Eighth Circuit Opens Circuit Split on the Scope of the Equal Credit Opportunity Act

By Aaron J. Fickes

The Equal Credit Opportunity Act (ECOA) makes it unlawful for any creditor “to discriminate against any applicant, with respect to any aspect of a credit transaction . . . on the basis of . . . marital status.” The statute was designed to prevent, in part, creditors from refusing to grant a wife’s credit application without a guaranty from her husband. However, one must be an “applicant” for the statute’s protections to apply. While Congress defined “applicant,” the Federal Reserve Bank expanded the definition by regulation to include guarantors. Is that regulation entitled to deference under the familiar Chevron two-step framework? The question is important because it determines the scope of the ECOA.

The two courts of appeals that have squarely addressed this issue have reached opposite conclusions. Earlier this year, the Sixth Circuit in RL BB Acquisition, LLC v. Bridgemill Commons Development Group enforced the regulation, effectively expanding the scope of the ECOA. According to the Sixth Circuit, because the ECOA does not specify whether a guarantor qualifies as an applicant, and because the Federal Reserve’s interpretation — that a guarantor is a credit applicant — is reasonable in light of the statute, the Federal Reserve’s definition is entitled to deference and therefore enforceable.

Recently, the Eighth Circuit in Hawkins v. Community Bank of Raymore expressly disagreed with the Sixth Circuit. In that case, the plaintiffs, two wives, alleged that Community Bank required them to execute guaranties securing loans to a company that their husbands owned solely because they are married to their respective husbands. The plaintiffs claimed that this requirement constituted discrimination against them on the basis of their marital status, in violation of the ECOA, so their guaranties were void and unenforceable. Community Bank moved for summary judgment. The trial court granted the motion, holding that the plaintiffs, as guarantors, were not “applicants” within the meaning of the ECOA. As such, Community Bank could not violate the ECOA by requiring the plaintiffs to execute guaranties.

The Eighth Circuit affirmed. At Chevron step one the court held that the plain language of the ECOA provides that a person is an applicant only if she requests credit. A guarantor does not request credit, but rather assumes a secondary, contingent liability on behalf of the person requesting credit. So, a guarantor cannot be an applicant under the ECOA. As a result, a guarantor is not protected from marital-status discrimination by the ECOA.

The Supreme Court may intervene to resolve this circuit split. Until then, it may be prudent for creditors outside of the Eighth Circuit to assume that the Sixth Circuit rule applies to avoid potential liability under the ECOA.


The Supreme Court agreed to review Hawkins and on March 22, 2016, issued a 4-4 per curiam order.  Because the Court was evenly divided, the order has the effect of affirming the Eighth Circuit’s ruling, but it has no precedential value for future cases.  As a result, the circuit split remains.

The CFPB Takes Aim at Arbitration Clauses in Contracts for Consumer Financial Products

Schnader Alert by Monica Clarke Platt:

The Consumer Financial Protection Bureau (CFPB) last week issued two proposals aimed at weakening and discouraging arbitration clauses in contracts for consumer financial products. First, the CFPB proposes prohibiting the application of arbitration clauses to class actions proceeding in court. Specifically, the Bureau is considering a requirement that arbitration clauses in covered consumer financial contracts provide that the arbitration agreement is inapplicable to putative class actions filed in court unless and until class certification is denied or the class claims are dismissed. This proposal could significantly increase putative class claims in the consumer finance sector (indeed, increasing access to class litigation appears to be the Bureau’s goal). Second, the Bureau seeks to require entities that use arbitration agreements in their contracts to submit to the Bureau notice of claims filed in arbitration proceedings and arbitration awards, potentially for publication.

Please click here to read the full Alert.

