Dist. LEXIS 72833).
(Order available. Document #88-120625-219R.)
U.S. Judge John A. Houston of the Southern Districtof California made the ruling in the MDL against Port-folio Recovery Associates LLC (PRA), denying themotion filed by Christine and Carlos Suarez.
The MDL consists of five consolidated putative classactions and one ‘‘tag-along’’ action, each seeking relieffrom the defendant based on allegations that the defen-dant violated the TCPA by calling cell phone numberswith an automatic telephone dialing system (ATDS)without prior express consent. On April 12, the Suarezplaintiffs filed their motion to remand their case to theSouthern District of Florida, where they originally filedtheir complaint, and on May 11, PRA filed its opposi-tion brief.
‘Overarching Questions’
The Suarez plaintiffs say that ‘‘[d]efendant’s own calllogs indicate calls made with an [ATDS] . . . [and] that[defendant] obtained [p]laintiff’s cellular numberthrough contacts [d]efendants initiated with [p]laintiff’smother.’’ This, according to the Suarez plaintiffs, noissues of material fact regarding the defendant’s liabilityremain to be resolved in this cause such that it is nowripe for a case-specific summary judgment motion.
PRA responds that there are overarching questions thatmust be answered in all of the member actions, such aswhether the defendant used an ATDS to call the plain-tiffs; whether any such calls were made to a cell phonenumber without prior consent; whether any purportedviolations of the TCPA were willful and knowing; andwhether recovery for the plaintiffs under the TCPAwould violate PRA’s constitutional rights. The defen-dant disputes the Suarez plaintiffs’ suggestion thatfurther discovery and trial in their case would be limitedto case-specific issues, noting that the plaintiffs admitthat the corporate deposition has not yet taken place.
PRA claims that the Suarez plaintiffs’ argument thatPRA’s call logs are sufficient evidence to prove the useof an ATDS is ‘‘nonsensical,’’ pointing out that theSuarez plaintiffs’ ‘‘referenced, but unattached, pur-ported discovery does not establish or even addressthe technology used by PRA to make telephone calls,let alone establish or address the questions of whetherPRA ever used a dialer with the requisite capacity asdefined in the TCPA.’’ PRA adds that the Suarez plain-tiffs will benefit from further coordinated proceedingsas part of the MDL, including the avoidance of dupli-cative discovery, conservation of judicial and partyresources and prevention of inconsistent rulings.
PRA further points out that the Suarez plaintiffs had theopportunity to oppose the MDL panel’s conditionaltransfer order but did not do so, essentially acquiescingto the MDL panel’s determination that the Suarez caseshares common facts with the transfer faces. The defen-dant says there is no reason to abandon the MDLpanel’s determination regarding common facts, notingthat such requests are generally denied.
Remand Not Proper
The Suarez plaintiffs reply that they have demonstratedgood cause to remand because there is no evidence inthe record to contradict the fact that the telephonenumber at issue was a number assigned to a cellphone owned by the Suarez plaintiffs and that PRAplaced calls to that number using an ATDS or prere-corded voice. ]They say the issue of whether the defen-dant placed such calls without prior consent is stillunproven and wholly dependent on facts commononly to their case. They say PRA is incorrect in statingthat their claim is dependent on proving an ATDS wasimplemented. Even if the case were dependent on theuse of an ATDS, the Suarez plaintiffs contend that theevidence in the record answers the question affirma-tively, pointing to PRA’s registration of its ATDSwith the State of Texas Public Utility Commission.
Judge Houston said he is unconvinced that the evi-dence presented by the Suarez plaintiffs conclusivelydemonstrates that PRA used an ATDS, as defined bythe TCPA, when it called them. He agreed with PRAthat all of the cases transferred to the District Court bythe MDL panel have common questions of fact thathave yet to be answered and find there is more to beresolved in the Suarez case than only case-specific issues.He said the Suarez plaintiffs’ case will benefit from
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further coordinated proceedings, including the corpo-rate deposition, and he said he ‘‘sees no reason to dis-turb the MDL Panel’s initial determination that thiscase is appropriate for transfer to these coordinatedproceedings.’’
The Suarezes are represented by Scott David Owens ofHallandale, Fla. PRA is represented by Edward D. Lod-gen and Julia V. Lee of Robins, Kaplan, Miller & Ciresiin Los Angeles and Christopher W. Madel and JenniferM. Robbins of Robins, Kaplan in Minneapolis.
(Additional documents available: Motion to remand.Document #88-120625-220M. Response to motionto remand. Document #88-120625-221B. Reply insupport of motion to remand. Document #88-120625-222B.) n
Federal Judge: Act Doesn’tLet Consumers RevokeConsent to ContactSCRANTON, Pa. — A federal judge in Pennsylvaniaon May 29 dismissed a Telephone Consumer Protec-tion Act (TCPA) complaint alleging that a creditorcontacted a plaintiff via her mobile telephone aftershe sent a letter asking the creditor to stop calling,explaining that the TCPA does not authorize consu-mers to revoke consent to contact after they initiallygrant consent (Ashley Gager v. Dell Financial Services,LLC, No. 11-02115, M.D. Pa.; 2012 U.S. Dist.LEXIS 73752).
(Opinion available. Document #88-120625-230Z.)
U.S. Judge Robert D. Mariani of the Middle Districtof Pennsylvania granted Dell Financial Services LLC’s(DFS) motion to dismiss the suit Ashley Gager filedagainst it.
Gager secured a line of credit with the DFS in December2007 to purchase computer equipment. When she pre-pared her credit application with DFS, she completed anInternet form that asked applicants to provide a ‘‘housephone’’ number. Gager did not have a land-line tele-phone, so she provided her mobile phone numberinstead. She became delinquent in her payments tothe defendant, and the defendant began calling her
mobile phone with prerecorded messages regardingthe debt. In December 2010, Gager sent DFS a letterasking it to stop calling her. A copy of the letterattached to Gager’s complaint does not inform DFSthat the number it was using to contact her was con-nected to a mobile device. Gager asserts that the letter‘‘revoked her consent that she had previously given tothe Defendant to place calls to her cellular telephonenumber.’’ She says DFS nonetheless continued toplace an additional 40 calls to her cell phone in lessthan three weeks.
Starkey
Judge Mariani noted that Gager admits that she pro-vided consent for DFS to call her cell phone when shelisted that number of a credit application. Thus, thequestion of consent to contact is undisputed, leavingGager’s claim to turn on whether, as a matter of law,she was able to revoke consent with her letter to DFS,the judge said.
Gager provides several out-of-circuit district court casesfor the proposition that withdrawal of consent to con-tact after the consummation of a credit contract is per-missible under the TCPA, but the cases discuss only themethods of revocation (written notice versus sufficiencyof oral revocation) and do not address the propriety ofrevocation itself or when such revocation may be per-mitted, the judge said. The cases Gager cites all con-cerned circumstances requiring the application of theTCPA in conjunction with the Fair Debt CollectionPractices Act (FDCPA) or assume, without support,that a revocation of consent to contact under theTCPA is authorized by the statute and its implement-ing regulations, Judge Mariani said. These casesinitiated under both the TCPA and FDCA, wherethe defendants were debt collectors under theFDCPA, have no application here, the judge explained,because DFS is a creditor and not a debt collector.
In one of these cases, Starkey v. Firstsource Advantage,LLC (W.D. N.Y. [2010]), the Western District of NewYork ‘‘essentially infused the written withdrawalrequirement of the FDCPA into the TCPA becausethe debt collector in that case was subject to bothstatutes,’’ Judge Mariani explained.
Adamcik, Gutierrez
In Adamcik v. Credit Control Services, Inc. (W.D.Texas [2011]), the Western District of Texas criticized
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the Starkey line of cases and held that the TCPA andthe FDCPA are two independent statutes whose provi-sions should not be read into one another, Judge Mar-iani explained. While Adamcik repudiated the Starkeycourt’s writing of FDCPA requirements into theTCPA, ‘‘it still found, without any statutory or FCCsupport, that revocation of consent was possible,and need only be given orally, after such consent wasgiven during the formation of a debt contract,’’ JudgeMariani said.
Judge Mariani went on to note that in Gutierrez v.Barclays Group (S.D. Calif. [2011]), the Southern Dis-trict of California also broke with Starkey and held thatoral revocation of consent to contact under the TCPAwas sufficient. The Gutierrez court recognized thatrevocation of consent was still possible after the con-summation of a credit contract, Judge Mariani said.
‘‘We do not find the statutory construction and reason-ing in Starkey, Adamcik, or Gutierrez, to be persuasive,and expressly decline to hold that the TCPA, or anyFCC regulation or advisory opinion construing the sta-tute, contains any provision permitting this Court tofind post-formation revocation of consent authorizedunder the provisions of the TCPA,’’ Judge Marianisaid. ‘‘While the Starkey line might have applicabilityif Defendant were subject to the FDCPA, under theprevailing law of the Third Circuit, Defendant is nota ‘debt collector’ as defined by that statute; thus, theright to withdraw consent provisions enacted underthe FDCPA do not apply to Defendant and we donot find any TCPA provision allowing revocation,so that Plaintiff’s claims that her rights were violatedunder the TCPA, assuming all of the facts in herAmended Complaint as true, do not state a cause ofaction.’’
Gager is represented by Brett M. Freeman of the Saba-tini Law Firm in Dunmore, Pa. DFS is represented byAnthony L. Gallia of Duane Morris in Philadelphia.
(Additional documents available: Motion to dismiss.Document #88-120625-231M. Brief in support ofmotion to dismiss. Document #88-120625-232B.Opposition to motion to dismiss. Document #88-120625-233B. Reply brief in support of motion todismiss. Document #88-120625-234B. Plaintiff’ssur-reply brief. Document #88-120625-235B.) n
Federal Judge: TelephoneConsumer Protection ActClaim Falls ShortLAS VEGAS — A federal judge in Nevada on June 14dismissed a Telephone Consumer Protection Act(TCPA) complaint, ruling that the plaintiff failed toallege that the defendant used an automatic telephonedialing system or an artificial or prerecorded voice incalling his cell phone (Timothy P. Harris v. AmericanGeneral Financial Services LLC, No. 10-1662, D.Nev.; 2012 U.S. Dist. LEXIS 83192).
(Order available. Document #88-120625-308R.)
U.S. Judge Gloria M. Navarro of the District of Nevadagranted American General Financial Services LLC’smotion to dismiss the suit Timothy P. Harris filedagainst it. Judge Navarro dismissed the complaintwith prejudice, closing the case.
Harris filed the suit based on American General’sreports of his delinquent accounts to national creditbureaus. On Sept. 28, 2011, Judge Navarro grantedAmerican General’s motion to dismiss, permittinghim to amend his claim under Count III, which allegedTCPA violations. Harris filed an amended complaint,alleging five claims against American General for viola-tion of the Fair Credit Reporting Act (FCRA) and oneclaim under the TCPA. He explains that ‘‘upon appealthe courts will side with the Plaintiff [regarding Plain-tiff’s FCRA claims] and this case will be sent back tothis court for further proceedings.’’
Section 227(b)
Because Judge Navarro gave Harris leave to amend hisclaim only under the TCPA, she limited her analysis tothe TCPA claim. She acknowledged that Harris mayappeal the dismissal of the FCRA claims.
Judge Navarro said that Harris appears to invoke 47U.S. Code Section 227(b), which prohibits the use of‘‘any automatic telephone dialing system or an artificialor prerecorded voice’’ to make a call to emergency tele-phone lines, hospital and health care facility guestrooms or to any telephone number for which the calledparty is charged for the call, other than for emerge-ncy purposes or with the prior express consent of thecalled party. Section 227(b) also prohibits the initia-tion of ‘‘any telephone call to any residential telephone
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line using an artificial or prerecorded voice to delivera message without the prior express consent of thecalled party.’’
The judge found that the Harris failed to allege thatAmerican General used an automatic telephone dialingsystem or an artificial or prerecorded voice in calling hiscell phone. In fact, Judge Navarro said, the plaintiffappears to allege specific people who called his phoneby listing the first names of people alleged to havemade each call. Harris’ allegation that American Gen-eral had no permissible purpose or permission to makethese calls therefore fails to state a under Section 227(b)Section 227(d), she said.
Harris, of North Las Vegas, Nev., appears pro se. Amer-ican General is represented by Laurel E. Davis ofFennemore Craig in Las Vegas.
(Additional documents available: Motion to dismiss.Document #88-120625-309M. Response to motionto dismiss. Document #88-120625-310B. Reply insupport of motion to dismiss. Document #88-120625-311B.) n
Supreme Court Will HearAppeal Of DismissalOf Debt Collection SuitWASHINGTON, D.C. — The U.S. Supreme Courton May 29 agreed to hear an appeal of a ruling that acollection agency did not violate the Fair Debt Collec-tion Practices Act (FDCPA) when it contacted a debt-or’s employer to verify her employment status (OliveaMarx v. General Revenue Corporation and KevinCobb, No. 11-1175, U.S. Sup.; See January 2012,Page 28).
On Dec. 21, the 10th Circuit U.S. Court of Appealsaffirmed the U.S. District Court for the District ofColorado’s dismissal of the suit filed by Olivea Marxagainst General Revenue Corp. (GRC) and KevinCobb. Marx filed her petition for writ of certiorari onMarch 23.
The question presented is: ‘‘Whether a prevailingdefendant in a Fair Debt Collection Practices Act(FDCPA) case may be awarded costs for a lawsuit
that was not ‘brought in bad faith and for the purposeof harassment,’ when the FDCPA provides that ‘[o]n afinding by the court that an action under this sectionwas brought in bad faith and for the purpose of harass-ment, the court may award to the defendant attorney’sfees reasonable in relation to the work expendedand costs’ and Federal Rule of Civil Procedure 54(d)provides that ‘[u]nless a federal statute, these rules, ora court order provides otherwise, costs — otherthan attorney’s fees — should be allowed to theprevailing party.’ ’’
Fax Not ‘Communication’
After Marx defaulted on her student loan, her guaran-tor, EdFund, a division of the California Student AidCommission, hired GRC to collect on the account. In2008, she sued GRC in the District Court, allegingabusive and threatening phone calls in violation ofthe FDCPA. She amended her complaint to add aclaim that GRC violated the FDCPA by sending afax to her workplace that requested information abouther employment status. The District Court foundthat the challenged debt collection practices were notabusive and threatening.
On appeal to the 10th Circuit, Marx contested theDistrict Court’s finding that GRC did not violate theFDCPA’s provision against debt-collector communica-tions with their parties. She argued that the DistrictCourt erred in finding that a fax sent by GRC didnot constitute a ‘‘communication’’ under the FDCPA,awarding GRC costs pursuant to Federal Rule of CivilProcedure 54(d) and permitting, in the alternative, anaward of costs following GRC’s offer of judgment pur-suant to Federal Rule of Civil Procedure 68.
The 10th Circuit agreed with the District Court thatthe fax in question is not a ‘‘communication’’ under theFDCPA. A ‘‘communication’’ under the FDCPA mustindicate to the recipient that the message relates to thecollection of debt. The panel said the fax cannot beconstrued as ‘‘conveying’’ information ‘‘regarding adebt’’ because the fax does not reference debt and speaksonly of verifying employment.
The 10th Circuit also found that the District Courtproperly awarded costs to GRC.
Attorneys
Marx is represented by Allison M. Zieve of the PublicCitizen Litigation Group in Washington.
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GRC is represented by Adam Loyd Plotkin ofDenver. n
3rd Circuit: Consumer FailedTo Show Debt CollectionLetter Was MisleadingPHILADELPHIA — A consumer has failed to showthat a debt collector’s letters seeking payment on a debtwas either false or misleading, a Third Circuit U.S.Court of Appeals panel ruled June 11 in affirming dis-missal of the consumer’s Fair Debt Collection PracticesAct (FDCPA) claim (Norman Morse, administrator ofthe estate of Nancy Morse, v. Paula G. Kaplan, et al.,No. 11-2562, 3rd Cir.; 2012 U.S. App. LEXIS 11749).
(Opinion available. Document #88-120625-013Z.)
Norman Morse, as administrator of the estate of NancyMorse, sued debt collector Paula G. Kaplan and Sara A.Younger in the U.S. District Court for the District ofNew Jersey.
Morse alleges that two debt collection letters sent byKaplan to Morse’s wife were misleading and, thus, vio-lated the FDCPA.
Summary Judgment
The District Court granted Kaplan’s motion for sum-mary judgment, and Morse appealed to the Third Cir-cuit, which affirmed.
The panel held that, applying the least sophisticateddebtor standard to the instant action, Kaplan’s debtcollection letters provided key information to Morseabout the debt in a nonconfusing manner.
‘‘Section 1692(a)(3) [of the FDCPA] mandates thatcollectors provide notice that the debtor has ‘thirtydays after receipt of the notice’ to ‘dispute the validityof the debt.’ In this case, the letter clearly trackedthe requirements of the FDCPA — informing Morsethat within 30 days of her receipt of the notice, ifMorse disputed the debt in writing, Kaplan wouldprovide evidence, and if Morse did not respond with-in 30 days, the debt would be assumed valid,’’ thepanel said.
Least Sophisticated Debtor
The panel also rejected Morse’s contentions that theleast sophisticated debtor would not understandwhether the dispute of validity would be acceptable30 days within the date of the letter or 30 days withinthe receipt of the letter, and that it is unclear who wouldassume that the debt is valid after 30 days, calling thearguments ‘‘meritless.’’
Moreover, the panel disagreed with Morse’s assertionthat Kaplan violated Section 1692g(a)(5) of theFDCPA, which requires that the letter inform thedebtor with the name and address of the original cred-itor, if different from the current creditor.
‘‘Kaplan’s letter does not have this language. However,Kaplan was collecting the debt for JFK [Johnson Reha-bilitation Institute], the original creditor, so inclusion ofsuch language would be confusing. It would make littlesense to differentiate between the original and currentcreditor in this case as they are the same entity. BecauseKaplan was collecting on behalf of the original creditor,Morse’s argument that Kaplan violated § 1692(a)(5) ismeritless,’’ the panel said.
Section 1692e(10)
‘‘Lastly, Morse alleges that due to the above allegedviolations, Kaplan’s letter was false and misleading,in violation of § 1692e(10). However, as we haveexplained above, there are no violations and no partof the letter was misleading, so this argument mustalso fail.’’
Senior Circuit Judge Richard D. Cudahy of theSeventh Circuit U.S. Court of Appeals, who was sittingby designation, wrote the panel’s opinion and wasjoined by Circuit Judges Thomas I. Vanaskie and Mar-yanne Trump Barry.
Morse is represented by Joseph K. Jones of Fairfield,N.J.
Kaplan and Younger are represented by Dante C. Rohrand John L. Slimm of Marshall, Dennehey, Warner,Coleman & Goggin in Cherry Hill, N.J.
(Additional documents available: Appellant brief.Document #88-120625-014B. Appellee brief. Docu-ment #88-120625-015B. Reply brief. Document#88-120625-016B.) n
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9th Circuit UpholdsAttorney Fees AwardIn Debt Collection SuitSAN FRANCISCO — The Ninth Circuit U.S. Courtof Appeals on May 30 affirmed a district court’s awardof attorney fees to the defendants in a Fair Debt Collec-tion Practices Act (FDCPA) suit, ruling that the districtcourt did not err in finding that the plaintiff’s FDCPAaction was brought in bad faith and for the purpose ofharassment (Christopher Ceresko v. LVNV Funding,LLC, et al., No. 11-15456, 9th Cir.; 2012 U.S. App.LEXIS 10859).
(Unpublished opinion available. Document #88-120625-236Z.)
The Ninth Circuit panel majority of Circuit JudgesRichard B. Clifton and N. Randy Smith upheld theU.S. District Court for the District of Arizona’saward of attorney fees to LVNV Funding LLC, Gur-stel, Staloch & Chargo PA and Ruth A. Fischetti in thesuit Christopher Ceresko filed against them. CircuitJudge Stephen Reinhardt dissented.
Bad Faith Finding
Ceresko filed his complaint in the District Court onMarch 10, 2009, alleging that the defendants violatedthe FDCPA by asserting in their collection actionagainst him in the Estrella Mountain Justice Court inMaricopa County, Ariz., that court costs as incurredare chargeable to him. He contended that the defen-dants’ allegation is a false representation in connectionwith the collection of a debt. The District Court foundthat the allegation is not a false representation inconnection with the collection of a debt and, thus,not a violation of the FDCPA. On July 30, 2010, theDistrict Court granted the defendants’ motion forsummary judgment.
On Jan. 19, 2011, the District Court ordered Cereskoto pay the defendants $10,467 in attorney fees.The FDCPA at 15 U.S. Code Section 1692k(a)(3)provides that ‘‘[o]n a finding by the court that an actionunder this section was brought under bad faith and forthe purpose of harassment, the court may award to thedefendant attorney’s fees reasonable in relation to thework expended and costs.’’
The District Court found that Ceresko’s FDCPAaction was brought in bad faith and for the purpose
of harassment for three reasons: The District Court hadpreviously concluded that Ceresko’s allegations failed toestablish a violation of the FDCPA in the state courtaction; Ceresko’s counsel ‘‘suffered the same result inthree previous lawsuits . . . involving different plaintiffsmaking the same claim: that an allegation or prayer forrelief for costs and fees in a state court collection actionis a false statement in violation of the FDCPA’’; andCeresko ‘‘failed to provide a single citation to a caseanywhere in the country where this particular claimhad been successful.’’
No Clear Error
Ceresko moved for reconsideration, which the DistrictCourt denied, and he appealed the ruling to the NinthCircuit. The panel majority said the District Court didnot clearly err in finding that Ceresko’s FDCPA actionwas brought in bad faith and for the purpose of harass-ment. The District Court had previously concludedthat Ceresko had failed to establish a violation of theFDCPA, and he did not appeal or otherwise dispute theDistrict Court’s conclusion that the action was merit-less, the panel majority said. The panel majoritypointed out that the District Court decided in therelated cases filed by Ceresko’s counsel that an allega-tion or prayer for relief for costs and attorney fees in astate court collection complaint did not violate theFDCPA. Ceresko’s claim centered on essentially thesame argument his counsel unsuccessfully made inthose cases, the majority said.
The majority also agreed with the District Court thatCeresko did not identify any favorable legal authoritiesapplicable to his claim. Ceresko’s precedent insteadinvolved cases where attorney fees and costs demandswere sent to plaintiffs before the start of judicial pro-ceedings, it said.
The majority said that even if it were to disagree withthe District Court, it cannot conclude that the DistrictCourt’s findings were ‘‘illogical, implausible, or withoutsupport in the record,’’ quoting United States v. Span-gle (626 F.3d 488, 497 [9th Cir. 2010]). Additionally,the District Court did not abuse its discretion in award-ing attorney fees, the majority determined. The DistrictCourt identified and applied the correct legal rule fromSection 1692k(a)(3), and the District Court’s decisiondid not result ‘‘from a factual finding that was illogical,implausible, or without support in inferences that maybe drawn from the facts in the record,’’ the majority
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said, quoting United States v. Hinkson (585 F.3d1247, 1263 [9th Cir. 2009]).
Dissent
Dissenting, Circuit Judge Reinhardt said the ‘‘leastsophisticated debtor,’’ which is the standard for estab-lishing a violation of the FDCPA, likely would havebeen misled by the inclusion of two separate paragraphsin the state court collection complaint, one stating that‘‘the prevailing party will be entitled to an award of allcosts’’ and another stating that ‘‘Court costs as actuallyincurred are chargeable to [the debtor].’’ The complaintprovided no information that the second paragraph wastrue only if the creditor was the ‘‘prevailing party,’’Circuit Judge Reinhardt said. Ceresko therefore pre-sented a ‘‘minimally colorable’’ claim, and the DistrictCourt clearly erred in finding that his FDCPA actionwas brought in bad faith and for the purpose ofharassment.
The District Court also clearly erred in finding thatCeresko’s counsel ‘‘suffered the same result in three pre-vious lawsuits involving different plaintiffs making thesame claim,’’ Circuit Judge Reinhardt said. Two of thecases cited by the District Court to support this holding,Cisneros v. Neuheisel Law Firm (D. Ariz. [Jan. 3,2008]) and Winn v. Unified CCR Partners (D. Ariz.[March 30, 2007]), involved claims that a request for aspecific sum of attorney fees in the prayer for relief was arequest for liquidated attorney fees, which plaintiffsalleged violated the FDCPA because only reasonablyattorney fees, not liquidated fees, were recoverableunder the agreements, he said. Ceresko, however,claimed the statement in the body of the state courtcomplaint regarding court costs being allocated to thedebtor was misleading because it was represented asa fact although there had been no determination thatthe creditor was the prevailing party, Circuit JudgeReinhardt said.
Cisneros and Winn, therefore, presented entirely differ-ent claims than Ceresko’s, Circuit Judge Reinhardt said.The third case the District Court cited, Thompson v.Crown Asset Management, LLC (D. Ariz. [Sept. 23,2009]), presented the same claim as Ceresko’s, but itwas not decided until six months after Ceresko filed hiscomplaint, so neither Ceresko nor his counsel couldhave known that the claim would be rejected at thetime he brought his claim, Circuit Judge Reinhardt said.
Further, the District Court ignored the cases Cereskocited in support of his FDCPA claim, Circuit JudgeReinhardt said. ‘‘Although those cases involved demandletters rather than a complaint in a collection case, theunderlying claims are similar to the one here: that ademand for fees or costs by a creditor when there hasbeen no determination that the creditor is the prevailingparty, is misleading,’’ he said. Because the DistrictCourt’s findings were based on clear errors and its ana-lysis of the controlling cases consisted of repeated errorsof law, its award of attorney fees and costs against Cer-esko was clearly erroneous and constituted an abuseof discretion, Circuit Judge Reinhardt said.
Attorneys
Ceresko is represented by Richard Nel Groves of theLaw Offices of Richard N. Groves in Phoenix.
The defendants are represented by Tomio Buck Naritaof Simmonds & Narita in San Francisco and MichaelRichard Sneberger in Tempe, Ariz., Bridget Ann Sulli-van in Garden Valley, Minn., and Jennifer Wiedle inScottsdale, Ariz., all of Gurstel Staloch & Chargo.
(Additional documents available. Appellant brief.Document #88-120625-237B. Appellee brief. Docu-ment #88-120625-238B.) n
Notice Did Not ViolateDebt Collection Act,9th Circuit AffirmsSAN FRANCISCO — A letter sent by a debt-collect-ing law firm does not violate the Fair Debt CollectionPractices Act (FDCPA) because it does not expresslyrequire a debtor to contest her debt in writing, theNinth Circuit U.S. Court of Appeals ruled June 8,affirming a district court’s granting of summary judg-ment in favor of the firm (Joann Riggs v. Prober &Raphael, A Law Corp., et al., No. 10-17220, 9thCir.; 2012 U.S. App. LEXIS 11631).
(Opinion available. Document #88-120625-266Z.)
The panel of Circuit Judges J. Clifford Wallace, Con-suelo M. Callahan and Carlos T. Bea affirmed the U.S.
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District Court for the Northern District of Californiaruling in the suit Joann Josephine Riggs filed against thelaw firm Prober & Raphael and attorney Dean Prober(collectively, Prober).
Riggs filed the action in the District Court after Probersought to collect a debt Riggs owed to Prober’s client,Fireside Bank. She alleged that Prober’s debt-collectionletter did not comply with the FDCPA or its Californiaequivalent, the Rosenthal Fair Debt Collection PracticesAct, because it impermissibly required her to dispute herdebt in writing and, as a result, misrepresented her rightsto dispute her debt. The District Court granted Probersummary judgment, holding that Prober’s validationnotice did not impermissibly require Riggs to disputeher debt in writing and did not falsely misrepresenther rights to dispute the debt. Riggs appealed.
Expressly Vs. Implicitly
The panel noted that the Ninth Circuit previously heldthat a collection letter violates Section 1692g(a)(3) ofthe FDCPA ‘‘insofar as it state[s] that [the debtor’s]disputes must be made in writing,’’ quoting Cama-cho v. Bridgeport Fin., Inc. (430 F.3d 1078, 1082[9th Cir. 2005]). The primary issue in the instant caseis whether Prober’s validation notice runs afoul of thisrule, the panel said.
Here, in contrast to the validation notice in Camacho,Prober’s validation notice did not expressly requireRiggs to dispute her debt in writing, the panel noted.Instead, Riggs argues that the notice implicitly requiredher to do so.
‘‘We assume, without deciding, that the least sophisti-cated consumer could understand Prober’s validationnotice to imply that any dispute of her debt must be inwriting,’’ the panel said. ‘‘Nevertheless, we concludethat the notice does not violate the FDCPA. As wehave explained, Camacho held only that debt collectorsmay not expressly require that disputes be in writing;Camacho did not decide whether the FDCPA also pro-hibits debt collectors from implicitly requiring that dis-putes be in writing.
‘‘We do not believe the FDCPA can support such aprohibition. Subsections (a)(4) and (a)(5) of § 1692gprominently require a consumer to do certain thingsin writing, including ‘notif[y] the debt collector in
writing . . . that the debt, or any portion thereof, isdisputed’ in order to obtain verification, while subsec-tion (a)(3) is silent as to what form a general dispute ofan alleged debt must take. When these subsections areread together, they could be read to imply that a debtormust dispute her debt in writing. Court decisionsapplying these provisions do nothing to dispel thisimplication.’’
Not Unlawful
If the FDCPA itself can be read to imply that consumermust dispute an alleged debt in writing, a validationnotice like Prober’s, which more or less simply reversesthe order of the Section 1692g(a)(3)-(5) advisories, can-not be unlawful merely because it allows for the sameimplication, the panel said. Any confusion over what aconsumer must do in writing, versus what she may do inwriting, ‘‘stems at least in part from the FDCPA itself,’’the panel said, adding that ‘‘it would be untenable toread the FDCPA to prohibit validation notices thatsimply mimic the statute’s own shortcomings.’’
On appeal, Riggs argued for the first time that Prober’svalidation notice does not comply with other purportedrequirements of Section 1692g(a)(3): that she beinformed that she could dispute the validity of herdebt, that she could dispute only a portion of herdebt, and that she could make a dispute within 30days of receiving the notice. The panel found thatthese arguments are barred because Riggs did notraise them in her complaint, which alleges as the onlyviolation of Section 1692g that Prober ‘‘required thatdisputes be in writing to prevent [Prober] from con-sidering the debt valid, in violation of § 1692g(a)(3).’’ Aplaintiff may not try to amend her complaint throughher arguments on appeal, the panel said, citingVincent v. Trend W. Technical Corp. (828 F.2d563, 570 [9th Cir. 1987]).
Riggs is represented by Fred W. Schwinn of the Con-sumer Law Center in San Jose, Calif. Prober is repre-sented by Jonathan Matthew Blute and TimothyHalloran of Murphy, Pearson, Bradley & Feeney inSan Francisco.
(Additional documents available: Appellant brief.Document #88-120625-267B. Appellee brief. Docu-ment #88-120625-268B. Appellant reply brief.Document #88-120625-269B.) n
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Panel: Consumer FailedTo Provide Evidence Of DebtCollection Law ViolationNEW YORK — A federal district court did not err ingranting a law firm’s motion for summary judgment ina Fair Debt Collection Practices lawsuit because theconsumer who filed the suit failed to provide any evi-dence of a violation of the statute, a Second CircuitU.S. Court of Appeals panel ruled June 18 (Kara A.Tzanetis v. Weinstein & Riley, P.S., No. 11-3169, 2ndCir.; 2012 U.S. App. LEXIS 12262).
(Summary order available. Document #88-120625-056R.)
Consumer Kara A. Tzanetis sued the law firm of Wein-stein & Riley in the U.S. District Court for the Districtof Connecticut, alleging that a demand letter the lawfirm sent her violated provisions of the Fair Debt Col-lection Practices Act (FDCPA) and various Connecti-cut debt collection statutes.
On Nov. 1, 2010, the District Court granted the lawfirm’s motion for summary judgment and denied Tza-netis’ motion for summary judgment.
Reconsideration
Tzanetis then moved for reconsideration, and onJuly 26, 2011, the District Court denied her motion.She then appealed to the Second Circuit, whichaffirmed.
In holding that the District Court properly granted thelaw firm’s motion for summary judgment, the panelexplained that ‘‘[t]he factual evidence before the DistrictCourt consisted of two demand letters. Tzanetisdeclined to submit additional evidence.’’
‘‘The letters contained passages that merely indicatedthe possibility that other lawful charges might accrue ata later date, and do not establish a violation of theFDCPA,’’ the panel said.
Without Merit
‘‘We have considered all of Tzanetis’s arguments onappeal and find them to be without merit.’’
Circuit Judges Guido Calabresi, Jose A. Cabranes andRaymond J. Lohier Jr. joined in the opinion.
Tzanetis is represented by Joanne S. Faulkner of NewHaven, Conn. The law firm is represented by KennethS. Jannette of Weinstein & Riley in New York.
(Additional documents available: Appellant brief.Document #88-120625-057B. Appellee brief. Docu-ment #88-120625-058B. July 26, 2011 order. Docu-ment #88-120625-059R. Nov. 1, 2010 order.Document #88-120625-060R.) n
Letter Not A DebtCollection Demand Letter,Federal Judge RulesTAMPA, Fla. — A debt owner’s letter to a consumerletting her know that it was the current owner of hercredit card debt did not violate the Fair Debt CollectionPractices Act (FDCPA) because the letter was not ademand letter seeking payment, a federal judge in Flor-ida ruled June 15 (Belinda Parker v. Midland CreditManagement Inc., No. 12-110, M.D. Fla.; 2012 U.S.Dist. LEXIS 83296).
(Order available. Document #88-120625-051R.)
Consumer Belinda Parker filed an amended class actioncomplaint in the U.S. District Court for the MiddleDistrict of Florida. She alleges that Midland CreditManagement Inc. (MCM) violated Sections 1692e(11) and 1692g(a) of the FDCPA by sending her a letteracknowledging that it was the current owner of Parker’sCapital One credit card debt but failing to provideher with her ‘‘mini-Miranda’’ rights under Section1692e(11).
Parker also avers that MCM violated Section 1692g(a)by failing to notify her of her complete validation rightsin the letter or in a subsequent written communicationsent to her within five days of the letter.
FCCPAMCM moved to dismiss, arguing that it did not violatethe FDCPA because it was required to send the letterpursuant to the Florida Consumer Collection PracticesAct (FCCPA), and Judge James S. Moody Jr. grantedthe motion.
In particular, Judge Moody held that dismissal is properbecause the letter ‘‘is not a communication in connec-tion with debt collection.’’
