InfoBytes, May 25, 2007
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Miscellany
- Mortgages
- Banking
- Securities
- Insurance
- Litigation
- E-Financial Services
- Privacy/Data Security
- Credit Cards
Federal Issues
House Passes Bills on GSE Reform and ILCs. On May 23, the U.S. House of Representatives passed the Federal Housing Finance Reform Act (H.R. 1427), and on May 21, the House passed the Industrial Bank Holding Company Act (H.R. 698). The Federal Housing Finance Reform Act (most recently reported in the March 30th issue of InfoBytes) was passed by a vote of 313 to 104 and would, if enacted into law, establish a new regulator for the government sponsored enterprises (GSEs, i.e. Fannie Mae and Freddie Mac) to replace the Office of Federal Housing Enterprise Oversight (OFHEO). The new regulator would have greater oversight authorities than OFHEO, including the power to set capital retention requirements for the entities. An amendment proposed by House Financial Services Committee Ranking Member Spencer Bachus (R – Ala.), which would have removed a contentious provision establishing a GSE-financed affordable housing fund, failed by a vote of 148 to 269. Another amendment, which passed by a vote of 383 to 36, requires the new GSE regulator to consider the risks posed by the GSEs’ portfolios to the GSEs themselves, rather than to the broader economy. The Industrial Bank Holding Company Act (most recently reported in the May 4th issue of InfoBytes) was passed by a vote of 371 to 16 and would, if enacted into law, prohibit “commercial firms” from owning Industrial Loan Companies (ILCs) while providing a “grandfathering” exemption with regard to ILCs insured before October 1, 2003. Both bills now go to the Senate. For more information on H.R. 1427, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.01427:. For more information on H.R. 698, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.00698:.
Senator Levin Introduces Credit Card Bill to Halt Certain Credit Practices. On May 15, Senator Carl Levin (D – Mich.) introduced the Stop Unfair Practices in Credit Cards Act (S. 1395). The bill, if enacted into law, would, among other things, amend the Truth in Lending Act (TiLA) to prohibit the charging of interest on any portion of a credit card debt that is paid on time within a minimum fourteen-day billing period. The bill would also, in part, (i) restrict interest rate increases, (ii) cap penalty interest rates at seven percent above the normal rate, (iii) prohibit charging interest on fees, (iv) prohibit charging “over the limit” fees on borrowers driven over their credit limit by penalty fees, (v) prohibit imposing any penalty more than once in a billing cycle, (vi) prohibit “retroactive” interest rate increases on debts already incurred, and (vii) require more thorough annual data collection by the Federal Reserve Board under TiLA. This bill follows hearings last March by the Senate Committee on Homeland Security & Governmental Affairs on credit card fees and practices in which Senator Levin played a prominent role. No hearings on this bill have yet been scheduled. For more information on the details of S. 1395, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:s.01395:.
FRB Proposes Revisions to Reg Z for Credit Cards. On May 23, the Federal Reserved Board (FRB) announced proposed revisions to Regulation Z, the implementing regulation of the Truth in Lending Act (TiLA), for open-ended credit not secured by a home. The proposed revisions would, in part, significantly alter the format of several TiLA related disclosures and require more complete explanations of several aspects of the terms, fees, and interest rates of the credit agreement. The proposed changes would also require notification 45 days in advance of an interest rate change, including penalty increases due to late payments. Also, “change-in-terms” notices would be required 45 days in advance of any change in the agreement, and certain changes would be required to be summarized in disclosure formats required at the opening of the account. Comments on the rules to the FRB are due 120 days after the proposed rule’s publication in the Federal Register. For more information, and text of the 800 page proposal, please see http://www.federalreserve.gov/BoardDocs/Press/bcreg/2007/20070523/default.htm.
State Issues
New York Passes Bill Bringing Electronic Commerce under Mail-Order Business Statute. On May 15, the New York State Assembly passed a bill that, if signed into law by Gov. Spitzer, would amend that state’s laws governing mail-order business to apply to electronic transactions. Specifically, the bill would redefine “mail-order business” and “accepts orders” (under NY Gen Bus Law § 396-m) to include transactions conducted over the internet or via electronic mail. The new legislation would also prohibit online businesses from (i) advertising or accepting orders for merchandise that will be unavailable for shipment within thirty days, unless a longer period of time is conspicuously advertised and (ii) charging additional fees for expedited shipping when the seller does not reasonably expect the merchandise to be shipped within three business days of the date the order was placed. In addition, the bill will require online businesses (i) to display their legal name and street address in all advertisements containing a post office box address, (ii) to state their refund policy in all advertisements, and (iii) to maintain records of complaints alleging failure to ship merchandise. The law would be enforced by the attorney general with injunctions and fines; it contains no private right of action. For the official text of the bill, please see http://assembly.state.ny.us/leg/?bn=A07649&sh=t.
Massachusetts Proposes to Increase Education and Experience Requirements for License Applicants. On May 17, the Massachusetts Division of Banks published a proposed amendment to Regulatory Bulletin 5.1-102 which outlines required education and experience for mortgage lender and broker licensing. Presently, mortgage brokers must have at least one year of full-time experience. Under the new rule (if adopted), a new applicant must have three years of full-time experience and any time spent working for an unlicensed, non-exempt entity would not count toward the three years. The increased experience requirement would not apply to those seeking renewal of their licenses, but only to new applicants. A branch manager would be required to satisfy the education and experience requirements of the regulatory bulletin. The current requirement for two years of experience by persons in supervisory positions would be replaced by the longer three-year requirement. Comments on the proposal are due by June 8, 2007 via email to ndob.comments@state.ma.us. The bulletin can be found at http://www.mass.gov/Eoca/docs/dob/5_1-102draft.pdf.
New Nevada Law Authorizes Electronic Recording of Real Property Documents. Nevada recently enacted the Uniform Real Property Electronic Recording Act (URPERA), permitting county recorders to accept electronic documents for real property recording. Under the new law, any requirement that a document be an original may be satisfied by an electronic document. Additionally, any requirement that a document be signed is satisfied by an electronic signature. County recorders must continue to accept paper documents; however, the Nevada URPERA authorizes them to convert paper documents into electronic form. The Nevada URPERA is effective October 1, 2007. To view the bill as enrolled (S.B. 88), please visit http://www.leg.state.nv.us/74th/Bills/SB/SB88_EN.pdf.
