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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS
InfoBytes Breakfast – March 16, 2007 – In conjunction with the American Bar Association's Spring Meeting of the Business Law Section, Buckley Kolar LLP will host a Breakfast for InfoBytes subscribers and other friends of the firm on Friday, March 16th from 7:30 AM until 9:00 AM. We appreciate the large and growing readership of InfoBytes and hope that as many of our subscribers as possible will join us to meet the attorneys and staff of Buckley Kolar who bring you InfoBytes each week. The breakfast will be held at the Embassy Suites near the DC Convention Center where the ABA meeting is being held.
Topics – Covered This Week (Click to View)
FEDERAL ISSUES
FDIC Issues Cease and Desist Order Against Fremont Investment & Loan. On March 7, the Federal Deposit Insurance Corporation (FDIC) issued a cease and desist order to Fremont Investment & Loan ordering the bank to, among other things, cease and desist from (i) operating with management whose policies and practices are detrimental to the bank, (ii) operating the bank without effective risk management policies and procedures related to subprime and commercial mortgage lending activities, (iii) operating with a large volume of poor quality loans, and (iv) operating without adequate plans, procedures, capital and liquidity related to the bank's volatile business lines. Specifically with respect to ARM products, the bank was ordered to cease and desist from (i) qualifying borrowers based on the introductory rate, (ii) approving borrowers without considering appropriate documents or verifying income, and (iii) making loans with features likely to require frequent refinancing and with substantial prepayment penalties or with prepayment penalties that extend beyond the initial rate adjustment period. Freemont Investment & Loan was ordered, again with respect to its ARM lending, to cease and desist from (i) providing borrowers with inadequate and/or confusing information relative to product choices, loan terms, product risks, prepayment penalties and obligations related to taxes and insurance, (ii) approving borrowers with inadequate debt-to-income analysis, and (iii) approving loans or piggybacks loans with LTVs approaching or exceeding 100%. The bank additionally was ordered to adopt a subprime mortgage lending policy correcting its practices within 90 days. The bank also must adopt a 5 year strategic plan for its business and within 90 days describe efforts it will make to restructure distressed loans consistent with the marketability of such loans and with sound principles of underwriting. A copy of the full order containing additional requirements may be obtained at http://www.fdic.gov/bank/individual/enforcement/2007-03-00.pdf.
Bernanke Calls for Stronger GSE Regulation, “Clear and Credible” Receivership Process. In a March 6 speech, Federal Reserve Chairman Ben Bernanke called for new steps to control the “potentially significant source of systemic risk” posed by the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac. Bernanke suggested that (i) OFHEO, or any successor, should have “broad authority” to impose capital retention requirements due to the “concentrated and potentially volatile nature of the GSEs’ portfolios,” (ii) the GSEs should have a “clear and credible” receivership process in the event of failure, in order to downplay the federal government’s “implicit guarantee” of the GSEs and bring their cost of capital more in line with market standards, and (iii) the GSEs’ should be “anchored to a clear and well-defined public purpose” to reduce the potential for “unbridled” portfolio growth. Similar calls for GSE reform have been heard from the Federal Reserve before (most recently reported in the January 26 issue of InfoBytes). To read a transcript of the Chairman’s comments in full, see here.
Standard for Transmission of Electronic Contracts Moves Forward. The Accredited Standards Committee X9, Inc. voted to approve a forthcoming standard that will provide guidance for determining how and when an electronic contract, such as the authoritative copy of electronic chattel paper, has changed location. This standard is anticipated to have a significant influence on the conduct of electronic transactions involving electronic chattel paper, such as automotive finance contracts. The draft standard is anticipated to be made available for public comment in the upcoming weeks.
COURTS
Ninth Circuit Clarifies Burden of Proof on Proponent of CAFA Jurisdiction. In a case of first impression, the Ninth Circuit held that, where a plaintiff pleads an amount in controversy less than the amount required for federal jurisdiction, the defendant must show to a “legal certainty” that the amount in controversy is satisfied. Lowdermilk v. United States Bank National Assoc., No. 06-36085 (9th Cir. opinion issued March 2, 2007). In Lowdermilk, plaintiff sued defendant in state court on behalf of herself and a class of similarly situated employees alleging that defendant failed to pay final paychecks timely and improperly rounded down hourly wages. In her complaint, plaintiff alleged that her damages did not exceed $5 million – the amount in controversy required to exert Class Action Fairness Act of 2005 (CAFA) jurisdiction. Nonetheless, defendant removed the case under CAFA, arguing that the actual amount in controversy exceeded CAFA’s jurisdictional requirement. The district court remanded, holding that defendant failed to show that the amount in controversy alleged by plaintiff was made in bad faith. On appeal, the Ninth Circuit agreed that the burden of establishing the amount in controversy lies properly with the proponent of federal jurisdiction – in this case, the defendant – but rejected the “bad faith” standard used by the district court. Instead, the Ninth Circuit panel held that, where plaintiff has in good faith plead a specific amount of damages less than the required jurisdictional amount, defendant must overcome the presumption against federal jurisdiction by “showing to a legal certainty that the amount in controversy exceeds the statutory minimum.” A copy of the Lowdermilk opinion is available here. For the dissenting opinion, see here.
Court Upholds FCRA “Firm Offer” That Required 10% Equity. In Zawacki v. Discover Financial Services, Inc., No. 06-C-4925, 2007 U.S. Dist. LEXIS 12655 (Feb. 23, 2007), the U.S. District Court for the Northern District of Illinois dismissed a complaint that a prescreened solicitation for a home equity line of credit violated the Fair Credit Reporting Act (FCRA) firm-offer requirement. The court held that the mailer “discloses all material terms and there is no reasonable inference that it is a guise for solicitation rather than a legitimate credit offer.” The court rejected the plaintiff’s claim that the fact that the letter stated that the offer required at least 10% equity and solicited consumers who did not meet that standard to “call for other, non-disclosed, non-definite terms” converted the letter into a mere sales pitch as to those consumers, noting that “FCRA allows creditors to provide certain conditions in their otherwise firm offers, including varying levels of collateral.” For a copy of this opinion, please contact .