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‘‘The letter did not demand payment or discuss specificsof the underlying debt. And the purpose of the letterwas to inform Plaintiff of the assignment of the accountto Defendant. Indeed, the letter even states that ‘this isnot an attempt to collect a debt.’ And, although thebalance of the debt is stated, the letter does not includeterms of payment or deadlines. On its face, it is clearlyinformational; it informs Plaintiff that her account hasbeen assigned to Defendant and includes the newaccount number and Defendant’s contact informa-tion,’’ Judge Moody said.
No Debt Collection
‘‘In sum, these facts, taken from the amended com-plaint and the letter itself, demonstrate, as a matter oflaw, that the letter was not sent in connection withcollection of a debt. Any other conclusion would defylogic and place debt collectors in an untenable position,where they are subjected to lawsuits, despite theirbest efforts.’’
Judge Moody further stated that ‘‘[t]he Court wouldlike to see a bright-line rule adopted by the Circuits onthis issue, so that cases like the instant case are pre-vented in the future.’’
‘‘A letter, such as the one at issue here, that merelyinforms a debtor of the assignment of her debt, providesthe debtor with the new information, and clearly statesthat the letter is not an attempt to collect a debt shouldstand as an example of a letter that does not constitute acommunication in connection with the collection ofa debt in violation of the FDCPA,’’ Judge Moodyexplained.
Counsel
Parker is represented by Christopher C. Casper andNicole C. Mayer of James, Hoyer, Newcomer & Smil-janich in Tampa, Christopher C. Nash and Ian R.Leavengood of Leavengood Nash Dauval & Boyle inSt. Petersburg, Fla., and Heather M. Fleming of Mar-one Law Group in St. Petersburg.
MCM is represented by James Beckett Thompson Jr.of Thompson, Goodis, Thompson, Groseclose &Richardson in St. Petersburg and John A. Love ofKing & Spalding in Atlanta.
(Additional documents available: Motion to dismiss.Document #88-120625-052B. Opposition brief.
Document #88-120625-053B. Reply brief. Docu-ment #88-120625-054B. Amended complaint.Document #88-120625-055C.) n
Debt Collector Failed ToProvide Required Disclosures,Federal Judge RulesCHICAGO — A consumer has properly shown thatnumerous voice mail messages left for her by a debtcollector violated provisions of the Fair Debt CollectionPractices Act (FDCPA) because the debt collector failedto provide the required disclosures, a federal judge inIllinois ruled June 14 (Anna Pawelczak v. NationsRecovery Center Inc., No. 11-3700, N.D. Ill.; 2012U.S. Dist. LEXIS 82916).
(Opinion available. Document #88-120625-039Z.)
Consumer Anna Pawelczak sued debt collector NationsRecovery Center Inc. (NRC) in the U.S. District Courtfor the Northern District of Illinois. Pawelczak allegesthat NRC violated Sections 1692d(6) and 1692e(11)of the FDCPA by leaving several live and recordedmessages for her on her voice mail system without pro-viding the necessary disclosures.
Both Pawelczak and NRC moved for summary judg-ment, and Judge Charles P. Kocoras granted Pawelc-zak’s motion and denied NRC’s motion.
Transcripts
In particular, Judge Kocoras held that Pawelczak’sadmission of transcripts of the voice mail messagesinto evidence is proper because it is not hearsay andbecause ‘‘Pawelczak is competent to testify as to thecontent of the voice mail messages.’’
The testimony of NRC CEO Paul Bataillon is notadmissible, though, Judge Kocoras found, because hisstatement regarding the effectiveness of a dialing con-nection system that is supposed to hang up if a liveperson does not answer the phone ‘‘is based on uniden-tified statistics that he had obtained from an unknownsource at some unidentified time in the past.’’
‘‘Bataillon’s assertion is based on speculation, and doesnot provide the necessary factual support for NRC’s
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claim that the Dial Connect system is as successful as itclaims it to be. We therefore accord Bataillon’s state-ment, and the conclusion that the Dial Connect systemis 98-99% successful at distinguishing between a liveand automated voice, no weight,’’ Judge Kocoras said.
Section 1692e(11) Claim
Moreover, Judge Kocoras ruled that Pawelczak isentitled to summary judgment on her Section1692e(11) claim because ‘‘Pawelczak has offered uncon-tested testimony that in NRC’s initial December 11th,2010 voice mail message, its employee did not disclosethat he or she was calling to collect a debt, nor that heor she would use any information to collect that debt.’’
‘‘There is no disagreement that NRC, through itsemployees, failed to identify itself as a debt collectorin each of its subsequent voice mail messages to Pawelc-zak. NRC only argues that a voice mail message is not a‘communication’ under the FDCPA,’’ Judge Kocorasstated.
‘‘Here, each of the live and recorded voice messages lefta callback number, several of the live voice messagesrequested that Pawelczak call back to discuss the ‘mat-ter,’ and that it was ‘important’ that Pawelczak call back‘soon,’ or ‘today.’ These messages at least indirectlyconvey information regarding a debt — namely, callingPawelczak’s attention to a matter of importance, andleaving a phone number that Pawelczak should call tofurther discuss the matter. There is no dispute thatPawelczak is ‘any person’ under the Act, or that con-tacting her by telephone constitutes ‘through any med-ium.’ We therefore hold that the voice mail messagesare ‘communications’ under the § 1692a(2). Othercourts in this district have reached the same conclusionon this issue.’’
Necessary Disclosures
Judge Kocoras further rejected NRC’s argument thatmaking the necessary disclosures under Section1692e(11) on a voice mail message exposes itself toliability under 15 U.S. Code Section 1692c(b), findingit to be ‘‘unavailing for two reasons.’’
‘‘First, NRC presents no argument that a debtor’s voicemail service should be construed as a ‘third party’ underthe Act. Furthermore, NRC’s argument that theyshould not be penalized for seeking to protect Pawelc-zak’s privacy is severely undermined by its own internal
memorandum dated January 28, 2011, which indi-cated that NRC had some procedures in place foremployees to leave FDCPA-compliant voice mail mes-sages. In any event, if NRC was actually uncertain as towhat constituted an FDCPA-compliant voice mail,refraining from leaving a message at all would ensurecompliance with the Act. As NRC has failed to provideany evidence to the contrary, we find that NRC’s voicemail messages did not comply with Section 1692e(11)as a matter of law,’’ Judge Kocoras explained.
Pawelczak is also entitled to summary judgment on herSection 1692d(6) claim, Judge Kocoras held, because‘‘[t]here is no genuine dispute that in three of the livevoice messages and all of the recorded messages left forPawelczak, NRC employees failed to disclose NRC’sidentity.’’
‘‘Furthermore, none of NRC’s live or recorded voicemail messages stated that the purpose of the phone callwas to collect a debt. These facts sufficiently establishthat NRC failed to provide Pawelczak ‘meaningful dis-closure’ of its identity, and that it therefore violated§ 1692d(6) as a matter of law,’’ Judge Kocoras stated.
Bona Fide Error Defense
Judge Kocoras also found that NRC is not entitled to a‘‘bona fide error’’ defense because ‘‘[w]hen weighing thisevidence, we cannot conclude that as a matter of lawNRC’s procedures were reasonably adapted to preventthe FDCPA violations of which Pawelczak now com-plains. Nor do we find that a triable issue of fact exists,as any claim that NRC’s procedures were reasonablyadapted to prevent its employees from leaving non-FDCPA compliant voice mail messages is foreclosedby the fact that Pawelczak received eight illegal callsfrom four different NRC employees in little overtwo months.’’
‘‘We also find that NRC’s procedures with respect tothe Dial Connect system were not reasonably adaptedto avoid FDCPA violations. NRC’s contention is basedon the premise that the Dial Connect system is 98-99%effective at distinguishing live from automatedresponses. For the reasons discussed above, NRC hasprovided no admissible evidence to substantiate itsdefense. In any event, Pawelczak received thirteenrecorded voice messages in just over three months, sug-gesting that the Dial Connect system is not nearly aseffective as NRC claims. While we are aware that the
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maintenance of reasonably adapted procedures ‘doesnot require debt collectors to take every conceivableprecaution to avoid errors . . . it only requires reasonableprecaution,’ NRC presents no evidence for this Courtto conclude that the Dial Connect system meets thatthreshold. As NRC has failed to provide sufficient evi-dence to create a triable issue of material fact, Pawelc-zak’s motion for summary judgment is granted.Accordingly, NRC’s motion for summary judgmentis denied,’’ Judge Kocoras explained.
Pawelczak is represented by William F. Horn of FreshMeadows, N.Y., and Cathleen M. Combs, Daniel A.Edelman, Francis R. Greene and James O. Latturner ofEdelman, Combs, Latturner & Goodwin in Chicago.
NRC is represented by David M. Schultz, CorinneCantwell Heggie and Nicholas D. O’Conner of Hin-shaw & Culbertson in Chicago.
(Additional documents available: NRC motion forsummary judgment. Document #88-120625-040B.Opposition to NRC motion for summary judgment.Document #88-120625-041B. Pawelczak motion forsummary judgment. Document #88-120625-042B.Opposition to Pawelczak motion for summary judg-ment. Document #88-120625-043B. Complaint.Document #88-120625-044C.) n
Judge: Attorney FeesSought In Debt CollectionCase Are ReasonableSAN DIEGO — A federal judge in California onJune 15 granted a consumer’s motion for attorneyfees in a Fair Debt Collection Practices Act (FDCPA)lawsuit against a debt collector and others, ruling thatcounsel for the consumer has requested fees that arereasonable and in line with what has been approvedin other cases similar to the instant action (Donald R.Williams v. Midland Funding LLC, et al., No. 11-2539, S.D. Calif.; 2012 U.S. Dist. LEXIS 83490).
(Order available. Document #88-120625-045R.)
Consumer Donald R. Williams sued Midland FundingLLC, Midland Credit Management Inc. and EncoreCapital Group Inc. in the U.S. District Court for theSouthern District of California. He alleges that
Midland violated the FDCPA and California’sRosenthal Fair Debt Collection Practices Act by con-tacting him several times in an attempt to collect on adebt for an individual unknown to Williams, eventhough Williams stated numerous times that the Mid-land representative had the wrong number.
After an early neutral evaluation conference, the defen-dants made an offer of judgment pursuant to FederalRule of Civil Procedure 68 of $1,001, plus ‘‘reasonableattorneys’ fees incurred and costs accrued’’ to the dateof the offer. Williams accepted the offer, but the par-ties failed to agree on the appropriate amount ofattorney fees.
No Unnecessary Work
In granting Williams’ motion for attorney fees, JudgeJeffrey T. Miller rejected the defendants’ argument thatWilliams’ counsel performed unnecessary work becausethey failed to inform him in the middle of January ofa settlement offer that was made.
‘‘Defendants’ argument asks the court to assume thatPlaintiff’s counsel completely failed to perform theirduty to inform Plaintiff of the settlement offer. Whileit is true that Plaintiff’s counsel’s billing does not spe-cifically reflect a conversation concerning the settlementoffer, the court declines to accept Defendants’ assump-tion that the offer was never conveyed, causing unne-cessary litigation. Defendants’ further argument — thatrelaying the settlement offer to Plaintiff would havehastened settlement because it would have alertedDefendants to their statutory violations — must failas well as it is predicated upon speculation,’’ JudgeMiller said.
Judge Miller also disagreed with the defendants’ asser-tion that Williams’ counsel overbilled for the workdone because multiple attorneys and/or paralegals billedfor work on the same documents or for speaking to eachother, finding that ‘‘[w]hile Defendants are clearly cor-rect that unnecessary work should not be billed, Defen-dants provide little or no legal support for theirarguments concerning specific instances of billing.’’
Trivial Amounts Of Time
‘‘Many of Defendants’ arguments arise from disputesover trivial amounts of time, sometimes as little as one-tenth of one hour. It is virtually impossible to reason-ably determine whether each tenth of an hour billed byPlaintiff’s counsel is accurate; however, each entry
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appears to be reasonable, and the overall amount oftime spent on the case certainly falls well within therange of reasonableness. Moreover, Defendants havenot provided any reasoning behind their implicit theorythat multiple attorneys should not be allowed to bill forwork on the same document. Similarly, they do notsupport their argument that two attorneys are notallowed to each bill time for speaking with one anotherabout the case. Without legal support, the courtdeclines to reduce the time billed in the amountrequested by Defendants,’’ Judge Miller stated.
Moreover, Judge Miller ruled that the rate chargedby attorney Amy Bennecoff of $278 an hour is reason-able and in line with what other courts have foundto be reasonable.
Williams is represented by Bennecoff of Kimmel &Silverman in Ambler, Pa.
The defendants are represented by Thomas F. Landersand Leah S. Strickland of Solomon Ward Seiden-wurm & Smith in San Diego.
(Additional documents available: Motion for attorneyfees. Document #88-120625-046B. Oppositionbrief. Document #88-120625-047B. Reply brief.Document #88-120625-048B. Complaint. Docu-ment #88-120625-049C. Offer of judgment. Docu-ment #88-120625-050B.) n
Judge: Consumers MetSpecificity RequirementsIn Debt Collection SuitKANSAS CITY, Kan. — Dismissal of consumers’ FairDebt Collection Practices Act (FDCPA) claim against adebt collector is not proper because the consumers haveproperly met the ‘‘factual specificity required by’’ twoU.S. Supreme Court rulings, a federal judge in Kansasruled June 20 (David Webb, et al. v. Premiere Credit ofNorth America LLC, No. 12-2001, D. Kan.; 2012U.S. Dist. LEXIS 85075).
(Opinion available. Document #88-120625-067Z.)
Consumers David and Melissa Webb sued debt collec-tor Premiere Credit of North America LLC in the U.S.
District Court for the District of Kansas. The Webbsallege that Premiere violated the FDCPA by callingthem on ‘‘continuous days’’ and on multiple occasionssix times per day.
They seek statutory and actual damages, includingemotional distress.
Leave To Amend
In granting the Webbs’ motion for leave to amend theircomplaint and denying Premiere’s motion to dismiss,Judge Julie A. Robinson held that leave to amend isproper because ‘‘Plaintiffs included a request for leave tofile an amended complaint in their Response to Defen-dant’s Motion to Dismiss, as well as the title and prayerof the same document.’’
‘‘And although Plaintiffs did not separately file a mem-orandum in support of their motion to amend, theCourt may relieve Plaintiffs of complying with thatrequirement. Plaintiffs are advised to review [Districtof Kansas Local] Rules 7.1 and 7.6; however, this Courtmust construe rules of procedure liberally to facilitatedecisions on the merits rather than procedural techni-calities. Because Plaintiffs substantially compliedwith [District of Kansas Local] Rule 15.1 by attachingtheir proposed Amended Complaint, Plaintiffs’ Motionto File Amended Complaint is granted. The Courtwill thus evaluate the Amended Complaint under [Fed-eral Rule of Civil Procedure] Rule 12(b)(6),’’ JudgeRobinson said.
Judge Robinson also found that dismissal of theFDCPA claim is not proper because the amended com-plaint ‘‘meets the factual specificity required’’ by BellAtlantic Corp. v. Twombly (550 U.S. 544 [2007];2007 U.S. LEXIS 5901) and Ashcroft v. Iqbal (556U.S. 662 [2009]; 2009 U.S. LEXIS 3472).
Collection Calls
‘‘First, Plaintiffs’ factual allegations concerning the fre-quency of Defendant’s collection calls are entitled to anassumption of truth. While the original Complaint’s‘near[ly] verbatim recitation of the statutory language’consists entirely of conclusory allegations, the AmendedComplaint asserts specific facts: that Defendant placeddaily or near daily collection calls to Plaintiffs, at a rateof up to six calls per day, demanding payment on aspecific account number. Such allegations distinguishthis claim from a ‘cookie-cutter filin[g],’ and provide
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sufficient factual content to give Defendant fair noticeof what Plaintiffs are claiming. Because these allegationssurpass mere legal conclusions, the Court assumes themto be true,’’ Judge Robinson stated.
‘‘Assuming the truth of Plaintiffs’ factual allegations, theCourt finds the claim to be facially plausible.’’
Moreover, Judge Robinson ruled that the Webbs areentitled to emotional distress damages, agreeing withthe findings of three other district courts within the10th Circuit U.S. Court of Appeals, which determinedthat ‘‘the FDCPA does not require a plaintiff to satisfystate tort law standards to prove emotional distressdamages.’’
‘‘Yet, even if Plaintiffs were required to satisfy state tortlaw standards, it is not unreasonable to infer that sixcalls per day, depending on the circumstances, mightcause extreme emotional distress. Accordingly, theCourt finds Plaintiffs’ claim for emotional distressdamages under [15 U.S. Code] § 1692d(5) to be suffi-ciently stated,’’ Judge Robinson explained.
Counsel
The Webbs are represented by J. Mark Meinhardt ofLeawood, Kan.
Premiere is represented by Louis J. Wade and Mikki L.Copeland of McDowell, Rice, Smith & Buchanan inKansas City, Mo.
(Additional documents available: Motion to dismiss.Document #88-120625-068B. Opposition to motionto dismiss and motion for leave to amend. Document#88-120625-069B. Opposition to motion for leaveto amend. Document #88-120625-070B. Amendedcomplaint. Document #88-120625-071C.) n
Settlement EarnsPartial ApprovalIn Debt Collection SuitFORT PIERCE, Fla. — A federal judge in Florida onMay 23 certified a class and preliminarily granted par-tial approval of a settlement in a suit in which a defen-dant was alleged to have violated the Fair DebtCollection Practices Act (FDCPA) in its attempt to
collect a debt purportedly owed to a third-party mort-gage receiver, but he rejected the proposed settlement’srequirement for class members to submit claim forms(Malka Andes v. G. Moss and Associates, LLP, No. 11-14295, S.D. Fla.; 2012 U.S. Dist. LEXIS 71661).
(Order available. Document #88-120625-216R.)
U.S. Judge K. Michael Moore of the Southern Districtof Florida made the rulings in the suit Malka Andesfiled, individually and behalf of all others similarly situ-ated, against debt collector G. Moss and Associates LLP.
Andes alleges that on Aug. 17, 2010, the defendant senther two letters in an attempt to collect the purporteddebt. Andes says the letters violated the FDCPA by‘‘failing to properly inform the consumer as to the con-sumer’s rights for debt verification in a manner whichwas not reasonably calculated to confuse or frustrate theleast sophisticated consumer’’ in violation of 15 U.S.Code Section 1692g. Andes alleges that the defendantsent similar letters to thousands of Florida residents.
Class Meets Requirements
The parties negotiated the claims and finalized a classaction settlement. On May 10, 2012, the parties filedthe joint motion to certify class and approve settlement.The proposed settlement calls for the defendant toestablish a $30,000 fund and would require the defen-dant to pay a pro rata share of the fund to each classmember who timely returns a claim form and does notopt out of the settlement. It also requires the defendantto pay $1,000 to Andes as class representative for herrole in the litigation.
In certifying the class, Judge Moore found that theFederal Rule of Civil Procedure 23(a) requirements ofnumerosity, commonality, typicality, adequacy, predo-minance and superiority have been satisfied.
In preliminarily approving the settlement in part, JudgeMoore determined that the settlement is fair, reason-able and adequate to the parties. He found that basedon the defendant’s representations of net worth, settle-ment for $30,000 constitutes an amount in excess ofmaximum available statutory damages recoverable by aclass under the FDCPA and is therefore fair and reason-able. He also determined that a $1,000 payment toAndes for damages and her role in the litigation is fairand reasonable, as is a separate payment to settlement
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class counsel for reasonable fees and costs to be deter-mined at the time of final approval of the settlement.The payment to settlement class counsel is not to betaken from any recovery to the settlement class, JudgeMoore noted.
No Claim Forms
However, Judge Moore said he does not approve of thesettlement’s provision requiring class members totimely submit claim forms to receive their share ofthe settlement funds.
‘‘A pro-rata share of the Settlement Fund shall be dis-tributed to each Class Member who does not timelyopt-out of the Class,’’ Judge Moore concluded.
Andes is represented by Robert William Murphy inFort Lauderdale, Fla. The defendant is represented byDavid Palmer Hartnett of Hinshaw & Culbertson inMiami.
(Additional documents available. Motion to certifyclass, approve settlement. Document #88-120625-217M. Brief in support of motion to certify class,approve settlement. Document #88-120625-218B.) n
Nonjudicial ForeclosuresAre Not Debt Collection,Federal Judge RulesRENO, Nev. — A federal judge in Nevada on May 31dismissed a debt collection action because, in part, non-judicial foreclosures are not an attempt to collect a debtunder the Fair Debt Collection Practices Act (FDCPA)(Craig A. Whitney and Aubree S. Whitney v. CTXMortgage Co. LLC, et al., No. 11-00037, D. Nev.;2012 U.S. Dist. LEXIS 75221).
(Order available. Document #88-120625-239R.)
U.S. Judge Larry R. Hicks of the District of Nevadagranted the motion for judgment on the pleadings filedby JPMorgan Chase Bank N.A., as successor by mergerto defendant Chase Home Finance LLC, in the suitbrought by Craig A. Whitney and Aubree S. Whitney.
In 2006, the Whitneys refinanced real propertythrough a mortgage note and deed of trust originated
by CTX Mortgage Co. LLC. In 2009, beneficial inter-est under the deed of trust was assigned to Chase. TheWhitneys defaulted on the mortgage note and JPMor-gan initiated nonjudicial foreclosure proceedings. TheWhitneys’ amended complaint alleges causes of actionfor debt collection violations, violations of the NevadaUnfair and Deceptive Trade Practices Act (NevadaRevised Statute 598.0923) and NRS 107.080, quiettitle, slander of title and abuse of process.
No FDCPA Violation
Judge Hicks noted that pursuant to NRS 649, it is aviolation of state law to violate any provision of theFDCPA. Here, the Whitneys alleged that JPMorganviolated the FDCPA by initiating a nonjudicial foreclo-sure without following the proper procedures forattempting to collect a debt. Judge Hicks said it iswell-established that nonjudicial foreclosures are notan attempt to collect a debt under the FDCPA andsimilar state statutes, pointing to Hulse v. OcwenFed. Bank FSB (195 F. Supp. 2d 1188 [D. Ore.2002]) and Charov v. Perry (D. Nev. 2010), whichheld that recording a notice of default is not an attemptto collect a debt because the borrower already consentedto allow the foreclosure trustee to record the noticeupon default. Judge Hicks found that the Whitneysfailed to state a claim for violation of the FDCPA andthereby failed to state a claim under Section 649.
The Whitneys allege that JPMorgan violated theNevada Unfair and Deceptive Trade Practices Act byrecording the notice of default without having a statebusiness license. However, it is undisputed that JPMor-gan took no action in recording the notice of default.Because the bank took no action in causing the noticeof default to be recorded, it cannot have violated theNevada Unfair and Deceptive Trade Practices Act asa matter of law, the judge said.
The Whitneys allege that the defendants improperlyforeclosed on their property because the promissorynote was served from the deed of trust and none ofthe defendants hold the original mortgage note, in vio-lation of NRS 107.080. At the time of the foreclosure,Nevada law did not require the production of the ori-ginal note before one of the statutorily enumeratedparties initiates a nonjudicial foreclosure; therefore,the Whitneys fail to allege a claim upon which reliefcan be granted, Judge Hicks said.
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Remaining Claims
Judge Hicks noted that under NRS 40.010, a quiet titleaction may be brought by someone who claims anadverse interest in property. Here, JPMorgan doesnot claim any interest in the property adverse to theWhitneys’ interest in the property; therefore, they haveno grounds to quiet title against JPMorgan, he found.
The judge said that a claim for slander of title ‘‘involvesfalse and malicious communications, disparaging toone’s title in land, and causing special damages,’’ pur-suant to Executive Mgmt. Ltd. v. Ticor Title Co. (963P.2d 465, 478 [Nev. 1998]). Here, the recorded noticeof default and notice of trustee’s sale are not false andmalicious communications disparaging the Whitneys’title, Judge Hicks said. First, the Whitneys concede thatthey were in default of their loan; thus, the notice ofdefault does not make a false statement about the titleto property, Judge Hicks said. Second, it is not false thatthe property was to be sold at a trustee’s sale, he said.Therefore, he found that the Whitneys have failed tostate a claim for slander of title.
To establish a claim for abuse of process, a party mustshow that an opposing party had an ulterior purpose forbringing a legal action other than resolving a legal dis-pute and that the opposing party used the legal processin a way that is not proper in the regular conduct of theproceeding, Judge Hicks said, citing Las Vegas Fetishand Fantasy Halloween Ball Inc. v. Ahern Rentals (182P.3d 764, 767 [Nev. 2008]) and Georgiou StudioInc. v. Boulevard Interest LLC (663 F. Supp. 2d 973,982 [D. Nev. 2009]). Judge Hicks found that theWhitneys have failed to allege any facts demonstratingthat JPMorgan had an ulterior motive in initiating non-judicial foreclosure proceedings other than the resolu-tion on the default on the mortgage note. Further, theprocess at issue is a nonjudicial foreclosure, which isnot the characteristic legal action contemplated by anabuse of process claim, he said, citing Smith v. Wacho-via Mortgage Corp. (N.D. Calif. 2009). Therefore, hefound that the Whitneys have failed to state a claimfor abuse of process.
The Whitneys are represented by Rick Lawton of theLaw Office of Rick Lawton in Fernley, N.V. JPMorganis represented by Kent F. Larsen and Joseph T. Prete ofSmith Larsen & Wixom in Las Vegas.
(Additional documents available: Motion for judg-ment on the pleadings. Document #88-120625-
240M. Response to motion for judgment on thepleadings. Document #88-120625-241B.) n
Divided 2nd Circuit: NoEn Banc Rehearing Of ValidityOf AmEx Arbitration ClauseNEW YORK — The Second Circuit U.S. Court ofAppeals on May 29 in a divided ruling denied rehearingen banc of its Feb. 1 opinion affirming its prior holdingthat a mandatory class action waiver clause in AmericanExpress Co.’s (AmEx) standardized service contract vio-lated the Federal Arbitration Act (FAA) (In re: Amer-ican Express Merchants’ Litigation [Italian ColorsRestaurant, et al. v. American Express Travel RelatedServices Company, et al.], No. 06-1871-cv, 2nd Cir.;2012 U.S. App. LEXIS 10815).
(Order available. Document #81-120628-002R.)
In its Feb. 1 opinion, the Second Circuit panel said thatits original analysis was unaffected by AT&T MobilityLLC v. Concepcion (131 S.Ct. 1740 [2011]), in whichthe Supreme Court held that the FAA preempted aCalifornia law barring the enforcement of class actionwaivers in consumer contracts.
Circuit Judge Rosemary S. Pooler, who was a memberof the panels issuing the two previous decisions, con-curred by opinion in the denial of rehearing en banc.Chief Judge Dennis Jacobs and Judges Jose A. Cab-ranes, Debra Ann Livingston, Reena Raggi and RichardC. Wesley dissented by opinion.
Judge Jacobs, with whom Judges Cabranes and Living-ston joined, argued that the panel opinion relied ondicta that was ‘‘pulled out of context and distorted’’and ‘‘is a broad ruling that, in the hands of class actionlawyers, can be used to challenge virtually every con-sumer arbitration agreement that contains a class-actionwaiver—and other arbitration agreements with such aclause.’’ Judge Cabranes also commented that ‘‘the issueat hand is indisputably important, creates a circuit split,and surely deserves further appellate review.’’
Judge Raggi, with whom Judge Wesley joined, said thatbecause the panel’s decision to hold a class-actionwaiver unenforceable results in a circuit split, he
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‘‘think[s] it would be useful to have the issues exploredfurther by the full court in the adversarial context of anen banc argument.’’
Merchant Fees
Italian Colors Restaurant and other merchants suedAmEx over AmEx’s service contract, which allegedlycontained an ‘‘honor all cards agreement’’ whereby mer-chants were forced to pay supracompetitive fees onAmEx’s mass-marketed products or lose a significantportion of sales from businesses, travelers and affluentcustomers who are traditional users of AmEx cards. Theagreement precluded merchants from accepting someAmEx cards and denying others in violation of theSherman Act, the merchants said.
The merchants further alleged that as a condition ofaccepting AmEx’s cards, they were required to sign a‘‘card acceptance agreement’’ that contained a manda-tory arbitration clause and prohibited the merchantsfrom bringing a class action lawsuit in court and fromhaving any claim arbitrated on anything other than anindividual basis. The merchants contended that theagreement violated the FAA.
The U.S. District Court for the Southern District ofNew York granted AmEx’s motion to compel arbitra-tion of the merchants’ antitrust claims and the questionof whether the class action waivers were enforceable,and the District Court dismissed their cases.
On Jan. 30, 2009, the Second Circuit reversed, findingthat the merchants had adequately demonstrated thatthe class action waiver provision was not enforceablebecause enforcement of the waiver would effectivelypreclude any action seeking to vindicate the statutoryrights asserted by the plaintiffs and ‘‘would grantAMEX de facto immunity from antitrust liability.’’According to the appeals panel, the merchants demon-strated that ‘‘the size of the recovery received by anyindividual plaintiff will be too small to justify the expen-diture of bringing an individual action.’’
The panel found that Section 2 of the FAA providesthat an agreement to arbitrate ‘‘shall be valid, irrevoc-able, and enforceable, save upon such grounds as existat law or in equity for the revocation of any contract.’’The panel held that because a valid ground exists for therevocation of the class action waiver, it cannot beenforced under the FAA.
Stolt-Nielsen And Concepcion
On May 3, 2010, the Supreme Court granted AmEx’spetition for a writ of certiorari, vacated the SecondCircuit’s decision and remanded in light of Stolt-Niel-sen S.A., et al. v. AnimalFeeds Int’l Corp (130 S.Ct.1758 [2010]), in which the Supreme Court, in a 5-3decision on April 27, 2010, held that an arbitrationpanel exceeded its authority under the FAA by constru-ing an arbitration clause to permit class arbitration ofantitrust claims when the clause was silent on that issue.
On remand, the Second Circuit on March 8, 2011, saidthat ‘‘Stolt-Nielsen states that parties cannot be forced toengage in a class arbitration absent a contractual agree-ment to do so. It does not follow, as Amex urges, that acontractual clause barring class arbitration is per seenforceable. Indeed, our prior holding focused not onwhether the plaintiffs’ contract provides for class arbi-tration, but on whether the class action waiver isenforceable when it would effectively strip plaintiffsof their ability to prosecute alleged antitrust violations.’’
The appeals panel found that the affidavit of an econ-omist ‘‘establishes, as a matter of law, that the cost ofplaintiffs’ individually arbitrating their dispute withAmex would be prohibitive, effectively depriving plain-tiffs of the statutory protections of the antitrust laws.’’
The Supreme Court subsequently issued its decision inConcepcion.
Open Question
In its Feb. 1 opinion, the Second Circuit said thatneither Stolt-Nielsen nor Concepcion ‘‘addresses theissue presented here: whether a class-action arbitrationwaiver clause is enforceable even if the plaintiffs are ableto demonstrate that the practical effect of enforcementwould be to preclude their ability to vindicate theirfederal statutory rights.’’
The specific preemption question addressed by theSupreme Court in Concepcion was ‘‘whether the FAAprohibits States from conditioning the enforceabilityof certain arbitration agreements on the availabi-lity of classwide arbitration procedures,’’ the appealspanel said.
‘‘Concepcion and Stolt-Nielsen, taken together, standsquarely for the principle that parties cannot be forcedto arbitrate disputes in a class-action arbitration unless
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the parties agree to class action arbitration,’’ the SecondCircuit said, adding that ‘‘[w]hat Stolt-Nielsen and Con-cepcion do not do is require that all class-action waiversbe deemed per se enforceable. That leaves open thequestion presented on this appeal: whether a manda-tory class action waiver clause is enforceable even if theplaintiffs are able to demonstrate that the practical effectof enforcement would be to preclude their abilityto bring federal antitrust claims.’’
Fact-Specific Inquiry
The Second Circuit reiterated that ‘‘[t]he evidence pre-sented by plaintiffs here establishes, as a matter of law,that the cost of plaintiffs’ individually arbitrating theirdispute with Amex would be prohibitive, effectivelydepriving plaintiffs of the statutory protections of theantitrust laws.’’
Therefore, the Second Circuit remanded to the DistrictCourt with the instruction to deny AmEx’s motion tocompel arbitration.
The panel commented that ‘‘each waiver must be con-sidered on its own merits, based on its own record, andgoverned with a healthy regard for the fact that the FAA‘is a congressional declaration of a liberal federal policyfavoring arbitration agreements.’ ’’
The merchants are represented by Gary B. Friedman,Tracey Kitzman, Aaron Patton and Warren Parrino ofFriedman Law Group in New York.
AmEx is represented by Bruce H. Schneider ofStrook & Strook & Lavan in New York, Julia B. Strick-land and Stephen J. Newman of Stroock & Stroock &Lavan in Los Angeles and Michael K. Kellogg andDerek T. Ho of Kellogg, Huber, Hansen, Todd,Evans & Figel in Washington, D.C. n
Judge Says Bank Did Not ShowThat Cardholder AgreedTo Arbitration AgreementST. PAUL, Minn. — In a suit in which a plaintiff saysCredit One Bank NA and a collection agency violatedthe Fair Debt Collection Practices Act in their attemptsto collect his credit card debt, a federal judge in Min-nesota on May 22 denied the bank and agency’s motion
to dismiss and compel arbitration, explaining that therecord at this point is insufficient to make a showingthat the plaintiff entered into a valid agreement to arbi-trate with Credit One (Galen Traylor v. I.C. SystemInc., et al., No. 11-02968, D. Minn.; 2012 U.S. Dist.LEXIS 70850).
(Opinion available. Document #88-120625-201Z.)
U.S. Judge Donovan W. Frank of the District of Min-nesota made the ruling in the suit filed by Galen Tray-lor, individually and on behalf of all others similarlysituated, against the bank and I.C. System Inc.
The unpaid balance on Traylor’s Credit One creditcard account is $905.48, and she has not made pay-ments on the account since May 5, 2010. Traylor saysthe debt she owed on her Credit One credit card wastransferred to I.C. System for collection. She alleges thatthe defendants called her numerous times on her homeand cell phones to collect the debt. Traylor furthercontends that her caller identification identified thecaller as I.C. System, but when she called the identifiednumbers back, the persons answering identified them-selves as being from Credit One. She says Credit Oneused the false name of I.C. System to deceive customersinto believing that someone other than Credit Onewas calling.
‘Very Limited Discovery’
Traylor’s complaint asserts a single count for a violationof the FDCPA against both defendants. The defen-dants moved to compel arbitration and dismiss andsubmitted a copy of Traylor’s cardholder agreement,which includes an arbitration agreement they claimgoverns the account and relationship between Traylorand Credit One. The arbitration agreement providesthat ‘‘[a]ny questions about what Claims are subject toarbitration shall be resolved by interpreting this arbitra-tion provision in the broadest way the law will allow itto be enforced.’’