Colorado Increases Homestead Exemption. Effective May 14, 2007, the Colorado legislature revised Colorado Statutes Section 38-41-201 to increase the exemption available for homesteads from execution and attachment arising from any debt, contract, or civil obligation. The new limits for the homestead exemption are (i) $60,000 if the homestead is occupied as a home by an owner or an owner’s family, and (ii) $90,000 if the homestead is occupied as a home by an elderly (60 years or older) or disabled owner, an elderly or disabled spouse of an owner, or an elderly or disabled dependent of an owner. To view the final version of the Act, see http://www.leg.state.co.us/clics/clics2007a/csl.nsf/ fsbillcont/F138D87FD3B95538872572680066BD36?Open&file=158_enr.pdf.
Indiana Homeowners Association Lien Law Signed. On May 3, the governor of Indiana signed S.B. 232, adding a new chapter to the Indiana real property code, to establish the conditions under which a homeowners association may enforce a lien for unpaid common area assessments. The association may enforce its lien by filing a complaint to foreclose the lien within one year after recording the lien. At foreclosure, the court will order a sale of the real estate subject to the lien without regard to the valuation or appraisement laws. To view text of this bill, see http://www.in.gov/legislative/bills/2007/SE/SE0232.1.html.
Courts
Court Upholds FCRA “Firm Offer” That Showed Minimum Loan But Omitted Other Details. In Klutho v. Shenandoah Valley National Bank, 2007 U.S. Dist. LEXIS 37372 (E.D. Mo. May 22, 2007), the mailer in a prescreened credit solicitation showed the minimum home equity loan amount of $25,000 but did not show the specific amount of credit being extended to the consumer and omitted other details such as the interest rate, amortization period, or method of computing interest. The court held that the letter still met the “firm offer” requirement for prescreened offers under the Fair Credit Reporting Act (FCRA) because “the letters do offer something of value, i.e., a minimum home equity loan of at least $25,000.00, which is more than a nominal amount.” Therefore, the court granted the lender’s motion for judgment on the pleadings. For a copy of the decision, please contact .
Credit Monitoring Insufficient Injury for Data Breach Negligence Claim Absent Proof of Identity Theft. On May 16, the U.S. District Court for the Southern District of Ohio determined that a plaintiff failed to show that she had been injured by the defendant’s negligence, where her personal information was stolen from the defendant’s business. Kahle v. Litton Loan Servicing LP, Case No. 1:05cv756 (S.D. Ohio May 16, 2007). Several hard drives, which contained personal information on over 200,000 persons, were stolen from defendant’s locked data center. The defendant notified the plaintiff within four weeks of the theft and the plaintiff claimed to have enrolled in credit monitoring services to ensure against identity theft. There were no claims that the defendant’s personal information had actually been used to commit fraud or identity theft. The plaintiff sought recovery of her past and expected future credit monitoring fees. Citing several cases, including Guin v. Brazos Higher Educ. Servs. Corp. (see the February 24, 2006 issue of InfoBytes), the court determined that the plaintiff’s alleged injuries were too remote, despite the fact that the “defendant owed a duty of care to the Plaintiff and that… duty was breached.” Thus, absent actual injury through identity theft, plaintiff would be denied recovery of her credit monitoring fees. Please contact for a copy of the magistrate’s decision.
Court Rejects Claim That Inaccurate Credit Report Caused Higher Interest Rate. The District Court of Minnesota recently rejected the claims of a loan borrower who sued a credit reporting agency on the basis that a contested item on his credit report forced him to select a loan with a higher interest rate than he otherwise would have received. In McKinley v. CSC Credit Services, Inc., 2007 WL 1412555, No. 05-2340 (D. Minn. May 10, 2007), the borrower, McKinley, applied for and received a subprime mortgage loan after an unsuccessful challenge to a negative item on his credit report. He did not shop for a loan with any other lender, prime or subprime, instead believing, based on his experience as a mortgage loan officer, that he would not receive a prime loan. McKinley then sued CSC on the theory that the contested negative item in the credit report was the reason he had to pay the higher interest rate on his loan. CSC filed for summary judgment, which the court granted. The court found that McKinley did not present any factual evidence proving that the interest rate he received was higher because of the negative credit report. Consequently, McKinley could not prove that CSC caused any harm, and thus he was unable to avoid summary judgment. The court also rejected McKinley’s claims for damages for emotional distress, out-of-pocket costs and fees, and negligent violation of FCRA, none of which he could establish. For a copy of this decision, please contact .
Court Rules That “Costs” Do Not Include Attorneys’ Fees under FCRA. A federal district court recently ruled against a defendant seeking to collect attorneys’ fees under the “automatic” provision of FCRA, but ruled for recovery of costs under Rule 68. Cole v. Cole, C.A. No. 04-2073-CM, 2007 WL 1411612 (D. Kan. May 10, 2007). In the underlying case, the plaintiff, Karen Cole, sued the defendant Gary Cole for violations of FCRA. The defendant made a offer of judgment to the plaintiff for $5,000, but the plaintiff rejected the offer. At trial, the court found that Gary Cole had violated FCRA, but that he did not willfully violate the act, nor did the plaintiff suffer any damages. The jury therefore awarded no damages. Gary Cole sued to recover his attorneys’ fees under the “automatic” provisions of FCRA, which allow for automatic recovery of fees incurred as a result of an “unsuccessful pleading, motion, or other paper” that was filed “in bad faith or for purposes of harassment.” While the court noted the “hostile behavior by both parties” at trial, the court, in rejecting the defendant’s motion, found that there was legal merit (although no monetary remedy) to the plaintiff’s claims. The court ruled, however, that Gary Cole was entitled to “costs” under FRCP 68. Rule 68 states that that if a party makes an offer of judgment that is not accepted, but the offeree subsequently obtains judgment that is not more favorable than the offer, then “the offeree must pay the costs incurred after the making of the offer.” Noting that “costs” are not defined by FCRA to include attorneys’ fees, the court allowed the defendant to recover only the actual costs, but not attorneys’ fees, incurred since the settlement offer was made. For a copy of the opinion, please contact .
