Consumer Finance Litigation – Burr & Forman https://www.burr.com Burr & Forman Tue, 24 Nov 2020 18:53:56 +0000 en-US hourly 1 https://wordpress.org/?v=5.5.1 Burr & Forman Consumer Finance Litigation – Burr & Forman Burr & Forman Consumer Finance Litigation – Burr & Forman https://www.burr.com/wp-content/plugins/powerpress/rss_default.jpg https://www.burr.com/blogs/consumer-finance-litigation/ The Consumer Finance Outlook Under a Biden Administration https://www.burr.com/2020/11/24/the-consumer-finance-outlook-under-a-biden-administration/ https://www.burr.com/2020/11/24/the-consumer-finance-outlook-under-a-biden-administration/#respond Tue, 24 Nov 2020 18:53:56 +0000 https://www.burr.com/?p=43447 When President-elect Joe Biden takes office in January, it is safe to bet that addressing the pandemic-related financial pressures facing millions of Americans will be at the top of his agenda.  And in particular, the administration is expected to focus on consumer finance, which should give renewed energy and purpose to the Consumer Financial Protection […]

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When President-elect Joe Biden takes office in January, it is safe to bet that addressing the pandemic-related financial pressures facing millions of Americans will be at the top of his agenda.  And in particular, the administration is expected to focus on consumer finance, which should give renewed energy and purpose to the Consumer Financial Protection Bureau, an agency the Trump administration all but grinded to a halt.

Pursuant to a recent Supreme Court ruling that gives the President the right to remove the head of the CFPB at will, President-elect Biden will be able to select a new head of the watchdog agency, rather than having to wait for the current CFPB director, Kathleen Kraninger, to finish out her term.  The CFPB will presumably take an active role in upholding federal CARES Act protections relied on by Americans who have been hurt by the pandemic, such as by monitoring mortgage servicers’ compliance with the Act’s rules permitting borrowers to skip payments.  The CFPB’s enforcement arm will also presumably gain renewed fervor, particularly if Democrats fail to gain control of the Senate and have to rely on enforcement, rather than legislation, to carry out their consumer protection goals.  A first step will likely be to undo the Trump administration’s reorganization of the agency, which largely gutted the Bureau’s authority to open fair lending investigations. Defendants may also expect to see harsher penalties as the result of these investigations.

Under the new administration, the CFPB is also expected to reinstate restrictions on payday lending in response to the Trump administration’s backtracking on Obama-era underwriting rules that had required payday lenders to verify borrowers’ ability to pay.  President-elect Biden also campaigned on creating a federal credit reporting agency within the CFPB, which federal lenders would be required to use.  The federal credit reporting agency Biden envisions would compile non-traditional data sources (such as rental history and utility bills) to evaluate credit, which Biden believes will expand access to credit and reduce racial disparities in lending.

Biden’s advocacy for using alternative data sources to evaluate credit may suggest alignment with, and support for, nonbank fintechs, which extend credit to consumers who otherwise would be denied by considering such alternative data sources.  Compatibility with this aspect of fintech lending may give Biden an incentive to promote fintech growth, and perhaps even support granting fintechs national banking charters, something Democrats have previously opposed.

Who Biden appoints to run the Federal Communications Commission will also have consumer finance implications, as the FCC is responsible for drafting regulations to implement the Telephone Consumer Protection Act.  While differing interpretations of the Act’s scope have been playing out in the courts—for example, with the Supreme Court set to address the circuit split on the definition of an autodialer this term—the FCC chairman could significantly affect the direction of the TCPA on any issues left unaddressed by the high Court.  Biden’s inclusion of former FCC Commissioner Mignon Clyburn on his FCC transition team may signal an intent to broaden the TCPA’s reach, as Clyburn had voted in favor of the FCC’s 2015 declaratory ruling that broadened the definition of autodialer.  That definition was struck down in 2018 by the D.C. Circuit Court of Appeals in ACA International v. FCC, and the agency has yet to issue a new interpretation of the term.

The degree to which the new administration will be able to significantly change course from President Trump’s policies will depend in large part on whether Democrats gain control of the Senate and whether Biden’s nominees are confirmed.  And, of course, the degree to which consumer finance remains a top priority will certainly be impacted by the eventual arrival of a vaccine and how quickly unemployment figures improve.  However, based on the current lay of the land, at a minimum, creditors can broadly expect an increased emphasis on pro-consumer policies and enforcement actions.

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District of Kansas Holds a Device that Dials from Stored Customer Database is Not an ATDS https://www.burr.com/blogs/consumer-finance-litigation/2020/08/17/district-of-kansas-holds-a-device-that-dials-from-stored-customer-database-is-not-an-atds/ https://www.burr.com/blogs/consumer-finance-litigation/2020/08/17/district-of-kansas-holds-a-device-that-dials-from-stored-customer-database-is-not-an-atds/#respond Mon, 17 Aug 2020 18:12:04 +0000 https://www.burr.com/?p=42622 On April 13, 2020, the District Court of Kansas in Hampton v. Barclays Bank Delaware, No. 18-4071-DDC-ADM, 2020 WL 4698476 (D. Kan. Aug. 13, 2020), joined the Seventh and Eleventh Circuits in holding that devices that exclusively dial numbers stored in a customer database do not qualify as autodialers under the TCPA. The Plaintiff, Anthony […]

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On April 13, 2020, the District Court of Kansas in Hampton v. Barclays Bank Delaware, No. 18-4071-DDC-ADM, 2020 WL 4698476 (D. Kan. Aug. 13, 2020), joined the Seventh and Eleventh Circuits in holding that devices that exclusively dial numbers stored in a customer database do not qualify as autodialers under the TCPA.