The defendants assert that when Traylor opened heraccount with Credit One, she executed the agreementand thereby agreed to submit all disputes arising underthe agreement to arbitrate. Traylor argues that CreditOne provides no facts in support of mutual assent to thealleged arbitration agreement. In particular, she saysthe defendants have not alleged facts showing whenthe agreement was written; when, how or even if the
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terms of the agreement were communicated to her; orwhen, how or even if Traylor assented to the terms. Thedefendants, in a reply brief and the supplemental affi-davit of Credit One Vice President of Collections-Operations David Guy, respond that because Traylorapplied for credit online, she could not have completedthe application and obtained credit without firstexpressly accepting the terms of the agreement.
‘‘While it appears likely that Defendants will be able todemonstrate, upon a more complete factual record, thatPlaintiff entered into a valid agreement to arbitrate withCredit One, the record at this point is insufficient tomake such a showing,’’ Judge Frank said. ‘‘Plaintiff doesnot deny that she entered into a contractual relationshipwith Credit One, accepted and benefitted from theextension of credit under the Account, and failed torepay amounts due and owing. However, as pointedout by Plaintiff, the Guy Affidavit does not describe orset forth the process by which Plaintiff would berequired to ‘expressly accept’ the terms of the Arbitra-tion Agreement (such as how the terms of the arbitra-tion agreement would be displayed or made known toPlaintiff), or otherwise detail the foundational elementsof the online application process.’’
Judge Frank found that the parties should engage in‘‘very limited discovery’’ to gather information necessaryfor the District Court to determine whether Trayloragreed to the arbitration provision via the online appli-cation. He said he will then entertain a revised motionto compel arbitration after the discovery is concluded‘‘and Defendants are able to provide sufficient factualsupport of the contention that Plaintiff is bound by theterms of the Agreement.’’
Within Scope Of Agreement
Judge Frank also found that Traylor’s FDCPA claimagainst Credit One is within the scope of the agree-ment, explaining that the claim implicates the opera-tion and handling of the account and involves bothcommunications and collection matters that relate tothe account. Traylor argues that even if the agreementcovers her claims against Credit One, it does not governher claims against I.C. System because there is no asser-tion that I.C. System was a party to the agreement.Traylor says I.C. System has not offered a theory asto how an agreement to arbitrate between Traylorand Credit One would apply to it as a third party.
Judge Frank disagreed with Traylor, first noting thatthe agreement provides that claims subject to arbitra-tion include ‘‘[c]laims for which [Credit One] may bedirectly or indirectly liable.’’
‘‘Here, I.C. System became involved in the servicing ofPlaintiff’s Account when it engaged in collectionefforts,’’ Judge Frank explained. ‘‘Plaintiff’s FDCPAclaim against I.C. System directly relates to CreditOne, as Plaintiff alleges that her calls to telephone num-bers owned by I.C. System were answered by indivi-duals who identified themselves as Credit Onerepresentatives. Because Plaintiff has pled a singlecause of action against both Defendants, based on analleged scheme devised between the two, it appears thatthis claim is one for which Credit One may be directlyor indirectly liable. As such, the claim against I.C.System will also be subject to arbitration if Defen-dants can establish that Plaintiff accepted the termsof the Arbitration Agreement at the time she openedher Account.’’
Traylor is represented by Mark L. Vavreck of Marti-neau, Gonko & Vavreck in Minneapolis and ThomasJ. Lyons of the Lyons Law Firm in Vadnais Heights,Minn. The defendants are represented by MichelleKreidler Dove of Bassford Remele in Minneapolis.
(Additional documents available. Motion to dismissand compel arbitration. Document #88-120625-202M. Brief in support of motion to dismiss andcompel arbitration. Document #88-120625-203B.Opposition to motion to dismiss and compel arbi-tration. Document #88-120625-204B. Reply in sup-port of motion to dismiss and compel arbitration.Document #88-120625-205B.) n
Class CertifiedIn Military Credit CardOvercharge ActionSAN FRANCISCO — A federal judge in California onJune 20 granted a motion for class certification in a suitin which a plaintiff alleges overcharges on militarycredit cards (Taylor Russell v. United States of America,No. 09-03239, N.D. Calif.; 2012 U.S. Dist. LEXIS85614; See April 2012, Page 30).
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(Order available. Document #88-120625-343Z.)
Taylor Russell, who served in the U.S. Army on activeduty from April 1997 until July 2000, opened his Armyand Air Force Exchange Service (AAFES) credit cardaccount in 1998 and made required payments until thetime of his separation from service in 2000. Theaccount became delinquent shortly after he left serviceand remained delinquent until the outstanding balancewas paid through offsets in his federal tax refunds. Heclaims that the interest charged was in excess of thatallowed in the credit agreement. The agreement pro-vided that the interest would not exceed bank primerate plus 4.75 percent, with a minimum of 12 percentper year. When his debt was transferred to AAFEScollections, his balance was $940. This balance wasassessed at 14.25 percent, which exceeds the amountin the agreement.
Remand
In February 2010, the AAFES adjusted 46,851accounts with the same contractual terms as Russell’sby reducing the interest rate to the 12 percent mini-mum allowed under the agreements. A week later, theAAFES sent Russell a refund of $150 for all interestabove 12 percent paid on his balance. An AAFE volun-tary audit continued after the U.S. District Court forthe Northern District of California dismissed Russell’sindividual claim as moot. In May 2010, a second auditidentified the interest overcharges on additionalaccounts and resulted in adjustments of an additional103,320 accounts, of which 69,198 received refunds.In total, the AAFES has adjusted 149,781 accounts andissued 101,432 refunds.
Russell filed his complaint in 2009. By March 2010, hisfinal claim of interest overcharges was dismissed asmoot because he had been issued the $150 refundcheck. In the dismissal order, the District Court heldthat his class claim was also moot because he received afull refund on his individual claim before moving forclass certification. The court found that his refund cameas part of a voluntary audit of thousands of accounts‘‘outside the aegis of this lawsuit [and that] this scenariodoes not invoke the policy concerns of a defendanttargeting only the named plaintiffs to prevent a suitand frustrate the objective of a class action.’’ The Dis-trict Court allowed Russell’s counsel an opportunity tofind a substitute named plaintiff with a live claim torepresent the proposed class. On June 22, 2010, theDistrict Court entered final judgment after possible
intervenors were considered and rejected. Russellappealed the dismissal of the interest-overcharge claimto the Federal Circuit U.S. Court of Appeals.
The Federal Circuit affirmed that Russell’s individualclaim had been fully satisfied by the refund despitepurported claims for attorney fees and costs. However,based on its interpretation of an intervening NinthCircuit decision in Pitts v. Terrible Herbst (653 F.3d1081, 1091-92 [9th Cir. 2011]), the Federal Circuitdisagreed that mooting Russell’s individual claim war-ranted dismissing the class claim as moot. The FederalCircuit remanded the case to the District Court,instructing the District Court to determine whether,upon further factual development, the class claim hasbeen mooted by the AAFES’s voluntary account adjust-ment and refunds.
Rule 23(a) Satisfied
In a renewed motion for class certification, Russellasked the District Court to certify only a class ofapproximately 15,000 people who would not havereceived refund checks (15 percent of the 101,432accounts sent refunds). On March 22, Judge WilliamAlsup declined to rule on the renewed motion. He saidRussell’s estimate of 15,000 class members is ‘‘largelyspeculative.’’ The judge said no discovery has beentaken on the issue and the AAFES has not providedsufficient information to determine what percent ofrefunds were not received. ‘‘More precision is neededbefore adjudicating the . . . renewed motion for classcertification herein,’’ the judge said.
On May 17, Russell filed an amended renewed motionfor class certification. He proposed a class including:‘‘All natural persons (1) from whom AAFES has col-lected, after July 16, 2003 and through the present date,debt incurred pursuant to an AAFES Credit Agree-ment; (2) from whom the amount collected exceededthe principal amount of account purchases in all cate-gories plus finance charges permitted by the applicableAAFES Credit Agreement and allowable penaltiesand administrative fees and; (3) were not sent or havenot cashed refund check(s) for the full amount of theinterest overcharge(s).’’ ‘‘The class does not include per-sons with claims that exceed $10,000 unless suchpersons waive their claim above $10,000,’’ accordingto the motion.
In granting the amended motion, Judge Alsup foundthat the proposed class satisfies Federal Rule of Civil
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Procedure 23(a)’s requirements regarding numerosityof class, common questions of law or fact, typicality andthe ability of the represented parties to fairly and ade-quately protect the interest of the class.
‘‘As stated, Russell’s proposed class definition foregoesan independent recalculation to determine appropriaterefunds, if any, of all 149,781 delinquent accounts, andinstead adopts the AAFES’s finding of 60,557 accountsthat are owed refunds but where refund checks are stilluncashed or were returned as undeliverable,’’ JudgeAlsup said. ‘‘Russell admits that persons who havealready had their accounts adjusted by AAFES andcashed refund checks are not part of his class definition.This order agrees and finds that the AAFES’s metho-dology of account adjustment and determination ofrefunds appears correct.’’
Attorneys
Russell is represented by Deepak Gupta of Public Citi-zen Litigation Group in Washington, D.C., MarieNoel Appel of Consumer Law Office of Marie NoelAppel in San Francisco and S. Chandler Visher of LawOffices of S. Chandler Visher in San Francisco.
The United States is represented by Alicia M. Hunt andMichael J. Quinn of the U.S. Department of Justice inWashington.
(Additional documents available: Motion for classcertification. Document #88-120625-344M. Res-ponse to motion for class certification. Document#88-120625-345B. Reply in support of motion forclass certification. Document #88-120625-346B.) n
1st Circuit Affirms DismissalOf Corruption SuitAgainst Puerto Rico BankBOSTON — The First Circuit U.S. Court of Appealson June 4 affirmed dismissal of a suit in which a plain-tiff alleges that a bank in Puerto Rico that has sincefailed kept funds from an escrow account held in theplaintiff’s interest in violation of the Racketeer Influ-enced and Corrupt Organizations Act and Puerto Ricolaws (Fabricia de Muebles J.J. Alvarez, Inc. v. Inver-siones Mendoza, Inc., et al., No. 11-1985, 1st Cir.;2012 U.S. App. LEXIS 11240).
(Opinion available. Document #88-120625-248Z.)
The First Circuit panel of Chief Judge Sandra L. Lynchand Circuit Judges Michael Boudin and Kermit V.Lipez affirmed the ruling of the U.S. District Courtfor the District of Puerto Rico in the suit Fabricia deMuebles J.J. Alvarez Inc. (Alvarez) filed against Wester-nbank de Puerto Rico, whose successor in interest isBanco Popular de Puerto Rico (BPPR). The First Cir-cuit also affirmed the District Court’s denial of Alvarez’stwo motions for reconsideration of its dismissal ruling.
The suit arose from Alvarez’s agreement to sell a furni-ture business to Inversiones Mendoza Inc. (Mendoza).Westernbank agreed to finance the transaction. OnAug. 29, 2004, the parties opened what Alvarez sayswas an escrow account at Westernbank. Alvarez saysWesternbank daily swept and kept money from theescrow account in partial satisfaction of the debtsowed to it by Mendoza. Mendoza eventually filed forChapter 11 bankruptcy protection.
No Stipulation Filed
On June 19, 2009, Alvarez filed its complaint in theDistrict Court against Westernbank and various JohnDoe employees and insurance companies. The com-plaint included five causes of action: civil law fraud,breach of fiduciary duty and lender’s liability; violationof RICO; civil fraud under commonwealth law; recov-ery of funds or property; and foreclosure of mortgage.As to the RICO claims, Alvarez pleaded violationsunder subsections (a), (c) and (d) of 18 U.S. CodeSection 1692. On Sept. 28, 2009, Westernbankmoved to dismiss for failure to state a claim, and theDistrict Court partially granted the motion, allowingonly the Section 1692 RICO claim and the remainingstate law claims to survive.
On April 30, 2010, the commissioner of financialinstitutions of Puerto Rico closed Westernbank andappointed the Federal Deposit Insurance Corp. as itsreceiver to liquidate the bank. On the same date, theFDIC sold most of the bank’s assets to BPPR. OnMay 12, 2010, BPPR replaced Westernbank in theinstant case.
At a March 18, 2011, settlement conference, Alvarezagreed to dismiss three of the five causes of action: thecivil law fraud and breach of fiduciary duty claim, theremaining RICO claim and the claim of civil fraud
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under Puerto Rico law. The District Court ordered theparties to file, pursuant to the settlement agreement, astipulation dismissing the three causes of action. Mean-while, Alvarez also said it recently identified insurancecompanies that had issued policies that would cover thedamages in the case. The District Court granted theplaintiff’s motion to amend its complaint by substitut-ing those insurance companies for the fictitious insurersit had named in the initial complaint.
On March 28, 2011, after the stipulation deadline hadpassed, BPPR moved to dismiss the causes of actionthat Alvarez had agreed to dismiss, stating that Alvarezhad failed to cooperate or comply with any of BPPR’srequests to help prepare the stipulation. The DistrictCourt granted the motion. On June 28, the DistrictCourt ordered Alvarez to show cause as to why theremaining claims, which the District Court character-ized as state laws claims, should not be dismissed forlack of subject matter jurisdiction. Alvarez did notrespond to the show-cause order within the time direc-ted by the District Court. On July 5, the District Courtdetermined that only state claims for mortgage foreclo-sure and recovery of funds remained at issue anddeclined to exercise supplemental jurisdiction overthose claims.
Reconsideration Denied
On the same date, Alvarez moved for reconsideration,contending that the case involved questions of bank-ruptcy law that the District Court was more competentto handle than state courts. On July 6, the DistrictCourt denied the motion, and on July 21, the plaintifffiled another motion for reconsideration, asserting forthe first time that the District Court should retain jur-isdiction because the plaintiff had RICO claims againstWesternbank employees that had never been dismissed.The District Court denied the motion on Aug. 3.
Alvarez appealed to the First Circuit on Aug. 4. Thedefendant appellees are Mendoza, former Westernbankofficers and directors Frank C. Stipes Garcia, WilliamM. Vidal-Carvajal and Miguel A. Vazquez Seijo, formerWesternbank in-house counsel Rosa Vicens Diaz, XLSpecialty Insurance Co., Liberty Mutual Insurance Co.,ACE Insurance Co. and Chartis Insurance Corp. ofPuerto Rico.
Alvarez argued that the District Court abused its dis-cretion in denying the second motion for reconsidera-tion because although Alvarez agreed to the dismissal
of the RICO claims against BPPR, it never agreed to thedismissal of its RICO claims against the Westernbankemployees.
‘Reasonable’ View
‘‘The short answer is that it was reasonable for the dis-trict court, after settlement, to have viewed the dismissalorder as encompassing all the RICO claims,’’ the panelreasoned. ‘‘And plaintiff, when given the opportunity topresent a different view, utterly failed to do so.’’
As to the Westernbank employees, the complaintpleads only the ‘‘control of influence’’ element of aRICO claim, the panel said. The remainder of theRICO claim discusses only the actions of Westernbankand makes no mention of its employees, and it is basiclaw that RICO claims against employees must be sepa-rate and distinct from those against the employer, thepanel said, citing Bessette v. Avco Fin. Servs., Inc. (230F.3d 439, 449 [1st Cir. 200]).
The panel added that no individuals had been named orserved as defendants when the claims were reportedsettled; although the parties were ordered to file a sti-pulation of settlement, the plaintiff failed to cooperate;and the plaintiff did not assert that it had RICO claimsremaining.
No Abuse Of Discretion
Further, the District Court did not abuse its discretionin denying Alvarez’s first motion for reconsideration,the panel said. The District Court correctly held thatthe mere fact that the settlement agreements arose in thecontext of a bankruptcy proceeding is not a standalonebasis for federal jurisdiction, the panel said.
Alvarez also argues that the District Court erred indismissing the case after the show-cause order becausethe complaint should have been read as asserting federalclaims beyond the RICO claims. On its face, the com-plaint supported several federal causes of action besidesthose under RICO, including causes under Sarbanes-Oxley, the Transportation of Stolen Property Act, sta-tutes regulating the relationship between the FDIC andthe bank and various federal securities laws, the plaintiffargues. The panel disagreed, saying the complaint’sreference to these statutes ‘‘does not come close to meet-ing the pleading requirements’’ of Ashcroft v. Iqbal(556 U.S. 662 [2009]).
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Attorneys
Alvarez is represented by Rafael Gonzalez-Velez of SanJuan, Puerto Rico.
Mendoza is represented by Nelly Mendoza of Mendozain Cayey, Puerto Rico.
Stipes Garcia and Vidal-Carvajal are represented byGary H. Montilla-Brogan in San Juan. Vazquez Seijois represented by Roberto Buso-Aboy in San Juan.Vicens Diaz is represented by Berenice B. Bellotti andRoberto Santana-Aparicio of Del Toro & Santana inSan Juan.
XL is represented by Benjamin Cairns Eggert of WileyRein in Washington, D.C., and Manuel Antonio Pie-trantoni of Casellas Alcover & Burgos in San Juan.Liberty Mutual is represented by Eric Perez-Ochoa ofAdsuar Muniz Goyco Seda & Perez-Ochoa in SanJuan. ACE is represented by Francisco E. Colon-Ramirez of Colon, Colon & Martinez in San Juan.Chartis is represented by Jeannette Lopez de Victoriaof Pinto-Lugo, Oliveras & Ortiz in San Juan.
(Additional documents available. Appellant brief.Document #88-120625-249B. Vazquez Seijo’s appel-lee brief. Document #88-120625-250B. XL’s appel-lee brief. Document #88-120625-251B. Appellantreply brief. Document #88-120625-252B.) n
10th Circuit AffirmsDismissal Of Suit AllegingWrongful ForeclosureDENVER — The 10th Circuit U.S. Court of Appealson June 11 affirmed the dismissal of a suit in which aplaintiff accused OneWest Bank, which had acquiredhis loan after the failure of IndyMac Bank, of wrong-fully foreclosing on his home, ruling that OneWest was‘‘a holder of an evidence of debt’’ under Colorado law(Bruce C. McDonald v. OneWest Bank, No. 11-1071,10th Cir.; 2012 U.S. App. LEXIS 11801).
(Opinion available. Document #88-120625-270Z.)
The 10th Circuit panel of Senior Circuit Judge WadeBrorby and Circuit Judges Paul J. Kelly Jr. and
Terrence L. O’Brien affirmed the U.S. District Courtfor the District of Colorado’s ruling in the suit BruceC. McDonald filed against OneWest.
McDonald in 2003 took out a $198,000 loan securedby a deed of trust on Colorado real property in favor ofthe lender, IndyMac. He made payments on the loanuntil April 2008, including while IndyMac was oper-ated in receivership by the Federal Deposit InsuranceCorp. When the FDIC sold IndyMac to OneWest,McDonald says he stopped making payments becauseOneWest ‘‘did not provide [him] with the instrumentor reasonable evidence of authority to make such apresentment’’ in accordance with his demands for theoriginal note. OneWest then provided him with a copyof the note and deed of trust.
‘Meritless’ Argument
OneWest foreclosed on the property and obtained anorder under Colorado Rule of Civil Procedure 120authorizing the sale of the property. McDonald twicesought reconsideration of the sale order, which wasdenied. On March 24, 2010, the property was soldand OneWest purchased it, later assigning its interestin the property to the Federal Home Loan MortgageCorp. (Freddie Mac). On the day before the sale,McDonald filed a suit in the state court claiming thatOneWest was not entitled to payment on the note andthe order of sale was void. Freddie Mac filed a forcibleentry and detainer action against McDonald seeking toevict him. McDonald obtained a stay pending resolu-tion of the state court action. He amended his statecourt complaint to join Freddie Mac and include aquiet title action. Neither defendant answered, andthe state court granted a default judgment quietingtitle. The case is on appeal.
On July 22, 2010, McDonald filed the District Courtaction against One West, alleging a violation of theRacketeer Influenced and Corrupt Organizations Act,a pattern of racketeering activities, violation of the FairDebt Collection Practices Act, fraud and violation ofthe Colorado Consumer Protection Act. He soughtdamages for the loss of his home, mental anguish,pain and suffering and attorney fees and costs. TheDistrict Court dismissed the suit on the basis of McDo-nald’s failure to state a claim. The District Court deniedMcDonald’s motion for reconsideration, and heappealed to the 10th Circuit.
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On appeal, McDonald asserts that OneWest was notentitled to foreclose because it was not ‘‘a holder in duecourse’’ and did not own the underling note. The panelsaid the attempt to graft ‘‘holder in course’’ require-ments onto this process, ‘‘though obvious in its pur-pose, is meritless and clearly distorts the law.’’
‘Holder In Due Course’
The panel said that in Colorado, nonjudicial foreclosurebased upon a violation of a deed of trust provision can beaccomplished by ‘‘a holder of an evidence of debt,’’ quot-ing Colorado Revised Statute Section 38-38-101(1).The ‘‘holder of an evidence of debt’’ includes a ‘‘personentitled to enforce an evidence of debt’’ and presump-tively includes ‘‘the person in possession of a negotiableinstrument evidencing a debt, which has been dulynegotiated to such person or to bearer or indorsed inblank,’’ according to the statute.
‘‘As the commercial code makes clear, a person entitledto enforce an instrument may be a holder, and need notbe an owner, of the instrument,’’ the panel said. ‘‘Con-trary to Mr. McDonald’s position, nothing in the lawstates that ‘holder in due course’ status is required.’’
The panel noted that at oral argument, McDonald’scounsel said the note presented to the state court wasnot the original note and, therefore, it was not valid.McDonald’s counsel said the argument was raised in amotion he filed under Federal Rule of Civil Procedure60 with the District Court, although that is not appar-ent, the panel said. His counsel also admitted that theissue was not covered by the notice of appeal, whichonly specifies the order of dismissal and denial of recon-sideration, the panel said. The Rule 60 motion was notfiled until nearly six months after the notice of appealwas filed, and no new notice of appeal has been enteredon the issue, the panel said. Therefore, the panel said, itis unable to consider these claims on appeal.
McDonald is represented by Gary D. Fielder of the LawOffice of Gary Fielder in Arvada, Colo. OneWest isrepresented by Victoria Edwards of Akerman Senterfittin Denver.
(Additional documents available. Appellant brief.Document #88-120625-271B. Appellee brief. Docu-ment #88-120625-272B. Appellant reply brief.Document #88-120625-273B.) n
Bank Earns PartialSummary Judgment In LoanParticipation DisputeST. LOUIS — A federal magistrate judge in Missourion June 13 ruled that Beal Bank USA is entitled to adeclaratory judgment that it is a ‘‘participating bank’’under a loan participation agreement with a failed bankbut that that Beal is not entitled to summary judgmenton future payments or prejudgment interest (Beal BankUSA v. The Business Bank of St. Louis, No. 11-0561,E.D. Mo.; 2012 U.S. Dist. LEXIS 81801).
(Opinion available. Document #88-120625-296Z.)
U.S. Magistrate Judge David D. Noce of the EasternDistrict of Missouri made the ruling in the suit in whichBeal alleges that The Business Bank of St. Louis (BBSL)has not paid to Beal proceeds due to it under the parti-cipation agreement with failed Champion Bank.
Beal alleges that the Federal Deposit Insurance Corp.,as the receiver of Champion, transferred to Beal aninterest in certain loan proceeds and that BBSL, thecontractual promissory, has not paid to Beal all theproceeds due to it under the participating agreementto which Champion had been a party. BBSL previouslytried, and failed, to buy Champion from the FDIC.
Participation Agreement
Effective Sept. 6, 2007, BBSL entered into the partici-pation agreement with Champion, whereby BBSL soldto Champion an undivided 82 percent interest in a$4.9 million loan BBSL made to Matthew J. Rattereeand Toni Ratteree. On April 30, 2010, the MissouriDivision of Finance closed Champion and appointedthe FDIC as receiver of Champion’s assets, includingChampion’s participation in the Ratteree loan repay-ments. BBSL offered to repurchase the Champion par-ticipation, but the FDIC rejected the offer. The FDICthen attempted to sell the participation via a biddingprocess, and on Dec. 3, 2010, the FDIC agreed to sellthe participation to Beal.
On Jan. 11, 2011, the FDIC sent a letter advising it ofthe transfer of the Champion participation to Beal, andBeal instructed BBSL to send all payments due to itunder the participation agreement to CLMG Corp.,Beal’s servicer. BBSL responded Jan. 17, 2011, sendinga letter to CLMG arguing that the FDIC’s repudiation
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of its right of first refusal requires the payment ofdamages for tortious interference with BBSL’s statelaw contractual rights under the participation agree-ment. BBSL also made these complaints to theFDIC, which responded that BBSL has the right tofile an administrative claim against it as receiver, butBBSL has not filed any such claim.
Beal sought a declaratory judgment that it is the ‘‘parti-cipating bank’’ under the participation agreement, aswell as payment of all past, unpaid payments; prejudg-ment interest on those payments; and an order direct-ing BBSL to make all future payments owed under theparticipation agreement. BBSL argued that the issuesare moot because in an attempt to resolve the litigation,it has paid what it owes to Beal under the participationagreement.
‘Participating Bank’
Magistrate Judge Noce concluded that BBSL has con-ceded that Beal is the ‘‘participating bank’’ under theparticipation agreement. Moreover, he said, any chal-lenges to Beal being the ‘‘participating bank’’ are effec-tually challenges to the FDIC assignment, an issue notbefore the District Court.
The magistrate judge also found that Beal is the identi-fiable third-party creditor beneficiary because of theFDIC assignment and that BBSL cannot currentlychallenge the FDIC assignment. Therefore, he said,Beal may be entitled to judgment for unpaid proceedsat the Champion participation.
‘‘As previously noted, the parties dispute whether BBSLhas paid to Beal Bank all the monies that it would beentitled to under the Participation Agreement,’’ Magis-trate Judge Noce said. ‘‘Therefore, the factual issue offull payment remains to be tried. Affected by this fac-tual issue are Beal Bank’s claims to prejudgment interestand other relief.’’
Attorney Fees
Beal also argues that is entitled to attorney fees, costsand post-judgment interest under the participationagreement. On Beal’s claim for payment of loan pro-ceeds under the participation agreement, Beal is the‘‘prevailing party’’ and BBSL is the ‘‘unsuccessfulparty’’ under Section 14 of the participation agreementbecause BBSL has impliedly agreed that Beal is entitledto the proceeds from the Champion participation in
the Ratteree loan payments, Magistrate Judge Nocefound. Beal also previously prevailed on its motion todismiss BBSL’s counterclaims. Therefore, Beal isentitled to court costs and ‘‘reasonable attorneys’ fees’’under Section 14, he said. Because further litigation isneeded to decide what amount, if any, Beal is entitled tounder the participation, a final determination of reason-able attorney fees for Beal as the prevailing party ispremature, the magistrate judge said.
Beal is represented by Nicholas J. Zluticky and Mark A.Shaiken of Stinson and Morrison in Kansas City, Mo.BBSL is represented by Jayme Major, John M. Hesseland Larry E. Parres of Lewis Rice in St. Louis.
(Additional documents available: Motion for sum-mary judgment. Document #88-120625-297M.Brief in support of motion for summary judgment.Document #88-120625-298B. Response to motionfor summary judgment. Document #88-120625-299B. Reply in support of motion for summaryjudgment. Document #88-120625-300B.) n
Judge: Investor FailedTo Plead Subjective FalsityIn Failed Bank SuitSANTA ANA, Calif. — Dismissal of federal securitieslaw claims against the former outside auditor of a failedbank is proper because a shareholder failed to properlyplead subjective falsity, a federal judge in Californiaruled June 7 (Buttonwood Tree Value Partners LP,et al. v. Jack A. Sweeney, et al., No. 10-00537, C.D.Calif.; 2012 U.S. Dist. LEXIS 80118).
(Opinion available. Document #88-120625-008Z.)
Shareholder Buttonwood Tree Value Partners LP fileda second amended class action complaint in the U.S.District Court for the Central District of California onbehalf of all purchasers of First Regional Bank (FRB)common stock from Jan. 1, 2007, to Jan. 29, 2010.
Buttonwood alleges that several former FRB executiveofficers and directors violated Sections 10(b) and 20(a)of the Securities Exchange Act of 1934 and Securitiesand Exchange Commission Rule 10b-5 by issuing aseries of false and misleading statements regarding
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FRB’s capitalization, the quality of its underwriting, theamounts reserved for loan losses, the quality of its loanportfolio and the mental competency of FRB CEOJack Sweeney.
Audit Reports
Buttonwood also contends that FRB’s outside auditor,Deloitte & Touche LLP, violated Section 10(b) andRule 10b-5 by fraudulently stating in its audit reportsthat FRB was in compliance with generally acceptedaccounting principles (GAAP) in preparing its financialstatements and that Deloitte was compliant with gen-erally accepted auditing standards (GAAS).
In granting Deloitte’s motion to dismiss, Judge CormacJ. Carney held that ‘‘[w]ith respect to the misrepresen-tation element of Plaintiffs’ claim, Plaintiffs have failedto allege subjective falsity with respect to the allegedmisrepresentations made in Deloitte’s audit reports.’’
‘‘Where a plaintiff challenges an opinion statementunder the securities law, the plaintiff must allege withparticularity that the defendant believes his or her opi-nion was false. An auditor’s report is a statement ofprofessional opinion, not fact. This Court concludesthat, unlike the Tenth Circuit [U.S. Court of Appeals],both the GAAS assertion and GAAP assertions are mat-ters of opinion, because both GAAS and GAAP area collection of broad standards that are ‘couched inrather general and in some cases inherently subjectiveterms . . . requir[ing] for example, that the auditor planthe audit engagement properly, use ‘‘due professionalcare,’’ exercise ‘‘professional skepticism,’’ and ‘‘assessthe risk of material misstatement due to fraud all mattersas to which reasonable professionals planning or con-ducting an audit reasonably and frequently coulddisagree,’ ’’ ’’ Judge Carney said, citing In re LehmanBros. Securities & ERISA Litigation (799 F. Supp. 2d258, 300-03 [S.D.N.Y. 2011]).
GAAS
‘‘Determining whether Deloitte complied with GAASwould not be easily answerable as true or false, butwould likely instead require reference to the opinionsof other auditors familiar with GAAS. Because they arestatements of opinion, Plaintiffs must allege subjectivefalsity, that Deloitte did not believe, or had no reason-able basis to believe, that it complied with GAAS andthat FRB complied with GAAP. The SAC [second
amended complaint] does not sufficiently allege suchbeliefs and thus fails to adequately plead the first ele-ment of a claim for securities fraud,’’ Judge Carneyexplained.
Buttonwood is represented by Jon Tostrud of CuneoGilbert & LaDuca in Los Angeles.
Deloitte is represented by James J. Farrell of Latham &Watkins in Los Angeles and Peter A. Wald of Latham &Watkins in San Francisco. n
Federal Judge Bars SuitAgainst Bank Due ToPlaintiff’s Intent To MisleadGAINESVILLE, Ga. — In a suit in which a plaintiffasserted negligence and breach of contract claimsagainst a bank regarding a loan, a federal judge in Geor-gia on May 23 granted the motion to dismiss filed bythe Federal Deposit Insurance Corp., as receiver of thefailed bank, ruling that the claims are barred by judicialestoppel because the plaintiff intended to mislead abankruptcy court by not listing the potential value ofthe instant litigation (Sonya Rose Lopez v. FederalDeposit Insurance Corporation, No. 10-00158, N.D.Ga.; 2012 U.S. Dist. LEXIS 71743).
(Order available. Document #88-120625-210R.)
U.S. Judge Richard W. Story of the Northern Districtof Georgia granted the FDIC’s motion in the suit filedby Sonya Rose Lopez.
Lopez initially sued the Bank of Hiawassee on July 15,2009, in the Towns County, Ga., Superior Court,asserting claims of negligence and breach of contractarising from a loan she obtained from the bank toconstruct a hotel. On March 19, 2010, the GeorgiaDepartment of Banking and Finance closed the bankand appointed the FDIC as receiver. The state courtgranted the bank’s motion to substitute the FDIC asdefendant, and the FDIC removed the suit to the Dis-trict Court on Aug. 19, 2010.
Judicial Estoppel
On Sept. 21, 2011, Lopez filed for Chapter 7 bank-ruptcy in the U.S. Bankruptcy Court for the Northern
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District of Georgia. In her initial statement of financialaffairs and amended schedules, Lopez did not discloseher participation the instant case or list her claim as apotential asset. On Feb. 3, 2012, the FDIC moved todismiss the instant suit on the grounds that the DistrictCourt lacks subject matter jurisdiction under FederalRule of Civil Procedure 12(b)(1) because of Lopez’sfailure to timely file a proof of claim or comply withthe procedures for judicial review of a disallowed claimand her lack of standing to prosecute an unscheduledcause of action after filing for Chapter 7 bankruptcy.Alternatively, the FDIC moved that the case should bedismissed because of Lopez’s failure to list the litigation‘‘as having any value on her bankruptcy schedules.’’
Judge Story noted that the doctrine of judicial estoppelprecludes a plaintiff from asserting a claim in a judicialproceeding that contradicts the position taken underoath in a prior proceeding, pursuant to Parker v. Wen-dy’s Int’l Inc. (365 F.3d 1268, 1271 [11th Cir. 2004]).He said the 11th Circuit U.S. Court of Appeals inBurnes v. Pemco Aeroplex (291 F.3d [11th Cir.2002]) adopted a two-prong test for determiningwhether judicial estoppel should bar a given claim.First, the prior inconsistent position must be assertedunder oath, and second, the court decides whether theinconsistent statements amount to a manipulation ofthe judicial system.
The judge said there is no debate that Lopez’s financialdisclosure forms were submitted under oath to theBankruptcy Court. He went on to find that the recordsupports an inference that Lopez intentionally manipu-lated the judicial system. Specifically, she did not dis-close her claim or her status as a party to this case in herinitial schedules and asset filings with the BankruptcyCourt, and she again failed to disclose her claim and theinstant litigation in a set of amended schedules filedmore than a month later, Judge Story said. Addition-ally, there are no facts in the record from which tosurmise that Lopez was unaware that her claim waspending in the District Court when she filed for bank-ruptcy, he said.
‘Intent To Mislead’
Assuming that a claim value Lopez filed with the FDICis reasonably accurate, the value of the present litigationwas double the value of her listed assets and would triplethe available asset pool from which creditors couldsatisfy their claims, Judge Story said.
‘‘Given these undisputed facts, the Court finds thatPlaintiff had the requisite intent to mislead the bank-ruptcy court,’’ Judge Story said.
Judge Story dismissed Lopez’s claims with prejudiceand declined to further consider whether the DistrictCourt lacks subject matter jurisdiction over Lopez’sclaims.
Lopez is represented by Neil Louis Wilcove of Free-man, Mathis & Gary in Atlanta. The FDIC is repre-sented by Irene B. Vander Els, Kristen A. Yadlosky andSamuel Robinson Arden of Hartman, Simons & Woodin Atlanta.
