California Consumer Finance Litigation Lawyer & Attorney : O'Rielly & Roche Law Firm : San Francisco, Oakland, Bay Area, Los Angeles

On October 6, 2008, the U.S. Supreme Court heard oral argument in Vaden v. Discover Bank, an appeal from Discover Bank, Discover Financial Services v. Vaden, 489 F.3d 594 (4th Cir. 2007), which will have a significant impact on arbitration and the doctrine of complete preemption.

Vaden arises out of a dispute between credit cardholder and a card issuer.  In 2003, Discover Financial Services, a servicing subsidiary of Discover Bank, filed suit against cardholder Vaden in Maryland state court to collect a $10,000 delinquent debt.  Vaden filed a putative class action counterclaim in state court, alleging, among other state law causes of action, violation of Maryland's usury laws.  Discover Financial Services and Discover Bank filed a free-standing petition to compel arbitration in the U.S. District Court of Maryland, pursuant to Section 4 of the Federal Arbitration Act ("FAA").  Discover asserted that Vaden's state law claims were completely preempted by the Federal Deposit Insurance Act, 12 U.S.C. §1811 et seq.  ("FDIA").  The district court granted Discover's motion to compel arbitration.  Vaden appealed.

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The Ninth Circuit last week addressed choice of law considerations in the context of a class wide arbitration waiver.  In Hoffman v. Citibank (South Dakota), N.A., the Ninth Circuit held that the district court's analysis of California choice of law was flawed, and remanded for the district court to re-analyze whether California or South Dakota law applies to the class arbitration waiver.

In Hoffman, Citibank issued a credit card to Hoffman in 1994 which contained a choice of law provision favoring South Dakota law.  In a mailing in 2001, Citibank gave Hoffman notice of a change in the arbitration provision of the cardholder agreement, including a waiver of class arbitration.  Hoffman did not object and continued to use the card.

Hoffman later sued Citibank, alleging that Citibank had improperly retroactively increased cardholders' interest rates, among other things.  Citibank removed the case to federal court and moved to compel arbitration.  The district court applied South Dakota law pursuant to the choice of law provision.  Holding that the class arbitration waiver was not unconscionable under South Dakota law, the district court granted Citibank's motion to compel arbitration of plaintiff's claims on an individual basis.  Hoffman moved to certify the ruling for immediate appeal.  The district court granted the motion and the Ninth Circuit granted Hoffman's petition to be heard.

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The comment period has closed for the Federal Reserve's sweeping proposed rule changes for credit cards and overdrafts.  The proposed revisions to Regulation AA, revisions to Regulation DD, and revisions to Regulation Z seek to redefine "unfair or deceptive acts or practices" in connection with credit card accounts and overdraft protection services.

The Federal Reserve reports receiving an unprecedented number of comments on these proposed regulations.  The Fed received nearly 50,000 comments on the proposed revisions to Regulation AA alone.  On a parallel track, the "Credit Cardholders Bill of Rights Act of 2008" (H.R. 5244), which would amend Truth in Lending Act to include new restrictions on billing and practices related to credit cards, is moving to the floor of the House.

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The "Credit Cardholders Bill of Rights Act of 2008" (H.R. 5244), which would amend Truth in Lending Act to include new restrictions on billing and practices related to credit cards, has cleared the U.S. House Financial Services Committee and will move to the floor of the House. 

As detailed in the summary, the bill's provisions would make significant amendments to existing law, including:

• requiring card issuers to give consumers 45 days notice of any interest rate increases;
• prohibiting card issuers from charging interest on debt that is paid during a grace period (so-called "double cycle billing);
• prohibiting card issuers from increasing rates retroactively on existing balances unrelated to a consumer's card account (so-called "universal default rate increase");
• requiring card issuers to mail billing statements 25 days before the due date and to consider timely any payment received before 5:00 p.m. on the due date;
• restricting terms that may be used in advertisements;
• requiring certain allocations of consumer payments; and
• limiting "over-the-limit" fees card issuers can charge consumers.

These proposed changes follow the Fed's proposed rule changes for credit card and overdraft regulations.

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The Federal Reserve's Division of Consumer and Community Affairs released its updated and revised Consumer Compliance Handbook.  The Handbook, intended to provide comprehensive background information on federal consumer compliance statutes and regulations to Federal Reserve examiners, is a critical resource for compliance personnel at any financial institution.  The Handbook contains comprehensive resources and background information regarding regulations and statutes on deposits, credit, fair lending, the Community Reinvestment Act, and other applicable laws. 

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In Absher v. Autozone, Inc., the Second District California Court of Appeal held that a request for personal identification information in connection with a return of merchandise purchased with a credit card does not violate Civil Code §1747.08, otherwise known as the Song-Beverly Credit Card Act of 1971, which prohibits a merchant from requesting or requiring personal identification information for a credit card payment.

In Absher, plaintiff used a credit card to purchase a locking gas cap from Autozone and immediately tried to return it after he discovered in the store's parking lot that it was the wrong size for his car.  Autozone's cashier swiped plaintiff's credit card and asked him to fill out a form with personal identification information, including his name, address, telephone number and signature.  Plaintiff filled out the form, and two weeks later sued Autozone in a class action, alleging that Autozone violated Civil Code §1747.08(a)(3) by utilizing a form with spaces for his personal identification information.  The trial court granted Autozone's motion for summary judgment.  Plaintiff appealed.
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For those fans scoring at home, there are many revised, amended, proposed or new regulations and laws recently enacted or on deck in Sacramento and DC in consumer finance.  Many more are likely to come.  A summary of the most recent: 

California law

• Mortgages: new foreclosure procedures are now law in Civil Code §§2923.5, 2923.6 and 2929.3 and Code of Civil Procedure §1161b.

