California Supreme Court Resolves Split of Authority Concerning Viability of UCL Claims Covered by the UIPA

By Todd Holvick

In Zhang v. Superior Court, the California Supreme Court resolved a split of authority in the Courts of Appeal regarding the viability of California Unfair Competition Law (UCL) claims based on insurer conduct also covered by section 790.03 of the California Unfair Insurance Practices Act (UIPA). Prior to the Supreme Court’s ruling in Zhang, some courts held that the Supreme Court’s ruling in Moradi-Shalal v. Fireman’s Fund Ins. Companies, which held that there is no private right of action under the UIPA, precluded UCL claims where the insurer’s conduct was covered by the UIPA, while other courts determined that Moradi-Shalal does not preclude a UCL claim based on conduct that violates the UIPA so long as the insurer’s conduct is independently actionable.  The Supreme Court resolved the split holding that “Moradi-Shalal does not preclude first party [i.e., the insured] UCL actions based on grounds independent from section 790.03, even when the insurer’s conduct also violates section 790.03.”

In Zhang, the plaintiff purchased a comprehensive general liability policy from California Capital Insurance Company (California Capital) to insure a commercial property. Following a coverage dispute related to fire damage to the property, the plaintiff filed suit alleging causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of the UCL. The plaintiff’s UCL claim alleged that California Capital “engaged in unfair, deceptive, untrue, and/or misleading advertising” by promising to provide “coverage when it had no intention of paying the true value of its insured’s covered claims.”

California Capital sought to dismiss the UCL claim on the grounds that it was merely an impermissible attempt to plead around Moradi-Shalal’s bar against a private right of action under the UIPA. The circuit court agreed with California Capital, but was revered on appeal. The Supreme Court granted California Capital’s petition for review.

On review, a majority of the Supreme Court upheld the Court of Appeals decision. The majority opinion engaged in an extensive discussion of Moradi-Shalal and its progeny and determined that those authorities simply do not stand for the proposition that a private plaintiff lacks standing under the UCL whenever the alleged unfair conduct also violates a statute under which there is no private right of action. To the contrary, the majority stated that “Moradi-Shalal itself established that while violations of section 790.03 are themselves not actionable, there is no bar to common law fraud and bad faith actions.” To be clear, the majority confirmed that a plaintiff cannot utilize a UCL claim to plead around the absolute bar to a private right of action under the UIPA. However, the majority stated that the UIPA does not operate as a shield against civil liability where the insurer’s conduct violates both the UIPA and obligations imposed by other statues or the common law. Rather, to preclude a UCL action, “another provision must actually bar the action or clearly permit the conduct.”

Ultimately, the Court’s majority opinion resolves a significant split among the courts of appeals and makes clear that insurance practices that violate the UIPA may support an action by an insured under the UCL, even though an insured would have no private right under the UIPA.

Delaware Supreme Court confirms that fraud exception to continuous ownership rule is very narrow

By Patrick M. Horan

Under Delaware’s continuous ownership rule, in order to bring and maintain a derivative action, a shareholder “must not only be a stockholder at the time of the alleged wrong and at the time of commencement of suit but … must also maintain stockholder status throughout the litigation.”  Last month the Delaware Supreme Court reigned in an effort by former shareholders to expand an exception to the continuous ownership rule known as the “fraud exception.”

In Arkansas Teacher Retirement System, et al. v. Countrywide Financial Corporation, shareholders in Countrywide Financial Corporation initiated a derivative action in the United States District Court for the Central District of California alleging that the former Countrywide CEO and other executives had lied about the company’s lending practices.  When the plaintiffs were divested of their shares in Countrywide as a result of Countrywide’s merger with Bank of America, the district court dismissed the former shareholders’ derivative claims as barred by Delaware’s continuous ownership rule.

On appeal to the Ninth Circuit, the former shareholders argued that, because the merger allegedly was designed to cover up fraudulent activity, their derivative claims should have survived the merger under the “fraud exception” to the continuous ownership rule.  Unable to locate any precedent on the issue, the Ninth Circuit certified the following question to the Delaware high court:

Whether, under the “fraud exception” to Delaware’s continuous ownership rule, shareholder plaintiffs may maintain a derivative suit after a merger that divests them of their ownership interest in the corporation on whose behalf they sue by alleging that the merger at issue was necessitated by, and is inseparable from, the alleged fraud that is the subject of their derivative claims.

The Delaware Supreme Court first confirmed its holding in Lewis v. Anderson, which established the continuous ownership rule.  The Court then addressed the two exceptions to the rule.   Under Lewis, the continuous ownership rule does not bar former shareholders from maintaining claims when: (1) the merger is fraudulently executed simply to deprive a stockholder of standing, and (2) a merger is basically a reorganization that does not extinguish the ownership interest.  The first of the two exceptions is known as the “fraud exception.”

The Court made clear that the fraud exception only is available where shareholders directly allege that a merger fraudulently stripped them of their ownership interest.  Because the shareholders in the case before it alleged that the merger was designed to cover up alleged fraud and not to divest them of their shares, the Court held that the fraud exception to the continuous ownership rule did not apply.  In short, the Delaware Supreme Court confirmed that the fraud exception to the continuous ownership rule is very narrow.