(Additional document available. Motion to dismiss.Document #88-120625-211M.) n
FDIC Can Intervene In SuitAgainst Failed Banks’Former OfficersINDIANAPOLIS — A federal magistrate judge inIndiana on June 1 granted the Federal Deposit Insur-ance Corp.’s motion to intervene in a suit in which theChapter 7 trustee of a failed bank alleges that the bank’sformer senior officers breached their fiduciary duties(Elliott D. Levin v. William I. Miller, et al., No. 11-01264, S.D. Ind.; 2012 U.S. Dist. LEXIS 76231).
(Order available. Document #88-120625-242R.)
U.S. Magistrate Judge Tim A. Baker of the SouthernDistrict of Indiana granted the FDIC’s motion to inter-vene in the suit Eliott D. Levin, the Chapter 7 trusteefor failed bank Irwin Financial Corp. (IFC), filedagainst the bank’s former CEO William I. Miller, for-mer Chief Financial Officer and Senior Vice PresidentGregory F. Ehlinger and former CFO, Senior VicePresident and Executive Vice President Thomas D.Washburn.
IFC filed for bankruptcy protection on Sept. 18, 2009,after regulators closed its banks and appointed theFDIC as receiver. The trustee filed the suit onSept. 16, 2011, bringing counts for breach of duty ofcare and breach of duty of loyalty. On Dec. 7, the
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defendants moved to dismiss, arguing that the trusteelacks standing because his claims belong exclusivelyto the FDIC pursuant to 12 U.S. Code Section1821. On March 28, the FDIC moved to interveneas a party, asserting that it has exclusive ownership ofthe trustee’s claims.
Motion Was Timely
Pursuant to Federal Rule of Civil Procedure 24(a)(2),the party seeking intervention of right must show thatthe motion was timely, that the party possesses an inter-est related to the subject matter of the action, thatdisposition of the action threatens to impair that inter-est and that existing parties to the action fail to representthat interest adequately, the magistrate judge said, cit-ing United States v. BDO Seidman (337 F.3d 802, 808[7th Cir. 2003]).
The trustee argued that the motion was not promptbecause the FDIC’s counsel was present at the bank-ruptcy proceedings that were conducted prior to thetrustee filing the complaint and thus ‘‘was well awarethat this action was in prospect.’’ However, an action‘‘in prospect,’’ is not the same as a lawsuit in progress,the magistrate judge said. The defendants’ motion todismiss first placed the FDIC’s interest at issue, and theFDIC moved to intervene only 15 days after the trusteefiled a sur-reply to the motion to dismiss, the magistratejudge said. The motion is timely because the FDICpromptly moved to intervene, intervention presentsminimal prejudice to the existing parties and denyingthe motion could result in substantial prejudice to theintervener, the magistrate judge determined.
The magistrate judge also found that the FDIC has alegitimate interest in the subject matter of the litigation,agreeing with the FDIC’s argument that under theFinancial Institution Reform, Recovery and Enforce-ment Act of 1989 (FIRREA), the trustee’s claims arederivative and belong exclusively to the FDIC.
‘Not Adequately Represented’
The magistrate judge further found that the FDIC’sability to protect its interest may be impaired if it isnot permitted to intervene. Impairment depends on‘‘whether the decision of a legal question involved inthe action would as a practical matter foreclose rightsof the proposed intervenors in a subsequent proceeding,’’he said, quoting City of L.A. v. United Air Lines
(No. 06-1084, N.D. Ill. [July 7, 2006]). Because theFIRREA allocates exclusive rights to the FDIC, a rulingregarding the FIRREA’s impact on the trustee’s claimspotentially could impact the FDIC’s ability to bring aclaim and may otherwise adversely affect the FDIC, themagistrate judge said.
The FDIC’s rights are not adequately represented by anexisting party, the magistrate judge also found.
‘‘A party seeking intervention as of right must onlymake a showing that the representation may be inade-quate and the burden of making that showing shouldbe treated as minimal,’’ he said, quoting Ligas ex rel.Foster v. Maram (478 F.3d 771, 774 [7th Cir. 2007]).The FDIC argued that if permitted to intervene, it willfile a motion to dismiss based on the reasons articulatedin the defendants’ motion to dismiss. The trusteeargued that because the FDIC bases its proposedmotion to dismiss on arguments already advanced inthe defendants’ motion to dismiss, the defendants ade-quately represent the FDIC’s interests.
‘‘However, the FDIC seeks dismissal of Plaintiff’sclaims precisely so that it may bring the same claimsagainst Defendants,’’ the magistrate judge said. ‘‘TheFDIC is thus adverse to Plaintiff and Defendants. Con-sequently, the FDIC’s interest in this litigation is notadequately represented by the existing parties.’’
Attorneys
Levin, Elizabeth M. Lally and John C. Hoard ofRubin & Levin in Indianapolis and Alfred S. Lurey,Angela N. Frazier, Susan A. Cahoon and Todd C.Meyers of Kilpatrick Townsend & Stockton in Atlantarepresent Levin.
The defendants are represented by David E. Wright,James A. Knauer, Kevin Dale Koons and Steven E.Runyan of Kroger Gardis & Regas in Indianapolis.
The FDIC is represented by Byron E. Leet and JohnW. Woodard Jr. in Louisville, Ky., and Douglas A.Black and Robert Edgar Craddock Jr. in Memphis,Tenn., all of Wyatt Tarrant & Combs.
(Additional documents available. Motion to intervene.Document #88-120625-243M. Opposition to motionto intervene. Document #88-120625-244B.) n
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Chase Did Not AssumeLiability From WaMu,Federal Judge RulesCHARLOTTE, N.C. — A federal judge in NorthCarolina on June 13 granted JPMorgan Chase & Co.Inc.’s (Chase) motion to dismiss a suit arising from aloan Chase acquired from Washington Mutual Inc.(WaMu), ruling that Chase did not assume any ofWaMu’s liability when it purchased certain WaMuassets from the Federal Deposit Insurance Corp. (JustusA. Oketch v. JPMorgan Chase & Co. Inc., No. 12-0102, W.D. N.C.; 2012 U.S. Dist. LEXIS 81606).
(Order available. Document #88-120625-291R.)
U.S. Judge Graham C. Mullen of the Western Districtof North Carolina made the ruling in the suit Justus A.Oketch filed against Chase, dismissing the suit withprejudice.
Oketch says he bought real estate in 1981 with a$38,050 loan from the North Carolina Federal Savingsand Loan Association (North Carolina Federal),extending a promissory note and a deed of trust infavor of North Carolina Federal. He says Fleet Mort-gage Corp. ‘‘took over the loan,’’ then WaMu becamesuccessor in interest as a result of its merger with Fleet.His loan was referred to a foreclosure as a result ofan arrearage.
Allegations Lacking
WaMu obtained a default judgment against Oketch in2005, in which the Mecklenburg County SuperiorCourt found that he defaulted on the note. The plain-tiff says WaMu bought his property at a Dec. 29, 2005,foreclosure sale, obtained an order of writ of possessionagainst him on Feb. 16, 2006, and conveyed the prop-erty to the U.S. Department of Housing and UrbanDevelopment, which had partially subsidized Oketch’sloan payments through the National Housing Act.HUD then sold the property to Terry Albert Smithon Oct. 6, 2006, Oketch says.
On Jan. 11, Oketch filed suit in the state court, allegingclaims against Chase for breach of contract, fraud,breach of common law and statutory duties of goodfaith and violations of North Carolina’s Unfair andDeceptive Trade Practices Act (UDTPA). Chase
removed the suit to the District Court and moved todismiss.
Judge Mullen found that Oketch’s complaint lacks fac-tual allegations demonstrating any conduct attributableto Chase, noting that a single sentence in the complaintconnects Chase to the action (‘‘For the purposes of thisComplaint, all acts and omissions against Defendant’sPredecessors in Interest are imputed against Defendant,and any reference to Defendant’s acts or omissions isintended to include the acts and omissions of Defen-dant’s Predecessors in Interest.’’). There are no allega-tions in the complaint that Chase engaged in any of theactions and omissions, and there are no factual allega-tions that would allow the District Court to find thatChase should be held liable for the actions and omis-sions of its predecessors, the judge said.
Res Judicata
The purchase and assumption agreement throughwhich Chase purchased certain assets of WaMu‘‘makes it clear that Defendant did not assume anyliability that would support the instant lawsuit,’’Judge Mullen explained. He said courts have reliedon Section 2.5 of the agreement to dismiss claimsagainst Chase that were based on the pre-sale actionsand omissions of WaMu and that he finds the relianceof other courts on Section 2.5 to be instructive.
Even if Chase was the successor in interest to NorthCarolina Federal, Fleet and WaMu regarding Oketch’snote and deed of trust, his claims would still be barredbecause of the entry of judgment against him in thestate court because of the doctrine of res judicata, JudgeMullen concluded.
Regarding the claims for breach of the covenant of goodfaith and violation of the UDTPA, Judge Mullen said theplaintiff alleges no additional facts to support the claims;therefore, the District Court must rely on the factualallegations to support the claims. Because the factssupporting the claims were resolved by the state courtjudgment and cannot be relitigated in the DistrictCourt, the claims are barred by res judicata.
Oketch is represented by John Francis Hanzel of Cor-nelius, N.C. Chase is represented by Julia Bright Hart-ley and Thomas G. Hooper of Nelson, Mullins,Riley & Scarborough in Charlotte.
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(Additional documents available. Motion to dismiss.Document #88-120625-292M. Brief in support ofmotion to dismiss. Document #88-120625-293B.Opposition to motion to dismiss. Document #88-120625-294B. Reply in support of motion to dis-miss. Document #88-120625-295B.) n
Federal Judge DismissesMost Of Suit ArisingFrom Home ForeclosureSAN FRANCISCO — A federal judge in California onJune 18 dismissed several counts from a suit againstseveral banks and other defendants arising from ahome foreclosure because the complaint lacks sufficientspecificity, among other reasons (John P. McGough v.Wells Fargo Bank NA, et al., No. 12-0050, N.D.Calif.; 2012 U.S. Dist. LEXIS 84327).
(Order available. Document #88-120625-317R.)
U.S. Judge Thelton E. Henderson of the NorthernDistrict of California partially granted the motions todismiss filed by Wells Fargo Bank NA, OneWest Bank,U.S. Bank and Meridian Foreclosure Service in the suitbrought by John P. McGough.
McGough borrowed $960,000 from First FederalBank of California in 2006, and the loan was securedby a deed of trust on McGough’s property in Danville,Calif. Originally, the beneficiary under the deed of trustwas First Federal, and the trustee was Seaside FinancialCorp. McGough alleges that at some point, his loan wassecuritized, with the note not being properly transferredto U.S. Bank, whom McGough alleges was the trusteefor the securitized trust. In 2009, the Office of ThriftSupervision closed First Federal, and the FederalDeposit Insurance Corp. was named receiver. TheFDIC then assigned its interest in the note and deedof trust to OneWest.
Debtor Files Suit
A notice of default was recorded Oct. 20, 2010, byMeridian, and Meridian was substituted for Seaside astrustee on Jan. 24, 2011, the same day a notice oftrustee’s sale was received by the Contra Costa CountyRecorder’s Office. The property was sold Feb. 14,2011, at a trustee’s sale.
On Feb. 23, 2011, Miah Callahan and J. Rost Realtyapproached McGough with a ‘‘cash for keys’’ agree-ment, in which McGough would vacate the apartmentby March 4, 2011, in exchange for an $8,000 payment.When McGough arrived to sign the contract and moveout, he says, he was presented with a contract thatreplaced the last term before the signature line with arelease of liability. McGough signed the contract andreceived an $8,000 check.
In his complaint, McGough brought 12 claims, six ofwhich are at issue in the instant motions to dismiss:lack of standing, breach of contract, violation of theTruth in Lending Act (TILA), violation of California’sunfair competition law (California Business and Profes-sions Code Section 17200) and penal code Sections115 and 532(f)(a)(4), intentional infliction of emo-tional distress and equitable estoppel.
Wells Fargo, U.S. Bank
In dismissing without prejudice all of McGough’sclaims against Wells Fargo, Judge Henderson notedthat Wells Fargo argues that it is referenced individuallyonly once in the 40-page complaint, where McGoughasserts that Wells Fargo is the purported servicer of themortgage. In making that contention, McGough refer-ences documents that do not make reference to WellsFargo, Judge Henderson said, and Wells Fargo deniespresently being, or ever having been, the servicer ofthe mortgage. Therefore, the judge said, the complaintas to Wells Fargo lacks sufficient specificity.
Similarly, Judge Henderson dismissed without preju-dice the claims against U.S. Bank because of a lack ofsufficient specificity. The complaint does not clearlyallege how U.S. Bank specifically, and not as a memberof a group of defendants but as an individual entity, wasinvolved in the conduct underlying McGough’s claimsor even what the wrongful conduct of U.S. Bank mighthave been, the judge explained.
Against all the defendants, McGough alleges impropersecuritization, arguing that the pooling and serviceagreement (PSA) governing the securitized trust wasviolated. Therefore, the note was never properly secur-itized, and the defendants are not properly the benefi-ciaries of the securitized trust and have no enforceablerights as to the property, he argues. Judge Henderson
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agreed with the defendants, who responded thatMcGough lacks standing to challenge any violationsof the PSA. When a plaintiff is not an investor in thePSA, courts have held that the plaintiff has no standingto challenge violations of the PSA’s terms, Judge Hen-derson said, dismissing the claims with prejudice.
Breach Of Contract
The judge went on to dismiss without prejudice theplaintiff’s breach of contract claims. McGough seeks toallege breach of contract by claiming that securitizationconstituted an improper transfer of the note separatefrom its security instrument, but Judge Hendersonagreed with OneWest, which pointed out that thenote itself provides that it may be transferred, andfurthermore, securitization is not a valid basis for bring-ing this cause of action.
In dismissing without prejudice McGough’s cause ofaction for violation of the TILA, the judge agreed withthe defendants’ argument that McGough exceeded theapplicable one-year statute of limitations to file theclaim. Judge Henderson also dismissed without preju-dice the plaintiff’s Section 17200 claim. Because theclaim sounds in fraud, it is held to the higher pleadingstandard of Federal Rule of Civil Procedure 9(b), thejudge said. The complaint makes many specific allega-tions about the mortgage industry generally and makesspecific allegations regarding some individuals, thejudge said. ‘‘However, without linking these specificsto the conduct of OneWest and Meridian (and evenWells Fargo or U.S. Bank, if such a link can be made)the complaint fails to meet the requirements of Rule9(b),’’ he said.
Judge Henderson declined dismissal of McGough’sclaims for intentional infliction of emotional distress,explaining that the complaint ‘‘clearly alleges conduct inbad faith, with reckless disregard for Plaintiff’s potentialemotional distress, as well as alleging a causative con-nection between the conduct involved and the effects ofthe distress, including lack of sleep, anxiety, depression,lack of appetite, and loss of productivity at work.’’
Finally, Judge Henderson denied as moot Meridian’smotion to dismiss the claims specific to it.
Attorneys
McGough is represented by Patricia Renee Rodriguez ofthe Law Offices of Patricia Rodriguez in Pasadena, Calif.
Wells Fargo is represented by Robert Arthur Bailey ofAnglin, Flewelling, Rasmussen, Campbell & Trytten inPasadena.
OneWest and U.S. Bank are represented by AntonLeBlanc Hasenkampf and Nicholas Bennett Waranoffof Allen Matkins Leck Gamble Mallory & Natsis inSan Francisco.
Meridian is represented by Michael W. Burnett of Bur-nett in Newport Beach, Calif.
(Additional documents available: Meridian’s motionto dismiss. Document #88-120625-318M. Responseto Meridian’s motion to dismiss. Document #88-120625-319B. Reply in support of Meridian’smotion to dismiss. Document #88-120625-320B.OneWest and U.S. Bank’s motion to dismiss. Docu-ment #88-120625-321M. Response to OneWest andU.S. Bank’s motion to dismiss. Document #88-120625-322B. Reply in support or OneWest andU.S. Bank’s motion to dismiss. Document #88-120625-323B. Wells Fargo’s motion to dismiss.Document #88-120625-324M. Response to WellsFargo’s motion to dismiss. Document #88-120625-325B. Reply in support of Wells Fargo’s motion todismiss. Document #88-120625-326B.) n
Federal Judge DismissesComplaint Arising FromWaMu’s Pre-Failure ConductNEW HAVEN, Conn. — A federal judge in Con-necticut on June 20 granted JPMorgan Chase BankNA’s motion to dismiss a suit in connection with anote and mortgage originally issued by WashingtonMutual Bank (WaMu) because the plaintiff’s claimsarise from WaMu’s pre-failure conduct (Harry T. Con-stas v. JPMorgan Chase Bank NA, No. 11-0032, D.Conn.; 2012 U.S. Dist. LEXIS 85339).
(Order available. Document #88-120625-333R.)
U.S. Judge Vanessa L. Bryant of the District of Con-necticut granted Chase’s motion to dismiss the suitHarry T. Constas filed against it.
Constas claims breach of the implied covenant of goodfaith and fair dealing, negligent infliction of emotional
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distress, unfair trade practices, tortious interferencewith contractual relations and a violation of the Con-necticut Unfair Trade Practices Act (CUPTA) in con-nection with a note and mortgage originally issued byWaMu and later sold to Chase.
Pre-Failure Conduct
Constas initially sued WaMu in the State SuperiorCourt for the Judicial District of Stamford/Norwalkin Connecticut, and the Federal Deposit InsuranceCorp., as receiver for WaMu, removed it to the DistrictCourt. On Sept. 25, 2008, the FDIC was appointed asreceiver for WaMu and most of WaMu’s assets andcertain liabilities were transferred to Chase, includingConstas’ mortgage loan. The liabilities transferred toChase expressly did not include any monetary claimsarising from WaMu’s pre-failure lending.
The FDIC moved to dismiss, and the District Courtgranted the FDIC’s motion without prejudice. Constasfiled an amended complaint, adding Chase as an addi-tional defendant, and the FDIC again moved to dismissbased on lack of jurisdiction as a result of Constas’failure to properly exhaust the claims process underthe Financial Institutions Reform Recovery and Enfor-cement Act of 1989 (FIRREA). The District Courtterminated the FDIC as a defendant and allowed theplaintiff to file another amended complaint. He filedhis second amended complaint, and Chase movedto dismiss.
Chase argued that because all of Constas’ claims stemfrom WaMu’s pre-failure conduct, the claims should beasserted against the FDIC as receiver, not Chase. Chasecontended that because Constas has failed to timelyexhaust the administrative claims process, the DistrictCourt lacks subject matter jurisdiction.
No ‘End-Around’ Allowed
Judge Bryant said it is ‘‘abundantly clear’’ that Constas’claims arise from WaMu’s pre-failure conduct of pur-portedly forging his mortgage and are therefore prop-erly asserted against the FDIC, not Chase, and subjectto the FIRREA’s mandatory administrative claimsprocess.
‘‘Constas may not try to evade FIRREA’s requirementsby alleging that Chase should be liable for WAMU’sprefailure conduct based on a conclusory allegation thatChase was made aware of WAMU’s pre-failure conduct
allegedly discovered after it acquired the subjectloan. . . . To allow a plaintiff to do so would create anend-run around the very purpose of FIRREA’s admin-istrative claims exhaustion requirement,’’ Judge Bryantexplained.
In the alternative, Chase argued that the complaintshould be dismissed under Federal Rule of Civil Proce-dure 9(b) for failure to plead fraud with particularity.Assuming arguendo that Constas’ claims were notbarred by the FIRREA, he has also failed to pleadwith particularity the circumstances constituting thealleged fraud that forms the basis of his claims, thejudge said.
Constas of Greenwich, Conn., appears pro se. Chase isrepresented by Mary Elizabeth Holland and Nicole L.Barber of Hunt Leibert Jacobson in Hartford, Conn.
(Additional documents available: Motion to dismiss.Document #88-120625-334M. Opposition tomotion to dismiss. Document #88-120625-335B.) n
In Reversal, 6th CircuitOrders Return OfForfeited Funds To BankCINCINNATI — Reversing a district court decision,the Sixth Circuit U.S. Court of Appeals on June 14ruled that a bank is entitled to the proceeds of a depositaccount that were seized by the government as part of acriminal forfeiture proceeding (United States ofAmerica v. Huntington National Bank, No. 10-2071, 6th Cir.; 2012 U.S. App. LEXIS 12040).
(Opinion available. Document #88-120625-301Z.)
The Sixth Circuit panel of Circuit Judges Eric L. Clayand Julia Smith Gibbons and U.S. Judge EdwardR. Korman of the Eastern District of New York, sitt-ing by designation, reversed the U.S. District Courtfor the Western District of Michigan’s ruling in thesuit the U.S. government filed against HuntingtonNational Bank.
The proceeding arises out of the activities of a business,known variously as Cybernet Engineering, CybercoHoldings and CyberNET (collectively, Cyberco),
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whose principals engaged in a complex scheme todefraud dozens of lending institutions out of morethan $100 million in loans and lines of credit. In2002, Huntington granted Cyberco a multimillion dol-lar line of credit, and in exchange, Cyberco grantedHuntington ‘‘a continuing security interest and lien’’in all of Cyberco’s tangible and intangible personalproperty and rights, including ‘‘deposit accounts.’’ InNovember 2004, after discovering the fraud, the gov-ernment seized approximately $4 million in Cybercoassets, including $705,168.60 from its account withHuntington (the Cyberco account).
Bank’s Appeals
Several Cyberco principals were indicted on bank fraud,mail fraud and money-laundering charges. In their pleaagreements, Cyberco principals Krista L. Kotlarz Wat-son and Paul Nathan Wright agreed to forfeit to theUnited States any interest identified in Count 10 of theindictment. The District Court entered a preliminaryorder of forfeiture on Sept. 24, 2007, with regard to theassets, including the Cyberco account.
Huntington filed a verified petition of claim, assertingthat it had a right to, and a direct ownership interest in,the funds in the Cyberco account. It claimed that at thetime it filed the petition, Cyberco was indebted to thebank for $926,162.57, that Cyberco had defaulted onits obligations by providing Huntington with fraudu-lent financial statements and by failing to makerequired payments and that Huntington was entitledto the funds in the account pursuant to the securityagreement between the parties. The District Courtfound that Huntington did not have a legal right,title or interest that rendered the order of forfeitureinvalid in whole or partially under 21 U.S. CodeSection 852(n)(6)(A).
The bank filed a motion to alter or amend the judg-ment, arguing that it was entitled to relief under Section853(n)(6)(B) because it was a bona fide purchaser forvalue (BFP) of its security interest in the funds in theCyberco account. The District Court denied themotion, finding that Huntington waived its BFP argu-ment by failing to raise it earlier. Huntington appealedto the Sixth Circuit, which found that Huntington hadnot waived his argument and remanded the issue to theDistrict Court so it could consider the merits of Hun-tington’s claim. The District Court again deniedthe bank’s claim, finding that the term ‘‘bona fide
purchasers’’ was a legal term of art that should not begiven an unnatural meaning for the purpose of Section853(n)(6)(B). It held that Huntington was not a BFPof the Cyberco account and reaffirmed the final orderof forfeiture.
Huntington then filed the instant appeal with the SixthCircuit, arguing that because it purchased a valid secur-ity interest in all of Cyberco’s assets by extending a lineof credit and loans to Cyberco and because it was una-ware of Cyberco’s fraud until the funds in the accountwere seized, Huntington is a BFP of the security interestin the account under Section 853(n)(6)(B). The bankasserts that is therefore entitled to the return of theforfeited proceeds from the account.
Bona Fide Purchaser
The panel noted that the criminal forfeiture statute,Section 853(c), provides that all right, title and interestin property subject to forfeiture ‘‘vests in the UnitedStates upon the commission of the act giving rise toforfeiture under the section.’’ At issue in this case is thesecond exception to Section 853(c), which in Section853(n)(6)(b) provides that property cannot be forfeitedif ‘‘the petitioner is a bona fide purchaser for value of theright, title, or interest in the property and was at thetime of purchase reasonably without cause to believethat the property was subject to forfeiture under thissection.’’
The panel said that Huntington is correct that it is wellestablished that one who takes a security interest inproperty in exchange for antecedent debt, as the bankdid, can be a BFP of that property interest. The panelsaid that the government’s position that creditors can-not be BFPs under the BFP exception is without merit.Because Huntington through its security agreementwith Cyberco had a secured interest in the forfeitedproperty and not simply a common-law or statutoryright of setoff, Huntington is eligible to claim protec-tion under the BFP exception, the panel said.
After finding that Huntington is able to claim protec-tion under the BFP exception, the panel turned to thequestion of whether Huntington actually qualifies as aBFP for value under Section 853(n)(6)(B). Huntingtonasserts that it purchased its security interest in theCyberco account and was ignorant of the potentialforfeiture of the account. Therefore, Huntington con-tends that it is a BFP of its security interest in the
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account, and because Cyberco owed Huntington morethan the value of the account, Huntington’s interestattached to the entire proceeds of the account. Thepanel agreed.
The panel directed the District Court to amend theorder of forfeiture in accordance with the panel’sanalysis.
Attorneys
The United States is represented by Assistant U.S.Attorneys Matthew G. Borgula and Joel S. Fauson ofthe U.S. Attorney’s Office in Grand Rapids, Mich.
Huntington is represented by Jeffrey O. Birkhold andGaetan E. Gerville-Reache of Warner, Norcross &Judd in Grand Rapids, Mich.
(Additional documents available: Appellant brief.Document #88-120625-302B. Appellee brief. Docu-ment #88-120625-303B. Appellant reply brief.Document #88-120625-304B.) n
Citibank Escapes SuitArising From RejectionOf Loan ApplicationGREENBELT, Md. — A federal judge in Maryland onJune 21 dismissed a suit in which a plaintiff asks for $7million in damages from Citibank NA for alleged viola-tions related to the bank’s rejection of his loan applica-tion, finding that the plaintiff’s allegations for fraud andnegligence do not meet the relevant pleading standards(Daniel Ford v. Citibank NA, No. 11-3578, D. Md.;2012 U.S. Dist. LEXIS 86199).
(Opinion available. Document #88-120625-339Z.)
U.S. Judge Roger W. Titus of the District of Marylandgranted Citibank’s motion to dismiss the suit DanielFord filed against the bank.
Ford alleges that he is a personal, business and merchantservices customer of Citibank. He says that in July2011, he applied for a $100,000 line of credit withCitibank. He says Citibank banker Juan Valdez madenumerous false statements concerning the status of the
loan before denying the loan. Ford alleges that Citibankbranch manager Michael Freeman informed him onAug. 29, 2011, that Freeman ‘‘threw the applicationin the basket to be shredded.’’ The plaintiff also sayshe filed a second application that day, to which he hasnot received a response.
Deficient Fraud Pleading
Ford filed a pro se complaint, contending that he isentitled to damages because Citibank acted fraudu-lently and negligently during the loan application pro-cess. He also claims that the bank violated unspecifiedfederal laws. He says he is owed $7 million in damages.Citibank moved to dismiss for failure to state a claimupon which relief can be granted, contending thatFord’s one-paragraph complaint fails to supply therequisite supporting detail needed to satisfy the heigh-tened pleading standard for fraud under Federal Rule ofCivil Procedure 9(b). The bank also argued that Fordoffered no detail to support the elements of a negligenceclaim and failed to reference the federal law Citibankallegedly violated. Ford filed a response, offering newfactual details, exhibits and legal arguments. The bankfiled a reply, saying the new allegations are outside thepleadings and can’t cure the defects of the complaint.
Judge Titus noted that Ford alleges that Valdez made‘‘numerous false statements regarding the status of [the]loan’’ and told Ford that the loan was denied when itwas actually discarded. Beyond these allegations, Fordfails to offer any factual allegations relating to his reli-ance on Valdez’s statements, nor has Ford alleged thatValdez’s statements were made with the purpose ofdefrauding Ford, Judge Titus determined. Addition-ally, Ford does not allege any details to suggest thatValdez knew that the statements were false or that Val-dez was recklessly indifferent to the truth, the judgesaid. Further, Ford offered no allegations relating tohow the statements resulted in damages beyond claim-ing that the bank’s acts ‘‘cost me years of damages aswell as damages to many of my business partners.’’Thus, the plaintiff has failed to meet the Rule 9(b)pleading standard for fraud.
No Fiduciary Duty
The judge went on to dismiss Ford’s negligence claimpursuant to Rule 12(b)(6). Under Maryland law, a bankdoes not owe a fiduciary duty to a customer, absent an
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agreement to the contrary, Judge Titus said, citingKuechler v. Peoples Bank (602 F. Supp. 2d 625, 633-34 [D. Md. 2009]).
Ford failed to plead that the bank breached or evenowed a duty to him, the judge said. The parties werenot in a contractual relationship; Ford was only apply-ing for a line of credit, Judge Titus noted. Citibank wasunder no duty to give Ford a loan, and thus the negli-gence claim cannot be cured by amendment, the judgesaid, adding that Ford also failed to allege any detailsregarding how the bank’s conduct proximately causedhis losses.
Judge Titus also dismissed the federal law claim, sayingthat ‘‘[b]eyond [the] bald assertion’’ that the bank’sdisposal of his loan application was a violation of federallaw, the complaint does not identify what law Citibankhas violated, nor has Ford alleged how he has beendamaged by Citibank’s supposed violation. Such allega-tions, ‘‘wholly lacking in factual or legal support,’’ fail tomeet the pleading standard under Rule 12(b)(6).
Leave To Amend
Judge Titus said he recognizes that pro se plaintiffsshould be afforded greater leeway in pleading matters,but because it is clear that Ford cannot cure his claimsof fraud and negligence by amending the complaint, hegranted Citibank’s motion to dismiss for failure to statea claim with prejudice. However, he said Ford’s federallaw claim ‘‘is not so facially inapplicable that anamended complaint would futile’’ and granted themotion to dismiss this claim without prejudice.
The judge also denied Ford’s motion to appoint coun-sel, saying Ford ‘‘has demonstrated the wherewithal toeither articulate the legal facts and factual basis of hisclaims himself or secure meaningful assistance in doingso,’’ noting that the pending issues ‘‘are not undulycomplicated and no hearing is necessary to the disposi-tion of this case.’’
Ford of Riverdale, Md., appears pro se. Citibank isrepresented by Virginia Wood Barnhart of TreanorPope and Hughes in Towson, Md.
(Additional documents available: Motion to dismiss.Document #88-120625-340M. Response to motionto dismiss. Document #88-120625-341B. Reply insupport of motion to dismiss. Document #88-120625-342B.) n
4th Circuit RemandsStudent Loan Suit For‘State Agency’ AnalysisRICHMOND, Va. — The Fourth Circuit U.S. Courtof Appeals on June 18 vacated and remanded the dis-missal of a complaint alleging that state-created studentloan corporations defrauded the U.S. Department ofEducation, explaining that a district court did notemploy the proper analysis to determine whether eachof the defendants is a state agency subject to suit underthe False Claims Act (FCA) (United States of Americaex rel. Jon H. Oberg v. Kentucky Higher EducationStudent Loan Corp., et al., No. 10-2320, 4th Cir.;2012 U.S. App. LEXIS 12290).
(Opinion available. Document #88-120625-313Z.)
The Fourth Circuit panel of Chief Judge William B.Traxler Jr. and Circuit Judges Diana Gribbon Motzand Barbara Milano Keenan reversed and remandedthe U.S. District Court for the Eastern District of Vir-ginia in the suit filed by Dr. Jon H. Oberg.
On behalf of the United States, Oberg sued the Ken-tucky Higher Education Student Loan Corp., Pennsyl-vania Higher Education Assistance Agency, VermontStudent Assistance Corp. and Arkansas Student LoanAuthority (the appellees), as well as other defendantsnot parties to the appeal, under the FCA. Each appelleewas created by its respective state and operates withvarying degrees of control by and support from itsrespective state.
‘Persons’ Under FCA
Oberg asserts that the appellees knowingly made frau-dulent claims to the Department of Education by enga-ging in various noneconomic transactions to inflatetheir loan portfolios eligible for special allowance pay-ments (SAP), a federal student loan interest subsidy. Asa result, the Department of Education overpaid mil-lions of dollars of SAP to the appellees, according toOberg. Each appellee moved to dismiss the complaintcontending that it was a ‘‘state agency,’’ and thus, underVermont Agency of Natural Resources v. United Statesex rel. Stevens (529 U.S., 787-88 [2000]), was not a‘‘person’’ that could be sued under the FCA. The Dis-trict Court agreed, dismissing the complaint. The Dis-trict Court did not apply any stated legal test andinstead primarily looked to state statutory provisions,
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which, in the District Court’s view, demonstrated eachentity’s status as a ‘‘state agency,’’ the panel said. Obergappealed to the Fourth Circuit.
The panel said the appeal presents the questions ofwhether each of the appellees constitutes a ‘‘person’’subject to liability under the FCA. The FCA providesa cause of action against ‘‘any person’’ who undertakescertain fraudulent behavior, including ‘‘knowingly pre-sent[ing], or caus[ing] to be presented, a false or frau-dulent claim for payment or approval’’ to an officer,employee or agent of the United States.
The relevant provisions of the FCA do not define theterm ‘‘person,’’ but the U.S. Supreme Court ‘‘has pro-vided helpful guidance on this question,’’ the panel said.In Stevens, the Supreme Court concluded that theVermont Agency of Natural Resources, a state agency,could not be sued under the FCA, holding that ‘‘theFalse Claims Act does not subject a State (or stateagency) to liability.’’ In Stevens, the Supreme Courtnoted that ‘‘the presumption with regard to corpora-tions is just the opposite of the one governing here’’ andexplained that corporations ‘‘are presumptively coveredby the term ‘person.’ ’’ Three years later, in CookCounty v. United States ex rel. Chandler (538 U.S.119 [2003]), the Supreme Court held that unlike statesand state agencies, municipal corporations are ‘‘persons’’subject to qui tam suits under the FCA.
Arguments On Appeal
On appeal, Oberg, relying on Chandler, argued thatany corporation, regardless of its association with astate, is ‘‘a legal personality independent of ‘theState’ ’’ and, therefore, a ‘‘person’’ for purposes of theFCA. Because each appellee is a corporation, Obergargued that each is a proper FCA defendant. ‘‘Such abroad rule—rendering every corporation, no matterhow close its relationship to a state, a ‘person’ forFCA purposes—appears inconsistent with Stevens’express holding that the term ‘person’ in the FCAdoes not include any state or state agency,’’ the panelreasoned.
The appellees argued that under Stevens, they are notFCA defendants because they are state agencies. Theysaid Chandler ‘‘concluded only that local governments,unlike States and State agencies, are persons underthe FCA,’’ and because they are not local governmententities, Chandler does not apply to them.