Plaintiff May Not Maintain FDCPA Claim for Alleged Improper Report to Credit Reporting Agency. Defendants in Breed v. Nationwide Insurance Co., No. 05-CV-547 (W.D. Ky., May 8, 2007), continued to chip away at the plaintiff’s FCRA and Fair Debt Collection Practices Act (FDCPA) claims arising from credit reports that they alleged resulted in the denial of credit or the issuance of credit at higher rates. (This case was previously reported in the March 23rd issue of InfoBytes.) In its most recent opinion, the district court dismissed the plaintiff’s FDCPA claims against the collection agency, stating that even if the agency had made an incorrect report to a credit bureau, this conduct would not violate the FDCPA, which only applies to instances where someone attempts to collect a debt. The district court allowed plaintiff’s remaining FCRA claims to proceed, however, notwithstanding arguments by the defendant collection and credit reporting agencies that the plaintiff had not set forth sufficient evidence. The district court stated that, assuming that the plaintiff provided evidence of his alleged injury, questions associated with whether the information reported was inaccurate, whether the defendants failed to follow reasonable procedures to assure the accuracy of the information reported, and whether the alleged conduct proximately caused the plaintiff’s injury were appropriately left to a jury. For a copy of this opinion, please contact .
Delaware Supreme Court Allows Direct Shareholder Action in Lieu of Derivative Action Where Excluding Action Would “Unjustly Exalt Form Over Substance.” On April 16, the Delaware Supreme Court reversed and remanded a decision on the issue of whether a shareholder lawsuit for breach of fiduciary duty must be brought exclusively as a derivative action where the claims arise out of a recapitalization that is deemed two separate transactions rolled into one, thereby giving the claim both derivative and direct characteristics. Gatz v. Ponsoldt, No. 298, 2006, (Del. April 16, 2006). The defendant in this case acquired a sizeable minority block of shares in the corporation, which gave him de facto control of the corporation. The recapitalization was carried out without any approval of the corporation’s public shareholders, thereby enabling the defendant to cash out most of his equity interest and to convert his de facto control of the corporation into an absolute majority interest that was simultaneously transferred to an entity owned by another defendant. The Chancery Court held the claims were entirely derivative and had not been filed according to shareholder derivative claims procedures. On appeal, the state supreme court reaffirmed earlier holdings in In re Tri-Star Pictures, Inc., 634 A.2d 319 (Del. 1993) and its recent progeny, Gentile v. Rossette, 906 A.2d 91 (Del. 2006). The court restated the reasoning of Rossette that “where: (1) a stockholder having majority or effective control causes the corporation to issue “excessive” shares of its stock in exchange for assets of the controlling stockholder that have a lesser value; and (2) the exchange causes an increase in the percentage of the outstanding shares owned by the controlling stockholder, and a corresponding decrease in the share percentage owned by the public (minority) shareholders,” the suit may be brought both directly and derivatively, as there is an injury to both the corporate entity and the individual shareholders. The Delaware Supreme Court held that the claims were not exclusively derivative and could have been brought directly because depriving plaintiffs of their entitlement to seek redress in a direct action would “unjustly exalt form over substance.” It was the very nature of a court of equity to look beyond form to the substance of an arrangement. To view the opinion, click http://courts.delaware.gov/opinions/(1eg02j45wvij4455y0p0dnqi)/download.aspx?ID=90580.
Delaware Appraisal Rights Pursuant to a Merger Are Exclusive to Record Holders, Not Beneficial Holders. The Delaware Chancery Court ruled on May 2 that under 8 Del. C. §262, only record holders of stock are permitted to claim and perfect appraisal rights. In re Appraisal of Transkaryotic Therapies, 1554-CC (Del. Ch., 5/2/07). The decision of Chancellor William Chandler III arose from the 2005 merger of Transkaryotic Therapies Inc. into a wholly-owned subsidiary of Shire Pharmaceuticals Group plc, with Cede & Co. (the depository frequently used as nominee for shares held in brokerage accounts) being the only record holder. Chancellor Chandler ruled that only Cede & Co. could exercise the appraisal rights with regard to all the shares beneficially owned by the petitioner, and the actions of the beneficial owners are “irrelevant.” In this case, the beneficial owners acquired the shares after the record date but before the merger, and the issue was whether the beneficial owners could seek appraisal rights for their shares. The court answered the question in the negative, stating that the primary purpose of Section 262 is to protect the contractual rights of shareholders who object to a merger and to fully compensate shareholders for any loss they may suffer as a result of the merger – but the right belongs solely to a record holder. The court’s reasoning behind the decision was that the corporation should not delve into the intimate relationship between the record and beneficial holder, and let the record stand for the rights allocable to each. For a copy of this decision, please contact .
Arbitration Clause Applies to FCRA Claims Arising Prior to Broker Agreement. On May 14, a federal district court in Ohio ruled that an arbitration clause in a “Broker Retention Agreement” applied to FCRA claims that had arisen prior to the execution of the agreement. Gardner v. Randall Mortgage Services, Inc., No. C-2-06-0612, 2007 WL 1432047 (S.D. Ohio May 14, 2007). The plaintiff in the case alleged that the defendant, a mortgage broker, violated FCRA by accessing her credit report without her knowledge or permission prior to the agreement, and continued to do so throughout the contract period. The court, however, ruled for the defendant, stating that “since some of plaintiff’s FCRA claims occur during the contract period, and the contract containing the arbitration provision broadly provides that ‘any dispute’ concerning the parties’ relationship is subject to arbitration, then the claims are so inextricably tied to Plaintiff’s other claims that all of Plaintiff’s claims shall be arbitrated.” For a copy of the opinion, please contact .
