Reading the Tea Leaves: The Supreme Court Seems Likely to Eliminate the ERISA Presumption of Prudence

By Stephen A. Fogdall

The U.S. Supreme Court heard argument this week in Fifth Third Bancorp v. Dudenhoeffer, the case that will decide whether fiduciaries of employee stock option plans (ESOPs) are presumed to comply with their ERISA duties by continuing to invest in the employer’s stock despite allegations that they know or should know that the stock is overvalued.  Although such a presumption has enjoyed wide acceptance in the federal Courts of Appeals, its days may be numbered.

Fifth Third’s lawyer argued that without the presumption, an ESOP fiduciary would be put in a position either of having to “outsmart the market” by guessing correctly that the stock is overvalued, or, even worse, violating the federal securities laws by divesting the stock on the basis of inside information about the employer.

Several of the Justices responded skeptically. Justice Scalia argued, “You have the same problems” with other types of retirement plans, so “we don’t have to adopt a special law for this.” Justice Sotomayor asked, “What’s wrong with following the law and disclosing that material information to the public and stopping the employees from losing more money in worthless stock?” Justice Kagan argued, “It just sort of defies language to say that a prudent person would retain” an investment in “overvalued stock.” Justice Kennedy suggested that a presumption of prudence would create “sort of a coach class trustee.” Justice Ginsberg was even more direct, stating, “I don’t know where this presumption comes from,” because “there is no presumption written into this statute.”

A few of the Justices seemed more receptive to the presumption of prudence. Chief Justice Roberts noted that “every Court of Appeals has recognized” that “by definition” an ESOP fiduciary acts prudently by investing in the employer’s stock unless “everything is going south and the company’s collapsing.” Then, even more emphatically, he stated, “I don’t understand how you . . . can say that [an ESOP fiduciary] has breached a fiduciary duty of prudence when the people investing in this ought to know what they’re going to get is the company’s stock.” Justice Alito observed that if “stopping purchases in company stock would be a signal that would potentially trigger bankruptcy and liquidation of the company,” that might be in the best interests of ESOP participants “if these participants were simply investors,” but “it might be very much not in their best interests as employees.” In addition, Justice Breyer suggested, “there is no rule of trust or ERISA law that you can breach a duty to a beneficiary by failing to use inside information, period.”

Notwithstanding these sympathetic statements from a minority of Justices, a majority of the Supreme Court (Justices Kennedy, Scalia, Ginsberg, Sotomayor and Kagan) seem prepared to hold that an ESOP fiduciary is not entitled to any presumption of prudence and may even be obligated to depart from the plan’s terms and cease purchasing employer stock, or divest the plan’s holdings in employer stock, if the fiduciary knows or should know, based on insider information, that the stock is overvalued. The Court should issue its decision before the end of the current term in June. We will continue to monitor the case closely.

In a TCPA case, Eleventh Circuit addresses who may give consent, how consent may be revoked and whether a charge is required

By Stephen J. Shapiro

The Telephone Consumer Protection Act (TCPA) provides, in relevant part, that “[i]t shall be unlawful for any person . . . to make any call (other than a call made . . . with the prior express consent of the called party) using any automatic telephone dialing system . . . to any telephone number assigned to a . . . cellular telephone service . . . or any service for which the called party is charged for the call.”

In a recent decision, the Eleventh Circuit held that:  (i) the “called party” who must give consent is the current subscriber of the cellular phone line; (ii) a person who shares a cellular phone plan with the subscriber may or may not, depending on the circumstances, have authority to give the consent envisioned by the TCPA; (iii) a “called party” may revoke consent orally; and (iv) a “called party” need not prove that he or she was charged for the calls at issue in order to prevail on a claim under the TCPA.

In Osorio v. State Farm Bank, F.S.B., Clara Betancourt provided the cellular phone number of her partner, Fredy Osorio, on a credit card application. When Betancourt later became delinquent on her credit card payments, a debt collector hired by the defendant creditor made more than 300 autodialed calls to Osorio. Osorio sued the creditor under the TCPA, alleging that he had not provided consent for the creditor to call his cellular phone and, even if he had, he later orally revoked that consent during telephone calls with the debt collector. The district court granted summary judgment in favor of the creditor, holding that Betancourt had consented to the calls when she provided the telephone number on her application and that Osorio’s alleged revocation was not effective as a matter of law because it was not in writing.