‘‘But nothing in Stevens suggests that the fact that a statelegislature or a state court labels a corporation a stateagency immunizes that corporation from suit underthe FCA,’’ the panel said. ‘‘Nor is Chandler as narrow asappellees suggest. Although a municipal corporationwas sued there, the Court’s discussion of the person-hood of corporations makes clear the historical signif-icance of corporate status.’’
Proper Analysis
To determine if the appellees are subject to suit underthe FCA, the critical inquiry is neither whether they arecorporations with ‘‘independent legal personalities,’’ asOberg contends, nor whether they have been denomi-nated ‘‘state agencies’’ by legislatures or courts, as theappellees appear to contend, the panel said. Rather, thecritical inquiry is whether the appellees are truly subjectto sufficient state control to render them a part of thestate, and not a ‘‘person,’’ for FCA purposes.
The panel said that several of its sister courts haverecognized that the arm-of-the-state analysis used inthe 11th Amendment context provides the appropriatelegal framework for this inquiry. This is the casebecause, although the question of whether an entity isa proper FCA defendant is one of statutory rather thanconstitutional interpretation, there is a ‘‘virtual coinci-dence of scope’’ between the statutory inquiry under theFCA and the 11th Amendment sovereign immunityinquiry, the panel said. Therefore, a court shouldemploy the 11th Amendment arm-of-the-state analysisin determining if an entity is properly regarded as thestate or an agency of the state and, as a result, notsubject to suit under the FCA, the panel said.
Attorneys
Oberg is represented by Christopher Michael Millsin McLean, Va., and Brendan John Morrissey, BertWalter Rein and Michael Lee Sturm in Washington,D.C., all of Wiley Rein.
The Kentucky Higher Education Student Loan Corp.is represented by Thomas Leo Appler and RocklanWilliam King III of Wilson, Elser, Moskowitz, Edel-man & Dicker in McLean.
The Pennsylvania Higher Education Assistance Agencyis represented by Jason Lee Swartley of the Pennsylva-nia Higher Education Assistance Agency in Harrisburg,Pa., Joseph Paul Esposito in Washington and Jill Marie
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deGraffenreid in McLean, both of Hunton and Wil-liams, and Daniel B. Huyett in Reading, Pa., and NeilColeman Schur in Philadelphia, both of Stevens & Lee.
The Vermont Student Assistance Corp. is representedby Megan Conway Rahman and John Stone West ofTroutman Sanders in Richmond.
The Arkansas Student Loan Authority is represented byN. Thomas Connally III and Thomas Michael Truck-sess of Hogan Lovells in McLean and Dennis R. Han-sen, Dustin McDaniel and Mark Nicholas Ohrenbergerof the Arkansas Office of the Attorney General in LittleRock, Ark.
(Additional documents available. Appellant brief.Document #88-120625-314B. Appellee brief. Docu-ment #88-120625-315B. Appellant reply brief.Document #88-120625-316B.) n
Wells Fargo’s CounterclaimSurvives In Student LoanBond Remarketing SuitST. LOUIS — A federal judge in Missouri on June 19denied dismissal of Wells Fargo Bank NA’s counter-claim in a suit in which a student loan servicer says thebank, as the trustee of bonds the loan servicer issued tofinance student loans, caused it to pay excessive intereston the remarketed bonds (Higher Education LoanAuthority of the State of Missouri v. Wells FargoBank NA, No. 10-1230, E.D. Mo.; 2012 U.S. Dist.LEXIS 84578).
(Opinion available. Document #88-120625-327Z.)
U.S. Judge John A. Ross of the Eastern District ofMissouri denied the bank’s counterclaim in the suitHigher Education Loan Authority of the State of Mis-souri (MOHELA) filed against it.
In 2005 and 2006, MOHELA issued $383 million ofvariable rate demand bonds to finance and purchasestudent loans, and the bonds and related assets wereplaced in a trust (the 2005 trust), with Wells Fargobeing named trustee. The bonds were secured by abond insurance policy issued by the MBIA InsuranceCorp. and a ‘‘liquidity facility’’ provided by Depfa
Bank, and bonds tendered by investors would thenbe held by Depfa as ‘‘liquidity provider bonds’’ andresold by designated remarketing agents.
Sale Of Remarketed Bonds
When the financial and credit crisis began in late 2007,investors began to tender their bonds for repurchase,and by July 2008, Depfa had purchased all of the bondsand held them as liquidity provider bonds. On Feb. 18,2009, MBIA’s rating was downgraded, which, accord-ing to Depfa, was an event of default and an automatictermination of its liquidity facility. MOHELA says thatas a trustee, Wells Fargo knew or should have knownabout the downgrading of MBIA. In April 2009,MOHELA learned that a Wachovia remarketingagent was remarketing $40 million of the bonds at8.08 percent, while other remarketing agents set theirinterest rate for MOHELA bonds considerably lower.MOHELA alleges that neither Wells Fargo nor theWachovia remarketing agent sought to verify whetherthe liquidity facility was in place at this time.
Over MOHELA’s objection, the sale of the remarketedbonds closed April 13, 2009, and Wells Fargo releasedthe liquidity provider bonds it held in the 2005 trust toan unnamed purchaser. MOHELA claims that as aresult of Wells Fargo’s actions, it was damaged by hav-ing to pay excessive interest on the remarketed bonds aswell as delays in efforts to refinance the 2005 trust.Wells Fargo counterclaimed based on certain indemni-fication provisions of the 2005 trust, alleging that if it isfound liable for any loss, liability or expense in connec-tion with this lawsuit incurred within negligence, will-ful misconduct or bad faith, it is entitled to paymentand/or reimbursement.
In its motion to dismiss Wells Fargo’s counterclaim,MOHELA argues that the counterclaim must be dis-missed because the 2005 trust does not expresslyrequire MOHELA to indemnify Wells Fargo for itswrongful conduct as alleged in the amended complaintand because Wells Fargo has failed to allege compliancewith the notice requirements of the indemnificationprovisions.
Plausible Claim
Judge Ross found that Wells Fargo has stated a plau-sible claim for indemnification given the plain langu-age of the indemnification provisions. Contrary toMOHELA’s argument, Wells Fargo is not seekingindemnification for its own negligence, the judge said.
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‘‘At this stage of the litigation, without more develop-ment of the facts, the Court cannot find Wells Fargo’scontractual indemnification claim is precluded as amatter of law,’’ Judge Ross said. ‘‘The issue of proof isnot before the Court at this time and the Court’s reviewis limited to the sufficiency of the allegations. WellsFargo’s pleadings, viewed in a light most favorable toWells Fargo, show it has pled a plausible contractualindemnification claim.’’
MOHELA is represented by Kevin Anthony Sullivanand John Gianoulakis of Kohn and Shands in St. Louis.Wells Fargo is represented by Adam S. Hochschild andJeffrey J. Kalinowski of Bryan Cave in St. Louis andMili Joseph of Tabet Divito & Rothstein in Chicago.
(Additional documents available: Counterclaim.Document #88-120625-328C. Motion to dismisscounterclaim. Document #88-120625-329M. Briefin support of motion to dismiss counterclaim. Docu-ment #88-120625-330B. Opposition to motion todismiss counterclaim. Document #88-120625-331B. Reply in support of motion to dismiss coun-terclaim. Document #88-120625-332B.) n
Federal Judge VacatesSummary JudgmentIn Student Loan SuitSAN ANTONIO — In a suit in which the UnitedStates sued a defendant to recover a student loan debt,a federal judge in Texas on June 1 granted the defen-dant’s motion to vacate a summary judgment that wasgranted in favor of the government, ruling that thedefendant’s failure to respond to the motion was excu-sable neglect (United States of America v. David P.Schafer, No. 11-00802, W.D. Texas; 2012 U.S. Dist.LEXIS 76334).
(Order available. Document #88-120625-245R.)
U.S. Judge Xavier Rodriguez of the Western District ofTexas granted David P. Schafer’s motion in the suit thegovernment filed against him.
The United States sued Schafer on Sept. 27 to recovermoney he owed under federally guaranteed studentloans. On Jan. 10, with Schafer’s written consent, the
government filed an amended complaint; Schafer didnot file an answer. The government filed a motion forsummary judgment on April 2; Schafer’s response wasdue April 16. Schafer did not file a response, and JudgeRodriguez granted the motion for summary judgmenton April 19.
Motion To Vacate
On April 18, Schafer filed the motion to set aside thejudgment. His counsel states that he knew about thedue date but that a miscommunication with his assis-tant led to the date being improperly calendared forApril 20, causing Schafer to fail to file a timely response.Additionally, Judge Rodriguez said the docket clerkinadvertently originally docketed the order as denyingthe motion but later corrected it. Schafer says he did notlearn that the motion had been granted until April 25.
To be entitled to an order vacating summary judgmentand permitting the defendant to respond to the plain-tiff’s motion for summary judgment, the defendantmust offer evidence that would create a question ofmaterial fact, Judge Rodriguez said. Because the Dis-trict Court, in granting the motion for summary judg-ment, previously found that the government met itsburden in establishing that there was no genuine issueof material fact, Schafer must ‘‘go beyond the pleadings’’and designate ‘‘specific facts’’ in the record ‘‘showingthat there is a genuine issue for trial,’’ the judge said,quoting Adams v. Travelers Indem. Co. (465 F.3d 156,164 [5th Cir. 2006]).
Schafer argued that he has several meritorious defensesto liability for the student loans and that not granting therelief requested would deprive him of justice because hecould be saddled with significant debt he says he doesnot owe. He said he has continuously maintained thathe does not owe all or part of the debt claimed by theUnited States, arguing that $4,000 in payments that hemade were not properly credited and that he was pre-viously involved in a separate suit where the accountsclaimed by the government were already paid.
Minimal Danger Of Prejudice
Because Schafer appears to have some summary judg-ment evidence that could raise an issue of material fact,Judge Rodriguez addressed whether the neglect in nottimely responding was otherwise excusable as to justifyrelief under Federal Rule of Civil Procedure 60(b)(1).He turned to the excusable neglect test articulated in
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Pioneer Inv. Servs. Company v. Brunswick Assoc. Ltd.P’ship (507 U.S. 380, 395 [1993]).
Regarding the danger of prejudice to the opposing partyfactor of the Pioneer test, Schafer argued that therewould be no prejudice to the government from vacatingthe order because the judgment is only about a monthold. Schafer further argued that the parties have sub-stantially completed discovery and could be ready fortrial quickly or the government could refile its motionfor summary judgment. He further noted that a suitfiled by the United States is exempt from schedulingorders and that no trial has been set, so no deadlineswould have to be changed. The government respondedthat it would have to incur expense to file a release of itsabstract of judgment and also that the current assistantU.S. attorney will soon be retiring and her replacementwill have little time to get up to speed on the case.
Judge Rodriguez found that the danger of prejudice tothe government from allowing Schafer to respond tothe motion for summary judgment is ‘‘minimal.’’ Thejudge said the District Court already found that thegovernment met its burden in proving there was nogenuine issue of material fact, and allowing Schaferan opportunity to present contradictory evidence willnot cause prejudice. Also, the defendant can be orderedto pay the government’s cost to release the abstract ofjudgment.
Good Faith
Regarding the second factor of the Pioneer test, JudgeRodriguez found that there was no undue delay in thecase because Schafer filed the motion for relief from thejudgment shortly after the government filed its abstractof judgment.
With respect to the third Pioneer factor, Schafer arguedthat he is not responsible for the delay because hisattorney and assistant are responsible. The governmentresponded that the assistant’s error in calendaring thedue date was a mistake but said Schafer’s attorney alsoerred because he knew that the deadline should havebeen 14 days, regardless of the date entered on thecalendar. The government said the case is analogousto United States v. Little (116 F.R.D., 152, 153-154[W.D. N.C. 1987]), where the court did not find excu-sable neglect when a defendant failed to file a responsedue to being involved in a jury trial and having beencalled for jury duty. However, because the trial court isgranted wide discretion in granting or denying Rule
60(b) motions and because the decision should bebased on equitable considerations, Judge Rodriguezsaid, the reason for the delay here can constitute excu-sable neglect.
Regarding the final Pioneer factor, both parties agreedthat the movant acted in good faith. ‘‘The Court agreesthat Defendant appears to have acted in good faith,’’Judge Rodriguez said. ‘‘Defendant has been activelyinvolved in the case, other than not responding to theAmended Complaint, and the failure to respond to themotion for summary judgment appears to be a simplehuman error.’’
Judge Rodriguez reinstated the government’s motionfor summary judgment as a pending motion and gaveSchafer until June 13 to file a response.
Attorneys
The government is represented by Assistant U.S. Attor-ney Susan B. Biggs in San Antonio.
Schafer is represented by Brian T. Trenz of the LawOffices of David Schafer in San Antonio.
(Additional documents available. Motion to set asidejudgment. Document #88-120625-246M. Responseto motion to set aside judgment. Document #88-120625-247B.) n
Student LoanDue Process Suit AgainstGovernment SurvivesBALTIMORE — A federal judge in Maryland onJune 1 allowed a suit to continue in which a pro seplaintiff says the U.S. Department of Education(DOE) violated his due process rights when it appliedhis federal income tax refunds to his student loan debt(Edward G. Shlikas v. United States Department ofEducation, No. 09-02806, D. Md.; Dist. LEXIS76557).
(Opinion available. Document #88-120625-253Z.)
U.S. Judge William D. Quarles Jr. of the District ofMaryland denied the DOE’s motion for summaryjudgment in the suit Edward G. Shlikas filed against it.
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Between January 1989 and December 1996, Shlikasobtained five student loans for a total of $29,125,which he has failed to pay. Sallie Mae Inc. (SLM) isthe service agent for all of the loans. Three of the loanswere guaranteed by United States Aid Funds (USAF),and the other two were granted by Great Lakes HigherEducation Guarantee Corp. The DOE reinsured all ofthe loans. After Shlikas defaulted on the loans, USAFand Great Lakes sent him letters notifying him that theDOE would request that the Department of Treasury(DOT) offset his loan debt against any federal pay-ments, including income tax refunds, that he wasentitled to receive in the future. Both letters explainedhow to avoid offset by making payment arrangementsand explained his rights to review documents about hisloans, object to the amount or existence of the loan andhave the guarantor review his objections. The lettersalso notified Shlikas about his right to request a hearing.
DOE Hearing
On April 10, 2008, Shlikas mailed Great Lakes andUSAF an objection to any offset demands for an ‘‘in-person hearing and trial by jury’’ in ‘‘an Article IIIcourt,’’ ‘‘a Maryland State Court’’ and ‘‘the CircuitCourt for Baltimore County’’; and a request to reviewdocuments about his loans and the guarantors’ hearingprocedures. Neither Great Lakes nor USAF responded.On May 8, 2008, the DOT notified Shlikas that it hadapplied his $600 2007 tax refund to his debt, and onApril 24, 2009, the DOT notified him that the samehad been done with his 2008 tax refund of $1,541.
Shlikas filed a complaint against SLM and the DOE inthe Baltimore County District Court, alleging that theoffsets violated his due process rights under the U.S.Constitution and the Maryland Declaration of Rights.The defendants removed the suit to the federal court.On Dec. 2, 2009, Great Lakes assigned Shlikas’accounts to the DOE. On Aug. 25, 2010, the federalcourt quashed service on SLM and denied the DOE’smotion for summary judgment because Shlikas hadattempted to serve it by delivering the summons andcomplaint to Sallie Mae’s attorney and mailing them toa Sallie Mae office in Virginia. The federal court heldthat summary judgment was not appropriate becausethere was no evidence ‘‘that Shlikas’s objections andrequests for documents were considered or that hewas advised of a decision on those matters.’’
In 2011, the DOE garnished 15 percent of Shlikas’wages to cover some of the debt. On Aug. 2, 2011,
USAF assigned his loans to the DOE, and later thatmonth, the DOE stopped garnishing Shlikas’ wages,granted him a hearing and allowed him to file objec-tions to the tax refund offsets. On Nov. 28, 2011, theDOE concluded that Shlikas’ ‘‘evidence did not sup-port [his] objection [to the tax refund offsets, and] thisdebt is enforceable by garnishment.’’ However, becauseShlikas was suing the DOE, the DOE did not resumegarnishing his wages.
Right To Be Heard
On Dec. 13, 2011, the DOE moved for summaryjudgment, arguing that the Nov. 28 DOE decisionsatisfied the Administrative Procedure Act standardfor setting aside unlawful agency actions. Shlikasopposed, arguing that there were disputes of materialfact and that the Nov. 28 DOE decision did not addresshis due process claim and violated his right to proce-dural due process.
The DOE contended that, as a matter of law, it did notdeprive Shlikas of property in 2007 because the guar-antors, not the DOE, held the debt and instituted theTreasury Offset Program (TOP) referral. However,even if the DOE did not own the loans in 2007, itwould not be entitled to summary judgment on thatground, Judge Quarles said. Only the DOE could referShlikas’ debt to TOP, and the DOE was responsible forensuring that Shlikas received the opportunity to beheard on the referral and for protecting his right toprocedural due process as required by the regulations,the judge said. That the DOE acquired the debt after itwas referred to TOP does not absolve it for complyingwith due process, he said.
The DOE further contended that the Nov. 28 DOEdecision, as well as its March 2012 denial of reconsi-deration, afforded Shlikas all the procedural rights towhich he was entitled and made up for any lost protec-tions in 2007. Judge Quarles disagreed, noting that anafter-the-fact hearing does not correct a deprivation ofthe right to be heard before property is taken.
Shlikas of Baltimore appears pro se. The DOE is repre-sented by Larry D. Adams and Rod J. Rosenstein of theOffice of the U.S. Attorney in Baltimore.
(Additional documents available. Motion for sum-mary judgment. Document #88-120625-254M.Response to motion for summary judgment.
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Document #88-120625-255B. Reply in support ofmotion for summary judgment. Document #88-120625-256B.) n
Student Loan Debtor’sThird-Party ComplaintAgainst State Agency FailsGREENBELT, Md. — A federal judge in Marylandon June 11 granted summary judgment in favor of thePennsylvania Higher Education Assistance Agency(PHEAA) on a third-party complaint filed by a defen-dant student loan debtor who alleges that her loans arein default as a result of PHEAA’s fraud and breach ofcontract (United States of America v. Cynthia Allen-Williams, No. 11-1001, D. Md.; 2012 U.S. Dist.LEXIS 80338).
(Opinion available. Document #88-120625-282Z.)
In addition to granting PHEAA’s motion on CynthiaAllen-Williams’ third-party complaint, U.S. Judge J.Frederick Motz of the District of Maryland also grantedthe federal government’s motion for summary judg-ment in the suit it filed against her.
The government sued Allen-Williams on behalf of theU.S. Department of Health and Human Services(HHS) seeking repayment of federal Health EducationAssistance Loans (HEAL) allegedly in default. She thenfiled a third-party claim against PHEAA.
Time-Barred Claims
HHS seeks $81,005.82 plus interest and filing fees.Allen-Williams seeks $708,000 in compensatorydamages, plus interest and punitive damages, averringthat damages arose in 2005 with the sale of her HEALloans but that she was not made aware of the sale untilmeeting with HHS attorneys in 2010. She contendsthat PHEAA’s sale of her loans was fraudulent becauseshe had been granted forbearance and was therefore notin default. The sale of her loans constituted a breach ofthe forbearance agreement, she contends.
Ruling on PHEAA’s motion for summary judgment,Judge Motz said that if Allen-Williams knew in 2005that HHS held her loans because of alleged default, or ifshe was aware that transfer to HHS is a consequence of
default, she would have been on notice of the defaultstatus of her loans, and her claims against PHEAAwould now be time-barred. The judge said it is dispo-sitive that Allen-Williams had actual or constructivenotice of PHEAA’s alleged fraud and breach of contractby 2006 at the latest, and she did not assert her claimuntil 2011. Her claims against PHEAA are thereforetime-barred, he determined.
Regarding the United States’ complaint, Allen-Wil-liams argued that the United States should have torecover against PHEAA because PHEAA fraudulentlysold her debt in violation of the alleged forbearanceagreement. Judge Motz said that Allen-Williams hadnot proven that her affirmative defenses are legally suf-ficient to survive summary judgment, pursuant to Uni-ted States v. Ogawa (No. 93-20375, N.D. Calif.[March 23, 1994]). It is undisputed that Allen-Wil-liams signed the promissory notes and received theHEAL loans, and it is also clear that HHS held herloans as of January 2005 and that she has not repaidthe debt, he said.
‘‘Williams asserts that these loans were in forbearanceand should therefore never have been transferred to thefederal government, but the record reflects no evidencethat Williams received a forbearance on her HEALloans in 2004 or 2005,’’ Judge Motz said. ‘‘Havingfailed to pay on loans for which she did not receive aforbearance, Williams’ loans entered default status and,per the terms of the promissory notes she admits shesigned, were transferred to the federal government forcollections. Accordingly, Williams must repay HHS.The United States’ motion for summary judgment istherefore granted.’’
Attorneys
The United States is represented by Thomas F. Cor-coran and Rod J. Rosenstein of the Office of the U.S.Attorney in Baltimore. Allen-Williams of Upper Marl-boro, Md., appears pro se.
PHEAA is represented by James John Jarecki ofPHEAA in Harrisburg, Pa., and Thomas J. Sippeland William David Day of Gill Sippel and Gallagherin Rockville, Md.
(Additional documents available: United States’motion for summary judgment. Document #88-120625-283M. Opposition to United States’ motion
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for summary judgment. Document #88-120625-284B. Reply brief in support of United States’motion for summary judgment. Document #88-120625-289B. PHEAA’s motion for summaryjudgment. Document #88-120625-285M. Brief insupport of PHEAA’s motion for summary judg-ment. Document #88-120625-286B. Opposition toPHEAA’s motion for summary judgment. Docu-ment #88-120625-287B. Reply brief in support ofPHEAA’s motion for summary judgment. Docu-ment #88-120625-288B.) n
Guaranty Agency NotSubject To Debt CollectionStatute, Federal Judge RulesBATON ROUGE, La. — A federal judge in Louisianaon June 14 dismissed a suit seeking damages from theEducational Credit Management Corp. (ECM) arisingfrom its actions in attempting to collect student loandebt because the ECM is not a ‘‘debt collector’’ asdefined by the Fair Debt Collection Practices Act(FDCPA) (Harold Lasserre Jr. v. Educational CreditManagement Corp., No. 12-0091, M.D. La.; 2012U.S. Dist. LEXIS 83043).
(Opinion available. Document #88-120625-305Z.)
U.S. Judge James T. Trimble Jr. of the Middle Districtof Louisiana granted the ECM’s motion to dismiss thesuit Harold Lasserre Jr. filed against it, dismissing thecase with prejudice.
Lasserre asserts a claim for damages for ECM’s allegedviolations of the FDCPA, which prohibits debt collec-tors from engaging in abusive, deceptive and unfairpractices. ECM is a fiduciary of the U.S. Departmentof Education which collects on defaulted student loans.Lasserre says that after defaulting on his loans, he agreedto pay $10 per month out of his bank account as part ofa rehabilitation program, and in return ECM agreedthat it would not seize his federal income tax refund. Hesays the ECM failed to make the second $10 withdra-wal from his bank account, which resulted in a seizureof his tax refund. He asserts that ECM violated numer-ous FDCPA provisions and seeks damages for stress,humiliation, anxiety, extreme mental anguish and suf-fering and emotional distress.
Fiduciary Exception
ECM argued that it is not a debt collector as defined bythe FDCPA and/or that it is specifically exempt fromthe FDCPA.
Judge Trimble agreed. He noted that the ECM is anonprofit organization that has an agreement withthe secretary of Education and helps to administer theFederal Family Education Loan Program (FFELP),under which student loans are guaranteed by either astate agency or nonprofit organization, such as guarantyorganizations like the ECM. Additionally, the 11th andNinth Circuits have recognized that the ECM is aguaranty agency, Judge Trimble said. Guaranty agen-cies acting in their fiduciary capacity to the Departmentof Education fall within the ‘‘fiduciary’’ exception of theFDCPA, the judge said.
‘‘The principle purpose of a guaranty agency is to pro-vide a guarantee to the lender and to assist in the admin-istration of the FFELP,’’ Judge Trimble explained.‘‘[ECM] is a guaranty agency which operates pursuantto the regulations of the FFELP and is excepted formthe FDCPA’s definition of ‘debt collector’ because it isan entity attempting to collect on the debt of anotherunder a bona fide fiduciary obligation.’’
Lasserre is represented by Garth Jonathan Ridge inBaton Rouge. ECM is represented by Paul N. DeBail-lon of DeBaillon & Miley in Lafayette, La.
(Additional documents available: Motion to dismiss.Document #88-120625-306M. Brief in support ofmotion to dismiss. Document #88-120625-307B.) n
9th Circuit Affirms DismissalOf Suit Arising FromAccessing Credit ReportSAN FRANCISCO — The Ninth Circuit U.S. Courtof Appeals on May 24 affirmed the dismissal of a plain-tiff’s Fair Credit Reporting Act (FCRA) claims regard-ing her closed Kohl’s Department Stores Inc. creditcard account, finding that the defendants were not‘‘objectively unreasonable’’ in accessing her credit report(Kamlesh Banga v. Experian Information Solutions,et al., No. 10-15913, 9th Cir.; 2012 U.S. App.LEXIS 10516).
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(Unpublished opinion available. Document #88-120625-212Z.)
In an unpublished opinion, Circuit Judges William C.Canby Jr., Susan P. Graber and Milan D. Smithaffirmed the U.S. District Court for the Northern Dis-trict of California’s granting of summary judgment infavor of Kohl’s and Experian Information SolutionsInc. in the suit Kamlesh Banga filed against them.
Banga filed the suit in 2008. She said that on Jan. 28,2007, she requested that Kohl’s close her credit cardaccount, and a few days later she received conformationfrom Kohl’s that it had been closed. She alleged thatExperian violated the FCRA when it sold her creditreport to former creditors with whom she longer hadan account for ‘‘account review.’’ Experian further vio-lated the FCRA when it repeatedly sold Banga’s creditreport for promotional purposes because her consumerfile was permanently excluded from all preapprovedcredit offer mailing lists, she alleged. She also claimedthat Kohl’s violated the FCRA when it impermissiblyaccessed her credit report for account review purposesbecause no such account existed.
Proper Summary Judgment
On March 18, 2010, the District Court grantedExperian’s motion for summary judgment and closedthe case. Banga appealed to the Ninth Circuit onApril 20, 2010.
The panel said that the District Court properly grantedsummary judgment on Banga’s claims for willful viola-tions under Section 1681n of the FCRA because, as sheconceded to the District Court, the defendants werenot objectively unreasonable in accessing her creditreport for account review purposes while she closedher Kohl’s account. The panel noted that there is nowillful violation of a defendant’s interpretation if ‘‘less-than-pellucid’’ statutory text is ‘‘not objectively reason-able’’ and there is no guidance from courts or relevantagencies, quoting Safeco Ins. Co. of Am. v. Burr (551U.S. 47, 69-70 & n. 20 [2007]).
The panel also ruled that the District Court properlygranted summary judgment on the plaintiff’s claims fornegligent violations under Section 1681o of the FCRAbecause she failed to raise a triable dispute as to whetherthe defendants’ conduct resulted in actual damages.The underlying court also properly granted summary
judgment on issue preclusion grounds as to Banga’sclaim that Experian violated Section 1681r of theFCRA because she unsuccessfully litigated the issuein a prior lawsuit.
Award Of Costs
Additionally, the District Court did not abuse its dis-cretion by awarding the defendants costs in connectionwith Banga’s deposition, the panel held, pointing toCherry v. Champion Int’l Corp. (186 F.3d 442, 448-449 [9th Cir. 1999]), which determined that costs oftranscribing and videotaping deposition are recoverableif they are necessarily obtained for use in the case.
The panel also said that Banga’s remaining contentionsare unpersuasive and denied as moot her motion forappointment of counsel for purposes of oral argumenton appeal.
Banga of Vallejo, Calif., appears pro se. Experian isrepresented by Meir Feder in New York and EricJohn Hardeman and Angela M. Taylor in Irvine,Calif., all of Jones Day. Kohl’s is represented byGregory P. Dresser of Morrison & Foerster in SanFrancisco.
(Additional documents available. Appellant brief.Document #88-120625-213B. Experian’s appelleebrief. Document #88-120625-214B. Kohl’s appelleebrief. Document #88-120625-215B.) n
Panel Reverses Ruling InInsurer’s Favor In CoverageSuit Over $2.5M SettlementNEW ORLEANS — The Fifth Circuit U.S. Court ofAppeals on June 15 reversed and remanded a lowerfederal court’s ruling in favor of a professional liabilityinsurer in a finance company insured’s lawsuit seekingindemnification for an underlying $2.5 million classaction settlement (Flagship Credit Corp. v. Indian Har-bor Insurance Co., No. 11-20408, 5th Cir.; 2012 U.S.App. LEXIS 12201).
(Per curiam opinion available. Document #13-120621-017Z.)
Glynn Hartt filed a class action lawsuit against FlagshipCredit Corp. after Flagship notified him that his
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automobile was going to be repossessed because Harttwas delinquent on his automobile loan payments. Harttalleged in a Pennsylvania state court that Flagship’snotice did not conform to certain technical require-ments of the Texas Business and Commerce Code,Sections 9.610-11, 9.613 and 9.614.
$2.5M Settlement
Flagship removed the action to the U.S. District Courtfor the Eastern District of Pennsylvania. The partieseventually reached a settlement that obligated Flagshipto pay $2.5 million into a settlement fund.
Flagship requested coverage from its insurer, IndianHarbor Insurance Co., under a professional liabilitypolicy. Indian Harbor refused on the grounds thatthe statutory minimum damages sought in that actionconstitute ‘‘penalties,’’ which the policy did not cover.
Flagship sued Indian Harbor for breach of contract andsought a declaration as to coverage. The parties cross-moved for summary judgment in the U.S. DistrictCourt for the Southern District of Texas.
The insured alleged that the statutory minimumdamages paid in settling the underlying suit were cov-ered losses. The insurer countered that the underly-ing suit’s statutory minimum damages were a penaltythat fell outside the scope of the professional liabilityinsurance policy.
Judge Gray H. Miller sided with Indian Harbor, find-ing that the damages are ‘‘penalties’’ under the policy.Flagship appealed to the Fifth Circuit.
Canon Of Construction
The panel found that the District Court’s analysis wasnot unreasonable.
‘‘Where we disagree, though, is that by rejecting thecanon of construction, the court allowed all the possiblemeanings of ‘penalties’ to apply. Noscitur a sociis is atraditional means of limiting statutory or contractwords from being given every conceivable meaning.Instead, when a list of words contains some whosegenerally accepted meanings have a commonality,then those associate words should limit a single wordthat has more varied meanings. The canon is theequivalent, likely not invariably correct but a serviceable
approach, of asking drafters which of the varied mean-ings of the doubtful word they intended,’’ the panelsaid.
The panel reversed and remanded the District Court’sruling in favor of the insurer.
‘‘Aided by the canon of construction, we conclude thatthe term ‘penalties’ within the phrase, ‘fines, penaltiesor taxes’ is limited to payments made to the govern-ment. Accordingly, the statutory-minimum-damagesportion of the Hartt settlement is not a ‘penalty,’ ’’the panel explained.
Remaining Issues
Flagship further argued that the attorney fees are not‘‘penalties’’ and, as a result, that the insurer has a duty topay them.
Citing Benefit Recovery, Inc. v. Donelon (521 F.3d326, 329 [5th Cir. 2008]), the panel determined thatthis argument is not properly before it on appeal.
‘‘While Flagship made a passing reference to this argu-ment before the district court, this is the first time Flag-ship has pressed the issue. Flagship’s comments to thedistrict court were not enough to afford the court anopportunity to rule on the issue,’’ the panel said.
The panel also rejected Indian Harbor’s assertion thatFlagship abandoned its breach of contract claim by fail-ing to present it to the lower court.
‘‘Our review of the record shows that Flagship ade-quately identified its claim. Moreover, the districtcourt dismissed the claim; so it clearly had the oppor-tunity to rule on it,’’ the panel said.
Chief Judge Edith H. Jones wrote the opinion, whichwas joined by Judges Edward C. Prado and Leslie H.Southwick.
Counsel
Flagship is represented by R. Ted Cruz, William S.W.Chang and Denise U. Scofield of Morgan Lewis &Bockius of Houston and Howard M. Radzely of thefirm’s Washington, D.C., office.
Indian Harbor is represented by David H. Topol andCharles C. Lemley of Wiley Rein in Washington and
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Joseph Gilbert Thompson III of Watt BeckworthThompson Henneman & Sullivan in Houston. n
Insured Bank Can RecoverLosses Arising From FraudulentCollateral, Panel AffirmsNEW ORLEANS — The Fifth Circuit U.S. Court ofAppeals on June 15 found that an insured bank canrecover its losses arising from fraudulent collateral,affirming a lower court’s ruling in favor of the insured(Peoples State Bank v. Progressive Casualty InsuranceCompany, No. 11-30731, 5th Cir.; 2012 U.S. App.LEXIS 12173).
(Per curiam opinion available. Document #13-120621-018Z.)
Fraudulent Collateral
Peoples State Bank sought recovery for losses caused bythree fraudulent loan packages presented as collateralfor residential loans.
Progressive Casualty Insurance Co. denied coverageunder a financial institution bond, arguing that Peoplesdid not review the submitted documents before issuingthe loans.
Peoples sued Progressive in the 11th Judicial DistrictCourt, Parish of Sabine, La. The insurer removed thecase to the U.S. District Court for the Western Districtof Louisiana, which granted summary judgment infavor of Peoples.
Progressive appealed to the Fifth Circuit. Peoples cross-appealed, contending that the District Court erred indenying its motion to alter or amend the judgment toallow it to claim statutory bad faith penalties.
Affirmed
The panel affirmed the District Court’s ruling.
‘‘The district court found that ‘on its face the Bondrequires only reliance and physical possession.’ Thedistrict court also found that Peoples satisfied the ‘onthe faith of’ reliance requirement because ‘it is undis-puted that Peoples extended credit . . . in exchange for asecurity interest in the loans and mortgages, thereby
relying on the documents as collateral. . . . Peopleswould not have extended credit . . . had it known theloan packages were counterfeit or forged.’ It found noindication that either the Bond’s ‘reliance’ or ‘posses-sion’ requirements required review or verification of thedocuments, and it declined to ‘read this heightenedburden into the Bond where it is not stated.’ Weagree with the district court’s interpretation of the dis-puted clause in the Bond,’’ the panel explained.
The panel also rejected the insured’s cross-appeal.
‘‘Peoples had not requested penalties in its summaryjudgment motion. The district court denied Peoples’post-judgment motion requesting leave to present theissue for the first time. We find no abuse of discretion inthis denial,’’ the panel said.