Student Loan Consolidation Offer Meets FCRA “Value” Test. The U.S. District Court for the Eastern District of Missouri dismissed another FCRA firm-offer case. McDonald v. Nelnet, Inc., No. 4:06CV1599, 2007 WL 646133 (E.D. Mo. Feb. 23, 2007). The plaintiff claimed that the lender had not made a valid firm offer because the only information that the mailer, which was promoting a student-loan consolidation program, conveyed about the terms of the offer was an explanation of how the interest rate was determined. The court stated that “Congress carefully crafted its definition of ‘firm offer’ and chose not to require that the lender specify particular loan terms.” The court agreed with the U.S. Court of Appeals for the Seventh Circuit in Cole v. U.S. Capital that “there [must be] some value to the consumer so that the offer is not a sham or mere solicitation,” but held that the offer letter in question did contain some value to the consumer, even though it did not mention a loan amount, because the federal Higher Education Act specifies a minimum loan amount for consolidation of student loans. For a copy of this opinion, please contact .
Appeals Court Upholds Dismissal of FDCPA Claims against Debt Collector. The Seventh Circuit Court of Appeals has upheld the summary judgment of claims brought under the Fair Debt Collection Practices Act (FDCPA) in favor of a law firm. Beler v. Blatt, Hasenmiller, Leibsker & Moore, LLC, No. 06-2707 (7th Cir., Mar. 7, 2007). In this case, the debtor defaulted on a private label credit card, and the defendant law firm instituted collection procedures in Illinois state court. As a result, the plaintiff’s bank account was frozen. The plaintiff’s lawyer asserted that the funds in the account were exempt as Social Security payments, and the law firm dismissed the citation and the funds were released. The plaintiff, in a suit filed in federal court, claimed that the law firm violated FDCPA, since the credit card agreement was incomprehensible to an unsophisticated consumer. The appeals court rejected this assertion, finding that “it is far from clear that the FDCPA controls the contents of pleadings filed in state court,” and that “a rule against trickery differs from a command to use plain English and write at a sixth-grade level.” The plaintiff also claimed that the debt collector violated the FDCPA by sending a citation to her bank that led to the bank freezing her account, including the exempt assets in her account. The court rejected this claim as well, finding that if the collector violated the Social Security Act or Illinois state law, claims should be brought under those laws. In upholding the summary judgment by the district court, the appeals court said that the FDCPA “does not so much as hint at being an enforcement mechanism for other rules of state and federal law. This is not a piggyback jurisdiction clause.” For a copy of the opinion, please contact .
Holder of Note Need Not Be Owner of Beneficial Interest In Order to Foreclose. In an opinion published on February 21, a Florida state appellate court reversed a trial court ruling that held that a person is incapable of bringing a foreclosure action in court against a defaulting mortgagor unless it is the owner of the beneficial interest in a mortgage note. Mortgage Electronic Registration Systems, Inc. v. Azize, Case No. 2D05-4544 (Fla. Dist. Ct. App. Feb. 21, 2007). In this case, Mortgage Electronic Registration Systems, Inc. (MERS) sought to foreclose against a borrower who defaulted on a mortgage note (which had been lost after MERS took possession of it) that named MERS as the mortgagee, as nominee for another lender. MERS claimed that, as owner of the note in possession at the time it was lost, it was entitled to enforce the note. The trial court dismissed the case with prejudice, ruling that even if MERS was able to reestablish the lost note, it could never, under any circumstances, be a proper plaintiff to bring a foreclosure action if it is not the owner of the beneficial interest in the note. The appellate court rejected the holding, reciting Florida law that permits a person who is not the real party in interest, but who is acting on behalf of such person, to bring an action. In addition, the appellate court rejected the trial court's holding that MERS lacked standing because one corporation cannot be the agent of another corporation, stating that conclusion was incorrect. For the full text of the opinion, please contact .
One Online Transaction into a State is Insufficient to Establish Personal Jurisdiction. A New York State court recently determined that a single transaction by an out-of-state defendant into New York is insufficient to establish the defendant’s “minimum contacts” with New York, and therefore that a New York court could not establish personal jurisdiction over that defendant. Sayeedi v. Walser, 2007 NY Slip OP 27081 (N.Y Civ. Ct. Feb. 27, 2007). In Sayeedi, the plaintiff purchased an allegedly defective engine from a Missouri resident over eBay, and sued for damages. The court noted that the defendant’s single contact with New York was insufficient to establish the New York courts’ personal jurisdiction over him, in part because the nature of eBay sales meant that the defendant did not direct his efforts towards selling into New York, and thus did not “purposefully avail” himself of New York law. Accordingly, the court determined that extending the New York courts’ jurisdiction over the defendant would be inconsistent with the due process clause and New York law. Please contact for a copy of the decision.
Accountants Primarily Liable for Failure to Correct False Statements. The Court of Appeals for the Second Circuit held for the first time on Feb. 26 that an accountant can be held primarily liable under 1934 Securities Exchange Act Section 10(b) upon failing to correct a certified opinion that was false or misleading when issued. Overton v. Todman, No. 06-2496, (2nd Cir. February 26, 2007). The court noted that primary liability stems from the “duty to correct” prior statements that were false when made, which is broader than the duty to update, which is typically triggered when intervening events cause a statement to become misleading. The holding is limited to circumstances in which the accountant (i) “makes a statement in its certified opinion that is false or misleading when made,” (ii) “subsequently learns or was reckless in not learning that the earlier statement was false or misleading,” and (iii) “knows or should know that potential investors are relying on its opinion,” but fails to take reasonable steps to correct or withdraw its certified opinion and / or the underlying financial statements. This decision can be found by searching the Second Circuit’s website at http://www.ca2.uscourts.gov/, or by contacting .