More on the Filed Rate Doctrine and Force-Placed Insurance

By Stephen A. Fogdall and Monica C. Platt

Last week, we reported on a decision out of the Southern District of New York holding that the filed rate doctrine does not apply to force-placed insurance rates because they are “secondarily billed” to the borrower. We plan to monitor this issue closely to see if other courts reach the same conclusion.

Recently, a judge in the United States District Court for the Northern District of Mississippi did not reach this conclusion.  The case is Singleton v. Wells Fargo Bank.

In Singleton, the plaintiff sued her loan servicer and a force-placed insurer, asserting violations of RESPA and other claims.  The plaintiff alleged that the servicer had agreed to give all of its force-placed business to the insurer in exchange for kickbacks.  The plaintiff said that the exclusive relationship allowed the insurer to charge inflated rates for the insurance, and that the rates were further inflated because they supposedly included the kickbacks to the servicer.

In fact, the rates had been reviewed and approved by the Mississippi Department of Insurance.  The defendants argued that the plaintiff’s claims were therefore barred by the filed rate doctrine.

The plaintiff argued in response that she was not challenging the rates themselves, but rather the manner in which they were obtained, which she described as a “manipulation of the force-placed insurance process.”

The court said that this was “semantics.”  At bottom, the plaintiff was simply asserting that the rates were too high. Because the alleged kickbacks that the plaintiff claimed were inappropriately included were actually part of the rate approved by the insurance department, the court concluded that the filed rate doctrine barred her claims.

Seventh Circuit confirms that the FCRA preempts state common law claims

By Stephen J. Shapiro

The Fair Credit Reporting Act (FCRA) imposes responsibilities on those who “furnish information to consumer reporting agencies.” Where entities that furnish information violate those responsibilities, the FCRA provides consumers with legal remedies, but prohibits them from pursuing state law claims relating to the violations. In a recent opinion, the Seventh Circuit reaffirmed that the FCRA preempts all state law claims, both those arising under state statutes, and those arising under state common law.

In Aleshire v. Harris, N.A., the plaintiff borrowed several million dollars from the defendant bank. When the bank reported those loans to consumer credit reporting agencies, it allegedly reported incorrect loan balances, double-reported some of the loans and incorrectly reported that the borrower had exceeded her credit limit. The borrower sued the bank, pleading claims under the FCRA as well as claims under state common law. Holding that they were barred by the FCRA’s preemption provision, the district court dismissed the borrower’s state law claims.

On appeal, the borrower argued that the FCRA only preempts state law claims arising under state statutes, not claims arising under the common law. In support of her argument, the borrower pointed to a section of the FCRA that prohibits consumers from bringing defamation, invasion of privacy and negligence claims against entities that furnish false information to credit reporting agencies unless those entities do so “with malice or willful intent to injure” the consumer. The borrower reasoned that, reading the FCRA’s preemption provision expansively to bar common law claims rather than narrowly to bar only statutory claims would nullify the section that allows consumers to bring defamation, invasion of privacy and negligence claims under certain conditions.

The Seventh Circuit noted that the borrower’s argument “has garnered some sympathy among district courts” in Pennsylvania, Georgia and Texas.  However, relying on its previous holding in Purcell v. Bank of America, in which the Seventh Circuit concluded that these two provisions of the FCRA are not inconsistent because one provision simply preempts more claims than the other, the Court rejected the borrower’s argument and affirmed the dismissal of her state law claims.

The Third Circuit holds that communications with debtors during bankruptcy proceedings can expose debt collectors to liability under the FDCPA

By Stephen J. Shapiro

The Third Circuit, addressing an issue of first impression in the circuit, recently held that debtors who receive communications from debt collectors in the course of bankruptcy proceedings are not barred from pursuing claims alleging that those communications violate the Fair Debt Collections Practices Act (FDCPA).  In Simon v. FIA Card Services, N.A., the plaintiffs filed for bankruptcy and FIA, one of their unsecured creditors, hired a law firm to represent its interests in the bankruptcy proceeding.  The law firm sent a letter to the Simons’ bankruptcy counsel in which it offered to refrain from initiating a proceeding to declare the debt nondischargeable if the Simons either stipulated that the debt was nondischargeable or agreed to settle the debt by paying a discounted amount.  The letter also enclosed a notice of the law firm’s intent to question the plaintiffs pursuant to Bankruptcy Rule 2004.

The Simons sued FIA and the law firm, arguing that the letter and notice violated the FDCPA.  The district court dismissed the suit because, it held, the Bankruptcy Code precluded the Simons’ FDCPA claims and because the Simons’ allegations were not sufficient to state a claim under the FDCPA.

The Third Circuit reversed.  First, the Court rejected the law firm’s argument that the FDCPA did not apply because the firm’s communication did not demand payment of a debt.  The Court held that the “FDCPA applies to litigation-related activities that do not include an explicit demand for payment when the general purpose is to collect payment,” and that “[t]he letter and notice were an attempt to collect the Simons’ debt through the alternatives of settlement . . . or gathering information to challenge dischargeability” through a Rule 2004 examination.