On appeal, the Eleventh Circuit reversed. On the issue of consent, because the TCPA permits calls to cellular telephone numbers “with the prior express consent of the called party,” the Court first addressed who qualifies as the “called party.” The Court held that the phrase “called party” means the current subscriber of the cellular phone line. Therefore, the Court concluded, the creditor had to establish that Osorio consented to the calls in order to avail itself of the TCPA’s consent exception. Because the parties had presented conflicting evidence as to whether Betancourt was authorized to consent to the calls on behalf of Osorio and, if so, whether she had in fact done so, the Court held that the issue of consent had to be resolved by a jury and that summary judgment was not appropriate. In so ruling, the Court rejected the creditor’s argument that Betancourt, as a matter of law, had authority to consent to calls to the cellular phone of anyone in her household.

On the issue of whether revocation of consent may be communicated orally or only in writing, the Court noted that, although the Fair Debt Collection Practices Act (FDCPA) requires a debtor who no longer wishes to be contacted by a debt collector to notify the debt collector in writing, the TCPA does not contain equivalent language. The Court “presume[d] from the TCPA’s silence regarding the means of providing consent that Congress sought to incorporate ‘the common law concept of consent.’” Explaining that the common law concept of consent “generally allow[s] oral revocation,” the Court held that a “called party” may orally revoke consent for purposes of the TCPA. Since the parties disputed whether Osorio orally revoked any consent Betancourt may have given to call the cellular phone, the Court held that summary judgment on the issue of revocation of consent was not appropriate.

Finally, the creditor argued that, because the TCPA prohibits calls “to any telephone number assigned to a paging service, cellular telephone service, specialized mobile radio service, or other radio common carrier service, or any service for which the called party is charged for the call,” a plaintiff must prove that he was charged for the calls at issue in order to prevail under the TCPA. The Court rejected this argument, holding that, as a matter of statutory construction, “the phrase ‘for which the called party is charged for the call’ modifies only ‘any service’ and not the other terms” in the provision such as “cellular telephone service.”

Ninth Circuit holds that, for purposes of diversity jurisdiction, a national bank is not a citizen of the state in which it maintains its principal place of business

By Stephen J. Shapiro

For purposes of determining diversity jurisdiction, national banks are “deemed citizens of the States in which they are . . . located.” 28 U.S.C § 1348.  In the recent case Rouse v. Wachovia Mortgage, FSB, the Ninth Circuit held that a national bank is not “located” in the state of its principal place of business, but rather is located only in the state of its main office.

The plaintiffs in Rouse sued Wells Fargo in California state court for claims relating to their home loan. The bank removed the case to federal court, alleging both federal question and diversity jurisdiction. When the plaintiffs, who are citizens of California, amended their complaint to assert only state law causes of action, the district court concluded that it lacked diversity jurisdiction and remanded the case to state court. The district court reasoned that the parties were not diverse because, in addition to being a citizen of South Dakota, the state in which its main office is located, the bank also is a citizen of California, the state in which its principal place of business is located.

On appeal, the Ninth Circuit reversed. The Court first noted that, although the Supreme Court held in Wachovia Bank, N.A. v. Schmidt that a national bank is not “located” for purposes of section 1348 in each state in which it has a branch, it did not address the instant question – whether a national bank is a citizen of the state in which it maintains its principal place of business. Therefore, the Ninth Circuit set out to determine the Congressional intent behind section 1348.

Looking to the history of the diversity statutes, the Court observed that, at the time the current version of section 1348 was enacted (in 1948), state-chartered corporations were deemed citizens only of the states in which they were incorporated. In 1958, though, Congress revised 28 U.S.C. § 1332(c)(1) to provide that state-chartered corporations also would be considered citizens of the states in which they maintain their principal places of business. When it made this change, however, Congress did not amend section 1348 to make a similar change for national banks. Given that history, the Court concluded that: (1) at the time it enacted section 1348, Congress did not intend that a national bank’s principal place of business would determine its citizenship; and (2) Congress purposefully passed on the opportunity to provide otherwise by refraining from amending section 1348 as it had amended section 1332(c)(1). Therefore, the Ninth Circuit (like the Eighth Circuit) held that “under § 1348, a national banking association is a citizen only of the state in which its main office is located.”