Federal law

•  Credit Cards:  the 2008 Credit and Debit Card Receipt Clarification Act, now law, clairifies the Fair and Accurate Credit Transactions Act of 2003;
•  Credit Cards and Deposit Accounts: "unfair or deceptive acts or practices" are refined and redefined in revisions to Regulation AA, revisions to Regulation DD, and revisions to Regulation Z;
•  Mortgages: Regulation X would get a makeover in HUD's proposed rule amending the Real Estate Settlement Procedures Act;
•  Arbitration:  the proposed "Arbitration Fairness Act of 2007" would slice and dice the Federal Arbitration Act;  the "Automobile Arbitration Fairness Act of 2008," would eviscerate pre-dispute arbitration provisions in auto sales or lease contracts.

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The Ninth Circuit this week addressed the evidence required to establish a "bona fide error" defense under the FDCPA, 15 U.S.C. 1692k(c).  In Reichert v. National Credit Systems, Inc., the Court held that to establish the bona fide error defense, "a showing of 'procedures reasonably adapted to avoid any such error' must require more than a mere assertion to that effect. The procedures themselves must be explained, along with the manner in which they were adapted to avoid the error."

In Reichert, plaintiff debtor sued National Credit Systems ("NCS") in connection with its collection activities for debtor's former landlord.  The debt that NCS attempted to collect included a $225 charge by the landlord's attorney for writing a letter to the debtor.  The debtor alleged, among other things, that the inclusion of this charge, which was not specifically provided in the lease, violated FDCPA provision 15 U.S.C. §1692f(1).   The district court granted summary judgment for the debtor.  NCS appealed. Continue Reading...

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The Fourth District California Court of Appeal reaffirmed in a published opinion that the issuance of a credit card is not subject to the California Consumers Legal Remedies Act ("CLRA") (Civ. Code § 1750 et seq.).  In Ball v. FleetBoston Financial Corporation, the Court of Appeal affirmed the Superior Court's denial of plaintiff's motion for leave to amend her complaint to allege violations of the CLRA and to seek declaratory relief against card issuer FleetBoston, citing prior cases that established "the CLRA does not apply to the issuance of a credit card."

In Ball, plaintiff sued FleetBoston (later Bank of America) for a violation of California's unfair competition law, Business and Professions Code § 17200 et seq., alleging that FleetBoston's cardholder agreement was procedurally and substantively unconscionable.  She later filed an amended complaint adding additional allegations of substantive unconscionability.  When Ball filed her complaint and first amended complaint, she did not have a credit card account with FleetBoston.  After Proposition 64 and subsequent cases confirmed that a non-cardholder had no standing to sue under 17200, Ball opened a credit card account and sought leave to amend her complaint for a second time to allege her new customer status, to allege violations of the CLRA, and to seek declaratory relief.  The Superior Court denied plaintiff's motion for leave to amend.  Plaintiff appealed.
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The comment period for the Federal Reserve's sweeping proposed rule changes for credit cards and overdrafts continues, following the Fed's press release announcing the proposed revisions on May 2, 2008.  The proposed revisions to Regulation AA, revisions to Regulation DD, and revisions to Regulation Z seek to redefine "unfair or deceptive acts or practices" in connection with credit card accounts and overdraft protection services.

The proposed changes would significantly alter the current regulations governing card issuers' payment billing cycles, allocation of payments, interest rate increases, security deposits and fees, credit card holds, and firm offers of credit.  The revised rules would also make significant changes to overdraft protection linked to deposit accounts, including imposing an opt-out provision, eliminating overdraft charges resulting from debit holds, and changing required overdraft fee disclosures.

The American Bankers Association issued a public comment on the proposed rule changes on May 2, 2008, citing its concerns about a resulting "reduction in credit availability at the very time the Fed is working to increase access to credit in the marketplace."

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Read together, California’s Rosenthal Fair Debt Collection Practices Act (Civ. Code § 1788 et seq.) and the federal Fair Debt Collection Practices Act (15 U.S.C. 1692 et seq.) would appear to have only a few differences. But those few differences matter. Unlike the federal Fair Debt Collection Practices Act, for example, which defines "debt collector" to exclude an employee of the creditor collecting debts owed to the creditor, California’s Rosenthal Act defines “debt collector” more broadly as one who collects debts “on behalf of himself or herself or others.” (Cf. 15 U.S.C. § 1692a and Civ. Code § 1788.2.) This is a significant difference: a credit card company whose employee's collection activities may be exempt from the federal FDCPA could be held liable under California’s Rosenthal FDCPA for the same actions.

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In Satey v. JP Morgan Chase & Co., 521 F.3d 1087 (9th Cir. 2008), the Ninth Circuit shed some light on the limitations of California’s potentially broad Identity Theft Law (Civ. Code § 1798.92-1798.97), which allows a victim of identity theft to sue a “Claimant” to recover damages, civil penalties, and attorney’s fees.  Under the statute, a “Claimant” is “a person who has or purports to have a claim for money or an interest in property in connection with a transaction procured through identity theft.”  (Civ. Code § 1798.93(a)).  In Satey, the Court upheld summary judgment against plaintiff, holding that credit card issuer Chase was not a “Claimant” under California’s Identity Theft Law, and therefore could not be sued, because Chase had sold plaintiff’s credit card account to another company before plaintiff filed his complaint.
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