Third Circuit holds that only “material” representations by a debt collector are actionable under the FDCPA

By Stephen J. Shapiro

Joining a national trend, the United States Court of Appeals for the Third Circuit recently held that a plaintiff must allege more than just a misleading representation to prevail on a claim under the Fair Debt Collections Practices Act (FDCPA). Rather, a plaintiff must allege that the representation at issue was “material” in the sense that it would impact the decision-making process of the least sophisticated debtor.

In Jensen v. Pressler & Pressler, the attorneys for a debt collector, after obtaining a default judgment in a New Jersey state court against a debtor who failed to pay her credit card debt, served the debtor with a subpoena in aid of collection.  Under the New Jersey rules, an attorney may issue a subpoena in the name of the clerk of the New Jersey Superior Court. When the attorneys prepared the subpoena, though, they mistakenly used the name of a person who was not – and never had been – a clerk of the Superior Court.

The debtor brought a putative class action in the United States District Court for the District of New Jersey alleging that the debt collector and its attorneys violated provisions of the FDCPA that prohibit those collecting debts from (a) using false, deceptive, or misleading representations to collect debts from a consumer, and (b) falsely representing that a document used to collect a debt is “authorized, issued or approved by any court …” The district court granted summary judgment in favor of the debt collector and its attorneys on the ground that the misidentification of the clerk was not a material false statement.

On appeal, the Third Circuit affirmed, joining the Fourth, Sixth, Seventh, and Ninth Circuits in holding that only material representations are actionable under the FDCPA.  The Court began by noting that the “least sophisticated debtor” standard governs claims under the FDCPA.  Under that standard, Courts “focus on whether a debt collector’s statement in a communication to a debtor would deceive or mislead the least sophisticated debtor.”  Whether the statement at issue is literally true or false is not determinative.  Rather, “debt collection communications must be assessed from the perspective of the least sophisticated consumer regardless of whether a communication is alleged to be false, misleading, or deceptive.”  Therefore, the Court held, “a false statement is only actionable under the FDCPA if it has the potential to affect the decision-making process of the least sophisticated debtor; in other words, it must be material when viewed through the least sophisticated debtor’s eyes.”

Applying the materiality standard to the facts before it, the Court held that the misidentification of the clerk in the subpoena “could not possibly have affected the least sophisticated debtor’s ‘ability to make intelligent decisions.’”  As for the debtor’s alternate argument – that, by misidentifying the clerk, the defendants violated the FDCPA by falsely representing that the subpoena was authorized by a court – the Third Circuit held that, because attorneys in New Jersey are authorized to act as agents of the clerk when issuing subpoenas, the subpoena was validly issued regardless of the misidentification of the clerk.

* Joshua Won, Temple University School of Law Class of 2017, assisted with the preparation of this post.

The U.S. Supreme Court Unanimously Rules Against the Creditor in Jesinoski

By Stephen A. Fogdall

We predicted here that at least five U.S. Supreme Court Justices would reject the creditor’s argument in Jesinoski v. Countrywide Home Loans, Inc. that a borrower must file a lawsuit within three years of the consummation of the loan in order to preserve the statutory right to rescind under the Truth in Lending Act. As it turned out, the Court rejected that argument unanimously, holding instead that mere written notice to the creditor within the three-year period is sufficient. “[The statute] explains in unequivocal terms how the right to rescind is to be exercised,” the Court stated. “It provides that a borrower ‘shall have the right to rescind . . . by notifying the creditor . . . of his intention to do so’ (emphasis added). The language leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind. It follows that, so long as the borrower notifies within three years after the transaction is consummated, his rescission is timely. The statute does not also require him to sue within three years.”

Pennsylvania Supreme Court Formally Adopts “Gist of the Action” Doctrine

By Stephen J. Shapiro

Pennsylvania’s “gist of the action” doctrine prohibits plaintiffs from pursuing tort claims for what are, in actuality, breach of contract claims.  A variety of defendants, including those in the financial services industry, regularly have invoked the doctrine to seek dismissal of contract-based claims that are “dressed up” as tort claims in an effort to pursue damages – such as consequential and punitive damages – that might not be available under a breach of contract claim.