Seventh Circuit Addresses When Offer of Settlement Can Moot Class Representative’s Interest; Holds That Dunning Letter Offering to “Settle” an Unenforceable Debt Violates FDCPA

By Theresa E. Loscalzo

In McMahon v. LVNV Funding LLC, and Delgado v. Capital Management Services, LP, two separate appeals consolidated for purposes of an opinion, the Seventh Circuit Court of Appeals addressed both the circumstances under which (a) a defense proffered settlement can pick off a party plaintiff in a class action, thereby mooting the claims; and (b) dunning letters seeking to collect time-barred debts may violate the Fair Debt Collection Practices Act (FDCPA).

In McMahon, the defendant debt collector sent a letter to plaintiff setting forth the name of the creditor from whom the debt was purchased, the amount of the debt and an offer to settle the debt for about 50 percent of the amount of the debt. The letter did not contain any information concerning when the original debt was incurred, a detail that would have alerted a consumer or his lawyer to the fact that there was, in the court’s words, “an iron-clad defense under the statute of limitations.”  Similarly, in Delgado, the defendant debt collector sent a letter to plaintiff seeking to collect an old debt.  The letter contained an offer to settle the outstanding debt but did not contain any information concerning when the original debt was incurred.

Both McMahon and Delgado filed individual and putative class action claims alleging that the debt collectors violated the FDCPA by including “settlement offers” in collection letters for time-barred debts.

Relevant Procedural Background. In McMahon, the defendant filed a motion to dismiss, and McMahon filed a motion for class certification.  The district court granted the defendant’s motion to dismiss the class allegations but on reconsideration, granted McMahon leave to amend the class allegations.  Hours after the district court granted leave to re-plead, defendant made an offer to settle plaintiff’s individual claim by paying statutory damages, costs incurred, a reasonable attorney’s fee, and “any other reasonable relief” if the court concluded more was necessary.  Plaintiff ignored the offer, and filed an amended class complaint and amended motion for certification.   Defendant moved to dismiss, arguing that its settlement offer rendered McMahon’s individual claim moot, which made him an inappropriate class representative.   Holding that the offer to pay McMahon everything he would be entitled to recover under the statute mooted his claim, the district court dismissed the case for lack of an Article III case or controversy.

In Delgado, the defendant filed a motion to dismiss, which the district court denied, holding that when “collecting on a time-barred debt a debt collector must inform the consumer that (1) the collector cannot sue to collect the debt and (2) providing a partial payment would revive the collector’s ability to sue and collect the balance.”  Defendant moved for interlocutory appeal, which motion was granted.

Mootness. Reversing the McMahon district court, the Seventh Circuit first addressed the issue of whether the settlement offer proffered in McMahon mooted plaintiff’s claims, and held that an offer to pay a plaintiff everything requested can render a putative class action moot only if the settlement is proposed before the plaintiff files a motion for class certification.  Because the time to re-plead his class allegations and move to certify had yet to run at the time of the settlement offer, McMahon retained an on-going personal economic stake in the substantive controversy and, therefore, could represent the putative class.

FDCPA. The Court then turned to an analysis of the circumstances under which a dunning letter for an unenforceable time-barred debt could violate the FDCPA.  Affirming the denial of the motion to dismiss in Delgado, the Court noted that Section 1692e(2)(A) of the FDCPA specifically prohibits the false representation of the character or legal status of any debt, and  squarely held that a debt collector violates the FDCPA if it uses language that would mislead an unsophisticated consumer into believing that a debt is legally enforceable, regardless of whether the letter actually threatens litigation (as the Third Circuit and Eighth Circuit require).   The Court noted that where dunning letters contain offers of settlement, as here, it exacerbates the potential impact on the consumer because by making a partial payment in response to such a letter, the consumer could unwittingly reset the statute of limitations on the entire debt and thereby revive what had been a legally unenforceable claim.

The Solicitor General says there is no presumption of prudence under ERISA

By Stephen A. Fogdall

Last week, the U.S. Solicitor General filed an amicus brief in Fifth Third Bancorp v. Dudenhoeffer, a case in which the Supreme Court will decide whether fiduciaries of an employee stock ownership plan are entitled to a presumption that their decision to invest in employer stock complied with their duties under ERISA. This is an issue we follow closely on this blog. The Solicitor General’s position is that ESOP fiduciaries are not entitled to any presumption of prudence.