The Plaintiff, Anthony Hampton (“Plaintiff”), asserted numerous claims against multiple defendants, including a TCPA claim against Marketplace Loan Grantor Trust, Series 2016-LD1’s (“Marketplace”). Specifically, Plaintiff claimed Marketplace violated the Telephone Consumer Protection Act (“TCPA”) by using an automatic telephone dialing system (“ATDS”) to call his cell phone without his consent.

Subject to certain exceptions, the TCPA prohibits using an ATDS to call a cell phone. See 47 U.S.C. § 227(b)(1)(A)(iii)). An ATDS is defined as “equipment which has the capacity—(A) to store or produce telephone numbers to be called, using a random or sequential number generator; and (B) to dial such numbers.” Id. § 227(a). Recently, a circuit split has emerged as to whether a device that dials numbers from a stored list qualifies as an autodialer. See Hampton, 2020 WL 4698476, at *25.

The system at issue in Hampton was “a cloud-based calling system from Five9 (the ‘Calling System’).” Id. at *23. The Calling System did not use and did not have the capacity to use a random or sequential number generator. See id. “[T]he Calling System use[d] lists of phone numbers generated from customer records” that were “most often, contained in spreadsheets and uploaded to the Calling System.” Id. Additionally, the Calling System did not use recorded messages or artificial voices, and all messages were left by live representatives. See id.

As the Tenth Circuit has not yet addressed “whether devices that exclusively dial numbers stored in a customer database qualify as automatic telephone dialing systems,” the District Court of Kansas analyzed how the Third, Seventh, Ninth, and Eleventh Circuits have decided the question before predicting how the Tenth Circuit would decide the question. See id. at *24.

The Court explained that both the Seventh and Eleventh Circuit decisions, Gadelhak v. AT&T Services, Inc., 950 F.3d 458 (7th Cir. 2020) and Glasser v. Hilton Grand Vacations Co., LLC, 948 F.3d 1301 (11th Cir. 2020), “exhaustively analyze the statute’s text” while the Ninth Circuit decision, Marks v. Crunch San Diego, LLC, 904 F.3d 1041 (9th Cir. 2018), found the statutory language was ambiguous and did not reach a conclusion about it. Following the Seventh and Eleventh Circuits’ lead, the Court observed that “the statute prohibits devices with the capacity to dial random or sequential numbers, even though that same device also potentially could be used to call phone numbers stored in a database.” Hampton, 2020 WL 4698476, at * 29. The Court further observed that the 11th Circuit’s interpretation was supported by the legislative history and that Congress’s decision not to amend the TCPA in 2015 did not equate to approval of the FCC’s 2015 Order, which “explained that (1) a device’s ‘capacity’ means its ‘potential functionalities with modifications such as software changes,’ and (2) predictive dialers qualify as autodialers. Id. at *24 (citations and internal quotations omitted); see id. at *29.

The Court thus concluded that “[t]he uncontroverted summary judgment facts show that the Calling System exclusively used phone numbers taken from a database of customers and thus lacked the capacity to function as an ATDS.” Id. at *30. Because the Court predicted that the Tenth Circuit would follow the Seventh and Eleventh Circuits, which exclude this type of device from the definition of an ATDS, the Court granted summary judgment in favor of Marketplace on Plaintiff’s TCPA claim. See id.

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TCPA Breaking News: The Sixth Circuit Sides With Marks, as the Supreme Court Readies to Step In https://www.burr.com/blogs/consumer-finance-litigation/2020/07/29/tcpa-breaking-news-the-sixth-circuit-sides-with-marks-as-the-supreme-court-readies-to-step-in/ https://www.burr.com/blogs/consumer-finance-litigation/2020/07/29/tcpa-breaking-news-the-sixth-circuit-sides-with-marks-as-the-supreme-court-readies-to-step-in/#respond Thu, 30 Jul 2020 00:00:40 +0000 https://www.burr.com/?p=42441 A copy of the Allan opinion discussed herein can be found here. This summer has been jam-packed with Telephone Consumer Protection Act (TCPA) developments.  The Federal Communications Commission (FCC) issued a decision finding that peer-to-peer text messaging systems were exempt from the statue’s reach, using certain language that may be helpful in arguing to exclude […]

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A copy of the Allan opinion discussed herein can be found here.

This summer has been jam-packed with Telephone Consumer Protection Act (TCPA) developments.  The Federal Communications Commission (FCC) issued a decision finding that peer-to-peer text messaging systems were exempt from the statue’s reach, using certain language that may be helpful in arguing to exclude other types of technology.[1]  The U.S. Supreme Court declared the statute unconstitutional in Barr v. American Association of Political Consultants, Inc.,[2] only to determine that the unconstitutional provision was severable, thus saving the statute and, in fact, broadening its reach even further.  The Supreme Court then determined it was appropriate to grant certiorari in the case Facebook, Inc. v. Noah Duguid, et al., No. 19-511, where it will finally decide: “whether the definition of [automatic telephone dialing system] in the TCPA encompasses any device that can “store” and “automatically dial” telephone numbers, even if the device does not “us[e] a random or sequential number generator.”