Judges W. Eugene Davis, Jerry E. Smith and James L.Dennis comprised the panel.
Counsel
Lottie L. Bash of Gold, Weems, Bruser, Sues & Run-dell in Alexandria, La., and Christopher M. Sylvia, in-house counsel for Peoples State Bank in Many, La.,represent Peoples State Bank.
John Tucker Kalmbach, Elizabeth Mendell Carmodyand Herschel E. Richard Jr. of Cook, Yancey, King &Galloway in Shreveport, La., and Archibald T. ReevesIV of McDowell Knight Roedder & Sledge in Mobile,Ala., represent Progressive. n
6th Circuit: ERISA BarsClaims Against Bank RelatedTo TPA’s EmbezzlementCINCINNATI — A depository bank that allegedlyfacilitated a third-party administrator’s (TPA’s) embez-zlement from plans governed by the Employee Retire-ment Income Security Act is not an ERISA fiduciary,and state-law claims against the bank are preempted byERISA, the Sixth Circuit U.S. Court of Appeals ruledJune 8 in a divided opinion (John C. McLemore,et al. v. Regions Bank, Nos. 10-5480, 10-5491, 6thCir.; 2012 U.S. App. LEXIS 11600).
(Opinion available. Document #54-120613-076Z.)
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Circuit Judge Gilbert S. Merritt dissented on the pre-emption ruling, saying that ‘‘[t]o foreclose unjustenrichment would leave those whom Congressintended to protect worse off than before ERISA wasenacted.’’
Plan Assets Stolen
Barry Stokes, an investment adviser, was the sole ownerand operator of 1Point Solutions LLC, which actedas a TPA of several employee-benefits plans, 401(k)retirement plans and cafeteria plans that are governedby ERISA.
1Point opened more than 58 fiduciary accounts withRegions Bank. In order to circumvent ‘‘know your cus-tomer’’ rules, which require banks to verify the identi-ties of their customers, Regions insisted that 1Pointopen the accounts in its own name and provide themtitles referencing the account’s corresponding clients,rather than establish the accounts for each clientunder the client’s tax identification numbers.
Because the accounts bore 1Point’s name, Stokes wasable to transfer money among and out of the accounts.Between 2002 and 2006, Stokes stole large sums fromthese accounts by transferring money from clientaccounts to his account at Regions, withdrawingmoney from the 1Point 401(k) account in the formof cashier’s checks, using client accounts to fund1Point’s operating expenses and transferring transferredmoney between customer accounts to pay overdraftfees and conceal his theft.
In 2004, the U.S. Financial Crimes Enforcement Net-work assessed a $10 million fine against Regions forfailing to comply with provisions of the Bank SecrecyAct, which required Regions to report large currencytransactions, file suspicious-activity reports, verify theidentities of those opening accounts and maintainautomated computer monitoring of accounts.
ERISA, State-Law Claims
The embezzlement was discovered when Stokes and1Point filed for bankruptcy protection in 2006.
John McLemore, Stokes’s bankruptcy trustee, and EFSInc. and other former clients of 1Point (collectively,EFS) claimed that Regions negligently and knowinglyallowed Stokes to steal from the fiduciary accounts heldat Regions. McLemore sued Regions under ERISA, and
both McLemore and EFS sued Regions under state law,alleging recklessness, unjust enrichment, violation ofthe Tennessee Consumer Protection Act and aidingand abetting.
The U.S. District Court for the Middle District ofTennessee dismissed the ERISA breach of fiduciaryduty claims under Federal Rule of Civil Procedure12(b)(6), concluding that although the trustee hadstanding to sue on behalf of the defrauded plans,Regions was not an ERISA fiduciary. The DistrictCourt also dismissed the ERISA nonfiduciary claimsand dismissed the state-law claims under Rule 12(c),finding that ERISA preempted the state-law claims.
Trustee’s Standing
In addressing the trustee’s ERISA claims, the SixthCircuit agreed that the trustee had standing. Althougha bankruptcy trustee lacks standing to bring a cause ofaction that does not belong to the debtor’s estate, in theinstant case, the trustee ‘‘brings this suit in his role as anERISA fiduciary.’’
Acting as an ERISA fiduciary with control over ERISA-plan funds, the trustee is required ‘‘to remedy theknown wrongs of a cofiduciary,’’ and, therefore, hadstatutory authority to pursue claims that benefittedthe trust beneficiaries, the court said.
Moreover, the fact that the trustee no longer controlledthe assets stolen from the ERISA plans did not defeatthe trustee’s status as an ERISA fiduciary because ‘‘hehas sufficiently pleaded his authority to manage or dis-pose of all assets belonging to the plans, notwithstand-ing his lack of control over the particular funds thatStokes stole from plan accounts,’’ the court said.
The panel also rejected Regions’ argument that theequitable doctrines of in pari delicto and uncleanhands barred the trustee’s claims because he steppedinto the shoes of Stokes and 1Point and the equitabledoctrines would have barred their claims.
‘‘Any funds that the Trustee recovers as an ERISAfiduciary inure to the ERISA plans’ benefit, ratherthan to the benefit of the estate’s creditors. For thepurposes of the Trustee’s ERISA claim, therefore, he‘steps into the shoes’ of the plans, rather than those ofthe criminal debtors,’’ the court said.
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Fiduciary Status
However, the Sixth Circuit ruled that Regions did notqualify as an ERISA fiduciary based on the bank’s exer-tion of ‘‘authority or control respecting management of[plan] assets.’’
‘‘In general, the complaint alleges that Regions main-tained accounts for 1Point, received deposits to thoseaccounts, and permitted Stokes and 1Point to transferand withdraw money from these accounts. Stokes and1Point maintained the accounts and directed all accountactivity. Regions merely held the funds on deposit.Custody of plan assets alone cannot establish controlsufficient to confer fiduciary status,’’ the court said.
Similarly, Regions’ advising 1Point and Stokes as tohow it ought to structure the accounts did not renderRegions a fiduciary because ‘‘[a]ll control of theaccounts remained with 1Point and Stokes.’’
Moreover, Regions’ withdrawal of about a half milliondollars in fees from 1Point plan accounts did notdemonstrate control over plan assets, the court said.
Because only ‘‘appropriate equitable relief’’ is availableagainst nonfiduciaries and the trustee sought onlydamages, the trustee’s ERISA claims were properlydismissed.
Preemption
Turning to the state-law claims, the Sixth Circuitmajority explained that Tennessee’s Uniform Fiduci-aries Act (UFA) barred claims that alleged mere negli-gence. Therefore, the trustee and EFS were limited toclaims of knowing or bad faith conduct.
‘‘What remains of plaintiffs’ claims are allegations thatRegions (1) acted with knowledge of Stokes’s and1Point’s breach of fiduciary duty or (2) acted in badfaith because it knew facts obviously suggestive of theirbreach. Proving these allegations depends on a showingthat Stokes and 1Point breached their fiduciary dutyand requires an examination of Regions’ knowledge ofthe breach. . . . [T]hese claims do not arise from anindependent legal duty; rather, they derive from theERISA violations committed by Stokes and 1Point.By seeking to impose liability on Regions for knowinglypermitting Stokes and 1Point to breach their fiduciaryduties, plaintiffs’ state-law claims seek an ‘alternativeenforcement mechanism’ for the legal duties imposed
under ERISA,’’ and therefore are preempted, themajority said.
The majority commented that it may have reached adifference conclusion if Tennessee’s UFA did not barclaims that alleged mere negligence and the plaintiffsdid not seek damages.
Circuit Judge Deborah L. Cook wrote the majorityopinion and was joined by U.S. Judge Sean F. Cox ofthe Eastern District of Michigan, sitting by designation.
Dissent
Judge Merritt commented that ‘‘[t]he law on ERISApreemption is in a state of disarray, to say the least’’ butthat he found ‘‘no similar cases preempting bankinglaws protecting from loss the deposits of customers,including ERISA customers, or regulating bank feescharged to such customers.’’
In dissenting, Judge Merritt said that ‘‘[t]he primarypurpose of ERISA is to protect the individual whohas a pension or health plan from certain kinds oflosses. . . . It is not to protect a depository bank fromgeneral state laws concerning malfeasance in connec-tion with the bank’s handling of the bank accounts ofparticipants. In this case, we have no idea whether thebank is liable for misfeasance under state law. The caseagainst the bank has not been tried or the facts provedor the state law analyzed and applied.’’
The dissent also commented that ‘‘[o]ur court’s ideathat state law remedies fail because they add or provideonly ‘an alternative enforcement mechanism’ is strange,indeed, when the federal ERISA law provides no ‘enfor-cement mechanism’ whatever for damages against themisfeasance of a depository bank that is not a fiduciary.There is nothing, no ERISA cause of action for damagesfor the state claims to be ‘alternative’ to. There is noERISA purpose or policy served by withdrawing theprotection of state laws of general application.’’
Counsel
McLemore is represented by Robert M. Garfinkle andPhillip G. Young Jr. of Garfinkle, McLemore & Young.EFS is represented by H. Naill Falls Jr. and John B.Veach III of Falls & Veach. All are in Nashville, Tenn.
Amicus curiae Secretary of Labor Hilda L. Solis support-ing appellants is represented by Solicitor of Labor M.
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Patricia Smith, Associate Solicitor for Plan BenefitsSecurity Division Timothy D. Hauser, Counsel forAppellate and Special Litigation Nathaniel I. Spillerand Trial Attorney Leonard H. Gerson of the U.S.Department of Labor in Washington, D.C.
Regions is represented by John R. Wingo of FrostBrown in Nashville.
(Additional documents available: McLemore’s appel-lant brief. Document #54-120613-077B. Regionsappellee brief. Document #54-120613-078B. McLe-more’s reply brief. Document #54-120613-079B.DOL’s amicus brief. Document #54-120613-080B.EFS appellant brief. Document #54-120613-081B.Regions appellee brief. Document #54-120613-082B. EFS reply brief. Document #54-120613-083B.) n
Panel: Investors Failed ToPlead Scienter In SecuritiesClass Action LawsuitBOSTON — Dismissal of a shareholder class actionlawsuit against Textron Inc. and certain of its executiveofficers was proper because the shareholders failed toplead a material misrepresentation or scienter in claim-ing that the defendants violated federal securities law, aFirst Circuit U.S. Court of Appeals panel ruled June 7(Automotive Industries Pension Trust Fund v. TextronInc., et al., No. 11-2106, 1st Cir.).
(Opinion available. Document #88-120625-003Z.)
Shareholders filed a second amended complaint in theU.S. District Court for the District of Rhode Island onbehalf of all purchasers of Textron Inc. common stockfrom July 19, 2007, to Jan. 29, 2009.
The shareholders alleged that Textron and executiveofficers Lewis B. Campbell, Ted R. French, Buell J.Carter, Thomas F. Cullen, Douglas Wilburne andAngelo Butera issued a series of false and misleadingstatements concerning Textron’s financial conditionthroughout the financial crisis in violation of Sections11 and 15 of the Securities Act of 1933, Sections 10(b)and 20(a) of the Securities Exchange Act of 1934 andSecurities and Exchange Commission Rule 10b-5.
3rd Amended Complaint
The shareholders filed a third amended complaint afterthe Securities Act claims were dismissed by agreement,and the defendants moved to dismiss the remainingclaims.
U.S. Judge Paul Barbadoro of the District of NewHampshire, who was sitting by designation, grantedthe motion, ruling that the shareholders failed to prop-erly plead a material misrepresentation.
Shareholder Automotive Industries Pension TrustFund then appealed to the First Circuit, whichaffirmed.
Close Call
The panel held that although the District Court did noterr in dismissing the action for failure to plead a materialmisrepresentation, the materiality issue is a ‘‘close call.’’
‘‘[A]s to materiality, this complaint may not be ‘thekind of vague prelude to a fishing expedition that Con-gress sought to bar by imposing the clarity-and-basisrequirement of the [Private Securities LitigationReform Act of 1995] PSLRA.’ Summary judgment isusually a more appropriate occasion to decide whethersuch details are of marginal interest or so important thatTextron’s statements were misleading without them,’’the panel said, citing the First Circuit’s ruling in In reStone & Webster Inc. Securities Litigation (414 F.3d187, 198 [2005]).
The panel also found that dismissal is proper becausethe shareholders failed to properly plead scienter.
Not Recklessly Unaware
In particular, the panel ruled that ‘‘[n]othing in thecomplaint suggests that any of the named officersbelieved, or was recklessly unaware, that the backlog’ssignificance had been undermined by weakened under-writing standards, sales to intermediates, or any of theother flaws on which the plaintiffs rely. And the ques-tionable materiality of the practices, depending impor-tantly on matters of degree and detail, deprives anyinference of scienter of forward momentum thatwould be helpful to plaintiffs.’’
‘‘Textron’s top managers may have been negligent ifthey were not aware; surely French was extravagant insaying of the backlog that Textron had ‘torn it apart.’
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But negligence or puffing are not enough for scienter,and warnings by subordinates or expressions of concernby executives are notably absent, as is an unusuallycompelling case on materiality,’’ the panel said, addingthat ‘‘[t]he few counters offered by the Fund underscorethe absence of such evidence.’’
‘‘This leaves a plaintiff’s counsel with a greater thanusual burden of investigation before filing a securitiesfraud complaint. Yet where district judges face promis-ing complaints that fall into an intermediate gray area,they have in practice some latitude to refuse to dismisssome or all counts and allow discovery, whether nar-rowly focused or in full. This complaint’s scienter alle-gations were weaker than its materiality allegations anddid not even arguably fall into a gray area encouragingfurther proceedings.’’
Circuit Judge Michael Boudin wrote the panel’s opi-nion and was joined by Circuit Judge O. RogerieeThompson and retired U.S. Supreme Court JusticeDavid H. Souter, who was sitting by designation.
Counsel
The shareholders are represented by Samuel R. Rud-man of Robbins Geller Rudman & Dowd in Melville,N.Y., and David J. George of Robbins Geller in BocaRaton, Fla.
The defendants are represented by John A. Tarantino,Patricia K. Rocha and Nicole J. Dulude of Adler Pol-lock & Sheehan in Providence and Mitchell A. Karlanand Brian M. Lutz of Gibson, Dunn & Crutcher inNew York.
(Additional documents available: Appellant brief.Document #88-120625-004B. Appellee brief. Docu-ment #88-120625-005B. Reply brief. Document#88-120625-006B. District Court opinion. Docu-ment #57-110912-016Z.) n
ATM Fees Class ActionStayed Pending OutcomeOf Supreme Court CaseOMAHA, Neb. — Pending the outcome of a U.S.Supreme Court case dealing with a similar standingissue, a federal judge in Nebraska on June 4 stayed aclass action accusing a bank of violating the Electronic
Fund Transfer Act by not posting a fee notice on anATM (Jarek Charvat v. First National Bank of Wahoo,No. 12-00097, D. Neb.; 2012 U.S. Dist. LEXIS77616).
(Opinion available. Document #88-120625-257Z.)
Chief U.S. Judge Laurie Smith Camp of the District ofNebraska made the determination while ruling on amotion to dismiss filed by First National Bank ofWahoo (FNBW) in a suit brought by Jarek Charvat,individually and on behalf of all others similarlysituated.
‘‘The issue before the Supreme Court in First Am. Fin.Corp. v. Edwards, 610 F.3d 514 (9th Cir. June 21,2010), cert. granted, 131 S. Ct. 3022 (U.S. June 20,2011) (No. 10-708) is similar to the standing issuepresented here, and the Supreme Court’s decision willbe relevant to this motion,’’ Judge Camp said. ‘‘It ispossible that the pending decision of the SupremeCourt in First American may alter this Court’s under-standing of the constitutional minimum requirement ofstanding. Therefore, it is in the best interest of Charvatthat all further proceedings in this matter to be stayedpending the Supreme Court’s decision.’’
Motion To Dismiss, Stay
Charvat made two electronic fund transfers (ETFs)from an FNBW ATM in Wahoo, Neb., on or aboutJan. 22 and March 4. FNBW charged him a $2 fee witheach transaction. At the time of the transactions, therewas no notice posted ‘‘on or at’’ the ATM telling cus-tomers that a fee would be charged for the use of theATM, Charvat says. He does not allege that he did notreceive an on-screen notice that a fee would be charged.He filed his complaint on March 8, alleging EFTAviolations and seeking statutory damages for himselfand the members of the class as well as an award ofcosts and attorney fees. Judge Camp noted that theEFTA requires any ATM operator that imposes feeson customers in connection with EFTs to provide
E M A I L T H E E D I T O R
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notice of the fact that a fee is being imposed and theamount of the fee, and the notice must be posted in twoplaces: both ‘‘on or at’’ the ATM and on the screen ofthe ATM or, alternatively, on a paper notice issuedbefore the transaction is completed.
On March 30, FNBW moved to dismiss for lack ofsubject matter jurisdiction, asserting that the DistrictCourt has no subject matter jurisdiction over Charvatbecause he has suffered no injury in fact and, therefore,does not have standing to bring the claim. Alternately,FNBW requested that the case be stayed pending theoutcome in First American.
Three requirements constitute the ‘‘irreducible consti-tutional minimum’’ of standing, the first of which is‘‘an injury in fact — an invasion of a legally protec-ted interest which is (a) concrete and particularized and(b) actual or imminent, not conjectural or hypotheti-cal,’’ Judge Camp said, quoting Lujan v. Defenders ofWildlife (504 U.S. 555, 560-561 [1992]). The require-ment of injury in fact is a ‘‘hard floor of Article IIIjurisdiction that cannot be removed by statute,’’ shesaid, quoting Summers v. Earth Island Inst. (555U.S. 488, 497 [2009]).
‘‘The issue then is whether FNBW’s failure to give anotice to which Charvat was statutorily entitled in itselfconstitutes an injury in fact to Charvat,’’ Judge Campsaid. ‘‘This Court concludes it does not.’’
Injury In Fact
The judge noted that three district courts have held thatwhen an ATM operator fails to provide a fee notice onthe exterior of the ATM as required by the EFTA, thestatutory violation is in itself an injury, regardless ofwhether the plaintiff had actual knowledge of the feethrough the on-screen notice and affirmatively acceptedit. However, she pointed out that these courts did notaddress the ‘‘hard floor’’ constitutional requirement ofinjury in fact.
‘‘The Constitution requires more than mere injury inlaw,’’ Judge Camp said. ‘‘A plaintiff must allege aninjury in fact that was caused by the lack of an exteriorfee notice on the ATM. This Court agrees that theEFTA should be construed broadly in favor of theconsumer, but the provision for actual and statutorydamages in the EFTA does not automatically meanthat a litigant is entitled to damages when he has alleged
no injury in fact. The authorization of statutorydamages is unrelated to injury.’’
Charvat argued that if the District Court determinesthat a statutory violation of the notice requirements ofthe EFTA is not in itself an injury, the District Courtwould be stripping the statute of a requirement purpo-sefully imposed by Congress. He noted that Congressmay have discerned that one notification was notenough or that unscrupulous ATM operators shouldbe prevented from luring customers under the falsepresumption that no transaction fee would be incurred.Judge Camp said she does not question Congress’ pur-pose for imposing the notice requirements. Instead, shesaid, the District Court is respectful of the constitu-tional minimum requirement of standing that a plain-tiff must have to proceed in an action before the court.
First American Has Bearing
In First American, the plaintiff sued title insuranceunderwriter First American Financial Corp. for failingto disclose a ‘‘kickback’’ to a title agency in which FirstAmerican had an ownership interest. The plaintiff’sclaim is that she was injured because First American’sownership interest violated the mandatory disclosurerequirements of the Real Estate Settlement ProceduresAct (RESPA). She had no complaint about the price orquality of the title insurance and alleged no harm otherthan a statutory violation of RESPA. First Americanraised the question of ‘‘whether a plaintiff can establishstanding to sue under RESPA merely by alleging astatutory violation, without any claim that the violationaffected the settlement services rendered.’’
Charvat contended that First American has no bearingon the standing issue in the instant case because there isnot a competitive market in Ohio for title insurance feesand the disclosure of the ownership interest in the titleagency would not have affected the fee. He said thepresence of a competitive market distinguishes thestanding question in his case because the EFTA man-dates the fee notice requirements so that consumers canmake an informed choice of whether to make an EFTA.
Judge Camp disagreed.
‘‘The presence of a competitive market does not changethe relevance of the question presented in First Amer-ican and its applicability to the standing issue here,’’ shesaid. ‘‘In both First American and here, the questionremains whether a violation of a statute, without an
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alleged injury in fact, is in itself sufficient to createstanding under Article III.’’
Attorneys
Charvat is represented by Michael Lewis of The LewisLaw Firm in Washington, D.C., and Tracy Hightower-Henne of Hightower Reff Law in Omaha.
FNBW is represented by Kenneth W. Hartman ofBaird Holm in Omaha.
(Additional documents available: Motion to dismiss.Document #88-120625-258M. Brief in support ofmotion to dismiss. Document #88-120625-259B.Response to motion to dismiss. Document #88-120625-260B. Reply in support of motion to dis-miss. Document #88-120625-261B.) n
Federal Judge DeniesClass CertificationIn ATM Fees LawsuitWASHINGTON, D.C. — A consumer has failed tomeet the statutorily required findings of commonality,typicality or predominance in attempting to certify aclass of consumers in an ATM fee lawsuit because hehas failed to show that a class action is superior to otherforms of adjudication, a federal judge in Washingtonruled June 11 (Daniel E. Ballard v. Branch Banking andTrust Co., No. 11-1327, D. D.C.; 2012 U.S. Dist.LEXIS 80109).
(Opinion available. Document #88-120625-009Z.)
Consumer Daniel E. Ballard filed an amended classaction complaint in the U.S. District Court for theDistrict of Columbia. He alleges that Branch Bankingand Trust Co. (BBT), which operates an ATM inWashington, violated the Electronic Funds TransferAct (EFTA) because its ATM did not have an on-machine fee notice.
Ballard moved to certify a class of all consumers whowere charged a late fee for withdrawing money from theATM from March 1, 2011, to July 21, 2011.
Putative Class Members
In denying Ballard’s motion, Judge Ellen Segal Huvelleheld that the motion for class certification fails even
although Ballard has agreed to limit the class to ‘‘con-sumers’’ who are covered by the EFTA. Judge Huvellealso rejected BBT’s argument that because putativeclass members used the ATM on different dates, thecourt will need to conduct ‘‘a case-by-case inquiry intowhether the fee notice was on the machine,’’ findingthat the argument does not preclude a finding of com-monality, typicality or predominance, as required byFederal Rule of Civil Procedure 23(a), but found thatBBT’s contention ‘‘poses a more serious challenge tothe predominance inquiry.’’
‘‘Initially, Ballard sought to certify a class of ‘all personswho, in the twelve (12) months prior to the filing ofPlaintiff’s complaint, made an EFT [electronic fundstransfer] at one of Defendant’s ATMs located at 614 HStreet, N.W., Washington, DC 20001, and werecharged a ‘‘terminal owner fee’’ in connection withthe transaction.’ Plaintiff has since narrowed this defi-nition to include only those who used the ATMbetween March 1, 2011 and July 21, 2011, since heconcedes that he cannot controvert defendant’s evidencethat the bank was compliant during the February/March 2011 time period and that he has no evidencethat defendant was out of compliance prior to February2011. However, given this concession, the use of theMarch 1, 2011, start date also appears to have no factualbasis,’’ Judge Huvelle said, adding that ‘‘[m]oreover, theunclear timeline for the alleged EFTA violation distin-guishes this suit from other fee-notices cases (themajority of which certify a class for settlement pur-poses only), since common proof may not resolve thefactual issues on a classwide basis here.’’
Judge Huvelle also found that class treatment in theinstant action is not superior to other methods of adju-dication because ‘‘[t]o adjudicate this case, it is abso-lutely essential to communicate with the individualswho used the ATM. In order to determine if anATM-user is a ‘consumer’ and therefore within theputative class, the Court must make certain limitedindividualized inquiries of each class member. If thiscannot be done, the Court will not know if theATM-user was a ‘consumer’ and therefore cannot ascer-tain the size of the class. In addition, without this infor-mation, it cannot determine statutory damages.’’
Not Feasible
‘‘Clearly, it is not feasible to individually identify classmembers,’’ Judge Huvelle explained.
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Moreover, Judge Huvelle ruled that ‘‘[w]hile the manycourts that have grappled with the EFTA cases havearrived at different conclusions about whether a classaction is superior, they did not confront the myriaddifficulties presented here. The majority of certifica-tions were for settlement purposes only and involveda definite time period for the violation. As the court inPfeffer [v. HSA Retail, Inc. (No. 11-cv-959, W.D.Texas; 2012 U.S. Dist. LEXIS 73083 [May 24,2012])] pointed out in denying class certification, thefew courts that have certified classes prior to settlementhave yet to resolve the practical problems presented ina case such as this.’’
‘‘Ballard’s response is that all ATMs are used for bothtypes of accounts and so the inability to identify ‘con-sumers’ within ATM-users cannot be a bar to certifica-tion because it would conflict with the statute’sprovision for class actions. However, he offers noauthority for the suggestion that Congress intendedthe EFTA to authorize class actions that do not satisfythe superiority requirement of Rule 23(b)(3).
‘‘Given plaintiff’s concession that notice by publicationis the only practical means for finding class membersand since he recognizes that class members will need tobe quizzed as to whether they engaged in a consumertransaction at a time when there was no notice on themachine (as opposed to the screen), it is highly likely
that the class could, at best, consist of a handful ofconsumers, or at worst, be a class of one — plaintiff.Moreover, it is undisputed that each of the prospectiveclass members proceeded with the transaction despitehaving received the required notice on the screen andthat the potential class recovery will be de minimus,especially in comparison to the petition for fees andcosts that will ultimately be filed after lengthy and costlylitigation. Given these substantial difficulties, the Courtconcludes that plaintiff has failed to satisfy Rule 23(b)and class certification is denied,’’ Judge Huvelle said.
Counsel
Ballard is represented by Trey Mayfield and MichaelLewis of the Lewis Law Firm in Washington.
BBT is represented by James P. Head of WilliamsMullen in McLean, Va.
(Additional documents available: Motion for classcertification. Document #88-120625-010B. Replybrief. Document #88-120625-011B. Amended com-plaint. Document #88-120625-012C.) n
Judge Certifies Class InRegions Financial SecuritiesClass Action LawsuitBIRMINGHAM, Ala. — A federal judge in Alabamaon June 14 certified a class of investors in a class actionlawsuit against Regions Financial Corp. and certaincurrent and former executive officers for alleged viola-tions of federal securities law, ruling that the investorshave met the statutory requirements for certification(Local 703, I.B. of T. Grocery and Food EmployeesWelfare Fund v. Regions Financial Corp., et al., No.10-2847, N.D. Ala.; 2012 U.S. Dist. LEXIS 82135;See September 2011, Page 29).
(Opinion available. Document #88-120625-022Z.)
Lead plaintiffs District No. 9 I.A. of M. & A.W. Pen-sion Trust and the Employees Retirement System ofthe Government of the Virgin Islands filed an amendedcomplaint in the U.S. District Court for the NorthernDistrict of Alabama on behalf of all purchasers ofRegions common stock from Feb. 27, 2008, toJan. 19, 2009.
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The lead plaintiffs contend that Regions, CEO C.Dowd Ritter, Chief Financial Officer (CFO) IreneM. Esteves and former CFO Alton D. Yother violatedSections 10(b) and 20(a) of the Securities ExchangeAct of 1934 and Securities and Exchange CommissionRule 10b-5 by issuing a series of false and misleadingstatements concerning AmSouth Bancorporation’sunderwriting of, among other things, adjustable-rate mortgages (ARMs) before Regions’ purchase ofAmSouth in November 2006.
Interlocutory Appeal
Judge Inge Prytz Johnson denied the defendants’motion to dismiss, and the defendants moved forreconsideration and/or for interlocutory appeal pur-suant to the U.S. Supreme Court’s ruling in JanusCapital Group, Inc. v. First Derivative Traders (131S. Ct. 2296 [2011; 2011 U.S. LEXIS 4380]).
In denying the motion, Judge Johnson held that rever-sal of her June 7 ruling is not proper because the defen-dants ‘‘are in ultimate authority over their statements.’’
The lead plaintiffs then moved for class certification,which Judge Johnson granted.
Rule 23(a) Requirements
Judge Johnson held that the lead plaintiffs properly metthe Federal Rule of Civil Procedure 23(a) requirementsfor numerosity, commonality, typicality and adequacyof representation.
Judge Johnson also found that the lead plaintiffs prop-erly met the Rule 23(b) requirement for predominance,rejecting the defendants’ claims that the lead plaintiffscannot establish the predominance requirementbecause they have not successfully invoked the fraud-on-the-market presumption for classwide proof of reli-ance and that even if they have done so, Regions hassuccessfully rebutted it.
Moreover, Judge Johnson ruled that the lead plaintiffshave properly met the Rule 23(b) requirement forsuperiority, stating that ‘‘a class action for the pursuitof these claims is superior to potentially thousands ofindividual claims against Regions, each of which willrequire extensive expert testimony and discovery con-cerning the effects of the alleged misrepresentations onthe value of the stock at different points in time.’’
‘‘In fact, should any plaintiff prove the impact of thealleged misrepresentations on the value of a share inRegions, then calculating damages for every singlestockholder becomes a mere mathematical exercise, inneed of no further evidence. The court agrees withplaintiffs that the sheer number of potential plaintiffsnumbers in at least the thousands,’’ Judge Johnson said.
Counsel
The lead plaintiffs are represented by Andrew J. Brownof Robbins Geller Rudman & Dowd in San Diego.
Regions is represented by John N. Bolus and MaibethJ. Porter of Maynard Cooper & Gale in Birmingham.
The individual defendants are represented by Betsy P.Collins, Kim Nesmith and Victor L. Hayslip of Burr &Forman in Atlanta.
(Additional documents available: Motion to certifyclass. Document #88-120625-029B. Reply in sup-port of motion to certify class. Document #88-120625-030B. Defendants’ sur-reply brief. Docu-ment #88-120625-031B. Lead plaintiffs sur-replybrief. Document #88-120625-032B. Defendants’motion for class certification hearing. Document#88-120625-033B.) n
Federal Judge AllowsSubprime Action AgainstFreddie Mac To ContinueYOUNGSTOWN, Ohio — A federal judge in Ohioon May 25 declined to dismiss a putative securities classaction complaint alleging that the Federal Home LoanMortgage Corp. (Freddie Mac) failed to disclose its truesubprime exposure, ruling that the plaintiff properlystate its claim (Ohio Public Employees RetirementSystem v. Federal Home Loan Mortgage Corp., et al.,No. 08-00160, N.D. Ohio).
(Order available. Document #88-120625-223R.)
U.S. Judge John R. Adams of the Northern District ofOhio made the ruling in the suit filed by the OhioPublic Employees Retirement System (OPERS) againstFreddie Mac, its former president and Chief OperatingOfficer Eugene M. McQuade and former executive
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vice president and Chief Financial Officer AnthonyS. Piszel.
The proposed class consists of investors who boughtFreddie Mac stock from Aug. 1, 2006, to Nov. 20,2007. OPERS alleges that during the class period, thedefendants made a series of materially false and mis-leading public statements relating to its exposure to orrisk of loss from subprime mortgage loans and othernontraditional, high-risk mortgages. OPERS alsoalleges that the defendants made false or misleadingpublic statements about Freddie Mac’s underwritingpolices and adherence to those policies, its loan analysisand fraud detection systems, its risk management andcapital position. According to OPERS, as a result, therewas a multibillion dollar loss for hundreds of thousandsof OPERS members. Freddie Mac, McQuade and Pis-zel each moved to dismiss.
Motions To Dismiss
Freddie Mac argued that the losses about whichOPERS complains were not the result of fraud by any-one at Freddie Mac. McQuade said he has never beentargeted by the U.S. Securities and Exchange Commis-sion or been named in any other private lawsuits regard-ing Freddie Mac’s actions with relation to the housingcrisis. He said he ‘‘had no responsibility, nor even argu-ably culpably participated in, the subprime issues at thecore of any of these cases, including this one.’’
‘‘Mr. McQuade did not sign or certify any public finan-cial disclosures during the class period at issue in thislawsuit, nor was he a member of any of the boardcommittees that allegedly addressed Freddie Mac’s sub-prime exposure,’’ McQuade’s counsel wrote in themotion to dismiss.
Piszel argued that the Securities Exchange Act of 1934does not apply to OPERS’s claims because Freddie Macis a type of entity excluded by the act. Even if theDistrict Court found that the act applied to FreddieMac, the claim against Piszel would fail becauseOPERS did not plead that he acted with the intentor knowledge of wrongdoing.
‘‘The court remains convinced that discovery needs totake place in this matter, and that discovery requestswould necessarily be propounded upon each of themoving defendants regardless of whether each remains
a party,’’ Judge Adams said. He did not elaborate on hisreasons for denying the motions to dismiss.
Attorneys
OPERS is represented by Jean M. Geoppinger, StanleyM. Chesley, Christopher D. Stock, James R. Cum-mins, Joseph T. Deters, Melanie S. Corwin, Renee A.Infante, Terrence L. Goodman and Wilbert B. Marko-vits in Cincinnati, Darren T. Kaplan, Gregory E. Kellerand John F. Harnes of Chitwood Harley Harnes inNew York, James M. Wilson, Krissi T. Gore and Mar-tin D. Chitwood of Chitwood Harley Harnes inAtlanta and Michael J. Hall and Richard MichaelDeWine of the Office of the Attorney General inColumbus, Ohio.
Freddie Mac is represented by Jason D. Frank andJordan D. Hershman of Bingham McCutchen in Bos-ton and Hugh E. McKay and Paul R. Matia of Porter,Wright, Morris & Arthur in Cleveland.
McQuade is represented by Andrew J. Levander ofDechert in New York and Cheryl A. Krause andDavid T. Jones of Dechert in Philadelphia.
Piszel is represented by Joseph P. Rodgers and Saber W.VanDetta of Squire Sanders in Cleveland, William E.Donnelly and Jerry A. Isenberg of Murphy & McGo-nigle in Washington, D.C., and James K. Goldfarband Jonathan S. Bashi of Murphy & McGonigle inNew York.
(Additional documents available: McQuade’s motionto dismiss. Document #88-120625-224M. Brief insupport of McQuade’s motion to dismiss. Docu-ment #88-120625-225B. Freddie Mac’s motion todismiss. Document #88-120625-226M. Brief in sup-port of Freddie Mac’s motion to dismiss. Document#88-120625-227B. Piszel’s motion to dismiss. Docu-ment #88-120625-228M. Brief in support of Piszel’smotion to dismiss. Document #88-120625-229B.) n
Judge: Consumer Fails ToState Debt Collection ClaimsAgainst Credit UnionGREENBELT, Md. — A consumer has failed to pleadhis federal debt collection law claims, as well as a
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number of other claims made against a credit union,because he has failed to show that the credit union is adebt collector as required under the Fair Debt Collec-tion Practices Act, a federal judge in Maryland ruledJune 14 (Isaiah Nichols v. Navy Federal Credit Union,No. 12-790, D. Md.; 2012 U.S. Dist. LEXIS 82724).