Firm News
Jerry Buckley and Joe Kolar will, on May 30, participate in a panel entitled “RESPA Compliance and Enforcement: Dealing with the Challenges” along with Gary M. Cunningham, Deputy Assistant Secretary of HUD and Peter S. Race, Assistant General Counsel of HUD. The panel will be chaired by American Banker’s Association Senior General Counsel John Rasmus. To learn more, or register, please see http://www.aba.com/teleweb/tb053007.htm.
Jerry Buckley and Matthew Previn will, on May 31, participate in a webcast entitled “Subprime Mortgage Lending: Managing Legal and Enforcement Risks” offered through West LegalWorks on May 31. The 90-minute discussion, second of a three part series on the subprime mortgage market, will discuss regulatory changes and litigation challenges posed by the growing wave of defaults by subprime borrowers. Among the topics to be discussed will be (i) recent developments in litigation involving subprime mortgages, (ii) regulatory response to subprime distress, and (iii) bankruptcy issues arising in the subprime context. Mr. Buckley and John Kromer spoke last month in the first installment of the series entitled “Legal Issues Associated with Managing Subprime Mortgage Portfolios.”
Jeff Naimon and Kirk Jensen will be speaking at the American Conference Institute’s upcoming seminar “Preventing, Defending and Resolving Consumer Credit Litigation” taking place on June 5-6, 2007 in New York. Mr. Naimon will be on the RESPA panel and Mr. Jensen will be speaking on arbitration. For more information, or to register, go to http://www.americanconference.com/Litigation/creditlit.htm.
Joe Kolar spoke on May 23 on “the Pitfalls of a Suitability Standard in Mortgage Lending” at the George Washington University Financial Services Research Program Policy Forum in Washington, D.C. The Forum was titled “Is New Regulation Needed to Protect Consumers from Unsuitable Mortgage Loans?”
Miscellany
Comptroller Dugan Expresses Concerns about “Stated Income” in Subprime Loans. On May 23, in a statement before the Neighborhood Housing Services of New York, Comptroller of the Currency John C. Dugan made comments regarding underwriting practices in the subprime lending market. Comptroller Dugan’s statements identify the increasing problem of subprime lenders relying upon unverified stated income figures, arguing (i) that relying on unverified stated income can lead to misrepresentation or outright fraud, (ii) that the practice “undermines transparency,” and (iii) that it is not a “safe and sound underwriting practice.” The text of the press release is available at http://www.occ.treas.gov/ftp/release/2007-48.htm. The full remarks by Comptroller Dugan are available at http://www.occ.treas.gov/ftp/release/2007-48a.pdf.
Bernanke Expects “No Serious Spillover” from the Subprime Defaults. On May 17, Ben Bernanke addressed the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition regarding the subprime mortgage market. Bernanke commented, in part, that he does not expect “significant spillovers from the subprime market to the rest of the economy or to the financial system.” Bernanke’s speech also loosely outlines several possible regulatory responses regarding the subprime mortgage industry. The full text of the speech is available at http://www.federalreserve.gov/boarddocs/speeches/2007/20070517/default.htm.
Mortgages
House Passes Bills on GSE Reform and ILCs. On May 23, the U.S. House of Representatives passed the Federal Housing Finance Reform Act (H.R. 1427), and on May 21, the House passed the Industrial Bank Holding Company Act (H.R. 698). The Federal Housing Finance Reform Act (most recently reported in the March 30th issue of InfoBytes) was passed by a vote of 313 to 104 and would, if enacted into law, establish a new regulator for the government sponsored enterprises (GSEs, i.e. Fannie Mae and Freddie Mac) to replace the Office of Federal Housing Enterprise Oversight (OFHEO). The new regulator would have greater oversight authorities than OFHEO, including the power to set capital retention requirements for the entities. An amendment proposed by House Financial Services Committee Ranking Member Spencer Bachus (R – Ala.), which would have removed a contentious provision establishing a GSE-financed affordable housing fund, failed by a vote of 148 to 269. Another amendment, which passed by a vote of 383 to 36, requires the new GSE regulator to consider the risks posed by the GSEs’ portfolios to the GSEs themselves, rather than to the broader economy. The Industrial Bank Holding Company Act (most recently reported in the May 4th issue of InfoBytes) was passed by a vote of 371 to 16 and would, if enacted into law, prohibit “commercial firms” from owning Industrial Loan Companies (ILCs) while providing a “grandfathering” exemption with regard to ILCs insured before October 1, 2003. Both bills now go to the Senate. For more information on H.R. 1427, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.01427:. For more information on H.R. 698, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.00698:.
Court Upholds FCRA “Firm Offer” That Showed Minimum Loan But Omitted Other Details. In Klutho v. Shenandoah Valley National Bank, 2007 U.S. Dist. LEXIS 37372 (E.D. Mo. May 22, 2007), the mailer in a prescreened credit solicitation showed the minimum home equity loan amount of $25,000 but did not show the specific amount of credit being extended to the consumer and omitted other details such as the interest rate, amortization period, or method of computing interest. The court held that the letter still met the “firm offer” requirement for prescreened offers under the Fair Credit Reporting Act (FCRA) because “the letters do offer something of value, i.e., a minimum home equity loan of at least $25,000.00, which is more than a nominal amount.” Therefore, the court granted the lender’s motion for judgment on the pleadings. For a copy of the decision, please contact .
Massachusetts Proposes to Increase Education and Experience Requirements for License Applicants. On May 17, the Massachusetts Division of Banks published a proposed amendment to Regulatory Bulletin 5.1-102 which outlines required education and experience for mortgage lender and broker licensing. Presently, mortgage brokers must have at least one year of full-time experience. Under the new rule (if adopted), a new applicant must have three years of full-time experience and any time spent working for an unlicensed, non-exempt entity would not count toward the three years. The increased experience requirement would not apply to those seeking renewal of their licenses, but only to new applicants. A branch manager would be required to satisfy the education and experience requirements of the regulatory bulletin. The current requirement for two years of experience by persons in supervisory positions would be replaced by the longer three-year requirement. Comments on the proposal are due by June 8, 2007 via email to ndob.comments@state.ma.us. The bulletin can be found at http://www.mass.gov/Eoca/docs/dob/5_1-102draft.pdf.