The question to be addressed in the Duguid case is one that has hung over TCPA litigation for over a decade.  Does the statute only restrict companies who dial numbers randomly or sequentially, i.e., telemarketers who do not care who they are calling?  Or, can the statute be read to have morphed with the technology it regulates and restrict all sorts of additional automatic dialing equipment?  The circuits are split on this issue.  And on Wednesday, July 29, the split deepened.

In Allan v. Pennsylvania Higher Education Assistance Agency, No. 19-2043 (6th Cir. July 29, 2020), the Sixth Circuit was faced with the same question posed in the Duguid case:  What constitutes an automatic telephone dialing system (ATDS)?  Prior to Wednesday, the Ninth Circuit and Second Circuit fashioned broad interpretations of the term ATDS, holding that any equipment that can “store” numbers and then call those numbers from a list can be considered an ATDS subject to the TCPA’s restrictions.[3]  This interpretation was roundly rejected by the Seventh and Eleventh Circuits, which have held that a device must be capable of storing or producing numbers to be called using a random or sequential number generator in order to qualify as an ATDS.[4]

In Allan, the two plaintiffs had taken out a student loan serviced by the defendant.  It was undisputed that on October 4, 2013, the plaintiff had asked the defendant to stop calling her.  The defendant continued calling and argued to the court that its dialing system was not subject to the TCPA.  The defendant used an Avaya Proactive Contact dialer, which had no “random or sequential” number generation or dialing component, but did create calling lists and place automated calls from that list.  The system would place the calls and connect the call recipient to an operator when a voice was detected.  This type of equipment is called a “predictive dialer.”

In deciding whether the TCPA restricted predictive dialers, the Sixth Circuit first pointed out that it could not look to Federal Communications Commission (FCC) orders for guidance because the D.C. Circuit had invalidated the FCC’s interpretation of ATDS in ACA Int’l v. Fed. Commc’ns Comm’n, 885 F. 3d 687, 700 (D.C. Cir. 2018).  Thus, the court noted, it would have to look solely to the statutory language.

As we’ve noted on this website before, the TCPA defines ATDS as “equipment which has the capacity –

(A) to store or produce telephone numbers to be called, using a random or sequential number generator; and

(B) to dial such numbers.”

47 U.S.C. § 227(a)(1).  The Sixth Circuit noted that each potential interpretation of the statute has its own problems.  Eventually, however, the court determined that the best way to read the statute was that the phrase “using a random or sequential number generator” modified only “produce,” and not “store.” So:

An ATDS is “equipment which has the capacity –

(A)  to store [telephone numbers to be called];

        or produce telephone numbers to be called, using a random or sequential number generator; and

(B)  to dial such numbers.”

Because the Avaya system could both store numbers and dial those numbers, the court held that the system functioned as an ATDS.  For the remainder of the opinion, the Sixth Circuit defended its interpretation by contrasting its decision against that of the Eleventh Circuit in Glasser v. Hilton Grand Vacations Co., 948 F. 3d 1301, 1304-05 (11th Cir. 2020).  Anticipating perhaps the biggest criticism of its ruling, the court held that interpreting the TCPA in such a broad way would not operate to sweep every day smartphones within its reach.  The court cited the ACA Int’l decision and held that simply because a device has theoretical capacity to store and dial numbers from a list is not enough to make it an ATDS.  Instead, a device must actually be used in that fashion, which most smartphones are not.

Thus, for now, the circuit split deepens.  Calls that are completely legal in Alabama, Florida, Illinois and other states, are illegal in California, Michigan, Tennessee and more.  And until the Supreme Court issues its decision in Duguid, the circuits will remain hopelessly divided.

[1] In re: P2P Petition for Clarification, CG Docket No. 02-278 (June 25, 2020), available at: https://docs.fcc.gov/public/attachments/DA-20-670A1.pdf

[2] 140 S.Ct. 2335 (2020), available at: https://www.supremecourt.gov/opinions/19pdf/19-631_2d93.pdf

[3] https://www.burr.com/blogs/consumer-finance-litigation/2020/04/08/duran-v-la-boom-disco-it-is-time-for-scotus-to-decide-the-atds-issue/

[4] https://www.burr.com/blogs/consumer-finance-litigation/2020/02/19/gadelhak-v-att-the-seventh-circuit-joins-the-eleventh-circuit-in-taking-a-big-bite-out-of-the-tcpa/

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Florida Supreme Court Sets the Standard for Loan Servicer Business Record Authentication https://www.burr.com/blogs/consumer-finance-litigation/2020/07/06/42185/florida-supreme-court-sets-the-standard-for-loan-servicer-business-record-authentication/ https://www.burr.com/blogs/consumer-finance-litigation/2020/07/06/42185/florida-supreme-court-sets-the-standard-for-loan-servicer-business-record-authentication/#respond Mon, 06 Jul 2020 13:58:30 +0000 https://www.burr.com/?p=42185 On July 2, 2020, the Florida Supreme Court issued its ruling Jackson v. Household Finance Corporation III, et al., SC18-357, 2020 WL 3580036, and provided new guidance for record authentication under the business records exception to the hearsay rule. At issue in the case was whether or not a testifying employee properly authenticated business records […]

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On July 2, 2020, the Florida Supreme Court issued its ruling Jackson v. Household Finance Corporation III, et al., SC18-357, 2020 WL 3580036, and provided new guidance for record authentication under the business records exception to the hearsay rule. At issue in the case was whether or not a testifying employee properly authenticated business records maintained by HSBC with respect to a mortgage loan account. The Florida Supreme Court’s ruling in favor of the lender resolves a split of authority in Florida on the quantum of proof necessary to access the business records exception to the hearsay rule in Florida.