While nominally supporting the decision by the U.S. Court of Appeals for the Sixth Circuit under review in Fifth Third, the Solicitor General’s brief actually argues for a far broader conclusion than the Sixth Circuit itself reached. The Sixth Circuit in Fifth Third revived a lawsuit challenging ESOP fiduciaries’ decision to remain invested in employer stock despite their alleged knowledge that the employer’s exposure to subprime lending risks artificially inflated its stock price. The district court dismissed the lawsuit, finding that the plaintiffs had failed to plead facts to overcome the presumption of prudence. The Sixth Circuit reversed. Although the Sixth Circuit recognizes a weak version of the presumption of prudence, the court held that the presumption should not be applied at the motion to dismiss stage. Rather, the Sixth Circuit concluded, a plaintiff challenging ESOP fiduciaries’ investment decisions should be permitted to survive a motion to dismiss simply by plausibly alleging that the fiduciaries’ decisions were imprudent, just as any other ERISA plaintiff would have to do with respect to any retirement plan.

The Sixth Circuit’s approach to the presumption of prudence differs from that of other circuits in two significant respects. First, as applied in other circuits, the presumption requires the plaintiff to meet a steep burden, such as showing that fiduciaries knew, or should have known, that the employer was on the verge of collapse or the stock was in imminent danger of becoming worthless. The Sixth Circuit requires only that the plaintiff show that a prudent fiduciary would have made a different decision, such as divesting the plan’s investments in employer stock. Second, unlike the Sixth Circuit, most courts hold that the presumption applies at the motion to dismiss stage, so that the plaintiff must plausibly plead facts rebutting it in the complaint.

While the Sixth Circuit’s approach is less stringent in these respects, the Solicitor General’s brief nevertheless maintains that even its weak version of the presumption is “inconsistent with ERISA,” because it still creates a “demanding burden” at the summary judgments stage or at trial.

In the Solicitor General’s view, the presumption of prudence arose out of courts’ misunderstanding of the exemption from the duty to diversify plan assets that ERISA grants to ESOP fiduciaries. According to the Solicitor General, the “diversification exemption merely absolves ESOP fiduciaries from the ordinary obligation to reduce risk by spreading plan assets among multiple prudent investments. It does not permit them to concentrate plan assets in an imprudent investment, such as employer securities the fiduciary knows or should know are materially overvalued.” In short, the Solicitor General concludes, ERISA “obligates the fiduciary of a plan that includes an ESOP option to depart from the plan’s requirements if the initial investment options are no longer prudent.”

The Supreme Court will hear arguments in the Fifth Third case on April 2, and will likely decide it before the end of the current term in June. We will report on any developments in the case immediately.

CFPB and Third Circuit highlight reporting obligations of furnishers of consumer information

By Monica C. Platt

Consumer credit reporting is coming under increased scrutiny, and furnishers should take care to review their reporting policies. In remarks at the Consumer Advisory Board meeting last month, CFPB Director Richard Cordray announced an increased effort by the CFPB to exercise its authority over large credit reporting companies and “many of their largest furnishers.” Director Cordray pointed to a CFPB report showing that more than 1 in 10 of the complaints submitted to the Bureau since its inception have been related to credit reporting, and 75 percent of these have been regarding incomplete or inaccurate credit reports. Also in February, the Third Circuit issued a decision clarifying that the Higher Education Act of 1965 (HEA) does not exempt a university from compliance with the Fair Credit Reporting Act (FCRA) when it furnishes information related to a consumer’s federal student loans.

In the Third Circuit case, plaintiff alleged that a university negligently and willfully violated FCRA with respect to reporting on a Perkins loan. The plaintiff defaulted on the loan in 1992, but paid the balance in 2011. Subsequently, a negative trade line appeared on his credit report because the university reported the previous delinquency to a consumer reporting agency (CRA), but did not report the date of first delinquency or that the account had ever been placed for collection. When the plaintiff submitted a formal dispute to the CRA, it notified the university, which investigated the dispute through an outside servicer, and then resubmitted substantially the same information to the CRA. After the plaintiff filed a second dispute, the university modified some parts of the report, but still did not report the loan’s history, the date of first delinquency, or the existence of a dispute.

FCRA was enacted to protect consumers from the transmission of inaccurate credit information. Under the Act, CRAs are prohibited from reporting accounts that have been placed for collection or charged to profit and loss more than seven years prior to the report, after which time such events are considered to have “aged off” the credit report. Furnishers providing information related to such an account must notify a CRA of the date the account first became delinquent so that the CRA can calculate when the delinquency ages off.