Court Rejects Claim That Inaccurate Credit Report Caused Higher Interest Rate. The District Court of Minnesota recently rejected the claims of a loan borrower who sued a credit reporting agency on the basis that a contested item on his credit report forced him to select a loan with a higher interest rate than he otherwise would have received. In McKinley v. CSC Credit Services, Inc., 2007 WL 1412555, No. 05-2340 (D. Minn. May 10, 2007), the borrower, McKinley, applied for and received a subprime mortgage loan after an unsuccessful challenge to a negative item on his credit report. He did not shop for a loan with any other lender, prime or subprime, instead believing, based on his experience as a mortgage loan officer, that he would not receive a prime loan. McKinley then sued CSC on the theory that the contested negative item in the credit report was the reason he had to pay the higher interest rate on his loan. CSC filed for summary judgment, which the court granted. The court found that McKinley did not present any factual evidence proving that the interest rate he received was higher because of the negative credit report. Consequently, McKinley could not prove that CSC caused any harm, and thus he was unable to avoid summary judgment. The court also rejected McKinley’s claims for damages for emotional distress, out-of-pocket costs and fees, and negligent violation of FCRA, none of which he could establish. For a copy of this decision, please contact .
Colorado Increases Homestead Exemption. Effective May 14, 2007, the Colorado legislature revised Colorado Statutes Section 38-41-201 to increase the exemption available for homesteads from execution and attachment arising from any debt, contract, or civil obligation. The new limits for the homestead exemption are (i) $60,000 if the homestead is occupied as a home by an owner or an owner’s family, and (ii) $90,000 if the homestead is occupied as a home by an elderly (60 years or older) or disabled owner, an elderly or disabled spouse of an owner, or an elderly or disabled dependent of an owner. To view the final version of the Act, see http://www.leg.state.co.us/clics/clics2007a/csl.nsf/ fsbillcont/F138D87FD3B95538872572680066BD36?Open&file=158_enr.pdf.
Banking
House Passes Bills on GSE Reform and ILCs. On May 23, the U.S. House of Representatives passed the Federal Housing Finance Reform Act (H.R. 1427), and on May 21, the House passed the Industrial Bank Holding Company Act (H.R. 698). The Federal Housing Finance Reform Act (most recently reported in the March 30th issue of InfoBytes) was passed by a vote of 313 to 104 and would, if enacted into law, establish a new regulator for the government sponsored enterprises (GSEs, i.e. Fannie Mae and Freddie Mac) to replace the Office of Federal Housing Enterprise Oversight (OFHEO). The new regulator would have greater oversight authorities than OFHEO, including the power to set capital retention requirements for the entities. An amendment proposed by House Financial Services Committee Ranking Member Spencer Bachus (R – Ala.), which would have removed a contentious provision establishing a GSE-financed affordable housing fund, failed by a vote of 148 to 269. Another amendment, which passed by a vote of 383 to 36, requires the new GSE regulator to consider the risks posed by the GSEs’ portfolios to the GSEs themselves, rather than to the broader economy. The Industrial Bank Holding Company Act (most recently reported in the May 4th issue of InfoBytes) was passed by a vote of 371 to 16 and would, if enacted into law, prohibit “commercial firms” from owning Industrial Loan Companies (ILCs) while providing a “grandfathering” exemption with regard to ILCs insured before October 1, 2003. Both bills now go to the Senate. For more information on H.R. 1427, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.01427:. For more information on H.R. 698, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.00698:.
Indiana Homeowners Association Lien Law Signed. On May 3, the governor of Indiana signed S.B. 232, adding a new chapter to the Indiana real property code, to establish the conditions under which a homeowners association may enforce a lien for unpaid common area assessments. The association may enforce its lien by filing a complaint to foreclose the lien within one year after recording the lien. At foreclosure, the court will order a sale of the real estate subject to the lien without regard to the valuation or appraisement laws. To view text of this bill, see http://www.in.gov/legislative/bills/2007/SE/SE0232.1.html.
Securities
Delaware Supreme Court Allows Direct Shareholder Action in Lieu of Derivative Action Where Excluding Action Would “Unjustly Exalt Form Over Substance.” On April 16, the Delaware Supreme Court reversed and remanded a decision on the issue of whether a shareholder lawsuit for breach of fiduciary duty must be brought exclusively as a derivative action where the claims arise out of a recapitalization that is deemed two separate transactions rolled into one, thereby giving the claim both derivative and direct characteristics. Gatz v. Ponsoldt, No. 298, 2006, (Del. April 16, 2006). The defendant in this case acquired a sizeable minority block of shares in the corporation, which gave him de facto control of the corporation. The recapitalization was carried out without any approval of the corporation’s public shareholders, thereby enabling the defendant to cash out most of his equity interest and to convert his de facto control of the corporation into an absolute majority interest that was simultaneously transferred to an entity owned by another defendant. The Chancery Court held the claims were entirely derivative and had not been filed according to shareholder derivative claims procedures. On appeal, the state supreme court reaffirmed earlier holdings in In re Tri-Star Pictures, Inc., 634 A.2d 319 (Del. 1993) and its recent progeny, Gentile v. Rossette, 906 A.2d 91 (Del. 2006). The court restated the reasoning of Rossette that “where: (1) a stockholder having majority or effective control causes the corporation to issue “excessive” shares of its stock in exchange for assets of the controlling stockholder that have a lesser value; and (2) the exchange causes an increase in the percentage of the outstanding shares owned by the controlling stockholder, and a corresponding decrease in the share percentage owned by the public (minority) shareholders,” the suit may be brought both directly and derivatively, as there is an injury to both the corporate entity and the individual shareholders. The Delaware Supreme Court held that the claims were not exclusively derivative and could have been brought directly because depriving plaintiffs of their entitlement to seek redress in a direct action would “unjustly exalt form over substance.” It was the very nature of a court of equity to look beyond form to the substance of an arrangement. To view the opinion, click http://courts.delaware.gov/opinions/(1eg02j45wvij4455y0p0dnqi)/download.aspx?ID=90580.