Section 90.803(6) sets forth Florida’s requirements to establish a hearsay exception for business records. The Florida Supreme Court reiterated the four elements of the business records exception: (1) that the record was made at or near the time of the event, (2) that it was made by or from information transmitted by a person with knowledge, (3) that it was kept in the ordinary course of a regularly conducted business activity, and (4) that it was a regular practice of that business to make such a record.

In Jackson, the defendant challenged whether or not the  necessary predicate testimony had been adduced as to the elements, and whether the witness had the requisite personal knowledge to establish these elements.  In holding that the witness’s testimony laid an adequate foundation for the records in question, the Florida Supreme Court held:

“Here, the proponent presented the testimony of a twenty-five year employee and executive vice president who testified that he was ‘familiar with the business practices of the company’ and that it was the company’s ‘regular business practice’ to ‘record acts, transactions, payments, communications, escrow account activity, disbursements, events and analysis with respect to the mortgage loan account.’ He further testified that the documents met each of the other foundational requirements set forth in section 90.803(6), using the language of the statute or a close approximation of it, as detailed above. No additional foundation is required by the statute or by any case from this Court, and we reject the notion that the witness must also detail the basis for his or her familiarity with the relevant business practices of the company or give additional details about those practices as part of the initial foundation because this would be inconsistent with the plain language of the statute.

Rather, once the proponent lays the predicate for admission of documents set forth in the statute and reflected in our case law, ‘the burden shifts to the opposing party to prove that the records are untrustworthy,’ or that they should not be admitted for some other reason.”

Id. (internal citations omitted). The Florida Supreme Court reiterated that the person authenticating business records for use in court proceedings need not be the person who created the document, and need not have been present when the document was created. Instead, “a qualified witness, therefore, is anyone with personal knowledge of the organization’s regular business practices relating to creating and retaining the record(s) at issue. This knowledge will necessarily come from the witness’s training or experience, or, most likely, a combination of both.” Id. (internal citations omitted).

Furthermore, as to the witness’ competence, the Florida Supreme Court found that the witness’ testimony on cross examination revealed no “disqualifying deficiency in his relevant knowledge.” Id.  Specifically, the Court observed:

“[The witness] explained that during his twenty-five years with the company he had ‘been in the various departments’ and ‘managed various departments’ such that he had ‘basically become really familiar with a lot of the different questions.’ He also mentioned ‘cross-training and what have you.’ Additionally, on cross-examination, [the witness] testified that he first became familiar with the Jackson file and documents ‘a couple of months ago.’ [The witness] explained that ‘upon [his] review of the documents,’ he personally ‘went into [HSBC’s] imaging system and reviewed those documents and compared them to the ones that were printed today.’ [The witness] stated that ‘they have not been changed,’ and that ‘[t]hey are the same that have been imaged in our system from the beginning.’ These responses demonstrate a working knowledge of HSBC’s relevant record-keeping practices and system.”

The Florida Supreme Court expressly rejected the opinions of lower courts, such as Florida’s Fourth District Court of Appeal, that had treated as a necessary prerequisite to the admission of business records testimony above and beyond the elements of the exception, such as requiring testimony showing detailed knowledge of the “procedures for inputting payment information into their systems and how the payment history was produced[.]” See e.g. Maslack v. Wells Fargo Bank, N.A., 190 So. 3d 656 (Fla. 4th DCA 2016).  The Florida Supreme Court also rejected the idea that a witness who testifies to the elements of the business records exception in terms verbatim to the language of the statute somehow offers lesser evidence than a witness whose testimony uses more colloquial phraseology when testifying. Id.

The Florida Supreme Court’s rationale for not requiring more testimony to authenticate business records is twofold: first the Court recognized that the statutory elements of the business records exception are just that, the elements, and requiring more would be both unfaithful to the statute and unnecessarily time consuming and expensive given that “documents are what they purport to be in 99 out of 100 cases”,  including mortgage foreclosure actions. Id. In other words, the Florida Supreme Court recognized that the business records authentication process should be simple and the burden of proof to authenticate a document is slight.  Id.  Finally, the Court recognized that in those rare cases where fraud is being perpetrated, nothing prevents the opposing party from bringing forth the evidence to make that apparent to the Court.  For example, in Jackson, despite appealing all the way to the Florida Supreme Court, the defendant did not even dispute the accuracy of the records in question – only whether more foundational evidence should have been required to admit the document into evidence.

The Florida Supreme Court’s common sense approach should cut against what has become a favored tactic to delay mortgage foreclosure and other financial services litigation matters – unnecessary hearsay objections to properly authenticated business records. The Florida Supreme Court’s ruling also provides a useful rubric for lenders, loan servicers, and any other business involved in litigation, on how to properly authenticate business records into evidence and the nature of the knowledge witnesses must possess to survive cross examination if the foundation for business records authentication testimony is challenged.

The Florida Supreme Court’s opinion can be found here.