Although the Pennsylvania Supreme Court had never formally recognized the doctrine, the intermediate appellate courts in Pennsylvania, as well as the Third Circuit, had applied the doctrine for years, predicting that the Supreme Court would adopt the doctrine if given the opportunity.  In the recent case Bruno v. Erie Insurance Company, the Pennsylvania Supreme Court confirmed the accuracy of those predictions.

In Bruno, the plaintiff homeowners purchased an insurance policy from the defendant insurer that, among other things, insured the homeowners against physical loss to the property caused by mold.  While renovating their home, the homeowners discovered mold growing on their basement walls.  Agents of the insurer told the homeowners that the mold was harmless and that they should continue with the renovations, which they did.  When the homeowners began to suffer from severe respiratory ailments, they had the mold tested and learned that it was toxic.  One of the homeowners later developed cancer, which her physician believed was caused by the toxic mold.  Unable to remove the mold, the homeowners eventually were forced to demolish the house.

The homeowners sued the insurance company for, among other causes of action, negligence, alleging that the insurer negligently misled them about the health risks posed by the mold.  The insurer filed preliminary objections to the negligence claim, arguing that it was barred by the gist of the action doctrine.  The trial court sustained the preliminary objections and, on an interlocutory appeal, the Superior Court affirmed the dismissal of the negligence claim, holding that “the gravamen of [the homeowners’] action . . . sounds in contract – not in tort.”

On appeal, the Pennsylvania Supreme Court formally adopted the gist of the action doctrine.  The Court explained that a claim can be categorized as a contract claim or a tort claim as follows:

“If the facts of a particular claim establish that the duty breached is one created by the parties by the terms of their contract – i.e., a specific promise to do something that a party would not ordinarily have been obligated to do but for the existence of the contract – then the claim is to be viewed as one for breach of contract.  If however, the facts establish that the claim involved the defendants’ violation of a broader social duty owed to all individuals, which is imposed by the law of torts and, hence, exists regardless of the contract, then it must be regarded as a tort.”

The Court went on to specify that:

“[A] negligence claim based on the actions of a contracting party in performing contractual obligations is not viewed as an action on the underlying contract itself, since it is not founded on the breach of any of the specific executory promises which comprise the contract.  Instead, the contract is regarded merely as the vehicle, or mechanism, which established the relationship between the parties, during which the tort of negligence was committed.”

The Court cautioned that, when applying the gist of the action doctrine, the substance of the plaintiff’s allegations, not the label placed on the claim, governs:  “[T]he substance of the allegations comprising a claim in a plaintiff’s complaint are of paramount importance, and, thus, the mere labeling by the plaintiff of a claim as being in tort, e.g., for negligence, is not controlling.”

Applying the gist of the action doctrine to the facts before it, the Court held that the homeowners’ negligence claim was “not based on [the insurer’s] violation of any . . . contractual commitments.”  Rather, the homeowners alleged that the insurer’s agents acted negligently “while they were performing [the insurer’s] contractual obligation to investigate the claim made by the [homeowners] under their policy.”  Because, the Court explained, “[t]he policy in this instance merely served as the vehicle which established the relationship between the [parties], during the existence of which [the insurer] allegedly committed a tort,” the gist of the action doctrine did not bar the homeowners’ negligence claim.  Therefore, the Court reversed and remanded for further proceedings.

Jesinoski v. Countrywide Home Loans: The U.S. Supreme Court Seems Ready to Hold that a Borrower’s Right of Rescission Under TILA Need Only be Exercised by Timely Notice, not a Lawsuit

By Stephen A. Fogdall

On November 4, 2014, the U.S. Supreme Court heard argument in Jesinoski v. Countrywide Home Loans, the case that will decide whether a borrower can timely exercise the right of rescission under the Truth in Lending Act simply by sending written notice of intent to rescind to the creditor within the three-year period set forth in the statute, or whether the borrower must instead file a lawsuit within that time period.  The Third, Fourth and Eleventh Circuits have held that written notice to the lender alone is sufficient to preserve the rescission claim. The First, Sixth, Eighth, Ninth and Tenth Circuits have held that filing a lawsuit within the three-year period is required. (You can find more on this issue here and here.)