Marginally Interactive Website Insufficient to Satisfy Personal Jurisdiction; No Evidence of Actual Sales to Forum State Presented. In a trademark dispute involving energy drink brands, a Texas federal court held that the defendant’s website did not create sufficient contacts with Texas to justify jurisdiction. Optimal Beverage Co., Inc. v. United Brands Co., Inc., No. 06-1386 (S.D. Tex., opinion issued February 27, 2007). Plaintiff, the manufacturer and seller of “Deezel” energy drink, sued defendant, the manufacturer and seller of “Diesel” energy drink, for allegedly violating plaintiff’s rights to the registered “Deezel” mark. In response to a motion to dismiss, plaintiff argued that the content of three of defendant’s product websites justified subjecting the defendant to personal jurisdiction in Texas. Two of defendant’s sites provided general information about the products, contained published articles about the products, and allowed customers to submit comments and contact information, but did not allow customers to order the products directly from the website. The third site – in addition to advertising and providing product information – allowed customers to place orders online and receive the product in all fifty states. The Court found that none of the websites justified subjecting the defendant to the Texas forum. Specifically, the two websites that only provided information about the products were “wholly passive” and therefore insufficient to satisfy minimum contacts. According to the Court, the third website, while allowing for some level of interactivity, was also not sufficient to justify personal jurisdiction over the defendant because plaintiffs provided no evidence that anyone in Texas actually used the site to purchase the drink. Moreover, the Court suggested that, to justify personal jurisdiction, the plaintiff would have to a level of proof more than sporadic internet sales to Texas customers, citing Bird v. Parsons, 289 F.3d 865 (6th Cir. 2002), in which the Sixth circuit held that 4,000 internet sales to forum-state residents was insufficient to justify jurisdiction. Please contact for copies of these opinions.
STATE ISSUES
South Dakota Enacts Aggressive Law Restricting Unsolicited Commercial Emails. On March 1, South Dakota Governor Mike Rounds signed the state legislature's bill (H.B. 1285) to prohibit unsolicited commercial e-mail messages from being sent to addresses belonging to state residents unless the subject line alerts the recipient of the commercial nature of the message. The legislation defines "unsolicited commercial e-mail advertisements" as commercial e-mails sent without a "pre-existing business relationship", and without the recipient's prior, direct consent. According to the South Dakota Governor's office, the new legislation does not conflict with the federal CAN-SPAM Act, 15 U.S.C. §§ 7701 et seq., because CAN-SPAM does not preempt state and local laws regulating commercial e-mail to the extent that such laws prohibit "falsity or deception" (though it does expressly preempt all other state and local laws regulating commercial e-mail.) The new legislation authorizes civil suits by individuals and the state attorney general where actual damages or liquidated damages are permitted up to $1,000 per unlawful e-mail or $1 million per "incident" - defined as a "a single transmission or delivery to a single recipient or to multiple recipients of an unsolicited commercial e-mail advertisement containing substantially similar content." For more information, including a copy of the bill, please contact .
Connecticut Considers Cost-Shifting Data Breach Notification Bill. A bill (SB 1089) was recently introduced into the Connecticut State Senate that would make companies that have a data breach involving unencrypted personal information to be liable to banks “for the costs of any reasonable action undertaken by the bank or out-of-state bank” to protect the personal information of their customers and their accounts. Such costs would include those associated with stop payment orders, reissuing credit cards, closing and/or reopening bank accounts, refunds issued to bank customers, and “any assistance provided to customers to help mitigate loss or inconvenience or to prevent further loss or inconvenience.” As reported in last week’s edition of InfoBytes, a similar data breach bill has been introduced in Massachusetts (H. 213) that would make retailers liable for the costs incurred by banks in protecting their customers’ accounts. For a copy of the Connecticut bill, please see http://www.cga.ct.gov/2007/TOB/S/2007SB-01089-R00-SB.htm.
Wyoming Legislature Enacts Law Designed to Protect Consumers Affected by Breaches of Personal Data. On March 1, the Governor of Wyoming signed a new law (S.F. 53), effective July 1, 2007, requiring businesses to notify Wyoming residents as soon as possible following a breach of their personal identifying information that "causes or is reasonably believed to cause loss or injury." E-mail or written notification is sufficient. However an entity may substitute notice by posting an announcement on its website and in major statewide media, depending, in part, on whether it is based in Wyoming, the number of residents affected, and the cost of regular notice. Under the new law, Wyoming residents will be allowed to place security freezes on their credit reports for a fee of $10 (though no fee is required of identity theft victims). A credit report company must have a freeze in place within five business days of a request. A freeze may be temporarily lifted or removed at the request of the consumer. A reporting firm has three business days to comply with such a request (this will change to 15 minutes on September 1, 2008). To view Wyoming S.F. 53, please visit: http://legisweb.state.wy.us/2007/Enroll/SF0053.pdf.
MISCELLANY
James Freis to Head FinCEN. On March 5, the Secretary of the Treasury named James H. Freis, Jr. as Director of the Financial Crimes Enforcement Network (FinCEN). Freis is currently the Treasury’s Deputy Assistant General Counsel for Enforcement & Intelligence, and has previously worked in the legal departments of both the New York Federal Reserve and the Bank for International Settlements in Basel, Switzerland. Freis replaces Robert Werner who left FinCEN at the end of last year. For the Treasury Department’s press release, see http://www.treasury.gov/press/releases/hp292.htm.
FTC to Host Workshop on Identity Theft Prevention. The Federal Trade Commission (FTC) will hold a workshop entitled “Proof Positive: New Directions in ID Authentication” on April 23 and 24, 2007. The FTC is seeking public comment on several issues to help arrange the workshop’s agenda, including (i) how individuals can prove their identities when first establishing them, (ii) promising current or emerging authentication technologies or methods, and (iii) whether these technologies work for the consumer. Public comments are due March 23, 2007. For more information, see http://www.ftc.gov/opa/2007/02/authentication.htm.
Internet Blog Tracking the Collapse of U.S. Subprime Mortgage Lenders. Aaron Krowne, head of digital research as Emory University’s Woodruff Library, has created a website to track the collapse in the subprime mortgage lending industry. His site keeps a running list of lenders that have been shut down and/or no longer operate independently, includes links to online news articles and commentary surrounding the issue, and provides brief day-by-day updates on mortgage lending news. The blog can be found at http://mortgageimplode.com/#about.