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Supreme Court Issues Blow to CFPB, Requires Restructuring of Bureau https://www.burr.com/blogs/consumer-finance-litigation/2020/06/30/supreme-court-issues-blow-to-cfpb-requires-restructuring-of-bureau/ https://www.burr.com/blogs/consumer-finance-litigation/2020/06/30/supreme-court-issues-blow-to-cfpb-requires-restructuring-of-bureau/#respond Tue, 30 Jun 2020 15:39:14 +0000 https://www.burr.com/?p=42136 On June 29, 2020, the United States Supreme Court held that the structure of the Consumer Financial Protection Bureau (“CFPB”) is unconstitutional. Specifically, the Court held that the CFPB director must be dischargeable at will by the president to prevent infringing upon the separation of powers between the legislative and the executive branches.  Chief Justice […]

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On June 29, 2020, the United States Supreme Court held that the structure of the Consumer Financial Protection Bureau (“CFPB”) is unconstitutional. Specifically, the Court held that the CFPB director must be dischargeable at will by the president to prevent infringing upon the separation of powers between the legislative and the executive branches.  Chief Justice John Roberts wrote the majority decision. The ruling may create an avenue to challenge nearly a decade’s worth of rulings and penalties issued by the CFPB since its creation in 2010.

Appellant Siela Law argued that need not respond to a request for documents issued by then-director Richard Cordray because the CFPB director enjoyed too much power and independence. In its 5-4 ruling, the United States Supreme Court agreed in part with Siela Law’s arguments, although it deferred to the 9th Circuit Court of Appeals for a new ruling on the document request.

The Court framed the issue as follows: “The CFPB Director has no boss, peers, or voters to report to. Yet the Director wields vast rulemaking, enforcement, and adjudicatory authority over a significant portion of the U. S. economy. The question before us is whether this arrangement violates the Constitution’s separation of powers.” The Court found such a structure unconstitutional, holding, “Such an agency lacks a foundation in historical practice and clashes with constitutional structure by concentrating power in a unilateral actor insulated from Presidential control.”  In so ruling, the Court found the provisions regarding the CFPB severable and held, “[t]he agency may therefore continue to operate, but its Director, in light of our decision, must be removable by the President at will.”

A concurrence in part, dissent in part by Justice Clarence Thomas argued that the Court should have declared every civil investigative demand issued by the CFPB director invalid due to its unconstitutional structure.  Thus, Justice Thomas’ opinion provides something of a road map for future litigants to argue to lower courts that investigative demands issued by the CFPB while its director enjoyed unconstitutional power should be invalidated.  Justice Thomas wrote, “As the Court recognizes, the enforcement of a civil investigative demand by an official with unconstitutional removal protection injures Seila . . . Presented with an enforcement request from an unconstitutionally insulated Director, I would simply deny the CFPB’s petition for an order of enforcement.”

Thus, while the Supreme Court’s decision ends nearly a decade’s worth of argument over the CFPB’s structure, it may just be the beginning for the CFPB who must now sort out what to do with rules, enforcement actions, and civil investigative demands issued at the behest of a director wielding unconstitutional authority.

The Court’s opinion can be found here.

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Bankruptcy Court Declares Prohibition Against Debtors in Bankruptcy from Participating in Paycheck Protection Program Unenforceable https://www.burr.com/blogs/consumer-finance-litigation/2020/06/25/bankruptcy-court-declares-prohibition-against-debtors-in-bankruptcy-from-participating-in-paycheck-protection-program-unenforceable/ https://www.burr.com/blogs/consumer-finance-litigation/2020/06/25/bankruptcy-court-declares-prohibition-against-debtors-in-bankruptcy-from-participating-in-paycheck-protection-program-unenforceable/#respond Thu, 25 Jun 2020 20:12:26 +0000 https://www.burr.com/?p=42091 In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in effort to provide support and economic relief to organizations and individuals during the Coronavirus pandemic. Pursuant to the CARES Act, Congress established the Paycheck Protection Program (PPP) to assist small businesses and self-employed individuals retain workers, cover operating costs, and […]

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In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in effort to provide support and economic relief to organizations and individuals during the Coronavirus pandemic. Pursuant to the CARES Act, Congress established the Paycheck Protection Program (PPP) to assist small businesses and self-employed individuals retain workers, cover operating costs, and maintain payroll. The Small Business Administration (SBA) backs the PPP, and is responsible for forgiving said loans if borrowers maintain payroll for eight (8) weeks and use the money for utilities, rent, etc.[1]

Nevertheless, on April 24, 2020, the SBA issued an interim final rule, which purports to disqualify bankruptcy debtors from participating in the PPP. In response to an inquiry relating to approval for PPP participation if a business is in bankruptcy, the SBA provided:

  • No. If the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan . . . . The Administrator, in consultation with the Secretary, determined that providing the PPP loans to debtors in bankruptcy would present an unacceptable high risk for an authorized use of funds or non-repayment of unforgiven loans.[2]

Additionally, the SBA’s PPP Lender Application reinforces said sentiments that a PPP loan will not be approved unless an applicant certifies that neither the applicant nor an owner is presently involved in bankruptcy. Notably, there is no language in the CARES Act prohibiting Chapter 11 debtors from participating in the PPP.

On June 12, 2020, the United States Bankruptcy Court for the District of Arizona entered an Order finding the SBA’s prohibition against debtors in bankruptcy from participating in the PPP unenforceable.[3] Particularly, the Court held the SBA’s prohibition, precluding entities involved in a bankruptcy proceeding from participating in the PPP, exceeds the SBA’s authority and jurisdiction. The court found such prohibition to be unlawful and ordered it to be set aside.