Next, the Court held that some of the Simons’ allegations stated viable claims for violations of the FDCPA.  Specifically, the FDCPA prohibits debt collectors from “threat[ening] to take any action that cannot legally be taken or that is not intended to be taken” and “false[ly] represent[ing] or impl[ying] that documents are legal process.”  The Court held that the Simons adequately pled that the law firm violated these prohibitions in the FDCPA by failing to comply with provisions of the Bankruptcy Rules and Federal Rules that required the firm to: (a) personally serve the Rule 2004 notice on the Simons, and (b) include in the Rule 2004 notice text explaining the duties of and remedies available to the recipient of such a notice.  The Simons also alleged that the law firm failed to include in its letter the “mini-Miranda” warning required by the FDCPA (that “the debt collector is attempting to collect a debt and that any information obtained will be used for that purpose”).

The Court then addressed an issue of first impression in the Third Circuit: “[W]hether, or to what extent, an FDCPA claim can arise from a debt collector’s communications to a debtor in a pending bankruptcy proceeding.”  The Court first noted that the circuits are split on this issue.  The Ninth Circuit, Ninth Circuit Bankruptcy Appellate Panel and the Second Circuit have held that communications with a debtor in the context of a bankruptcy proceeding cannot violate the FDCPA, while the Seventh Circuit has concluded that they can.  The Court agreed with the Seventh Circuit’s analysis, and held that “[w]hen FDCPA claims arise from communications a debt collector sends a bankruptcy debtor in a pending bankruptcy proceeding . . . there is no categorical preclusion of the FDCPA claims.”  Rather, the courts must consider “whether the FDCPA claim raises a direct conflict between the [Bankruptcy] Code or [Federal] Rules and the FDCPA, or whether both can be enforced.”

Applying that inquiry to the claims before it, the Court held that the Simons’ FDCPA claims based on the law firm’s failure to personally serve the Rule 2004 notice and failure to include in the notice text describing the rights and responsibilities of the recipient did not conflict with the Bankruptcy Code or the Federal Rules and, therefore, reversed the dismissal of those claims.  However, the Court affirmed the dismissal of the FDCPA claim based on the law firm’s failure to include in its letter a warning that it was attempting to collect a debt because such a warning would have violated the Bankruptcy Code’s automatic stay provision, which forbids “any act to collect, assess, or recover a claim against the debtor . . . .”

The lesson for debt collectors in the Simon case is clear.  When communicating with a debtor in a bankruptcy proceeding, debt collectors must take the same care to comply with the FDCPA as they would when communicating with debtors outside of bankruptcy proceedings.

The Filed Rate Doctrine and “Secondarily Billed” Rates

By Stephen A. Fogdall and Christopher A. Reese

The filed rate doctrine holds that the reasonableness of insurance rates filed with and approved by a state insurance regulator cannot be challenged in court.  That doctrine ought to apply even when the cost of the insurance is passed on, or “secondarily billed,” by the insured to its own customers.  After all, if the rate itself is reasonable (as the filed rate doctrine holds), then it should not cease to be reasonable simply because it is passed on to someone else.

However, a judge in the United States District Court for the Southern District of New York recently held that the filed rate doctrine does not apply to secondarily billed rates.

The case, Rothstein v. GMAC Mortgage, LLC, is one of many involving force-placed hazard insurance.  Under the terms of most home mortgage loans, a borrower is required to maintain hazard insurance on the mortgaged property.  If the borrower allows the policy to lapse, the lender typically has the right to purchase such insurance at the borrowers’ expense.

A spate of cases has been filed in the last few years alleging various improprieties in connection with force-placed insurance, including that the lender wrongly purchased backdated coverage, or that it purchased more coverage than it needed to, or that the insurer paid kickbacks to the lender as an inducement to purchase the insurance.  The plaintiffs in the Rothstein case made allegations like this, asserting claims under RICO and the Real Estate Settlement Procedures Act.

The defendants in Rothstein moved to dismiss the plaintiffs’ claims in part on the grounds that they were challenging the reasonableness of the rates the insurer charged for the force-placed insurance.  Because these rates were approved by state regulators, the defendants argued that the filed rate doctrine barred the plaintiffs’ claims.

The court rejected this argument.  Although the insurer’s rates were filed with and approved by insurance regulators, the insurer did not charge those rates directly to the plaintiffs.  Instead, the insurer charged the lender, who passed the cost on to the plaintiffs.  The court held that this “secondary billing” of the rates defeated the filed rate doctrine.

The motivation for such a “secondary billing” exception to the filed rate doctrine is less than clear.  The filed rate doctrine is based on the principle that courts should not second guess the reasonableness of rates approved by an expert administrative agency.  That rationale is not diminished simply because the insured has passed on the cost to its customers.  Moreover, if the insured does not pass the cost of the insurance directly on to its customers, it presumably will have to charge more for some other service or product to make up the difference.  That outcome does not appear to be any better for the customers, yet that is precisely the result the court’s ruling in Rothstein incentivizes.

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