FIRM NEWS
Margo Tank will be participating in a web seminar entitled “Legal Requirements for E-Signatures: Will your electronic records stand up in court?” on March 21. The 60-minute presentation will address several frequently asked questions regarding the enforceability and reliability of electronic transactions and records. For more information, go to http://www.silanis.com/site/corporate/seminars.php?id=491.
On Thursday, April 19, John Kromer and Clinton Rockwell will be speaking on a Pratt Audio Conference Series regarding non-traditional mortgage loans and federal and state agency guidance.
FDIC Issues Cease and Desist Order Against Fremont Investment & Loan. On March 7, the Federal Deposit Insurance Corporation (FDIC) issued a cease and desist order to Fremont Investment & Loan ordering the bank to, among other things, cease and desist from (i) operating with management whose policies and practices are detrimental to the bank, (ii) operating the bank without effective risk management policies and procedures related to subprime and commercial mortgage lending activities, (iii) operating with a large volume of poor quality loans, and (iv) operating without adequate plans, procedures, capital and liquidity related to the bank's volatile business lines. Specifically with respect to ARM products, the bank was ordered to cease and desist from (i) qualifying borrowers based on the introductory rate, (ii) approving borrowers without considering appropriate documents or verifying income, and (iii) making loans with features likely to require frequent refinancing and with substantial prepayment penalties or with prepayment penalties that extend beyond the initial rate adjustment period. Freemont Investment & Loan was ordered, again with respect to its ARM lending, to cease and desist from (i) providing borrowers with inadequate and/or confusing information relative to product choices, loan terms, product risks, prepayment penalties and obligations related to taxes and insurance, (ii) approving borrowers with inadequate debt-to-income analysis, and (iii) approving loans or piggybacks loans with LTVs approaching or exceeding 100%. The bank additionally was ordered to adopt a subprime mortgage lending policy correcting its practices within 90 days. The bank also must adopt a 5 year strategic plan for its business and within 90 days describe efforts it will make to restructure distressed loans consistent with the marketability of such loans and with sound principles of underwriting. A copy of the full order containing additional requirements may be obtained at: http://www.fdic.gov/bank/individual/enforcement/2007-03-00.pdf.
Court Upholds FCRA “Firm Offer” That Required 10% Equity. In Zawacki v. Discover Financial Services, Inc., No. 06-C-4925, 2007 U.S. Dist. LEXIS 12655 (Feb. 23, 2007), the U.S. District Court for the Northern District of Illinois dismissed a complaint that a prescreened solicitation for a home equity line of credit violated the Fair Credit Reporting Act (FCRA) firm-offer requirement. The court held that the mailer “discloses all material terms and there is no reasonable inference that it is a guise for solicitation rather than a legitimate credit offer.” The court rejected the plaintiff’s claim that the fact that the letter stated that the offer required at least 10% equity and solicited consumers who did not meet that standard to “call for other, non-disclosed, non-definite terms” converted the letter into a mere sales pitch as to those consumers, noting that “FCRA allows creditors to provide certain conditions in their otherwise firm offers, including varying levels of collateral.” For a copy of this opinion, please contact .
Holder of Note Need Not Be Owner of Beneficial Interest In Order to Foreclose. In an opinion published on February 21, a Florida state appellate court reversed a trial court ruling that held that a person is incapable of bringing a foreclosure action in court against a defaulting mortgagor unless it is the owner of the beneficial interest in a mortgage note. Mortgage Electronic Registration Systems, Inc. v. Azize, Case No. 2D05-4544 (Fla. Dist. Ct. App. Feb. 21, 2007). In this case, Mortgage Electronic Registration Systems, Inc. (MERS) sought to foreclose against a borrower who defaulted on a mortgage note (which had been lost after MERS took possession of it) that named MERS as the mortgagee, as nominee for another lender. MERS claimed that, as owner of the note in possession at the time it was lost, it was entitled to enforce the note. The trial court dismissed the case with prejudice, ruling that even if MERS was able to reestablish the lost note, it could never, under any circumstances, be a proper plaintiff to bring a foreclosure action if it is not the owner of the beneficial interest in the note. The appellate court rejected the holding, reciting Florida law that permits a person who is not the real party in interest, but who is acting on behalf of such person, to bring an action. In addition, the appellate court rejected the trial court's holding that MERS lacked standing because one corporation cannot be the agent of another corporation, stating that conclusion was incorrect. For the full text of the opinion, please contact .
Bernanke Calls for Stronger GSE Regulation, “Clear and Credible” Receivership Process. In a March 6 speech, Federal Reserve Chairman Ben Bernanke called for new steps to control the “potentially significant source of systemic risk” posed by the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac. Bernanke suggested that (i) OFHEO, or any successor, should have “broad authority” to impose capital retention requirements due to the “concentrated and potentially volatile nature of the GSEs’ portfolios,” (ii) the GSEs should have a “clear and credible” receivership process in the event of failure, in order to downplay the federal government’s “implicit guarantee” of the GSEs and bring their cost of capital more in line with market standards, and (iii) the GSEs’ should be “anchored to a clear and well-defined public purpose” to reduce the potential for “unbridled” portfolio growth. Similar calls for GSE reform have been heard from the Federal Reserve before (most recently reported in the January 26 issue of InfoBytes). To read a transcript of the Chairman’s comments in full, see here.
Internet Blog Tracking the Collapse of U.S. Subprime Mortgage Lenders. Aaron Krowne, head of digital research as Emory University’s Woodruff Library, has created a website to track the collapse in the subprime mortgage lending industry. His site keeps a running list of lenders that have been shut down and/or no longer operate independently, includes links to online news articles and commentary surrounding the issue, and provides brief day-by-day updates on mortgage lending news. The blog can be found at http://mortgageimplode.com/#about.