(Opinion available. Document #88-120625-034Z.)
Consumer Isaiah Nichols sued Navy Federal CreditUnion in the Prince George’s County, Md., CircuitCourt, alleging that Navy Federal violated six provi-sions of the Fair Debt Collection Practices Act, aswell as 12 other federal laws in attempting to collectionon a debt Nichols incurred with the credit union.
In particular, Nichols disputes the debt and claims thathe is a victim of identity theft.
Navy Federal removed the action to the U.S. DistrictCourt for the District of Maryland and moved to dis-miss, contending that Nichols’ pro se complaint failedto state a claim for relief, and U.S. Judge J. FrederickMotz granted the motion.
DeSantis v. Computer Credit
Citing the Second Circuit U.S. Court of Appeals’ rulingin DeSantis v. Computer Credit, Inc. (269 F.3d 159,161 [2001]), Judge Motz held that dismissal is properbecause ‘‘[t]o the extent that plaintiff is asserting a claimunder the Fair Debt Collection Practices Act, it is notcognizable against defendant because there are no factsalleged to suggest that defendant acted as a ‘professionaldebt collector,’ as is required under the Federal DebtCollection Practices Act.’’
Judge Motz also found that dismissal is proper because‘‘[t]o the extent that plaintiff is asserting a claim basedupon an alleged contract with defendant, there are nofacts alleged that give rise to the inference that any suchagreement existed.’’
‘‘Plaintiff’s assertions are based entirely upon the factthat he unilaterally submitted to defendant a series ofdocuments upon which he now bases a contract claim,’’Judge Motz said.
Moreover, Judge Motz ruled that dismissal is properbecause ‘‘to the extent that plaintiff alleges that defen-dant ‘attempted to fraud’ him, he has not made any
allegations setting forth with any particularity, asrequired by Fed. R. Civ. P. 9 [Federal Rule of CivilProcedure 9], that any fraud was committed.’’
Counsel
Nichols of Fort Washington, Md., appeared pro se.
Navy Federal is represented by Amy S. Owen and Kris-tin Anne Martin Zach of Cochran and Owen inVienna, Va.
(Additional documents available: Motion to dismiss.Document #88-120625-035B. Opposition brief.Document #88-120625-036B. Reply brief. Docu-ment #88-120625-037B. Complaint. Document#88-120625-038C.) n
Judge: Court HasSubject Matter JurisdictionOver Debt Collection SuitCLEVELAND — Remand of a credit card holder’slawsuit against a debt collector and credit card issueris not proper, a federal judge in Ohio ruled June 14,because the court has subject matter jurisdiction overthe claims (Theresa M. Passmore v. Discover Bank,et al., No. 11-1347, N.D. Ohio; 2012 U.S. Dist.LEXIS 82331; See November 2011, Page 8).
(Opinion available. Document #88-120625-023Z.)
Discover Bank sued credit card holder Theresa M.Passmore in the Lake County, Ohio, Court of Com-mon Pleas, seeking to collect on a debt Passmoreincurred on a credit card she had received from Dis-cover Bank. Discover Bank brought claims of breach ofcontract and unjust enrichment.
Passmore answered and counterclaimed against Dis-cover Bank and joined as counterclaim defendantsYale Levy and debt collector Levy & Associates (collec-tively, Levy defendants). Passmore sought to representa class of similarly situated individuals and broughtclaims for violation of the Fair Debt Collection Prac-tices Act (FDCPA) and the Ohio Consumer ProtectionAct, fraud, abuse of process, defamation and civilconspiracy.
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Realignment
Discover Bank dismissed its claims, and the Levy defen-dants moved to realign the parties. The state court thenrealigned Passmore to make her the plaintiff in theaction.
Discover Bank moved to compel arbitration of Pass-more’s claims pursuant to Discover Bank’s cardholderagreement and moved to stay the litigation pending aruling on the motion to compel arbitration, and Pass-more moved to strike a declaration submitted to sup-port the motion to compel arbitration.
The state court denied the defendants’ motions to com-pel arbitration, refused to consider the declaration ofdirector of Discover Bank’s credit card servicing affili-ate, Jeff Naami, because it was not notarized, and foundthat the attached copies of Discover Bank’s credit cardagreement were therefore unauthenticated and failedto establish a binding arbitration agreement betweenDiscover Bank and Passmore.
Arbitration
The defendants removed the action to the U.S. DistrictCourt for the Northern District of Ohio. The Levydefendants moved to compel arbitration and to staythe proceedings, and Passmore moved to strike.
Judge James S. Gwin granted the Levy defendants’motion, and Passmore moved to remand and to vacateJudge Gwin’s order.
In denying her motions, Judge Gwin held that Pass-more’s argument that the District Court lacks subjectmatter jurisdiction over the instant action because shenever filed an amended complaint in state court beforethe case was removed, leaving the District Court with-out a complaint upon which to test its jurisdiction, fails.
‘‘When a state court realigns parties, the realigneddefendant can properly remove an action to federalcourt. The Court explained as much in its earlierOrder. Passmore all but ignored Hrivnak [the NorthernDistrict of Ohio’s ruling in Hrivnak v. NCO PortfolioManagement (723 F. Supp. 2d 1020, 1028 [2010])] inher earlier motion papers. Now she makes Hrivnak thecenterpiece of her motion, saying that the case carriesno weight because she, unlike the removal plaintiff inHrivnak, never actually filed a redesignated complaintin state court. But Passmore’s failure to refile her
counterclaims on a recaptioned document hardly ren-ders her claims suddenly unknowable, and certainlydoes not render the action unremovable,’’ JudgeGwin said.
FDCPA Claims
Judge Gwin also rejected Passmore’s argument thateven if removal of the FDCPA claims was proper, herstate law claims should be severed, finding that ‘‘all ofher claims arise from the same set of facts and the Courtproperly exercises supplemental jurisdiction here.’’
Passmore is represented by Anand N. Misra of Beach-wood, Ohio, and Robert S. Belovich of Parma, Ohio.
Discover Bank is represented by Burt M. Rublin andNathan W. Catchpole of Ballard Spahr Andrews &Ingersoll in Philadelphia and Saber W. VanDetta andSteven A. Friedman of Squire, Sanders & Dempsey inCleveland.
Levy and Levy Associates are represented by I. JamesHackenberg of Baker, Hackenberg & Hennig in Pai-nesville, Ohio, and Boyd W. Gentry of Surdyk,Dowd & Truner in Miamisburg, Ohio.
(Additional documents available: Motion to remand.Document #88-120625-024B. Opposition to motionto remand. Document #88-120625-025B. Reply insupport of motion to remand. Document #88-120625-026B. Motion to vacate. Document #88-120625-027B. Opposition to motion to vacate.Document #88-120625-028B. Oct. 26 order. Docu-ment #88-111128-012R.) n
Preliminary Approval GrantedTo Settlement In MunicipalDerivatives Antitrust ActionNEW YORK — The federal judge in New York over-seeing the multidistrict litigation involving allegationsby purchasers of municipal derivatives that finan-cial services companies engaged in price fixing, bid rig-ging and market manipulation in violation of Section 1of the Sherman Act on June 4 granted preliminaryapproval to a $45 million settlement between JP Mor-gan Chase & Co. and a class of purchasers (In re Muni-cipal Derivatives Antitrust Litigation, No. 08 MDL No.1950, Master No. 08-02516, S.D. N.Y.).
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(Order available. Document #81-120628-014R.Motion for preliminary approval available. Docu-ment #81-120628-015B.)
Pursuant to the settlement agreement, JPMorganChase & Co., J.P. Morgan Securities and BearStearns & Co. (collectively, JPMC) agreed to pay$44.57 million or, with a potential opt-out reduction,$42.57 million and to provide reasonable cooperation,including discovery cooperation, to class plaintiffs’counsel. The proposed settlement is in addition toout-of-court opt-in settlements negotiated by statesattorneys general — $62.5 million with Bank of Amer-ica N.A. (BOA), $63.3 million with UBS AG and$65.5 million with JPMC.
The instant settlement follows a $4.5 million settle-ment with Morgan Stanley and a settlement withWachovia Bank N.A., now known as Wells FargoBank, N.A., and Wells Fargo & Co. (collectively,Wachovia), pursuant to which Wachovia agreed topay the greater of $37 million or 65 percent of thetotal amount that Wachovia agreed to pay as restitutionas part of the settlement agreement with the statesattorneys general.
Multiple Lawsuits
Multiple civil antitrust actions against various financialservices companies were filed by municipalities andother purchasers of municipal derivatives across thecountry alleging violations of Section 1 arising frombidding on municipal derivatives offerings. The JudicialPanel on Multidistrict Litigation transferred all theactions to the U.S. District Court for the SouthernDistrict of New York.
A consolidated class action complaint was filed Aug. 22,2008, against more than 40 defendants, and a secondconsolidated amended complaint (SCAC) was filedJune 18, 2009, against 16 defendants — Morgan Stan-ley; Wachovia; JPMC; BOA; National WestminsterBank PLC; Piper Jaffray & Co.; Societe Generale SA;UBS; Wachovia; Natixis Funding Corp.; InvestmentManagement Advisory Group Inc.; CDR FinancialProducts; Winters & Co. Advisors LLC; George K.Baum & Co; and Sound Capital Management Corp.
In addition, four California municipalities, includingthe City of Oakland, brought a separate class actioncomplaint (referred to as the JSAC) on Dec. 15,
2009, alleging that the 16 SCAC defendants violatedCalifornia’s Cartwright Act, and 11 municipalities,including the City of Los Angeles, asserted Section 1and Cartwright Act claims similar to those in the SCACand JSAC against the SCAC defendants and 31 addi-tional defendants not named in the SCAC or JSACaction.
Settlement Class
Judge Victor Marrero conditionally certified the classfor purposes of the settlement. The class is defined as‘‘[a]ll state, local and municipal government entities,independent government agencies, quasi-government,non-profit and private entities that (i) purchased bynegotiation, competitive bidding or auction MunicipalDerivative Transactions with Defendant or any AllegedProvider Defendant or Alleged Provider Co-Conspira-tor, or (ii) purchased by negotiation, competitive bid-ding or auction Municipal Derivative Transactionsbrokered by any Alleged Broker Defendant or AllegedBroker Co-Conspirator, at any time from January 1,1992 through August 18, 2011, in the United States.’’The class excludes ‘‘any entity that provides Defendantwith a release of claims it may have against Defendantas a result of opting into the State AG Settlement.’’
The City of Baltimore, the University of MississippiMedical Center, the University of Southern Missis-sippi, the Mississippi Department of Transportation,the University of Mississippi, the Central Bucks SchoolDistrict in Pennsylvania and the Bucks CountyWater & Sewer Authority in Pennsylvania werenamed class representatives for purposes of thesettlement.
The settlement provides that the settlement amountmay be funded by any amount remaining in the statesattorneys general escrow fund after all payments pur-suant to that settlement are made.
In addition, the settlement agreement permits JPMC torescind the agreement if the number of class memberswho elect to opt out of the settlement class exceeds anagreed-upon number.
The plaintiffs’ co-lead interim class counsel are MichaelD. Hausfeld and Megan E. Jones of Hausfeld inWashington, D.C.; Arun S. Subrahmanian, WilliamChristopher Carmody and Seth D. Ard of SusmanGodfrey in New York; Marc M. Seltzer of Susman
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Godfrey in Los Angeles; and William A. Isaacson,Tanya Chutkan and Jonathan Shaw of Boies, Schiller &Flexner in Washington. JPMC is represented byThomas C. Rice of Simpson Thacher & Bartlett inNew York. n
Judge Dismisses FederalSecurities Law Claims AgainstMadoff Feeder FundNEW YORK — Shareholders in a securities classaction lawsuit against a feeder fund of Bernard L. Mad-off Investment Securities LLC (BLMIS) have failed toshow that their federal securities law claims satisfy thestandard set forth in Absolute Activist Value MasterFund, Ltd. v. Ficeto, a federal judge in New Yorkruled June 4 (In re Optimal U.S. Litigation, No 10-4095, S.D. N.Y.; 2012 U.S. Dist. LEXIS 77311; SeeOctober 2011, Page 15).
(Opinion available. Document #57-120611-056Z.)
Shareholders, 56 non-U.S. people or entities thatinvested in Optimal Strategic U.S. Equity Fund (Pio-neer), a BLMIS feeder fund (collectively, the Pioneerplaintiffs), as well as the three non-U.S. citizen investorswho held their Pioneer investments with SBT (theSantander plaintiffs) filed a fourth amended complaintin the U.S. District Court for the Southern Districtof New York on behalf of a class of those similarlysituated.
The shareholders allege that Banco Santander S.A.,Optimal Investment Management Services S.A.(OIS), Banco Santander International (SantanderU.S.) and OIS and Santander Investment SecuritiesInc. employee Jonathan Clark failed to conduct ade-quate diligence regarding BLMIS, ignored ‘‘red flags’’that should have alerted them to Bernard L. Madoff’sfraud and issued a series of false and misleading state-ments in connection with the sale of Pioneer shares inviolation of Sections 10(b) and 20(a) of the SecuritiesExchange Act of 1934 and Securities and ExchangeCommission Rule 10b-5.
Additional Claims
Additional claims for common-law fraud, negligentmisrepresentation, gross negligence, breach of fiduciary
duty, aiding and abetting breach of fiduciary duty, aid-ing and abetting fraud, third-party beneficiary breach ofcontract and unjust enrichment also were made.
The defendants moved to dismiss the federal securitiesfraud claims in light of the U.S. Supreme Court’s rulingin Janus Capital Group, Inc. v. First Derivative Traders(131 S. Ct. 2296 [2011; 2011 U.S. LEXIS 4380]), andJudge Shira A. Scheindlin granted the motion in partand denied it in part.
Judge Scheindlin then issued an order to show causewhy the federal securities law claims should not bedismissed in light of the Second Circuit U.S. Courtof Appeals’ decision in Absolute Activist Value MasterFund, Ltd. v. Ficeto (677 F.3d 60 [2012]).
In Connection With
In a May 17 letter, the shareholders withdrew their‘‘allegations that the purchases or sales of OptimalU.S. shares took place in the United States.’’ Instead,they claim that the Exchange Act reaches their claimsfor two reasons: plaintiffs’ purchase of U.S. Optimalshares was ‘‘in connection with’’ Madoff’s purportedtrades in the United States, and the ‘‘economic reality’’of plaintiffs’ Optimal U.S. investments consisted ofMadoff’s purported transactions in the United States.
In dismissing the shareholders’ claims, Judge Schein-dlin rejected their assertion that under a textual readingof the U.S. Supreme Court’s ruling in Morrison v.National Australia Bank, Ltd. (130 S. Ct. 2869[2010]), the purchase of Optimal U.S. shares was ‘‘inconnection with’’ Madoff’s purported purchases andsales of New York Stock Exchange-listed stocks.
‘‘In short, this argument fails because plaintiffs rely onopinions construing ‘in connection with’ outside of theMorrison context, which thereby ignores the presump-tion against applying securities laws extraterritorially,’’Judge Scheindlin said.
Economic Reality
Judge Scheindlin also disagreed with the shareholders’argument that the ‘‘economic reality’’ of their purchaseof Optimal U.S. shares was essentially an investment inthe NYSE, finding that ‘‘Without determining the via-bility of the ‘economic reality’ test, which the SecondCircuit will consider in due course, I conclude that such
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a test would not sustain plaintiffs’ federal securities lawclaims here for two reasons.
‘‘First, the economic reality test was applied in Elliot[the District Court’s ruling in Elliott Associates v.Porsche Automobile Holding (759 F. Supp. 2d 469[2010])] based on Morrison’s presumption againstextraterritorial application of the Exchange Act,’’Judge Scheindlin stated.
‘‘Second, Valentini [v. Citigroup, Inc. ( No. 11 Civ.1355, [S.D.N.Y. Dec. 27, 2011])] and Elliot are dis-tinguishable on the grounds that they involve securitiesthat had a direct, one-to-one relationship with the U.S.security referenced, and the security at issue in thosecases fluctuated in value in direct correlation with thevalue of the U.S. security.
‘‘The issue of the extent to which the Exchange Act mayreach foreign instruments referencing U.S. stock is anissue that many district courts have grappled with andwhich requires further guidance from appellate courts.However, given that plaintiffs’ federal securities lawclaims fail to satisfy the standard in Absolute Activistand their extremely tenuous and speculative connectionto securities listed on a U.S. stock exchange, plaintiffshave failed to overcome the presumption against theextraterritorial reach of the Exchange Act,’’ JudgeScheindlin explained.
Counsel
The shareholders are represented by Edward W. Millerof New York and Alan I. Ellman, Javier Bleichmar andJoel H. Bernstein of Labaton Sucharow in New York.
The defendants are represented by Gustavo J. Mem-beila and Samuel A. Danon of Hunton & Williams inMiami and Paulo R. Lima and Shawn P. Regan ofHunton & Williams in New York. n
Madoff Customers’Claims Barred By Injunction,Automatic Stay, Judge RulesNEW YORK — Customers of Bernard L. MadoffInvestment Securities LLC (BLMIS) are not entitledto bring a securities class action lawsuit against theestate of a former BLMIS investor that is subject to a$7.2 billion settlement agreement with BLMIS’s
liquidation trustee because class action claims are pro-hibited by a permanent injunction and an automaticstay on customer claims, a federal bankruptcy judge inNew York ruled June 20 (Securities Investor ProtectionCorp. v. Bernard L. Madoff Investment Securities LLC,[In re Bernard L. Madoff], No. 08-1789, S.D. N.Y.Bkcy.; See December 2010, Page 4).
(Opinion available. Document #88-120625-064Z.)
Irving H. Picard, the liquidation trustee for Bernard L.Madoff Investment Securities LLC (BLMIS), sued theestate of former BLMIS investor Jeffrey M. Picower inthe U.S. Bankruptcy Court for the Southern District ofNew York. He sought to recover more than $7.2 billionthat Picower received as part of his role in Madoff’sPonzi scheme.
In February 2010, BLMIS investor Adele Fox suedPicower’s estate in the U.S. District Court for theSouthern District of Florida, seeking to recover lossessustained as part of Picower’s role in the Ponzi scheme,but the Bankruptcy Court enjoined Fox’s action (Fox I).Fox appealed to the Southern District of New York,which upheld the District Court’s order in aMarch 26, 2012, ruling.
Settlement Agreement
In the meantime, on Dec. 17, 2010, Picard enteredinto a settlement agreement with Picower’s estate,which required the estate to forfeit and repay approxi-mately $7.2 billion, of which $5 billion was to be paidto Picard as BLMIS trustee.
Fox appealed the settlement order to the Southern Dis-trict of New York, but the District Court upheld thesettlement agreement on March 26, 2012.
On Dec. 13, BLMIS investors A&G Goldman Partner-ship and Pamela Goldman (collectively, class actionplaintiffs) moved for a determination that neither theBankruptcy Court’s Jan. 13, 2011, injunction nor theautomatic stay provision of Section 362 of Title 11 ofthe U.S. Code bar, prohibit, restrict or prevent themfrom commencing and prosecuting a securities law classaction against Picower’s estate and related defendantsin the Southern District of Florida.
Standing
In denying that motion, Judge Burton R. Liflandrejected the class action plaintiffs’ assertions that the
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Bankruptcy Court ‘‘should not enjoin their ‘federalsecurities law claims’ because they belong to the share-holders and not the estate’’ and that Picard lacks stand-ing to bring those claims and the Bankruptcy Courtlacks jurisdiction to adjudicate them in light of theSecond Circuit U.S. Court of Appeals’ ruling in Tra-velers Casualty and Surety Co. v. Chubb IndemnityCo. [In re Johns-Manville Corp.] (517 F.3d 52[2008]).
‘‘The Class Action Plaintiffs . . . have simply repeated,repackaged, and relabeled the wrongs alleged by theTrustee in an attempt to create independent claimswhere none exist. In fact, they re-iterate allegationsalmost verbatim of not only the Trustee’s Complaint,but also of the complaints their same counsel set forthin Fox I. As such, the Court rejects the Plaintiffs’ argu-ments and denies the Motion,’’ Judge Lifland said.
The class action plaintiffs are represented by Joshua J.Angel and Frederick E. Schmidt Jr. of Herrick Feinsteinin New York.
Picard is represented by David J. Sheehan, Deborah H.Renner, Tracy L. Cole, Keith R. Murphy, Marc Ska-pof, Amy E. Vanderwal, Matthew J. Moody andGeorge Klidonas of Baker & Hostetler in New York. n
Judge Dismisses InvestorSuit Against Merrill Lynch,Pierce, Fenner & SmithNEW YORK — A shareholder has failed to plead anyof its state or federal law claims against Merrill Lynch,Pierce, Fenner & Smith Inc. for alleged securities lawviolations in connection with the sale of auction-ratesecurities, a federal judge in New York ruled June 4 indismissing the complaint (In re Merrill Lynch Auction-Rate Securities Litigation, No. 09-md-2030, [IconixBrand Group Inc. v. Merrill Lynch, Pierce, Fenner &Smith Inc., No. 10-0124], S.D. N.Y.; 2012 U.S. Dist.LEXIS 77331).
(Opinion available. Document #57-120611-057Z.)
Investor Iconix Brand Group Inc. sued Merrill in theU.S. District Court for the Southern District of NewYork. Iconix alleges that Merrill fraudulently induced it
into purchasing more than $100 million in auction-ratesecurities — the Anchorage Finance Sub-Trusts I-IVARS — in violation of Section 10(b) of the SecuritiesExchange Act of 1934, Securities and Exchange Com-mission Rule 10b-5 and Section 12(a)(1) of the Secu-rities Act of 1933.
Additional claims for common-law fraud and negligentmisrepresentation were also made.
Section 10(b)
In granting Merrill’s motion to dismiss, Judge LorettaA. Preska held that dismissal of the Section 10(b) andRule 10b-5 claims is proper because Iconix made itspurchase after Merrill produced its website disclosureand the SEC issued a 2006 order.
‘‘This Court has held squarely in this Multidistrict Liti-gation that these same disclosures ‘relieve [Merrill’s]liability on Plaintiff’s misstatement and market manip-ulation claims based on purchases made after the Web-site Disclosure.’ The claims in Merrill IV [In re MerrillLynch Auction-Rate Securities Litigation (No. 09-md-2030; 09-9887, S.D. N.Y. [Feb. 15, 2012])] that Mer-rill (and, to a lesser extent, Money Market One Institu-tional Investment Dealer) made material misstatementsor omissions are, in substance, analogous in all materiallegal respects to the same aims advanced here. Plaintiffmakes no new argument about the sufficiency of thosedisclosures. Nor does Plaintiff make new argumentswith respect to scienter, reliance, or loss causation,’’Judge Preska said.
Judge Preska also found that because Iconix’s claims‘‘were not harassing or frivolous, and Merrill did notaffirmatively allege any improper conduct or move forsanctions,’’ neither Iconix nor its counsel violated Rule11 of the Private Securities Litigation Reform Act.
Common-Law Fraud
Moreover, Judge Preska ruled that dismissal of Iconix’scommon-law fraud claim is proper because ‘‘the ele-ments of common law fraud essentially mirror thoseinvolved in the section 10(b) claims.’’
Judge Preska further dismissed Iconix’s Section12(a)(1) claim, holding that in addition to Iconix’sclaim being time-barred, it also has failed to state aclaim for relief.
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Dismissal of the negligent misrepresentation claim isalso proper, Judge Preska found, because the claim ispreempted by New York’s Martin Act.
Counsel
Iconix is represented by Marc E. Kasowitz and CharlesM. Miller of Kasowitz, Benson, Torres & Friedman inNew York.
Merrill is represented by Timothy P. Burke of BinghamMcCutchen in Boston and Mary G. Gearns of Bing-ham McCutchen in New York.
(Additional documents available: Motion to dismiss.Document #57-120611-058B. Opposition brief.Document #57-120611-059B. Reply brief. Docu-ment #57-120611-060B. Complaint. Document#57-120611-061C.) n
Facebook, Underwriters,Stock Exchange Hit WithClass Actions After IPOTwo putative class action complaints were filed May 22in response to Facebook’s initial public offering: a suitin a California state court against the company, itsofficers and underwriters, including Morgan Stanley,alleging that underwriters tipped off clients that theycut earnings projections ahead of the IPO, and a suit inNew York federal court against Nasdaq, accusing thestock exchange of mishandling orders for Facebookshares and causing investor loss.
Facebook shareholder Darryl Lazar brought the suitagainst the company in the San Mateo County SuperiorCourt, individually and on behalf of all others similarlysituated (Darryl Lazar v. Facebook Inc., et al., Calif.Sup., San Mateo Co.).
(Complaint available. Document #57-120611-501C.)
According to Lazar, Morgan Stanley, J.P. MorganSecurities LLC and Goldman Sachs & Co. cut theirearnings forecasts before the IPO but failed to tell thepublic. Lazar says this caused investors to buy Face-book stock based on misleading statements and omit-ted material information in the social networking
company’s registration statement and prospectus inviolation of Sections 11 and 15 of the Securities Actof 1933.
Misleading Statements Alleged
Lazar says that under applicable Securities andExchange Commission rules and regulations, the regis-tration statement was required to disclose knowntrends, events or uncertainties that were having, andwere reasonably likely to have, an impact on Facebook’scontinuing operations.
‘‘However, the Registration Statement failed to disclosethat during the IPO roadshow, the lead underwriters,including, Defendants Morgan Stanley, J.P. Morgan,and Goldman Sachs, all cut their earnings forecasts andthat news of the estimate cut was passed on only to ahandful of large investor clients, not to the public,’’according to the complaint. ‘‘Therefore, the Registra-tion Statement was negligently prepared and, as a result,contained untrue statements of material facts oromitted to state other facts necessary to make the state-ments made not misleading, and was not prepared inaccordance with the rules and regulations governingtheir preparation.’’
In the Southern District of New York action, investorPhillip Goldberg sued Nasdaq OMX Group Inc. andthe Nasdaq Stock Market LLC (collectively, Nasdaq),individually and behalf of all others similarly situated(Phillip Goldberg v. Nasdaq OMX Group Inc., et al.,No. 12-4054, S.D. N.Y.).
(Complaint available. Document #57-120611-502C.)
Goldberg says Facebook’s IPO was ‘‘hotly anticipated’’and many investors, both retail and institutional,sought to purchase shares in the IPO. However,because of Nasdaq’s negligence, that IPO was ‘‘badlymishandled,’’ according to the complaint.
Promptly, Efficiently
‘‘Because NASDAQ failed to process Facebook tradespromptly and efficiently, parties attempting to purchaseFacebook shares were unable to determine if they hadproperly done so,’’ Goldberg says. ‘‘Indeed, NASDAQfailed to process some trade orders for hours on end,and failed to cancel other orders despite customerrequests to do so.’’
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According to the complaint, this damaged the plaintiffand class members in a variety of ways. Some classmembers placed buy orders and then placed timelycancellations of those orders when the market pricedeclined, according to the complaint. These class mem-bers were damaged when the cancellations were notpromptly and correctly executed by Nasdaq, andinstead the buy orders were executed after Facebookprices had declined in value, meaning those class mem-bers overpaid for their shares, according the comp-laint. Other class members were unable to determineif their buy orders had been executed and did not knowwhether they owned Facebook shares, or at what price,and were accordingly unable to timely sell those shares,suffering losses, according to the complaint.
Lazar is represented by Lionel Z. Glancy, MichaelGoldberg, Robert V. Prongay and Casey E. Sadler ofGlancy Binkow & Goldberg in Los Angeles.
Goldberg is represented by Douglas G. Thompson Jr.,Michael G. McLellan and Robert O. Wilson of Finkel-stein Thompson in Washington, D.C., and Christo-pher Lovell, Victor E. Stewart and Fred T. Isquith Jr. ofLovell, Stewart, Halebain, Jacobson in New York. n
Judge: Consumer EntitledTo More Than $2,000 InDamages In Lending Law SuitLYNCHBURG, Va. — A consumer is entitled to morethan $2,000 in statutory damages under state and fed-eral law for an automobile dealer’s failure to properlydisclose requisite disclosures regarding the interest rateon an automobile loan, a federal judge in Virginia ruledJune 19 (Michael J. Hummel v. David W. Hall, t/aCountry Motor Sales, No. 11-0012, W.D. Va.; 2012U.S. Dist. LEXIS 84305).
(Opinion available. Document #88-120625-061Z.)
Consumer Michael J. Hummel sued David W. Hall inthe U.S. District Court for the Western District ofVirginia, alleging that Hall violated the Truth in Lend-ing Act (TILA) with regard to his sale of an automobileto Hummel.
In particular, Hummel contends that Hall failed toprovide requisite disclosures in violation of TILAwith regard to the interest rate charged on Hummel’spurchase of a used car from a dealership Hall owned,Country Motor Sales, and violated Virginia law bycharging Hummel a usurious interest rate.
Default Judgment
Hall failed to respond to the complaint’s allegations,and Hummel moved for default judgment.
Judge Norman K. Moon granted the motion and heldthat Hummel is not entitled to the $2,000 in statutorydamages under TILA that he is claiming, but is entitledto $1,000, because Title XIV of the Dodd-Frank WallStreet Reform and Consumer Protection Act, whichincreased the ceiling in TILA’s civil liability provisionfrom $1,000 to $2,000, did not take effect before theapplied effective date of Section 1400(c)(3) of theDodd-Frank Act.
Judge Moon also found that ‘‘ultimately, in light of theconsistency with which previous iterations of theDodd-Frank Act addressed the effective date of provi-sions under what eventually came to be Title XIV of theAct, and because of the explicit statement of the con-ferees’ intent as related in the Congressional Record, Iconclude that, contrary to Plaintiff’s contention, anddespite the ambiguity of section 1400(c)’s plain lan-guage, the increase in TILA’s civil liability cap did notbecome effective on July 22, 2010.’’
‘‘Accordingly, Plaintiff is entitled to $1,000, as opposedto $2,000, in statutory damages under TILA,’’ JudgeMoon stated.
Usury Damages
Moreover, Judge Moon ruled that under Virginia’susury law, Hummel is entitled to ‘‘a subtotal usurydamages amount of $2,876.45.’’
‘‘However, I will subtract from this amount the remain-ing principal balance that Plaintiff owes on the car,which is $1,693.78, as well as the interest that hasaccrued since September 2011, which is calculated tobe $76.23. Thus, the total usury damages to whichPlaintiff is entitled is $1,106.44,’’ Judge Moonexplained.
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Judge Moon further agreed with Hummel’s assertionthat because he never signed a security agreement forthe purchase of the automobile, Hall has ‘‘no enforce-able security interest in the car.’’
‘‘[W]ithout such a security interest, it was improper forDefendant to place a lien on the title to the car. Accord-ingly, I will enter an order declaring Defendant’s secur-ity interest in the car void and unenforceable. Further,that order will direct Defendant to release the lien, to
give the car’s title back to Plaintiff, and to return toPlaintiff any keys to the vehicle that he is holding,’’Judge Moon said.
Hummel is represented by Jeremy P. White of theVirginia Legal Aid Society in Lynchburg.
(Additional documents available: Motion for defaultjudgment. Document #88-120625-062B. Com-plaint. Document #88-120625-063C.) n
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Richar
d G. H
imelric
k (004
738)
J. Jam
es Ch
ristian
(0236
14)
Tiffan
y & Bo
sco, P.
A. Th
ird Fl
oor Ca
melba
ck Esp
lanade
II 252
5 East
Came
lback
Road
Phoeni
x, Arizo
na 850
16-423
7 Tel
ephone
: (602)
255-6
000
Facsim
ile: (
602) 2
55-010
3 rgh
@tbla
w.com
; jjc@
tblaw.c
om
Attorn
eys for
Plain
tiffs R
obert F
acciola
; The
Rober
t Maur
ice
Facci
ola Tr
ust Da
ted De
cember
2, 199
4; Ho
neylou
C. Re
znik;
The M
orris R
eznik a
nd Ho
neylou
C. Re
znik T
rust; J
ewel B
oxLoa
n Com
pany, I
nc.; Je
wel B
ox, In
c.; H-M
Inves
tments
, LLC
Andre
w S. Fr
iedma
n (005
425)
Bonne
tt, Fairb
ourn, F
riedma
n & Ba
lint, P.
C. 290
1 N. C
entral
Avenu
e. Suite
1000
Phoeni
x, Arizo
na 850
12 Tel
ephone
: (602)
274-1
100
Facsim
ile: (6
02) 27
4-1199
afr
iedma
n@bff
b.com
Att
orneys
for Pl
aintiff
s Fred
C. Ha
gel an
d Jacq
ueline
M. H
agel
Revoca
ble Li
ving T
rust D
ated M
arch 1
5, 1995
; Judith
A. Ba
ker
UNITE
D STA
TES D
ISTRIC
T COU
RT
DISTR
ICT OF
ARIZO
NA
ROBE
RT FA
CCIOL
A, et a
l.,
Plainti
ffs,
vs.
GREE
NBER
G TRA
URIG,
LLP, a
New
York
limited
liabili
ty partn
ership
, et al.
,
Defen
dants.
Case
No. 2:
10-cv-
01025-
FJM
LEAD
PLAI
NTIFF
S’ MO
TION F
OR
(1) PR
ELIM
INAR
Y APP
ROVA
L OF
CLAS
S ACT
ION S
ETTL
EMEN
T WITH
DE
FEND
ANT G
REEN
BERG
TR
AURI
G LLP
, AND
(2) PR
ELIM
INAR
YCER
TIFIC
ATIO
N OF
SETT
LEME
NT CL
ASSE
S
Case
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-cv-01
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I.IN
TROD
UCTI
ONML
Lead
Plain
tiffs-C
lass
Repre
sentati
ves a
nd RB
Lead
Plain
tiffs-C
lass
Repre
sentati
ves (c
ollect
ively
“Clas
s Plain
tiffs”)
have
reache
d a pr
oposed
class
settlem
ent
with D
efenda
nt Gree
nberg
Trauri
g LLP
(“Gree
nberg”
) whic
h, if ap
proved
, will
resolv
e all
claim
s alle
ged a
gainst
Gree
nberg
in thi
s act
ion. G
reenbe
rg has
agre
ed to
pay
$61,01
7,740.
00 in s
ettlem
ent of
all cla
ims th
at were
asser
ted, or
could
have
been a
sserte
d,
by the
ML S
ettlem
ent Cl
ass an
d the
RB Se
ttleme
nt Cla
ss aga
inst G
reenbe
rg ari
sing f
rom
the co
llapse
of Mo
rtgage
s Ltd.