Under HEA, CRAs are to ignore the aging off provisions when reporting on certain federally backed loans until the loan is paid in full. The university argued that HEA therefore requires universities to omit the date of first delinquency and the collection history when reporting on Perkins loans so that a CRA does not mistakenly allow a loan to age off of the credit report. The court disagreed, finding that universities must provide complete information to a CRA and leave the CRA’s compliance with HEA up to the CRA. The Third Circuit also found that HEA does not indefinitely exempt a loan from aging off because HEA clearly states that once a loan is paid off, it should age off.

In his remarks, Director Cordray stressed the need for furnishers to thoroughly investigate disputes and correct inaccurate information where it exists, chiding furnishers for not fully investigating disputes. In this vein, The Third Circuit found that a furnisher’s post-dispute investigation into a consumer’s complaint must be reasonable under the circumstances, and the factfinder must balance the potential harm from inaccuracy against the burden of safeguarding against inaccuracy. The court noted that even correct information might be inaccurate if there are omissions that create a materially misleading impression.

Lastly, the Third Circuit recognized that a plaintiff has a cause of action if a furnisher fails to note the dispute in later reporting. While private enforcement of the furnisher’s obligations to report a dispute is not available, the continuing failure to report a potentially meritorious dispute violates the requirements for accurate post-dispute reporting of debts, and is privately enforceable.

The Third Circuit’s decision and the CFPB’s recent report highlight the need for all furnishers, including universities, to be aware of the interaction between all applicable laws and the effect on their own reporting obligations. Universities providing federally backed loans as part of their financial aid packages (likely most universities) should review their reporting policies and practices and assess the dispute-resolution procedures of outside contractors to ensure compliance on all levels. Furnishers should also err on the side of providing more information, not less, to a CRA to enable the CRA to comply with its duties. If a university wants to flag for a CRA that a loan is subject to HEA, it may do so, but it should not screen information that it thinks the CRA does not need or cannot report.

Joining a split among the circuits, the Fourth Circuit holds that the FDCPA permits debtors to dispute debts orally

By Stephen J. Shapiro

The Fair Debt Collection Practices Act (FDCPA), in § 1692g(a)(3), requires a debt collector to send a consumer from whom it is attempting to collect a debt a notice.  Among other things, the notice must state that “unless the consumer, within 30 days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector.”  The Fourth Circuit, joining a conflict among the circuits, recently held that a consumer may dispute a debt orally, and, therefore, a notice that purports to require a consumer to dispute a debt in writing violates the FDCPA.

In Clark v. Absolute Collection Service, Inc., after plaintiffs did not pay a debt they owed to a health care facility, the facility engaged the defendant debt collector to collect the debt.  The debt collector sent the plaintiffs a notice that stated that “ALL PORTIONS OF THIS CLAIM SHALL BE ASSUMED VALID UNLESS DISPUTED IN WRITING WITHIN THIRTY (30) DAYS.”  Plaintiffs, on behalf of a putative class of debtors who received such notices, sued the debt collector alleging that, because the FDCPA did not require them to dispute the debt in writing, the debt collector violated the FDCPA by sending them a notice stating otherwise.  The debt collector moved to dismiss, arguing that § 1692g(a)(3) of the FDCPA contained an “inherent” requirement that debtors dispute debts in writing.  The district court agreed and dismissed the case.

On appeal, the Fourth Circuit vacated the decision and remanded the case for further proceedings.  The Court first noted that § 1692g(a)(3) on its face does not require debtors to dispute debts in writing and declined the defendant’s invitation “to read into [§ 1692g(a)(3)] words that are not there.”  The Court noted that other sections of the FDCPA explicitly require written communications, which suggests, under standard principles of statutory construction, that Congress intended to omit such a requirement from § 1692g(a)(3).

The Court also rejected the defendant’s argument that a reading of § 1692g(a)(3) that permits consumers to dispute debts orally would be absurd and inconsistent because debtors who do not dispute debts in writing waive protections afforded them by other provisions of the FDCPA.  The Court noted that, although consumers who give oral notice of a dispute would not be entitled to invoke some of the FDCPA’s protections, those consumers would not sacrifice all of the protections in the statute.  Therefore, the Court concluded, permitting debtors to dispute a debt orally would not lead to an absurd result.

In conclusion, the Court held that “[S]ection 1692g(a)(3) permits consumers to dispute the validity of a debt orally, and it does not impose a writing requirement.”  The Court noted that its holding departed from a contrary decision by the Third Circuit, but comported with decisions by the Second Circuit and the Ninth Circuit.

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