Delaware Appraisal Rights Pursuant to a Merger Are Exclusive to Record Holders, Not Beneficial Holders. The Delaware Chancery Court ruled on May 2 that under 8 Del. C. §262, only record holders of stock are permitted to claim and perfect appraisal rights. In re Appraisal of Transkaryotic Therapies, 1554-CC (Del. Ch., 5/2/07). The decision of Chancellor William Chandler III arose from the 2005 merger of Transkaryotic Therapies Inc. into a wholly-owned subsidiary of Shire Pharmaceuticals Group plc, with Cede & Co. (the depository frequently used as nominee for shares held in brokerage accounts) being the only record holder. Chancellor Chandler ruled that only Cede & Co. could exercise the appraisal rights with regard to all the shares beneficially owned by the petitioner, and the actions of the beneficial owners are “irrelevant.” In this case, the beneficial owners acquired the shares after the record date but before the merger, and the issue was whether the beneficial owners could seek appraisal rights for their shares. The court answered the question in the negative, stating that the primary purpose of Section 262 is to protect the contractual rights of shareholders who object to a merger and to fully compensate shareholders for any loss they may suffer as a result of the merger – but the right belongs solely to a record holder. The court’s reasoning behind the decision was that the corporation should not delve into the intimate relationship between the record and beneficial holder, and let the record stand for the rights allocable to each. For a copy of this decision, please contact .
Insurance
Plaintiff May Not Maintain FDCPA Claim for Alleged Improper Report to Credit Reporting Agency. Defendants in Breed v. Nationwide Insurance Co., No. 05-CV-547 (W.D. Ky., May 8, 2007), continued to chip away at the plaintiff’s FCRA and Fair Debt Collection Practices Act (FDCPA) claims arising from credit reports that they alleged resulted in the denial of credit or the issuance of credit at higher rates. (This case was previously reported in the March 23rd issue of InfoBytes.) In its most recent opinion, the district court dismissed the plaintiff’s FDCPA claims against the collection agency, stating that even if the agency had made an incorrect report to a credit bureau, this conduct would not violate the FDCPA, which only applies to instances where someone attempts to collect a debt. The district court allowed plaintiff’s remaining FCRA claims to proceed, however, notwithstanding arguments by the defendant collection and credit reporting agencies that the plaintiff had not set forth sufficient evidence. The district court stated that, assuming that the plaintiff provided evidence of his alleged injury, questions associated with whether the information reported was inaccurate, whether the defendants failed to follow reasonable procedures to assure the accuracy of the information reported, and whether the alleged conduct proximately caused the plaintiff’s injury were appropriately left to a jury. For a copy of this opinion, please contact .
Litigation
Court Upholds FCRA “Firm Offer” That Showed Minimum Loan But Omitted Other Details. In Klutho v. Shenandoah Valley National Bank, 2007 U.S. Dist. LEXIS 37372 (E.D. Mo. May 22, 2007), the mailer in a prescreened credit solicitation showed the minimum home equity loan amount of $25,000 but did not show the specific amount of credit being extended to the consumer and omitted other details such as the interest rate, amortization period, or method of computing interest. The court held that the letter still met the “firm offer” requirement for prescreened offers under the Fair Credit Reporting Act (FCRA) because “the letters do offer something of value, i.e., a minimum home equity loan of at least $25,000.00, which is more than a nominal amount.” Therefore, the court granted the lender’s motion for judgment on the pleadings. For a copy of the decision, please contact .
Credit Monitoring Insufficient Injury for Data Breach Negligence Claim Absent Proof of Identity Theft. On May 16, the U.S. District Court for the Southern District of Ohio determined that a plaintiff failed to show that she had been injured by the defendant’s negligence, where her personal information was stolen from the defendant’s business. Kahle v. Litton Loan Servicing LP, Case No. 1:05cv756 (S.D. Ohio May 16, 2007). Several hard drives, which contained personal information on over 200,000 persons, were stolen from defendant’s locked data center. The defendant notified the plaintiff within four weeks of the theft and the plaintiff claimed to have enrolled in credit monitoring services to ensure against identity theft. There were no claims that the defendant’s personal information had actually been used to commit fraud or identity theft. The plaintiff sought recovery of her past and expected future credit monitoring fees. Citing several cases, including Guin v. Brazos Higher Educ. Servs. Corp. (see the February 24, 2006 issue of InfoBytes), the court determined that the plaintiff’s alleged injuries were too remote, despite the fact that the “defendant owed a duty of care to the Plaintiff and that… duty was breached.” Thus, absent actual injury through identity theft, plaintiff would be denied recovery of her credit monitoring fees. Please contact for a copy of the magistrate’s decision.
Court Rejects Claim That Inaccurate Credit Report Caused Higher Interest Rate. The District Court of Minnesota recently rejected the claims of a loan borrower who sued a credit reporting agency on the basis that a contested item on his credit report forced him to select a loan with a higher interest rate than he otherwise would have received. In McKinley v. CSC Credit Services, Inc., 2007 WL 1412555, No. 05-2340 (D. Minn. May 10, 2007), the borrower, McKinley, applied for and received a subprime mortgage loan after an unsuccessful challenge to a negative item on his credit report. He did not shop for a loan with any other lender, prime or subprime, instead believing, based on his experience as a mortgage loan officer, that he would not receive a prime loan. McKinley then sued CSC on the theory that the contested negative item in the credit report was the reason he had to pay the higher interest rate on his loan. CSC filed for summary judgment, which the court granted. The court found that McKinley did not present any factual evidence proving that the interest rate he received was higher because of the negative credit report. Consequently, McKinley could not prove that CSC caused any harm, and thus he was unable to avoid summary judgment. The court also rejected McKinley’s claims for damages for emotional distress, out-of-pocket costs and fees, and negligent violation of FCRA, none of which he could establish. For a copy of this decision, please contact .