(“ML”
) and R
adical
Bunny
LLC (
“RB”
). Th
e term
s of th
e
propos
ed cla
ss set
tlement
with
Gree
nberg
(“the
GT S
ettlem
ent”)
are se
t fort
h in t
he
Stipul
ation o
f Settl
ement
filed
concur
rently
with
this m
otion.
1 Class
Plain
tiffs re
spectf
ully
reques
t that t
he Co
urt gr
ant pr
elimina
ry app
roval o
f the G
T Settl
ement
becau
se it p
rovide
s
substa
ntial
and im
media
te eco
nomic
benefi
ts to
more
than 1
,700 i
nvesto
rs acr
oss th
e
countr
y who
suffer
ed los
ses in
the a
lleged
securi
ties sc
heme th
at ende
d with
the c
ollaps
e
of bot
h ML a
nd RB
in 200
8.
The
GT S
ettlem
ent w
as rea
ched
throug
h a
separa
te me
diatio
n and
separ
ate
negoti
ations
conduc
ted in
depend
ently
from
the n
egotiat
ions u
nderly
ing th
e rece
ntly
submi
tted p
ropose
d set
tlement
with
Defe
ndant
Quarl
es &
Brady
LLP
(“the
QB
Settlem
ent”).
See “L
ead Pl
aintiff
s’ Moti
on for
(1) P
relimi
nary A
pprova
l of C
lass A
ction
Settlem
ents w
ith D
efenda
nts Q
uarles
& Br
ady, et
c.” (D
oc. #
407) (“
QB M
otion”
). Lik
e
the QB
Settle
ment,
howeve
r, the
GT Se
ttleme
nt is p
art of
a glo
bal re
soluti
on of
not on
ly
the Cl
ass Pl
aintiff
s’ claim
s agai
nst Gr
eenber
g, but
also,
pursua
nt to
separa
te agre
ement
s,
claim
s asse
rted b
y othe
r inves
tor gr
oups.
The r
esult i
s a se
cond g
lobal s
ettlem
ent am
ong
the in
vestor
group
s that
preser
ves th
e fund
ament
al pri
nciple
that
all vic
timize
d inve
stors
share i
n the re
covery
on an
essen
tially p
ro rat
a basi
s.
The G
T Set
tlement
accom
plishe
s this
throu
gh cer
tificat
ion o
f the
same t
wo
settlem
ent cla
sses p
ropose
d in c
onnect
ion wi
th the
QB Se
ttleme
nt: (1
) the M
L Settl
ement
1 Capit
alized
terms
gener
ally ha
ve the
same
defin
itions
as set
forth
in the
concu
rrentl
y file
d Stip
ulatio
n of S
ettlem
ent (D
oc. # 4
15).
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Class
and (2
) the
RB Se
ttleme
nt Cla
ss (co
llectiv
ely, “
the Se
ttleme
nt Cla
sses”)
. Th
e
propos
ed Set
tlement
Class
es rea
dily s
atisfy
all of
the re
quirem
ents fo
r cert
ificatio
n unde
r
Fed. R
. Civ.
P. Ru
le 23.
See Do
c. # 40
7, at 11
:20-15
:3.
At the
prelim
inary
approv
al sta
ge, th
e Cour
t revie
ws th
e prop
osed s
ettlem
ent to
determ
ine tha
t it is
not co
llusiv
e and,
“taken
as a w
hole, i
s fair,
reason
able a
nd ade
quate t
o
all con
cerned
.”Off
icers
for Ju
stice v
. Civil
Serv.
Com
m’n of
City
and C
ounty
of San
Franci
sco, 6
88 F.2
d 615,
625 (
9th Ci
r. 1982
). Do
c. # 40
7, at 2
:2-11.
The
propos
ed GT
Settlem
ent m
eets t
his st
andard
. Th
e $61
millio
n com
mon f
und es
tablish
ed by
the G
T
Settlem
ent re
presen
ts a ve
ry fav
orable
outco
me fo
r the in
vestor
class
memb
ers in
light
of
the ris
ks and
costs
atten
dant to
conti
nued l
itigatio
n, the
insur
ance c
overag
e avai
lable
to
pay in
vestor
claim
s agai
nst G
reenbe
rg (w
hich c
ontinu
ed liti
gation
woul
d furt
her er
ode)
and the
diffic
ulties
inhere
nt in s
uccess
fully p
rosecu
ting a
nd col
lectin
g clas
s claim
s agai
nst
a law
firm
defe
ndant.
The
GT S
ettlem
ent re
sults
from
indisp
utably
arm’
s leng
th
negoti
ations
before
one
of the
most
respe
cted
and so
ught a
fter m
ediato
rs, Da
vid
Geron
emus
of JA
MS, fo
llowin
g more
than
two ye
ars of
hard-
fought
litiga
tion b
efore
this
Court
. Class
Plaint
iffs th
erefor
e resp
ectful
ly req
uest th
at the
Cour
t ente
r the [
Propos
ed]
Prelim
inary
Appro
val O
rder, w
hich:
(1) pr
elimina
rily ap
proves
the G
T Settl
ement
; (2)
certifi
es the
ML
Settlem
ent C
lass a
nd the
RB
Settlem
ent C
lass;
(3) es
tablish
es a
coordi
nated
notice
progr
am fo
r the p
ropose
d GT a
nd QB
Settle
ments
; and (
4) sch
edules
a
hearin
g date
(the
“Final
Appr
oval H
earing
”) to
consid
er the
final
appro
val of
the G
T
Settlem
ent, t
he pro
posed
Plan
of All
ocation
, and
Class
Couns
el’s a
pplica
tion
for
attorne
ys’ fe
es and
expe
nses.
The
schedu
le pro
posed
by Cla
ss Pla
intiffs
, whic
h
Green
berg s
upport
s, will
allow t
he set
tlement
appro
val pr
ocess
to be
coordi
nated
with t
he
approv
al pro
cess f
or the
propo
sed cl
ass se
ttleme
nt wit
h QB
on a t
imeta
ble th
at stri
ctly
compli
es wit
h the C
ourt’s
recent
order
(Doc.
# 413)
.
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RE
EN
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RG
TR
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RIG
MO
TIO
N
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3
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
II.SU
MMAR
Y OF T
HE CL
AIMS
AND D
EFEN
SES R
ELAT
ING T
O GR
EENB
ERG
A.Cla
ss Plain
tiffs’ C
onten
tions
ML
Lead
Plain
tiffs c
ontend
that
Green
berg i
s eith
er pri
marily
or se
condar
ily
liable u
nder th
e Ariz
ona Se
curitie
s Act (
“ASA
”) in
connec
tion w
ith se
curitie
s viol
ations
commi
tted by
RB
and M
L. Th
e RB
Lead
Plaint
iffs as
sert s
econda
ry liab
ility c
laims
agains
t Gree
nberg
for th
e sam
e alleg
ed sec
urities
viola
tions.
As th
e prin
cipal
form
of
relief
for th
eir cla
ims a
gainst
Green
berg,
Class
Plaint
iffs se
ek sta
tutory
resci
ssion
under
A.R.S.
§ 44-2
001(A
).
Th
e fact
ual an
d lega
l base
s for C
lass P
laintiff
s’ claim
s agai
nst Gr
eenber
g and
the
law fir
m’s d
efense
s are
compre
hensiv
ely de
tailed
in a s
eries
of mo
tions
filed o
ver th
e
course
of the
litiga
tion, i
ncludi
ng:
Green
berg’s
First
Motio
n to D
ismiss
Com
plaint
. See
Briefi
ng at
Docs.
#104,
105, 1
35.
Lead
Plaint
iffs’ M
otion
to Am
end Co
mplain
t. See
Brief
ing at
Docs.
#216, 2
31, 24
5.
Lead
Plaint
iffs’ M
otion
to Ce
rtify I
nvesto
r Clas
ses. S
ee Bri
efing
at
Docs.
#256,
261, 2
69.
Green
berg’
Second
Moti
on to
Dismi
ss Co
mplain
t. See
Brie
fing a
t
Docs.
#299,
302, 3
07.
Green
berg’
Motio
n for
Summ
ary Ju
dgment
. See
Doc. #
381.
Lead
Plaint
iffs’ M
otion
for Su
mmary
Judgm
ent.S
ee Do
c. #378
.
Cla
ss Pla
intiffs
conte
nd tha
t Gree
nberg
cannot
genui
nely d
ispute
its kn
owled
ge of
the pr
imary
secur
ities v
iolatio
ns; Gr
eenber
g itsel
f conte
nds tha
t it told M
L that
the ma
nner
in wh
ich RB
was ra
ising f
unds fr
om in
vestor
s for u
se by
ML wa
s unla
wful.
Despi
te this
knowle
dge of
RB’s
misc
onduct
, Gree
nberg
contin
ued to
repre
sent M
L as
securi
ties
counse
l and t
o gene
rate n
ew M
L POM
’s used
to ra
ise m
oney f
rom M
L inve
stors w
ithout
disclo
sing t
he pas
t illeg
ality w
hile R
B con
tinued
to ra
ise te
ns of
millio
ns of
dollar
s
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illegal
ly fro
m the
RB
invest
ors.
Class
Plaint
iffs al
so alle
ge tha
t Gree
nberg’
s actio
ns
substa
ntially
assis
ted RB
’s ongo
ing fra
udulen
t secur
ities s
ales to
the R
B Settl
ement
Class
by fac
ilitatin
g the fl
ow of
tainte
d fund
s nece
ssary
to keep
ML a
float.
Th
e ASA
is re
media
l in
nature
and,
as thi
s Cour
t has
recogn
ized,
provid
es
invest
ors w
ith pr
otectio
ns and
reme
dies b
roader
than
those
availab
le und
er fed
eral la
w.
See D
oc. #
407, a
t 4:12
-19 (a
nd cita
tions
therei
n). T
he ana
lysis
and re
port o
f Clas
s
Plaint
iffs’ d
amage
s expe
rt, Dr
. Gord
on Ra
usser,
establ
ished
Green
berg’s
expos
ure to
a
rescis
sion a
ward
as hig
h as $
499 mi
llion if
found
liable
. Id.
B. Gr
eenber
g’ Pri
mary
Conte
ntion
s
Gr
eenber
g deni
es tha
t it en
gaged
in, or
aided
or abe
tted, a
ny sec
urities
fraud
or
fraudu
lent sc
heme.
Among
other t
hings,
Green
berg f
iled a m
otion
for su
mmary
judgm
ent
assert
ing th
at, bas
ed on
what i
t conte
nds to
be th
e undi
sputed
mate
rial fa
cts, it
is ent
itled
to jud
gment
in its
favor
(Doc.
# 381
). Gr
eenber
g cont
ends th
at ther
e is no
evide
nce th
at
Green
berg “
partici
pated
in or
induce
d” sal
es ma
de by
Mortg
ages L
td. and
Radic
al Bunn
y
to the
ir inv
estors
, know
ingly
engage
d in o
r assi
sted t
he alle
ged fr
audule
nt act
ivity
or
provid
ed sub
stanti
al ass
istance
to th
e alleg
ed fra
udulen
t activ
ity. G
reenbe
rg als
o asse
rts
that s
tatutor
y resc
ission
is no
t avai
lable
to the
Lead
Plaint
iffs, a
nd tha
t inves
tor lo
sses
were
caused
by
an eco
nomic
downtu
rn unr
elated
to
the a
lleged
misco
nduct.
Funda
menta
lly, G
reenbe
rg con
tends
that it
s know
ledge
of sec
urities
regis
tratio
n issu
es at
Radic
al Bu
nny, w
hich G
reenbe
rg end
eavore
d to c
ause i
ts clie
nt and
Radi
cal B
unny t
o
remedy
, cann
ot for
m the
basis
of a
securi
ties fra
ud cla
im ag
ainst i
t. Gr
eenber
g furt
her
disput
es tha
t Ariz
ona co
ntinues
to re
cogniz
e a ca
use of
actio
n for
aiding
and a
bettin
g
securi
ties fra
ud. F
inally
, whil
e for
purpos
es of
the St
ipulati
on of
Settlem
ent, G
reenbe
rg
consen
ts to t
he cer
tificat
ion of
the S
ettlem
ent Cl
asses,
it con
tends
that n
o litig
ation c
lass
could b
e prop
erly c
ertifie
d here
.
C. Pro
cedura
l Post
ure of
the C
ase as
of th
e GT S
ettlem
ent
This
action
is in
a pri
me pr
ocedur
al pos
ition f
or set
tlement
of th
e clas
s claim
s
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agains
t Gree
nberg.
Tang
ential
claim
s have
been
dismi
ssed b
y the
Court
or by
Clas
s
Plaint
iffs’ v
olunta
ry win
nowing
. Disc
overy
has be
en exh
austiv
e and
is com
plete.
Exper
t
initial
and r
ebuttal
repor
ts have
been
prepar
ed and
excha
nged a
nd the
partie
s’ res
pectiv
e
expert
s have
been
depose
d. Li
tigatio
n clas
ses ha
ve bee
n cert
ified.
Cros
s-moti
ons fo
r
summa
ry jud
gment
have
been f
iled an
d, in
the ca
se of
Class
Plaint
iffs’ c
laims a
gainst
Green
berg,
fully
briefe
d. In
short
, the c
laims a
gainst
Gree
nberg
have b
een th
orough
ly
presen
ted an
d vette
d, allo
wing a
ll side
s to co
nduct
a clea
r-eyed
and i
nform
ed eva
luatio
n
of the
respec
tive s
trengt
hs and
weakn
esses
of the
ir claim
s and
defens
es.
D. Me
diatio
n and
Negot
iation
of th
e GT S
ettlem
ent
In add
ition t
o its e
xposur
e as a
defen
dant in
this a
ction, G
reenbe
rg fac
es add
itional
lawsui
ts by
three
other
camps
of inv
estors
who
have f
iled in
dividu
al “gr
oup” a
ctions
agains
t Gree
nberg.
Giv
en the
stru
cture
of the
avai
lable
insura
nce c
overag
e and
Green
berg’
unders
tandab
le des
ire fo
r a co
mpreh
ensive
resol
ution,
all o
f the
intere
sted
parties
partic
ipated
in a g
lobal m
ediatio
n in N
ew Yo
rk bef
ore m
ediato
r Gero
nemus.
As a
prelud
e to
the g
lobal
Green
berg
media
tion,
weeks
of n
egotiat
ions a
nd pre
limina
ry
media
tion s
ession
s were
condu
cted t
o reso
lve al
locatio
n issu
es as
among
the m
ultipl
e
plaint
iff gro
ups.
The
propos
ed Set
tlement
ultim
ately
was
forged
throu
gh thi
s ext
ensive
and
prolon
ged pr
ocess
of arm
’s leng
th neg
otiatio
n and
media
tion.
All p
arties
recog
nized
that
time w
as of
the es
sence
in rea
ching
settlem
ent in
light
of the
impen
ding d
eadlin
es in
this
litigat
ion an
d the s
elf-co
nsumi
ng nat
ure of
the av
ailable
insura
nce co
verage
.
III.
SUMM
ARY O
F THE
GT SE
TTLE
MENT
A.Th
e Prop
osed S
ettlem
ent Cl
asses
The p
ropose
d Settl
ement
Clas
ses ar
e the
same M
L Set
tlement
Clas
s and
RB
Settlem
ent C
lass p
ropose
d in t
he QB
Settle
ment
(Doc.
# 407
, at 6
:15-28
). Ex
clusio
ns
from t
he Set
tlement
Class
es are
set ou
t in the
Stipu
lation.
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B. Ec
onomi
c Valu
e of th
e Sett
lement
to Cl
ass M
ember
s
Under
the S
ettlem
ent, G
reenbe
rg wil
l pay
$61,01
7,740
for th
e bene
fit of
the RB
Settlem
ent C
lass a
nd the
ML
Settlem
ent C
lass.
The
costs
of set
tlement
notice
and
admini
stratio
n and
court-a
pprove
d atto
rneys’
fees a
nd cos
ts paya
ble to
Class
Couns
el will
be pai
d from
the S
ettlem
ent Fu
nd. T
he rem
aining
amoun
t, the
“Net
Settlem
ent Fu
nd,”
will b
e distr
ibuted
to m
ember
s of th
e ML S
ettlem
ent Cl
ass an
d the
RB Se
ttleme
nt Cla
ss
under t
he pro
posed
Plan o
f Allo
cation
(Doc.
# 416-
1).
The a
nalysi
s cond
ucted
by Cla
ss Pla
intiffs
’ dam
ages e
xpert d
eterm
ined t
hat th
e
ML Se
ttleme
nt Cla
ss inc
urred
65% of
the t
otal n
et pri
ncipal
amoun
t inves
tor lo
sses a
nd
the R
B Set
tlement
Clas
s incu
rred 3
5% of
those
losse
s. In
recog
nition
of th
e rela
tive
strengt
h of th
e claim
s agai
nst G
reenbe
rg hel
d by t
he ML
Settle
ment
Class
and th
e RB
Settlem
ent C
lass, t
he Cla
ss Pla
intiffs
propo
se to
allocat
e an e
nhance
d shar
e of th
e Net
Settlem
ent Fu
nd to
the M
L Settl
ement
Clas
s (Do
c. # 4
16-1).
The
amoun
t of th
e Net
Settlem
ent Fu
nd allo
cated
to the
ML S
ettlem
ent Cl
ass an
d the
amoun
t alloc
ated t
o the
RB
Settlem
ent C
lass w
ill the
n be d
istribu
ted to
mem
bers o
f each
of th
e settl
ement
class
es
based
on the
ir rela
tive p
ro rat
a shar
es of
the ag
gregat
e inves
tor los
ses as
of the
close
of the
Class P
eriod
on Jun
e 3, 20
08. Id
.
C. Re
lease
In ret
urn fo
r the
benefi
ts of
the Se
ttleme
nt, of
the Se
ttleme
nt Cla
sses a
gree t
o
releas
e all c
laims a
gainst
Green
berg a
rising
out of
Green
berg’
repres
entatio
n of M
L. D.
Appo
intme
nt of
the Cl
ass Re
presen
tative
and C
lass C
ounse
l and
Paym
ent of
Attor
neys’ F
ees an
d Cost
s
As w
ith th
e QB
Settl
ement
(Doc.
# 4
07 at
7:23-8
:4), t
he GT
Settl
ement
contem
plates
that t
he Co
urt de
signat
e the C
lass P
laintiff
s as C
lass R
eprese
ntativ
es of
the
respec
tive S
ettlem
ent Cl
asses
and th
at: (1)
Tiffa
ny &
Bosco
LLP b
e appo
inted
as cla
ss
counse
l for th
e ML S
ettlem
ent Cl
ass; (2
) Bonn
ett, Fa
irbour
n, Frie
dman
& Ba
lint, P
.C. be
appoin
ted a
s Clas
s Coun
sel fo
r the
RB S
ettlem
ent C
lass;
and (3
) thes
e pro
posed
appoin
tment
s be e
xpress
ly dete
rmine
d to sa
tisfy R
ule 23
(g).
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IV.
THE P
ROPO
SED S
ETTL
EMEN
T WAR
RANT
S PRE
LIMI
NARY
AP
PROV
ALA.
The S
ettlem
ent Is
Fair,
Reaso
nable
and A
dequa
te, an
d Well-
Withi
n the
Rang
e of P
ossibl
e App
roval.
Strong
judic
ial pol
icy fa
vors s
ettlem
ent of
class
action
s. Cla
ss Pla
intiffs
v. City
of
Seattle
, 955
F.2d 1
268, 1
276 (9
th Cir
. 1992
); In
re NV
IDIA
Corp.
Deri
vative
Litig
.,
No. C
-06-06
110-SB
A (JC
S), 2
008 W
L 538
2544,
at *2
(N.D.
Cal.
Dec.
22, 2
008).
Settlem
ents a
re par
ticular
ly fav
ored “
in cla
ss act
ions a
nd oth
er com
plex c
ases w
here
substa
ntial
judicia
l resou
rces c
an be
conser
ved by
avoid
ing fo
rmal
litigat
ion.”
NVIDI
A,
2008 W
L 538
2544,
at *2
(quota
tion o
mitted
)); acc
ord R
odrigu
ez v.
West
Publis
hing
Corp.
, 563 F
.3d 94
8, 966
(9th C
ir. 200
9).
At
this s
tage,
the C
ourt’s
review
of th
e GT S
ettlem
ent is
“lim
ited to
the e
xtent
necess
ary to
reach
a rea
soned
judgm
ent th
at the
agreem
ent is
not th
e prod
uct of
fraud
or
overre
aching
by, o
r coll
usion
betwe
en, th
e nego
tiating
partie
s, and
that
the se
ttleme
nt,
taken
as a w
hole, i
s fair,
reason
able a
nd ade
quate t
o all c
oncern
ed.”
Office
rs for
Justic
e,
688 F.
2d at
625; a
ccord
Hanlo
n v Ch
rysler
Corp.
, 150
F.3d 1
011, 1
027 (9
th Cir
. 1998
).
This
is a l
ow th
reshol
d. Yo
ung v.
Polo
Retai
l, LLC
, No.
C-02-4
546 (V
RW), 2
006 W
L
305086
1, at
*5 (N
.D. C
al. Oc
t. 25,
2006)
(citat
ions a
nd quo
tations
omitte
d).
The
propos
ed GT
Settle
ment r
eadily
satisf
ies the
se req
uirem
ents fo
r prel
imina
ry app
roval.
1.Th
e GT S
ettlem
ent Is
the Pr
oduct
of Se
rious,
Infor
med
and N
on-Co
llusiv
e Nego
tiatio
ns.
This
Court
is fa
miliar
with
the l
ong, in
tensel
y adve
rsaria
l histo
ry of
this c
ase.
Throu
gh ext
ensive
disco
very e
ach si
de has
unque
stionab
ly am
assed
substa
ntial
factua
l
and ex
pert te
stimony
in su
pport o
f their
positi
ons an
d the
Court
has a
lready
addre
ssed
severa
l key
issues
in its
mult
iple r
ulings
on su
ccessi
ve mo
tions
to dis
miss
and fo
r clas
s
certifi
cation
(Doc.
# 407
, at 9
:14-23
). Cla
ss Pla
intiffs
have
had am
ple op
portun
ity to
evalua
te the
respe
ctive s
trengt
hs and
weak
nesses
in th
eir ca
se as
well a
s the
extent
of
availab
le ins
urance
cover
age an
d defe
nses t
o cove
rage.
Arm
ed wit
h this
infor
matio
n,
Class
Plaint
iffs en
tered
media
tion w
ith th
e assi
stance
of ab
le and
exper
ienced
Medi
ator
Geron
emus.
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2.Th
e Prop
osed G
T Sett
lement
Has “
No Ob
vious
Defici
encies
.”
The
propos
ed Set
tlement
“has
no
obviou
s def
icienci
es.”
Youn
g, 200
6
WL 30
50861,
at *5.
To t
he con
trary,
the G
T Settl
ement
provi
des a
straigh
tforw
ard ca
sh
commo
n Settl
ement
Fund
for th
e bene
fit of
all Set
tlement
Class
es me
mbers
, desi
gned t
o
maxim
ize an
imme
diate
recove
ry fro
m Gr
eenber
g in
the fa
ce of
“self-c
onsum
ing”
insura
nce co
verage
that
would
have
rapidl
y dim
inishe
d the
availab
le ass
ets ou
t of w
hich
even a
favora
ble jud
gment
after t
rial co
uld be
satisf
ied.
3.Th
e Prop
osed R
elief D
oes No
t “Gr
ant Pr
eferen
tial T
reatm
entto
Class R
eprese
ntativ
es.”
The L
ead P
laintiff
s are
treate
d the
same u
nder t
he Set
tlement
as ev
ery ot
her
memb
er of
the Se
ttleme
nt Cla
sses a
nd do
not as
k for
incent
ive or
servi
ce aw
ards, w
hich
are co
mmonl
y awa
rded i
n clas
s litig
ation.
Rodri
guez,
563 F.
3d at
958-59
(“Inc
entive
award
s are
fairly
typic
al in
class
action
cases
”) (em
phasis
in or
iginal
). An
d agai
n Clas
s
Couns
el con
templa
te a f
ee app
licatio
n of
only
15% b
ased
upon
their
pre-lit
igatio
n
agreem
ent w
ith th
e Lead
Plain
tiffs, f
ar bel
ow th
e Nint
h Circ
uit’s
25% sta
rting p
oint (o
r
“bench
mark”
) for d
eterm
ining
class a
ction f
ees (D
oc. # 4
07, at
10:14-
22).
4.Th
e Prop
osed R
elief Is
With
in the
“Ran
ge of
Possib
le Ap
proval
.”
The p
ropose
d GT S
ettlem
ent fa
lls we
ll with
in the
“rang
e of p
ossibl
e appr
oval,”
as
it prov
ides su
bstant
ial eco
nomic b
enefit
to the
invest
or cla
ss mem
bers w
ithout
the ris
k and
delays
of co
ntinue
d litig
ation,
trial a
nd app
eal, a
nd wit
hout th
e exha
ustion
of in
suranc
e
procee
ds thr
ough f
urther
defen
se of
this a
ction a
nd of
the pa
rallel
action
s brou
ght by
other
invest
or gro
ups (D
oc. #
407, a
t 10:2
4-11:1
9). B
ecause
Gree
nberg
is a la
w firm
havin
g
few ta
ngible
asset
s othe
r than
its cur
rent a
nd pro
spectiv
e clien
t billi
ngs, C
lass C
ounsel
necess
arily
took i
nto ac
count
the re
al pros
pect th
at a ju
ry ver
dict o
f the m
agnitu
de sou
ght
by Cla
ss Pla
intiffs
(or th
e mere
threa
t of th
is exis
tential
expos
ure) w
ould t
rigger
a ma
ss
exodus
of pa
rtners
leavin
g the c
lass m
ember
s with
a larg
ely un
collec
table p
aper ju
dgment
.
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B.Th
e Cou
rt Sho
uld Ce
rtify t
he Set
tlement
Class
es.
The M
L Settl
ement
Class
and t
he RB
Settle
ment
Class
should
be ce
rtified
for th
e
same r
easons
set fo
rth in
conne
ction w
ith th
e QB S
ettlem
ent (D
oc. #
407, at
11:20
-14:23
)
(incor
porate
d here
in by
refere
nce), a
nd in
connec
tion w
ith th
e Cour
t’s cer
tificat
ion of
the
litigat
ion cla
sses (
Doc. #
346).
C.Th
e Cour
t Shou
ld Ag
ain Ap
point
Lead
Coun
sel as
Coun
sel fo
r the
Settle
ment
Classe
s
Rule 2
3(g)(1
) requi
res th
e Cour
t to ap
point
counse
l to re
presen
t the in
terest
s of th
e
class.
This t
he Co
urt ha
s alre
ady do
ne for
the li
tigatio
n clas
ses. D
oc. #
346, at
14. F
or
the sa
me re
asons,
the l
aw fi
rms o
f Tiffa
ny &
Bosco
P.A.
and B
onnett,
Fair
bourn,
Friedm
an &
Balin
t, P.C
. and
are “w
ell equ
ipped”
to v
igorou
sly, c
ompet
ently
and
efficie
ntly r
eprese
nt the
respec
tive S
ettlem
ent Cl
asses.
V.PR
OPOS
ED CL
ASS N
OTIC
E
Lead
Plaint
iffs p
ropose
to g
ive in
terest
ed par
ties n
otice
by firs
t-clas
s mail,
addres
sed to
each
memb
er of
the Se
ttleme
nt Cla
sses u
sing t
he hig
hly re
liable M
L and
RB
bankru
ptcy p
roceed
ing re
cords
(Doc.
# 407
, at 1
5:5-16
) (and
autho
rities
cited t
herein
).
Notice
to th
e Settl
ement
Class
es in
the fo
rm pr
oposed
(Exhi
bit B
to the
Stipu
lation,
Doc.
# 415-
2, atta
ched a
s Exhi
bit 1
to the
propo
sed Pr
elimina
ry Ap
proval
Orde
r) ful
fills a
ll
Due P
rocess
requi
rement
s, com
plies
with t
he Fed
eral R
ules o
f Civi
l Proc
edure,
and
satisfi
es the
requi
rement
s of A
.R.S.
§ 44-2
081. Id
., at 1
5:17-1
6:5. T
he Cla
ss No
tice an
d
Cover
Page
will, w
hen m
ailed a
s sugg
ested,
fairly
appri
se me
mbers
of th
e Settl
ement
Classe
s of th
e GT S
ettlem
ent an
d their
optio
ns wit
h resp
ect the
reto.
VI.
PROP
OSED
SCHE
DULE
To av
oid an
y inco
nvenie
nce to
the C
ourt o
r conf
usion
among
the S
ettlem
ent
Classe
s Mem
bers,
the pa
rties r
espect
fully
reques
t the
Court
to ad
opt a
schedu
le for
consid
eratio
n of th
e prop
osed G
reenbe
rg set
tlement
that tr
acks th
e sche
dule e
stabli
shed b
y
the Co
urt in
conne
ction w
ith th
e Quar
les se
ttleme
nt. Ac
cordin
gly, th
e part
ies re
quest t
hat
the fi
nal ap
proval
heari
ng reg
arding
the G
reenbe
rg set
tlement
also
be sch
eduled
for
Case
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Septem
ber 14
, 2012
, the s
ame d
ay as
the Q
uarles
final
approv
al hea
ring.
This p
ropose
d
schedu
le com
plies
with t
he Cla
ss Ac
tion F
airnes
s Act
(“CAF
A”), w
hich p
rovide
s that
“[a]n
order
giving
final a
pprova
l of a
propo
sed se
ttleme
nt ma
y not
be iss
ued ea
rlier th
an
90 day
s afte
r the
later o
f the
dates
on wh
ich th
e appr
opriate
Feder
al off
icial a
nd the
approp
riate
State
officia
l are
served
with
the n
otice
requir
ed und
er sub
sectio
n (b).
” 28
U.S.C.
§ 171
5(d).
Consi
stent
with t
he pla
in lan
guage
of thi
s prov
ision, t
he fin
al appr
oval
hearin
g may
be hel
d prio
r to the
expir
ation o
f the n
inety-
day pe
riod, s
o long
as the
order
is
not en
tered
until t
he exp
iratio
n of th
e nine
ty-day
perio
d. Se
e, e.g.,
Beaty v
. Cont
’l Auto
.
Sys. U
.S., In
c., No
. CV-
11-S-8
90-NE
, 2012
WL 1
886134
, at *
5, 9 (
N.D. A
la. Ma
y 21,
2012);
In re
Air C
argo S
hippin
g Serv
s. An
titrust
Litig.
, No.
06-MD
-1775
(JG)(V
VP),
2011 W
L 2909
162, at
*1 n.
8 (E.D
.N.Y.
July 1
5, 201
1). T
he CA
FA no
tice in
this m
atter
will b
e serv
ed on
June 2
0, 201
2, and
thus
an ord
er giv
ing fin
al app
roval
that c
ompli
es
with C
AFA m
ay be
entere
d on o
r after
Septe
mber 1
8, 2012
.
Consi
stent
with t
he for
egoing
, the p
arties
respe
ctfull
y requ
est th
e Cour
t to ad
opt
the fo
llowin
g sche
dule fo
r consi
deratio
n of th
e Gree
nberg
propos
ed set
tlement
:
Entry
of the
Prelim
inary
Appro
val Or
der—
on or
before
June
29, 20
12.
Deadl
ine fo
r maili
ng of
Class
Notice
— wit
hin 5
days a
fter e
ntry o
f the
Order
appro
ving th
e Clas
s Noti
ce.
Deadl
ine fo
r servi
ce of
CAFA
Notice
—June
20, 20
12.
Deadl
ine fo
r Excl
usion
Reque
sts—
Augus
t 13, 20
12.
Deadl
ine fo
r Obje
ctions
to Settl
ement
– Augu
st 24, 2
012.
Final A
pprova
l Hear
ing—
Septem
ber 14
, 2012
VII.
CONC
LUSIO
N
For th
e reas
ons se
t forth
above
, Clas
s Plain
tiffs re
spectf
ully r
equest
that t
he Co
urt
certify
the M
L Settl
ement
Clas
s and
the R
B Set
tlement
Clas
s, app
oint c
ounsel
for th
e
Settlem
ent Cl
asses
and en
ter the
propo
sed Pr
elimina
ry Ap
proval
Order
.
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DATE
D: Ju
ne 20,
2012.
BO
NNET
T, FA
IRBOU
RN, F
RIEDM
AN
& BA
LINT,
P.C.
/s/ An
drew S
. Frie
dman
Andre
w S. F
riedm
an 290
1 N. C
entral
Avenu
e, Suit
e 1000
Ph
oenix,
AZ 85
012
Attorn
eys for
Plain
tiffs F
red C.
Hagel
and
Jacque
line M
. Hage
l Revo
cable L
iving T
rust
Dated
Marc
h 15, 1
995; Ju
dith A.
Baker
Richar
d G. H
imelr
ick
J. Jam
es Ch
ristian
TIF
FANY
& BO
SCO,
P.A.
Third
Floor
Came
lback
Esplan
ade II
2525 E
. Cam
elback
Road
Phoen
ix, AZ
85016
-4237
Attorn
eys for
Plain
tiffs R
obert F
acciola
; The
Rober
t Maur
ice Fa
cciola
Trust
Dated
De
cember
2, 199
4; Ho
neylou
C. Re
znik; T
he Mo
rris R
eznik a
nd Ho
neylou
C. Re
znik T
rust;
Jewel B
ox Loa
n Com
pany, I
nc.; Je
wel B
ox,
Inc.; H
-M In
vestme
nts, LL
C
Case
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B-4
Lexis Nexis� Financial Services Litigation Report Vol. 4, #4 June 2012
12
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Certif
icate o
f Serv
ice
I here
by cer
tify th
at on J
une 20
, 2012
, I ele
ctroni
cally
filed t
he for
egoing
with
the
Clerk
of the
Court
using
the CM
/ECF s
ystem
which
will s
end no
tificat
ion of
such
filing
to
the em
ail add
resses
denot
ed on
the El
ectron
ic Mail
notice
list, a
nd I h
ereby
certify
that I
have m
ailed t
he for
egoing
docum
ent or
paper
via t
he Un
ited St
ates P
ostal
Servic
e to t
he
non-CM
/ECF p
articip
ants in
dicate
d on th
e Manu
al Noti
ce list
.
I cert
ify un
der pe
nalty
of per
jury u
nder th
e law
s of th
e Unit
ed Sta
tes of
Ame
rica
that th
e foreg
oing is
true a
nd cor
rect.
/s/ Na
ncy Va
rner
Legal
Secre
tary
Case
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ent 4
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ge 13
of 13
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Lexis Nexis� Financial Services Litigation Report Vol. 4, #4 June 2012
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