At the argument, the creditor’s counsel focused heavily on TILA’s statement that the borrower’s right to rescind “shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first,” even if the forms and disclosures required by TILA were never delivered. In an earlier decision, Beach v. Ocwen Federal Bank, the Court had held that this provision “limits more than the time for bringing a suit, by governing the life of the underlying right [to rescind] as well.” The creditor’s counsel argued that, under Beach, a borrower who failed to file a lawsuit to obtain a rescission within three years would no longer have any right to rescind at all, regardless of whether the borrower had sent the creditor a notice within the three-year period. Thus, the failure to file a lawsuit should mean that the claim for rescission is extinguished.

Justices Ginsburg, Breyer, Sotomayor and Kagan were openly skeptical. They repeatedly returned to the fact that TILA itself refers only to written notice as the trigger for exercising the right to rescind. TILA states that “the obligor shall have the right to rescind the transaction until midnight of the third business day following consummation of the transaction,” or after the required disclosures and rescission forms are delivered by the creditor, whichever is later, simply “by notifying the creditor . . . of his intention to do so.” These four Justices seemed convinced that, given this language, a borrower’s right of rescission is exercised simply by sending such a notice. While litigation might ultimately be necessary to resolve whether the borrower in fact has a valid basis to rescind, filing such litigation is not necessary to preserve the right. Justice Ginsburg pointed out that in Beach the borrowers had never sent the creditor a notice of intent to rescind within the three-year period. Therefore, Beach could not have held that a notice of intent to rescind is insufficient to preserve the borrower’s rescission right.

In contrast to these four Justices, Justices Scalia and Alito emphasized that a rescission, by definition, requires that the parties be returned to where they were before the transaction was consummated. If the borrower lacks the ability to return the funds, then the rescission cannot be effectuated, regardless of whether the borrower sent the creditor a notice of intent to rescind. Thus, it seems, mere notice by the borrower could not be sufficient to accomplish a rescission. The implication, presumably, is that only a lawsuit could achieve that result, and thus filing a lawsuit within the three-year period is necessary.

The positions of Chief Justice Roberts and Justice Kennedy (the only other Justices who spoke during the argument) are much more difficult to read. Justice Kennedy’s questions largely dealt with situations in which the creditor disputes the borrower’s right to rescind. Some of his questions seemed sympathetic to the position apparently endorsed by Justices Ginsburg, Breyer, Sotomayor and Kagan — that litigation might be necessary to resolve the dispute, but is not needed to preserve the right to rescind itself. However, he also focused on an issue that these four Justices seemed not to be concerned with, namely, how long after giving notice the borrower can wait before bringing a lawsuit to rescind. The creditor’s counsel argued that one advantage of requiring the filing of a lawsuit to preserve the rescission right is that it clearly limits the time in which such a suit can be brought to three years from the date the loan is consummated, whereas the borrower’s position that notice is sufficient seems to leave that question unanswered. Justice Kennedy appeared to think that this consideration had some force.

Chief Justice Roberts made a single comment during the argument. At one point, the creditor’s counsel was attempting to find support for his position in a provision of TILA which provides that in “any action in which it is determined that a creditor has violated this section, in addition to rescission the court may award” other relief available under TILA, such as actual and statutory damages. The Chief Justice remarked that “you’re putting an awful lot of weight on a tiny, one-sentence provision,” and that “it would be very odd if that’s where Congress decided to place” a requirement that the borrower must bring a lawsuit within the three-year period.