Court Rules That “Costs” Do Not Include Attorneys’ Fees under FCRA. A federal district court recently ruled against a defendant seeking to collect attorneys’ fees under the “automatic” provision of FCRA, but ruled for recovery of costs under Rule 68. Cole v. Cole, C.A. No. 04-2073-CM, 2007 WL 1411612 (D. Kan. May 10, 2007). In the underlying case, the plaintiff, Karen Cole, sued the defendant Gary Cole for violations of FCRA. The defendant made a offer of judgment to the plaintiff for $5,000, but the plaintiff rejected the offer. At trial, the court found that Gary Cole had violated FCRA, but that he did not willfully violate the act, nor did the plaintiff suffer any damages. The jury therefore awarded no damages. Gary Cole sued to recover his attorneys’ fees under the “automatic” provisions of FCRA, which allow for automatic recovery of fees incurred as a result of an “unsuccessful pleading, motion, or other paper” that was filed “in bad faith or for purposes of harassment.” While the court noted the “hostile behavior by both parties” at trial, the court, in rejecting the defendant’s motion, found that there was legal merit (although no monetary remedy) to the plaintiff’s claims. The court ruled, however, that Gary Cole was entitled to “costs” under FRCP 68. Rule 68 states that that if a party makes an offer of judgment that is not accepted, but the offeree subsequently obtains judgment that is not more favorable than the offer, then “the offeree must pay the costs incurred after the making of the offer.” Noting that “costs” are not defined by FCRA to include attorneys’ fees, the court allowed the defendant to recover only the actual costs, but not attorneys’ fees, incurred since the settlement offer was made. For a copy of the opinion, please contact .
Plaintiff May Not Maintain FDCPA Claim for Alleged Improper Report to Credit Reporting Agency. Defendants in Breed v. Nationwide Insurance Co., No. 05-CV-547 (W.D. Ky., May 8, 2007), continued to chip away at the plaintiff’s FCRA and Fair Debt Collection Practices Act (FDCPA) claims arising from credit reports that they alleged resulted in the denial of credit or the issuance of credit at higher rates. (This case was previously reported in the March 23rd issue of InfoBytes.) In its most recent opinion, the district court dismissed the plaintiff’s FDCPA claims against the collection agency, stating that even if the agency had made an incorrect report to a credit bureau, this conduct would not violate the FDCPA, which only applies to instances where someone attempts to collect a debt. The district court allowed plaintiff’s remaining FCRA claims to proceed, however, notwithstanding arguments by the defendant collection and credit reporting agencies that the plaintiff had not set forth sufficient evidence. The district court stated that, assuming that the plaintiff provided evidence of his alleged injury, questions associated with whether the information reported was inaccurate, whether the defendants failed to follow reasonable procedures to assure the accuracy of the information reported, and whether the alleged conduct proximately caused the plaintiff’s injury were appropriately left to a jury. For a copy of this opinion, please contact .
Delaware Supreme Court Allows Direct Shareholder Action in Lieu of Derivative Action Where Excluding Action Would “Unjustly Exalt Form Over Substance.” On April 16, the Delaware Supreme Court reversed and remanded a decision on the issue of whether a shareholder lawsuit for breach of fiduciary duty must be brought exclusively as a derivative action where the claims arise out of a recapitalization that is deemed two separate transactions rolled into one, thereby giving the claim both derivative and direct characteristics. Gatz v. Ponsoldt, No. 298, 2006, (Del. April 16, 2006). The defendant in this case acquired a sizeable minority block of shares in the corporation, which gave him de facto control of the corporation. The recapitalization was carried out without any approval of the corporation’s public shareholders, thereby enabling the defendant to cash out most of his equity interest and to convert his de facto control of the corporation into an absolute majority interest that was simultaneously transferred to an entity owned by another defendant. The Chancery Court held the claims were entirely derivative and had not been filed according to shareholder derivative claims procedures. On appeal, the state supreme court reaffirmed earlier holdings in In re Tri-Star Pictures, Inc., 634 A.2d 319 (Del. 1993) and its recent progeny, Gentile v. Rossette, 906 A.2d 91 (Del. 2006). The court restated the reasoning of Rossette that “where: (1) a stockholder having majority or effective control causes the corporation to issue “excessive” shares of its stock in exchange for assets of the controlling stockholder that have a lesser value; and (2) the exchange causes an increase in the percentage of the outstanding shares owned by the controlling stockholder, and a corresponding decrease in the share percentage owned by the public (minority) shareholders,” the suit may be brought both directly and derivatively, as there is an injury to both the corporate entity and the individual shareholders. The Delaware Supreme Court held that the claims were not exclusively derivative and could have been brought directly because depriving plaintiffs of their entitlement to seek redress in a direct action would “unjustly exalt form over substance.” It was the very nature of a court of equity to look beyond form to the substance of an arrangement. To view the opinion, click http://courts.delaware.gov/opinions/(1eg02j45wvij4455y0p0dnqi)/download.aspx?ID=90580.
Delaware Appraisal Rights Pursuant to a Merger Are Exclusive to Record Holders, Not Beneficial Holders. The Delaware Chancery Court ruled on May 2 that under 8 Del. C. §262, only record holders of stock are permitted to claim and perfect appraisal rights. In re Appraisal of Transkaryotic Therapies, 1554-CC (Del. Ch., 5/2/07). The decision of Chancellor William Chandler III arose from the 2005 merger of Transkaryotic Therapies Inc. into a wholly-owned subsidiary of Shire Pharmaceuticals Group plc, with Cede & Co. (the depository frequently used as nominee for shares held in brokerage accounts) being the only record holder. Chancellor Chandler ruled that only Cede & Co. could exercise the appraisal rights with regard to all the shares beneficially owned by the petitioner, and the actions of the beneficial owners are “irrelevant.” In this case, the beneficial owners acquired the shares after the record date but before the merger, and the issue was whether the beneficial owners could seek appraisal rights for their shares. The court answered the question in the negative, stating that the primary purpose of Section 262 is to protect the contractual rights of shareholders who object to a merger and to fully compensate shareholders for any loss they may suffer as a result of the merger – but the right belongs solely to a record holder. The court’s reasoning behind the decision was that the corporation should not delve into the intimate relationship between the record and beneficial holder, and let the record stand for the rights allocable to each. For a copy of this decision, please contact .