Furthermore, the Court ordered the removal of all references relating to the involvement in bankruptcy from the underlying Plaintiff’s PPP Application, as well as any loan policies and procedures relating to said Plaintiff.  Accordingly, the Court authorized Plaintiff to submit its PPP Application without reference to its involvement in bankruptcy, and ordered lenders to consider said application and any supporting documentation to be accurate and complete.

[1] SBA, “Paycheck Protection Program Loan Informationhere.

[2] SBA “Business Loan Program Temporary Changes; Paycheck Protection Program – Requirements – promissory Notes, Authorizations, Affiliation, and Eligibility” Interim Final Rule, Docket No. SBA-2020-0021 here.

[3] In re Andes Indus., Adv. No. 2:20-ap-00118-PS (U.S. Bankr. D. Az. June 12, 2020).

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Suttles v. Facebook, Inc. The ATDS Debate Continues but a Texas District Court Provides Hope for the Industry in The Fifth Circuit https://www.burr.com/blogs/consumer-finance-litigation/2020/05/21/suttles-v-facebook-inc-the-atds-debate-continues-but-a-texas-district-court-provides-hope-for-the-industry-in-the-fifth-circuit/ https://www.burr.com/blogs/consumer-finance-litigation/2020/05/21/suttles-v-facebook-inc-the-atds-debate-continues-but-a-texas-district-court-provides-hope-for-the-industry-in-the-fifth-circuit/#respond Thu, 21 May 2020 18:06:51 +0000 https://www.burr.com/?p=41542 The Fifth Circuit Court of Appeals may now have to decide where it stands on the ATDS issue.  On May 20, 2020, Judge Lee Yeakel of the United States District Court for the Western District of Texas issued an opinion in Suttles v. Facebook, Inc., Case No. 1:18-cv-01004 (W.D. Tex. May 20, 2020), where he […]

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The Fifth Circuit Court of Appeals may now have to decide where it stands on the ATDS issue.  On May 20, 2020, Judge Lee Yeakel of the United States District Court for the Western District of Texas issued an opinion in Suttles v. Facebook, Inc., Case No. 1:18-cv-01004 (W.D. Tex. May 20, 2020), where he concluded that a dialing system is not an Automatic Telephone Dialing System (“ATDS”) under the Telephone Consumer Protection Act (“TCPA”) if it does not produce numbers.  A copy of the opinion can be read here.

Three circuit courts have previously held that the definition of an ATDS requires a dialing system to produce telephone numbers using a random or sequentially number generator, two circuits have gone the other way and concluded that it is enough if the dialing system is able to store telephone numbers.  See Dominguez v. Yahoo, Inc., 894 F.3d 116, 121 (3rd Cir. 2018); Glasser v. Hilton Grand Vacations Co., LLC, 948 F.3d 1301, 1309 (11th Cir. 2020); Gadelhak v. AT&T Serv., Inc., 950 F.3d 458, 464 (7th Cir. 2020); but see Marks v. Crunch San Diego, LLC, 904 F.3d 1041, 1052 (9th Cir. 2018); Duran v. La Boom Disco, Inc., 955 F.3d 279 (2nd Cir. 2020).  However, the Fifth Circuit has yet to weigh in on the ATDS definition. After describing this circuit split on the ATDS definition, Judge Yeakel provides, without additional discussion, that he “agrees that a device must randomly or sequentially generate – not just store – numbers to be considered an ATDS under the [TCPA].”

Unlike many ATDS decisions, however, Suttles involves a motion to dismiss and not a motion for summary judgment.  As such, even with its view of the ATDS definition, the Suttles court was still required to assume that all of the allegations in the complaint were correct.  The problem that the plaintiff had was that he alleged that he received “targeted” messages.  The court acknowledged “the difficulty [a plaintiff] faces in knowing the type of calling system used without the benefit of discovery.”  However, the court conclude that the facts already known by the plaintiff suggest that an ATDS was not used. Accordingly, based on the plaintiff’s allegation of receiving “targeted” messages, the court dismissed the complaint by holding that a device used to target specific individuals, not random individuals, “weigh[s] against an inference that an ATDS was used.”

One can only assume that this case will be appealed and that the Fifth Circuit will finally have a chance to weigh in on the ATDS definition unless the SCOTUS or Congress do something first, so stay tuned.

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Michigan Court Grants Injunctive Relief Against SBA Regarding Ineligibility Criteria for Loans to Small Businesses https://www.burr.com/blogs/consumer-finance-litigation/2020/05/21/michigan-court-grants-injunctive-relief-against-sba-regarding-ineligibility-criteria-for-loans-to-small-businesses/ https://www.burr.com/blogs/consumer-finance-litigation/2020/05/21/michigan-court-grants-injunctive-relief-against-sba-regarding-ineligibility-criteria-for-loans-to-small-businesses/#respond Thu, 21 May 2020 16:45:06 +0000 https://www.burr.com/?p=41537 In March 2020, the United States Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to provide financial relief to individuals and organizations impacted by the Coronavirus pandemic. As a part of the CARES Act, Congress created the Paycheck Protection Program (“PPP”) which authorized the Small Business Administration (“SBA”) to provide loans […]

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In March 2020, the United States Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to provide financial relief to individuals and organizations impacted by the Coronavirus pandemic. As a part of the CARES Act, Congress created the Paycheck Protection Program (“PPP”) which authorized the Small Business Administration (“SBA”) to provide loans to small businesses. Historically, however, the SBA has rendered certain types of business ineligible to receive SBA loans. Recognizing this, Congress established merely two criteria for PPP eligibility providing that businesses:

(1) during the covered period

(2) must have less than 500 employees or less than the size standard in number of employees established by the Administration for the industry in which the business operates.