FDIC Issues Cease and Desist Order Against Fremont Investment & Loan. On March 7, the Federal Deposit Insurance Corporation (FDIC) issued a cease and desist order to Fremont Investment & Loan ordering the bank to, among other things, cease and desist from (i) operating with management whose policies and practices are detrimental to the bank, (ii) operating the bank without effective risk management policies and procedures related to subprime and commercial mortgage lending activities, (iii) operating with a large volume of poor quality loans, and (iv) operating without adequate plans, procedures, capital and liquidity related to the bank's volatile business lines. Specifically with respect to ARM products, the bank was ordered to cease and desist from (i) qualifying borrowers based on the introductory rate, (ii) approving borrowers without considering appropriate documents or verifying income, and (iii) making loans with features likely to require frequent refinancing and with substantial prepayment penalties or with prepayment penalties that extend beyond the initial rate adjustment period. Freemont Investment & Loan was ordered, again with respect to its ARM lending, to cease and desist from (i) providing borrowers with inadequate and/or confusing information relative to product choices, loan terms, product risks, prepayment penalties and obligations related to taxes and insurance, (ii) approving borrowers with inadequate debt-to-income analysis, and (iii) approving loans or piggybacks loans with LTVs approaching or exceeding 100%. The bank additionally was ordered to adopt a subprime mortgage lending policy correcting its practices within 90 days. The bank also must adopt a 5 year strategic plan for its business and within 90 days describe efforts it will make to restructure distressed loans consistent with the marketability of such loans and with sound principles of underwriting. A copy of the full order containing additional requirements may be obtained at http://www.fdic.gov/bank/individual/enforcement/2007-03-00.pdf.
James Freis to Head FinCEN. On March 5, the Secretary of the Treasury named James H. Freis, Jr. as Director of the Financial Crimes Enforcement Network (FinCEN). Freis is currently the Treasury’s Deputy Assistant General Counsel for Enforcement & Intelligence, and has previously worked in the legal departments of both the New York Federal Reserve and the Bank for International Settlements in Basel, Switzerland. Freis replaces Robert Werner who left FinCEN at the end of last year. For the Treasury Department’s press release, see http://www.treasury.gov/press/releases/hp292.htm.
Student Loan Consolidation Offer Meets FCRA “Value” Test. The U.S. District Court for the Eastern District of Missouri dismissed another FCRA firm-offer case. McDonald v. Nelnet, Inc., No. 4:06CV1599, 2007 WL 646133 (E.D. Mo. Feb. 23, 2007). The plaintiff claimed that the lender had not made a valid firm offer because the only information that the mailer, which was promoting a student-loan consolidation program, conveyed about the terms of the offer was an explanation of how the interest rate was determined. The court stated that “Congress carefully crafted its definition of ‘firm offer’ and chose not to require that the lender specify particular loan terms.” The court agreed with the U.S. Court of Appeals for the Seventh Circuit in Cole v. U.S. Capital that “there [must be] some value to the consumer so that the offer is not a sham or mere solicitation,” but held that the offer letter in question did contain some value to the consumer, even though it did not mention a loan amount, because the federal Higher Education Act specifies a minimum loan amount for consolidation of student loans. For a copy of this opinion, please contact .
Ninth Circuit Clarifies Burden of Proof on Proponent of CAFA Jurisdiction. In a case of first impression, the Ninth Circuit held that, where a plaintiff pleads an amount in controversy less than the amount required for federal jurisdiction, the defendant must show to a “legal certainty” that the amount in controversy is satisfied. Lowdermilk v. United States Bank National Assoc., No. 06-36085 (9th Cir. opinion issued March 2, 2007). In Lowdermilk, plaintiff sued defendant in state court on behalf of herself and a class of similarly situated employees alleging that defendant failed to pay final paychecks timely and improperly rounded down hourly wages. In her complaint, plaintiff alleged that her damages did not exceed $5 million – the amount in controversy required to exert Class Action Fairness Act of 2005 (CAFA) jurisdiction. Nonetheless, defendant removed the case under CAFA, arguing that the actual amount in controversy exceeded CAFA’s jurisdictional requirement. The district court remanded, holding that defendant failed to show that the amount in controversy alleged by plaintiff was made in bad faith. On appeal, the Ninth Circuit agreed that the burden of establishing the amount in controversy lies properly with the proponent of federal jurisdiction – in this case, the defendant – but rejected the “bad faith” standard used by the district court. Instead, the Ninth Circuit panel held that, where plaintiff has in good faith plead a specific amount of damages less than the required jurisdictional amount, defendant must overcome the presumption against federal jurisdiction by “showing to a legal certainty that the amount in controversy exceeds the statutory minimum.” A copy of the Lowdermilk opinion is available here. For the dissenting opinion, see here.
Court Upholds FCRA “Firm Offer” That Required 10% Equity. In Zawacki v. Discover Financial Services, Inc., No. 06-C-4925, 2007 U.S. Dist. LEXIS 12655 (Feb. 23, 2007), the U.S. District Court for the Northern District of Illinois dismissed a complaint that a prescreened solicitation for a home equity line of credit violated the Fair Credit Reporting Act (FCRA) firm-offer requirement. The court held that the mailer “discloses all material terms and there is no reasonable inference that it is a guise for solicitation rather than a legitimate credit offer.” The court rejected the plaintiff’s claim that the fact that the letter stated that the offer required at least 10% equity and solicited consumers who did not meet that standard to “call for other, non-disclosed, non-definite terms” converted the letter into a mere sales pitch as to those consumers, noting that “FCRA allows creditors to provide certain conditions in their otherwise firm offers, including varying levels of collateral.” For a copy of this opinion, please contact .