Thus, at least five members of the Court (Justices Ginsburg, Breyer, Sotomayor and Kagan, and Chief Justice Roberts) seemed skeptical, to one degree or another, of the creditor’s position that timely notice alone is insufficient to preserve a borrower’s right to rescind under TILA. We will report on the outcome as soon as the case is decided.

NJ Banks May Not Face Common Law Tort Claims for Improper Electronic Funds Transfers

By Edward J. Sholinsky

The New Jersey Supreme Court in a matter of first impression held that a non-customer of a bank cannot bring a common law negligence claim against that bank for an improper money transfer via the Internet.  In ADS Associates Group, Inc. v. Oritani Savings Bank, the court held that the state legislature intended Article 4A of the UCC to create the exclusive remedy for an alleged breach of a duty when a bank makes an electronic funds transfer and preempts any common law remedies.

At issue in ADS was whether New Jersey’s version of the UCC provides the exclusive remedy when a non-customer alleged an unauthorized electronic funds transfer via online banking, or whether the non-customer could bring a common law negligence claim against the bank.  The trial court held that a non-customer could not bring a common law negligence claim; the state’s intermediate appellate court reversed in an unpublished opinion.  The Supreme Court reversed the appellate court and reinstated the judgment of the trial court.

Plaintiff Brendan Allen entered into a business relationship with co-defendant Asnel Diaz Sanchez to bid on a large construction project.  Rather than creating a new entity, Allen and Sanchez used Sanchez’s then-existing business ADS Associates, Inc., to bid because ADS was an established minority-owned business.  The pair went to Oritani Savings Bank and opened an account.  The account agreement required both Allen and Sanchez to sign checks drawn on the account.  The account agreement also allowed both Allen and Sanchez, as authorized signatories, to use online banking to transfer funds.  Sanchez had other ADS accounts at the bank, and eventually began to electronically transfer money from the ADS account he opened with Allen to other ADS accounts without Allen’s permission.

When Allen discovered the allegedly unauthorized transfers, he brought suit, in his own name and in the name of ADS, against both the bank and Sanchez.  The suit stated claims alleging violations of Article 4A of the UCC, as well as common law claims.  It was undisputed that ADS, and not Allen, was the bank’s customer.  At issue in the Supreme Court was “whether Allen may maintain a common law non-customer negligence claim against Oritani.”

Article 4A of the UCC (codified in New Jersey at N.J.S.A. 12A:4A-101, et seq.) controls the electronic transfer of funds.  The statute sets out a detailed regime for properly authorized electronic transfers, including online banking transfers, and allocates the risk of loss between the bank and the customer.  Per the court, “Article 4A thus defines in detail the rights and obligations of banks and their customers in the event that funds are transferred in accordance with a payment order that the customer has not authorized.”  Relying on the commentary to Article 4A, the court determined that only a customer could pursue a remedy under Article 4A.

In reaching its conclusion, the court distinguished City Check Cashing, Inc. v. Manufacturers Hanover Trust Co., which held that, in the limited circumstances where a non-customer could show that he had a special relationship with the bank, the non-customer could assert a common law tort claim against the bank. The ADS court held that, regardless of any alleged special relationship, when a dispute arises out of “a bank’s acceptance of an order transferring funds from one account held by its customer to another of that customer’s accounts” that the “Legislature intended Article 4A to constitute the exclusive means of determining the rights, duties and liabilities of affected parties.”

Permitting a non-customer to bring a common law negligence action would “contravene” the risk allocation and redefine bank’s duties, which the court declared the “essential objective of Article 4A.” Indeed, the court reasoned that permitting non-customers to bring common law claims could give them more rights than bank customers in unauthorized transfer cases.

After ADS, in New Jersey only bank customers may bring claims against banks relating to unauthorized electronic transfers – including those made through online banking – and those claims only may be brought under Article 4A of the UCC.  Non-customers may not bring claims alleging breaches under the common law, because the exclusive remedy for those transfers is set out in Article 4A.

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