In addition to the above, Congress also provided that, if those criteria are met, “any business concern . . . shall be eligible to receive a covered loan.” Nevertheless, the SBA adopted its rule which excludes a wide range of businesses from PPP loan guarantee eligibility, including:

  • banks
  • political lobbying firms
  • sexually oriented businesses that present entertainment or sell products of a prurient, but lawful, nature.

Notably, the SBA’s PPP Ineligibility serves as the basis for a recent action before the Eastern District Court of Michigan. Particularly, in April 2020, an adult-entertainment establishment and multiple similarly situated businesses requested a preliminary injunction precluding the enforcement of the SBA’s PPP Ineligibility rule that bars sexually oriented businesses from obtaining PPP loan guarantees. The Eastern District Court of Michigan addressed the following question:

May the SBA exclude from eligibility for a PPP loan guarantee a business concern that (1) during the covered period (2) has less than 500 employees or less than the size standard in number of employees established by the administration for the industry in which the business operates?

In its analysis, the Court found that Congress has explicitly answered no. The Court acknowledged that the plain language of the PPP unambiguously provides that “any business concern is eligible for a PPP loan if it employed the requisite number of Americans during the covered period.” Based on such, the Court held that the SBA’s PPP Ineligibility rule directly contravenes the eligibility guarantees provided in Congress’s PPP.

Additionally, the Court addressed whether it may enter preliminary injunctive relief against the SBA given the language of 15 U.S.C. § 634 (b)(1) which provides:

In the performance of, and with respect to, the functions, powers, and duties vested in him by this chapter the Administrator may sue and be sued in any court of record of a State having general jurisdiction, or in any United States district court, and jurisdiction is conferred upon such district court to determine such controversies without regard to the amount in controversy; but no attachment, injunction, garnishment, or other similar process, mesne or final, shall be issued against the Administrator of his property.

In answering the above, the Court acknowledged that rather than seeking to “attach the SBA’s assets or otherwise interfere with its internal operations,” the Plaintiffs merely sought to set aside unlawful action by the SBA. Even more so, courts have consistently taken the position that § 634 (b)(1) does not preclude injunctions against the SBA in all circumstances. Thus, the Court found that it may enter preliminary injunctive relief against the SBA.

Lastly, in considering whether Plaintiffs’ motion for preliminary injunction should be granted, the Court balanced four primary factors:

(1) whether the movant has a strong likelihood of success on the merits;

(2) whether the movant would suffer irreparable injury absent the injunction;

(3) whether the injunction would cause substantial harm to others; and

(4) whether the public interest would be served by the issuance of an injunction.

Finding that each of the above factors favored issuing the preliminary injunction, the Court granted Plaintiffs’ motion barring the SBA from enforcing its provisions prohibiting sexually oriented business from obtaining PPP loan guarantees.

Subsequently, the SBA appealed the Eastern District Court of Michigan’s decision requesting the Sixth Circuit Court of Appeals to stay the preliminary injunction pending a decision on the merits of said appeal. However, on May 15, 2020, providing a similar analysis as the district court, the Sixth Circuit likewise determined that the relevant factors favored denying a stay.

Cases can be found at:

DV Diamond Club of Flint, LLC, et al. v. United States Small Business Administration, et al., Case No. 20-cv-10899, 2020 WL 2315880 (E.D. Mich. May 11, 2020).

DV Diamond Club of Flint, LLC, et al. v. Small Business Administration, Case No. 20-1437 (6th Cir. May 15, 2020).

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Payday Lender Abandons Suit Challenging Eligibility for Paycheck Protection Program Loan https://www.burr.com/2020/05/14/payday-lender-abandons-suit-challenging-eligibility-for-paycheck-protection-program-loan/ https://www.burr.com/2020/05/14/payday-lender-abandons-suit-challenging-eligibility-for-paycheck-protection-program-loan/#respond Thu, 14 May 2020 17:55:33 +0000 https://www.burr.com/?p=41473 A payday lender recently filed suit against the Small Business Administration (“SBA”) in the United States District Court for the District of Columbia relating to its Paycheck Protection Program (“PPP”) loan application under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).  See Payday Loan, LLC v. United States Small Business Administration, Civil Action […]

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A payday lender recently filed suit against the Small Business Administration (“SBA”) in the United States District Court for the District of Columbia relating to its Paycheck Protection Program (“PPP”) loan application under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).  See Payday Loan, LLC v. United States Small Business Administration, Civil Action No. 1:20-cv-1084 (D.D.C. Apr. 25, 2020)  The lender operated twenty-two stores in California that provided lending, check-cashing, money orders, money transmission, and other financial services, while employing approximately 88 employees.  After the adoption of the CARES Act, the lender applied for a PPP loan from its SBA lender. The payday lender certified that it was otherwise eligible and adversely affected by the coronavirus and the current economic crisis. Its SBA lender, however, denied its application based upon existing SBA regulations that prohibit “financial business[es] primarily engaged in the business of lending” from participating.