Student Loan Consolidation Offer Meets FCRA “Value” Test. The U.S. District Court for the Eastern District of Missouri dismissed another FCRA firm-offer case. McDonald v. Nelnet, Inc., No. 4:06CV1599, 2007 WL 646133 (E.D. Mo. Feb. 23, 2007) The plaintiff claimed that the lender had not made a valid firm offer because the only information that the mailer, which was promoting a student-loan consolidation program, conveyed about the terms of the offer was an explanation of how the interest rate was determined. The court stated that “Congress carefully crafted its definition of ‘firm offer’ and chose not to require that the lender specify particular loan terms.” The court agreed with the U.S. Court of Appeals for the Seventh Circuit in Cole v. U.S. Capital that “there [must be] some value to the consumer so that the offer is not a sham or mere solicitation,” but held that the offer letter in question did contain some value to the consumer, even though it did not mention a loan amount, because the federal Higher Education Act specifies a minimum loan amount for consolidation of student loans. For a copy of this opinion, please contact .
Appeals Court Upholds Dismissal of FDCPA Claims against Debt Collector. The Seventh Circuit Court of Appeals has upheld the summary judgment of claims brought under the Fair Debt Collection Practices Act (FDCPA) in favor of a law firm. Beler v. Blatt, Hasenmiller, Leibsker & Moore, LLC, No. 06-2707 (7th Cir., Mar. 7, 2007). In this case, the debtor defaulted on a private label credit card, and the defendant law firm instituted collection procedures in Illinois state court. As a result, the plaintiff’s bank account was frozen. The plaintiff’s lawyer asserted that the funds in the account were exempt as Social Security payments, and the law firm dismissed the citation and the funds were released. The plaintiff, in a suit filed in federal court, claimed that the law firm violated FDCPA, since the credit card agreement was incomprehensible to an unsophisticated consumer. The appeals court rejected this assertion, finding that “it is far from clear that the FDCPA controls the contents of pleadings filed in state court,” and that “a rule against trickery differs from a command to use plain English and write at a sixth-grade level.” The plaintiff also claimed that the debt collector violated the FDCPA by sending a citation to her bank that led to the bank freezing her account, including the exempt assets in her account. The court rejected this claim as well, finding that if the collector violated the Social Security Act or Illinois state law, claims should be brought under those laws. In upholding the summary judgment by the district court, the appeals court said that the FDCPA “does not so much as hint at being an enforcement mechanism for other rules of state and federal law. This is not a piggyback jurisdiction clause.” For a copy of the opinion, please contact .
Holder of Note Need Not Be Owner of Beneficial Interest In Order to Foreclose. In an opinion published on February 21, a Florida state appellate court reversed a trial court ruling that held that a person is incapable of bringing a foreclosure action in court against a defaulting mortgagor unless it is the owner of the beneficial interest in a mortgage note. Mortgage Electronic Registration Systems, Inc. v. Azize, Case No. 2D05-4544 (Fla. Dist. Ct. App. Feb. 21, 2007). In this case, Mortgage Electronic Registration Systems, Inc. (MERS) sought to foreclose against a borrower who defaulted on a mortgage note (which had been lost after MERS took possession of it) that named MERS as the mortgagee, as nominee for another lender. MERS claimed that, as owner of the note in possession at the time it was lost, it was entitled to enforce the note. The trial court dismissed the case with prejudice, ruling that even if MERS was able to reestablish the lost note, it could never, under any circumstances, be a proper plaintiff to bring a foreclosure action if it is not the owner of the beneficial interest in the note. The appellate court rejected the holding, reciting Florida law that permits a person who is not the real party in interest, but who is acting on behalf of such person, to bring an action. In addition, the appellate court rejected the trial court's holding that MERS lacked standing because one corporation cannot be the agent of another corporation, stating that conclusion was incorrect. For the full text of the opinion, please contact .
One Online Transaction into a State is Insufficient to Establish Personal Jurisdiction. A New York State court recently determined that a single transaction by an out-of-state defendant into New York is insufficient to establish the defendant’s “minimum contacts” with New York, and therefore that a New York court could not establish personal jurisdiction over that defendant. Sayeedi v. Walser, 2007 NY Slip OP 27081 (N.Y Civ. Ct. Feb. 27, 2007). In Sayeedi, the plaintiff purchased an allegedly defective engine from a Missouri resident over eBay, and sued for damages. The court noted that the defendant’s single contact with New York was insufficient to establish the New York courts’ personal jurisdiction over him, in part because the nature of eBay sales meant that the defendant did not direct his efforts towards selling into New York, and thus did not “purposefully avail” himself of New York law. Accordingly, the court determined that extending the New York courts’ jurisdiction over the defendant would be inconsistent with the due process clause and New York law. Please contact for a copy of the decision.
Accountants Primarily Liable for Failure to Correct False Statements. The Court of Appeals for the Second Circuit held for the first time on Feb. 26 that an accountant can be held primarily liable under 1934 Securities Exchange Act Section 10(b) upon failing to correct a certified opinion that was false or misleading when issued. Overton v. Todman, No. 06-2496, (2nd Cir. February 26, 2007). The court noted that primary liability stems from the “duty to correct” prior statements that were false when made, which is broader than the duty to update, which is typically triggered when intervening events cause a statement to become misleading. The holding is limited to circumstances in which the accountant (i) “makes a statement in its certified opinion that is false or misleading when made,” (ii) “subsequently learns or was reckless in not learning that the earlier statement was false or misleading,” and (iii) “knows or should know that potential investors are relying on its opinion,” but fails to take reasonable steps to correct or withdraw its certified opinion and / or the underlying financial statements. This decision can be found by searching the Second Circuit’s website at http://www.ca2.uscourts.gov/, or by contacting .