Arbitration Clause Applies to FCRA Claims Arising Prior to Broker Agreement. On May 14, a federal district court in Ohio ruled that an arbitration clause in a “Broker Retention Agreement” applied to FCRA claims that had arisen prior to the execution of the agreement. Gardner v. Randall Mortgage Services, Inc., No. C-2-06-0612, 2007 WL 1432047 (S.D. Ohio May 14, 2007). The plaintiff in the case alleged that the defendant, a mortgage broker, violated FCRA by accessing her credit report without her knowledge or permission prior to the agreement, and continued to do so throughout the contract period. The court, however, ruled for the defendant, stating that “since some of plaintiff’s FCRA claims occur during the contract period, and the contract containing the arbitration provision broadly provides that ‘any dispute’ concerning the parties’ relationship is subject to arbitration, then the claims are so inextricably tied to Plaintiff’s other claims that all of Plaintiff’s claims shall be arbitrated.” For a copy of the opinion, please contact .
E-Financial Services
New York Passes Bill Bringing Electronic Commerce under Mail-Order Business Statute. On May 15, the New York State Assembly passed a bill that, if signed into law by Gov. Spitzer, would amend that state’s laws governing mail-order business to apply to electronic transactions. Specifically, the bill would redefine “mail-order business” and “accepts orders” (under NY Gen Bus Law § 396-m) to include transactions conducted over the internet or via electronic mail. The new legislation would also prohibit online businesses from (i) advertising or accepting orders for merchandise that will be unavailable for shipment within thirty days, unless a longer period of time is conspicuously advertised and (ii) charging additional fees for expedited shipping when the seller does not reasonably expect the merchandise to be shipped within three business days of the date the order was placed. In addition, the bill will require online businesses (i) to display their legal name and street address in all advertisements containing a post office box address, (ii) to state their refund policy in all advertisements, and (iii) to maintain records of complaints alleging failure to ship merchandise. The law would be enforced by the attorney general with injunctions and fines; it contains no private right of action. For the official text of the bill, please see http://assembly.state.ny.us/leg/?bn=A07649&sh=t.
New Nevada Law Authorizes Electronic Recording of Real Property Documents. Nevada recently enacted the Uniform Real Property Electronic Recording Act (URPERA), permitting county recorders to accept electronic documents for real property recording. Under the new law, any requirement that a document be an original may be satisfied by an electronic document. Additionally, any requirement that a document be signed is satisfied by an electronic signature. County recorders must continue to accept paper documents; however, the Nevada URPERA authorizes them to convert paper documents into electronic form. The Nevada URPERA is effective October 1, 2007. To view the bill as enrolled (S.B. 88), please visit http://www.leg.state.nv.us/74th/Bills/SB/SB88_EN.pdf.
Privacy/Data Security
Credit Monitoring Insufficient Injury for Data Breach Negligence Claim Absent Proof of Identity Theft. On May 16, the U.S. District Court for the Southern District of Ohio determined that a plaintiff failed to show that she had been injured by the defendant’s negligence, where her personal information was stolen from the defendant’s business. Kahle v. Litton Loan Servicing LP, Case No. 1:05cv756 (S.D. Ohio May 16, 2007). Several hard drives, which contained personal information on over 200,000 persons, were stolen from defendant’s locked data center. The defendant notified the plaintiff within four weeks of the theft and the plaintiff claimed to have enrolled in credit monitoring services to ensure against identity theft. There were no claims that the defendant’s personal information had actually been used to commit fraud or identity theft. The plaintiff sought recovery of her past and expected future credit monitoring fees. Citing several cases, including Guin v. Brazos Higher Educ. Servs. Corp. (see the February 24, 2006 issue of InfoBytes), the court determined that the plaintiff’s alleged injuries were too remote, despite the fact that the “defendant owed a duty of care to the Plaintiff and that… duty was breached.” Thus, absent actual injury through identity theft, plaintiff would be denied recovery of her credit monitoring fees. Please contact for a copy of the magistrate’s decision.
Credit Cards
Senator Levin Introduces Credit Card Bill to Halt Certain Credit Practices. On May 15, Senator Carl Levin (D – Mich.) introduced the Stop Unfair Practices in Credit Cards Act (S. 1395). The bill, if enacted into law, would, among other things, amend the Truth in Lending Act (TiLA) to prohibit the charging of interest on any portion of a credit card debt that is paid on time within a minimum fourteen-day billing period. The bill would also, in part, (i) restrict interest rate increases, (ii) cap penalty interest rates at seven percent above the normal rate, (iii) prohibit charging interest on fees, (iv) prohibit charging “over the limit” fees on borrowers driven over their credit limit by penalty fees, (v) prohibit imposing any penalty more than once in a billing cycle, (vi) prohibit “retroactive” interest rate increases on debts already incurred, and (vii) require more thorough annual data collection by the Federal Reserve Board under TiLA. This bill follows hearings last March by the Senate Committee on Homeland Security & Governmental Affairs on credit card fees and practices in which Senator Levin played a prominent role. No hearings on this bill have yet been scheduled. For more information on the details of S. 1395, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:s.01395:.
FRB Proposes Revisions to Reg Z for Credit Cards. On May 23, the Federal Reserved Board (FRB) announced proposed revisions to Regulation Z, the implementing regulation of the Truth in Lending Act (TiLA), for open-ended credit not secured by a home. The proposed revisions would, in part, significantly alter the format of several TiLA related disclosures and require more complete explanations of several aspects of the terms, fees, and interest rates of the credit agreement. The proposed changes would also require notification 45 days in advance of an interest rate change, including penalty increases due to late payments. Also, “change-in-terms” notices would be required 45 days in advance of any change in the agreement, and certain changes would be required to be summarized in disclosure formats required at the opening of the account. Comments on the rules to the FRB are due 120 days after the proposed rule’s publication in the Federal Register. For more information, and text of the 800 page proposal, please see http://www.federalreserve.gov/BoardDocs/Press/bcreg/2007/20070523/default.htm.