Under the CARES Act, participation in the PPP is restricted to businesses with no more than 500 employees, that were in operation on February 15, 2020, and that certify the adverse effect of the pandemic on their operations and permissible use of the loan proceeds.  The CARES Act did not expressly authorize the SBA to impose additional requirements on PPP applicants. The payday lender argued that the SBA’s regulations impermissibly limited its ability to participate in the program in violation of the clear Congressional intent to the contrary in the CARES Act. The payday lender requested injunctive relief allowing it to participate in the PPP and declaring the SBA regulation unlawful.

Before the district court could rule upon the payday lender’s request for preliminary injunctive relief, it received a firm offer for a PPP loan that required it to certify that it was “eligible” to participate in the program. The payday lender advised the court of its intent to execute the application and accept the loan proceeds.  The court then questioned whether the payday lender’s claims had been rendered moot as a result of that PPP loan. Although it argued they were not moot because it could still be required to refund the proceeds or repay the loan, the payday lender nevertheless voluntarily dismissed its claims on May 11, 2020.

Therefore, it currently remains an open question whether the SBA can impose additional requirements on applicants or exclude from the PPP businesses that otherwise meet the statutory requirements of the CARES Act.

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District of Massachusetts Enjoins Massachusetts’ Attorney General from Prohibiting Collection Calls https://www.burr.com/blogs/consumer-finance-litigation/2020/05/08/district-of-massachusetts-enjoins-massachusetts-attorney-general-from-prohibiting-collection-calls/ https://www.burr.com/blogs/consumer-finance-litigation/2020/05/08/district-of-massachusetts-enjoins-massachusetts-attorney-general-from-prohibiting-collection-calls/#respond Fri, 08 May 2020 15:33:10 +0000 https://www.burr.com/?p=41351 On May 6, 2020, Judge Richard G. Stearns of the U.S. District Court for the District of Massachusetts granted a temporary restraining order (“TRO”) and preliminary injunction sought by ACA International (“ACA”) against Massachusetts Attorney General Maura Healey. The TRO and preliminary injunction prohibit the Attorney General’s Office from enforcing specific provisions of 940 CMR […]

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On May 6, 2020, Judge Richard G. Stearns of the U.S. District Court for the District of Massachusetts granted a temporary restraining order (“TRO”) and preliminary injunction sought by ACA International (“ACA”) against Massachusetts Attorney General Maura Healey. The TRO and preliminary injunction prohibit the Attorney General’s Office from enforcing specific provisions of 940 CMR 35.00, an emergency regulation issued in response to the COVID-19 pandemic.

On March 27, 2020, Attorney General Healy issued 940 CMR 35.00, Unfair and Deceptive Debt Collection Practices During the State of Emergency Caused by COVID-19, which prohibits unfair or deceptive acts in trade or commerce. 940 CMR 35.00 restricts communications by financial institutions, lenders, and debt collectors with consumers for 90 days after the issuance of the regulation or until the conclusion of the declared state of emergency. Notably, 940 CMR 35.03-35.04 prevents creditors and debt collectors from, among other things, initiating, filing, or threatening to file any new collection lawsuits; visiting consumers at their homes, places of work, or public spaces; repossessing vehicles; making unsolicited debt collections calls; and garnishing wages.

In the ACA’s challenge of the Attorney General’s regulation, the ACA disputed the validity of Section 35.04, which barred debt collectors from communicating via telephone with debtors about their debts, on the grounds of free speech. Specifically, the ACA categorized Section 35.04 as a content-based speech restriction because it did not prohibit debt collectors from calling debtors regarding debts owed under mortgages or leases or about rescheduling court appearances.  Accordingly, the ACA argued that the only way to determine whether a communication would violate Section 35.04 would be to evaluate its content and the party initiating it. Likewise, the ACA also challenged Section 35.03, which barred creditors and debt collectors from filing new collection lawsuits and acting upon legal or equitable remedies, contending that the section violated state law separation of powers. The ACA alleged that the Attorney General’s regulation impermissibly interfered with the judiciary’s basic functions by restricting a court’s inherent power to permit the filing of new petitions, deciding cases on a unilateral basis, and making it illegal for creditors and debt collectors to seek relief.

In the District of Massachusetts’ May 6th order, Judge Stearns agreed with the ACA and enjoined Attorney General Healey from (i) enforcing the entirety of 940 CMR 35.04’s ban on telephonic communications initiated by debt collectors; and (ii) enforcing 940 CMR 35.03, to the extent that it barred debt collectors from bringing enforcement actions in court. In his reasoning, Judge Stearns noted that Section 35.04 did not fully protect a consumer from debt collection efforts as “mortgagors, landlords, and nonprofit entities, among others are excepted from the ban — rather [the ban] singles out one group debt collectors and imposes a blanket suppression order on their ability to use what they believe is their most effective means of communication, the telephone.” In reference to Section 35.03’s ban on the initiation of lawsuits, Judge Stearns added that “the mere fact of an emergency does not increase constitutional power, nor diminish constitutional restrictions.”

The final implications of this litigation could have a long lasting impact. If the court’s final ruling in this matter remains consistent with its analysis of the ACA’s motion for a TRO and preliminary injunction, other states may reconsider adopting similar restrictions on creditors and debt collectors during their respective COVID-19 state of emergencies. We will continue to monitor this issue and will update the blog accordingly.

A copy of the order can be found here.

A copy of 940 CMR 35.00 can be found here.

Stay up to date by monitoring the latest COVID-19 resources on our CORONAVIRUS RESOURCE CENTER.

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