Marginally Interactive Website Insufficient to Satisfy Personal Jurisdiction; No Evidence of Actual Sales to Forum State Presented. In a trademark dispute involving energy drink brands, a Texas federal court held that the defendant’s website did not create sufficient contacts with Texas to justify jurisdiction. Optimal Beverage Co., Inc. v. United Brands Co., Inc., No. 06-1386 (S.D. Tex., opinion issued February 27, 2007). Plaintiff, the manufacturer and seller of “Deezel” energy drink, sued defendant, the manufacturer and seller of “Diesel” energy drink, for allegedly violating plaintiff’s rights to the registered “Deezel” mark. In response to a motion to dismiss, plaintiff argued that the content of three of defendant’s product websites justified subjecting the defendant to personal jurisdiction in Texas. Two of defendant’s sites provided general information about the products, contained published articles about the products, and allowed customers to submit comments and contact information, but did not allow customers to order the products directly from the website. The third site – in addition to advertising and providing product information – allowed customers to place orders online and receive the product in all fifty states. The Court found that none of the websites justified subjecting the defendant to the Texas forum. Specifically, the two websites that only provided information about the products were “wholly passive” and therefore insufficient to satisfy minimum contacts. According to the Court, the third website, while allowing for some level of interactivity, was also not sufficient to justify personal jurisdiction over the defendant because plaintiffs provided no evidence that anyone in Texas actually used the site to purchase the drink. Moreover, the Court suggested that, to justify personal jurisdiction, the plaintiff would have to a level of proof more than sporadic internet sales to Texas customers, citing Bird v. Parsons, 289 F.3d 865 (6th Cir. 2002), in which the Sixth circuit held that 4,000 internet sales to forum-state residents was insufficient to justify jurisdiction. Please contact for copies of these opinions.
Accountants Primarily Liable for Failure to Correct False Statements. The Court of Appeals for the Second Circuit held for the first time on Feb. 26 that an accountant can be held primarily liable under 1934 Securities Exchange Act Section 10(b) upon failing to correct a certified opinion that was false or misleading when issued. Overton v. Todman, No. 06-2496, (2nd Cir. February 26, 2007). The court noted that primary liability stems from the “duty to correct” prior statements that were false when made, which is broader than the duty to update, which is typically triggered when intervening events cause a statement to become misleading. The holding is limited to circumstances in which the accountant (i) “makes a statement in its certified opinion that is false or misleading when made,” (ii) “subsequently learns or was reckless in not learning that the earlier statement was false or misleading,” and (iii) “knows or should know that potential investors are relying on its opinion,” but fails to take reasonable steps to correct or withdraw its certified opinion and / or the underlying financial statements. This decision can be found by searching the Second Circuit’s website at http://www.ca2.uscourts.gov/, or by contacting .
Standard for Transmission of Electronic Contracts Moves Forward. The Accredited Standards Committee X9, Inc. voted to approve a forthcoming standard that will provide guidance for determining how and when an electronic contract, such as the authoritative copy of electronic chattel paper, has changed location. This standard is anticipated to have a significant influence on the conduct of electronic transactions involving electronic chattel paper, such as automotive finance contracts. The draft standard is anticipated to be made available for public comment in the upcoming weeks.
South Dakota Enacts Aggressive Law Restricting Unsolicited Commercial Emails. On March 1, South Dakota Governor Mike Rounds signed the state legislature's bill (H.B. 1285) to prohibit unsolicited commercial e-mail messages from being sent to addresses belonging to state residents unless the subject line alerts the recipient of the commercial nature of the message. The legislation defines "unsolicited commercial e-mail advertisements" as commercial e-mails sent without a "pre-existing business relationship", and without the recipient's prior, direct consent. According to the South Dakota Governor's office, the new legislation does not conflict with the federal CAN-SPAM Act, 15 U.S.C. §§ 7701 et seq., because CAN-SPAM does not preempt state and local laws regulating commercial e-mail to the extent that such laws prohibit "falsity or deception" (though it does expressly preempt all other state and local laws regulating commercial e-mail.) The new legislation authorizes civil suits by individuals and the state attorney general where actual damages or liquidated damages are permitted up to $1,000 per unlawful e-mail or $1 million per "incident" - defined as a "a single transmission or delivery to a single recipient or to multiple recipients of an unsolicited commercial e-mail advertisement containing substantially similar content." For more information, including a copy of the bill, please contact .
One Online Transaction into a State is Insufficient to Establish Personal Jurisdiction. A New York State court recently determined that a single transaction by an out-of-state defendant into New York is insufficient to establish the defendant’s “minimum contacts” with New York, and therefore that a New York court could not establish personal jurisdiction over that defendant. Sayeedi v. Walser, 2007 NY Slip OP 27081 (N.Y Civ. Ct. Feb. 27, 2007). In Sayeedi, the plaintiff purchased an allegedly defective engine from a Missouri resident over eBay, and sued for damages. The court noted that the defendant’s single contact with New York was insufficient to establish the New York courts’ personal jurisdiction over him, in part because the nature of eBay sales meant that the defendant did not direct his efforts towards selling into New York, and thus did not “purposefully avail” himself of New York law. Accordingly, the court determined that extending the New York courts’ jurisdiction over the defendant would be inconsistent with the due process clause and New York law. Please contact for a copy of the decision.
Marginally Interactive Website Insufficient to Satisfy Personal Jurisdiction; No Evidence of Actual Sales to Forum State Presented. In a trademark dispute involving energy drink brands, a Texas federal court held that the defendant’s website did not create sufficient contacts with Texas to justify jurisdiction. Optimal Beverage Co., Inc. v. United Brands Co., Inc., No. 06-1386 (S.D. Tex., opinion issued February 27, 2007). Plaintiff, the manufacturer and seller of “Deezel” energy drink, sued defendant, the manufacturer and seller of “Diesel” energy drink, for allegedly violating plaintiff’s rights to the registered “Deezel” mark. In response to a motion to dismiss, plaintiff argued that the content of three of defendant’s product websites justified subjecting the defendant to personal jurisdiction in Texas. Two of defendant’s sites provided general information about the products, contained published articles about the products, and allowed customers to submit comments and contact information, but did not allow customers to order the products directly from the website. The third site – in addition to advertising and providing product information – allowed customers to place orders online and receive the product in all fifty states. The Court found that none of the websites justified subjecting the defendant to the Texas forum. Specifically, the two websites that only provided information about the products were “wholly passive” and therefore insufficient to satisfy minimum contacts. According to the Court, the third website, while allowing for some level of interactivity, was also not sufficient to justify personal jurisdiction over the defendant because plaintiffs provided no evidence that anyone in Texas actually used the site to purchase the drink. Moreover, the Court suggested that, to justify personal jurisdiction, the plaintiff would have to a level of proof more than sporadic internet sales to Texas customers, citing Bird v. Parsons, 289 F.3d 865 (6th Cir. 2002), in which the Sixth circuit held that 4,000 internet sales to forum-state residents was insufficient to justify jurisdiction. Please contact for copies of these opinions.
FTC to Host Workshop on Identity Theft Prevention. The Federal Trade Commission (FTC) will hold a workshop entitled “Proof Positive: New Directions in ID Authentication” on April 23 and 24, 2007. The FTC is seeking public comment on several issues to help arrange the workshop’s agenda, including (i) how individuals can prove their identities when first establishing them, (ii) promising current or emerging authentication technologies or methods, and (iii) whether these technologies work for the consumer. Public comments are due March 23, 2007. For more information, see http://www.ftc.gov/opa/2007/02/authentication.htm.
South Dakota Enacts Aggressive Law Restricting Unsolicited Commercial Emails. On March 1, South Dakota Governor Mike Rounds signed the state legislature's bill (H.B. 1285) to prohibit unsolicited commercial e-mail messages from being sent to addresses belonging to state residents unless the subject line alerts the recipient of the commercial nature of the message. The legislation defines "unsolicited commercial e-mail advertisements" as commercial e-mails sent without a "pre-existing business relationship", and without the recipient's prior, direct consent. According to the South Dakota Governor's office, the new legislation does not conflict with the federal CAN-SPAM Act, 15 U.S.C. §§ 7701 et seq., because CAN-SPAM does not preempt state and local laws regulating commercial e-mail to the extent that such laws prohibit "falsity or deception" (though it does expressly preempt all other state and local laws regulating commercial e-mail.) The new legislation authorizes civil suits by individuals and the state attorney general where actual damages or liquidated damages are permitted up to $1,000 per unlawful e-mail or $1 million per "incident" - defined as a "a single transmission or delivery to a single recipient or to multiple recipients of an unsolicited commercial e-mail advertisement containing substantially similar content." For more information, including a copy of the bill, please contact .
Connecticut Considers Cost-Shifting Data Breach Notification Bill. A bill (SB 1089) was recently introduced into the Connecticut State Senate that would make companies that have a data breach involving unencrypted personal information to be liable to banks “for the costs of any reasonable action undertaken by the bank or out-of-state bank” to protect the personal information of their customers and their accounts. Such costs would include those associated with stop payment orders, reissuing credit cards, closing and/or reopening bank accounts, refunds issued to bank customers, and “any assistance provided to customers to help mitigate loss or inconvenience or to prevent further loss or inconvenience.” As reported in last week’s edition of InfoBytes, a similar data breach bill has been introduced in Massachusetts (H. 213) that would make retailers liable for the costs incurred by banks in protecting their customers’ accounts. For a copy of the Connecticut bill, please see http://www.cga.ct.gov/2007/TOB/S/2007SB-01089-R00-SB.htm.
Wyoming Legislature Enacts Law Designed to Protect Consumers Affected by Breaches of Personal Data. On March 1, the Governor of Wyoming signed a new law (S.F. 53), effective July 1, 2007, requiring businesses to notify Wyoming residents as soon as possible following a breach of their personal identifying information that "causes or is reasonably believed to cause loss or injury." E-mail or written notification is sufficient. However an entity may substitute notice by posting an announcement on its website and in major statewide media, depending, in part, on whether it is based in Wyoming, the number of residents affected, and the cost of regular notice. Under the new law, Wyoming residents will be allowed to place security freezes on their credit reports for a fee of $10 (though no fee is required of identity theft victims). A credit report company must have a freeze in place within five business days of a request. A freeze may be temporarily lifted or removed at the request of the consumer. A reporting firm has three business days to comply with such a request (this will change to 15 minutes on September 1, 2008). To view Wyoming S.F. 53, please visit: http://legisweb.state.wy.us/2007/Enroll/SF0053.pdf.
FTC to Host Workshop on Identity Theft Prevention. The Federal Trade Commission (FTC) will hold a workshop entitled “Proof Positive: New Directions in ID Authentication” on April 23 and 24, 2007. The FTC is seeking public comment on several issues to help arrange the workshop’s agenda, including (i) how individuals can prove their identities when first establishing them, (ii) promising current or emerging authentication technologies or methods, and (iii) whether these technologies work for the consumer. Public comments are due March 23, 2007. For more information, see http://www.ftc.gov/opa/2007/02/authentication.htm.
Appeals Court Upholds Dismissal of FDCPA Claims against Debt Collector. The Seventh Circuit Court of Appeals has upheld the summary judgment of claims brought under the Fair Debt Collection Practices Act (FDCPA) in favor of a law firm. Beler v. Blatt, Hasenmiller, Leibsker & Moore, LLC, No. 06-2707 (7th Cir., Mar. 7, 2007). In this case, the debtor defaulted on a private label credit card, and the defendant law firm instituted collection procedures in Illinois state court. As a result, the plaintiff’s bank account was frozen. The plaintiff’s lawyer asserted that the funds in the account were exempt as Social Security payments, and the law firm dismissed the citation and the funds were released. The plaintiff, in a suit filed in federal court, claimed that the law firm violated FDCPA, since the credit card agreement was incomprehensible to an unsophisticated consumer. The appeals court rejected this assertion, finding that “it is far from clear that the FDCPA controls the contents of pleadings filed in state court,” and that “a rule against trickery differs from a command to use plain English and write at a sixth-grade level.” The plaintiff also claimed that the debt collector violated the FDCPA by sending a citation to her bank that led to the bank freezing her account, including the exempt assets in her account. The court rejected this claim as well, finding that if the collector violated the Social Security Act or Illinois state law, claims should be brought under those laws. In upholding the summary judgment by the district court, the appeals court said that the FDCPA “does not so much as hint at being an enforcement mechanism for other rules of state and federal law. This is not a piggyback jurisdiction clause.” For a copy of the opinion, please contact .
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