InfoBytes, March 20, 2009
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Topics in this issue:
- Announcements
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Litigation
- E-Financial Services
- Credit Cards
Announcements
The nation’s leading financial services enforcement and litigation practice, led by Andrew L. Sandler and Benjamin B. Klubes, is joining with Buckley Kolar LLP, a premier financial services law firm, to form a new firm, BuckleySandler LLP. For more information, please click here.
Federal Issues
FDIC Extends Portion of the Temporary Liquidity Guarantee Program; Imposes Surcharges on Guaranteed Debt. On March 17, the Federal Deposit Insurance Corporation (FDIC) voted to extend the debt guarantee portion of the Temporary Liquidity Guarantee Program from June 30, 2009 to October 31, 2009. As a result, the guarantee on debt issued before April 1, 2009 will expire no later than June 30, 2012, and the guarantee on debt issued on or after April 1, 2009 will expire no later than December 31, 2012. The FDIC also voted to impose surcharges on guaranteed debt that is issued on or after April 1, 2009 and has a maturity of one year or more. The FDIC will deposit the proceeds of these surcharges and the current fees for guaranteed debt into the Deposit Insurance Fund. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2009/pr09041.html.
FTC Obtains Temporary Restraining Order Against Credit Repair Companies. On March 17, the Federal Trade Commission (FTC) obtained a temporary restraining order against seven companies that allegedly promised to remove negative information, including accurate information, from consumer credit reports. In violation of the FTC Act and the Credit Repair Organizations Act, the defendants purportedly (i) did not provide the advertized credit repair services, (ii) charged consumers up-front fees, and (iii) did not provide adequate written disclosures and/or contracts. In addition to a temporary injunction, the FTC’s original February 24 complaint seeks a permanent injunction, restitution to consumers, and recovery of costs. For a copy of the complaint, please see http://www.ftc.gov/os/caselist/0823211/090317ucacmpt.pdf. For a copy of the press release, please see http://www.ftc.gov/opa/2009/03/unitedcredit.shtm.
Federal Reserve Bank of New York Revises TALF FAQs. On March 17, the Federal Reserve Bank of New York revised its frequently asked questions regarding the Term Asset-Backed Securities Loan Facility (TALF). The FAQs clarify, among other things, (i) borrower eligibility, (ii) collateral eligibility, (iii) operational mechanics, and (iv) “haircuts and rates.” This is the fourth revision of the FAQs since they were initially posted on December 19, 2008. For a copy of the current FAQ, please see http://www.newyorkfed.org/markets/talf_faq.html.
State Issues
Washington Regulator Issues Interpretive Statement Regarding Loan Modification Services. On March 10, the Washington Department of Financial Institutions, Division of Consumer Services issued a draft interpretive statement stating that loan modification service providers are acting as mortgage brokers or loan originators pursuant to the Washington Mortgage Broker Practices Act and the Washington Consumer Loan Act, and thus may require licensure. The guidance defines “loan modification” as “a change in one or more of the loan terms.” For a copy of the draft interpretive statement, please see http://www.dfi.wa.gov/cs/interpretive_statements/mortgage/IS-2009-01.pdf.
Wyoming Enacts Mortgage Loan Originator Licensing and Registration. On March 12, Wyoming Governor Dave Freudenthal signed HB 169, a bill that modifies the Wyoming Residential Mortgage Practices Act and Uniform Consumer Credit Code to provide for mortgage loan originator licensing and registration. Among other things, the bill details (i) the initial application process, (ii) pre-licensing education, (iii) testing requirements, (iv) the renewal process, and (v) continuing education requirements. While the bill goes into effect July 1, 2009, loan originators have until July 1, 2010 to register or obtain licensure. For a copy of the bill, please see http://www.buckleykolar.com/WY_HB_0169.pdf.
California Regulator Requires CFL, RMLA Licensees to Complete Online Survey. On March 16, the California Department of Corporations made available a survey form - the "National Mortgage Licensing System and Registry Survey" – (the “Form”) in connection with compliance with provisions of the S.A.F.E Mortgage Licensing Act of 2008. The Form must be completed by all California Finance Lender and Residential Mortgage Lending Act licensees, regardless of the types of loans made, brokered, or serviced. Completed surveys must be completed online and filed electronically by April 6, 2009. To access the online survey form, please see http://www.corp.ca.gov/fsd/survey/safe.asp.
Courts
Circuit Court Holds That Bank Did Not Violate TILA When Enforcing Retroactive Penalty Rate. On March 19, the Seventh Circuit held that a defendant bank’s practice of retroactively applying a penalty rate to the beginning of the month in which the triggering default occurred did not violate the change-in-terms notice requirements under Regulation Z. Swanson v. Bank of America, N.A., No. 08 C 184, 2009 WL 702267 (7th Cir. Mar. 19, 2009). In this case, whose opinion was written by Chief Judge Easterbrook, the bank sent the plaintiff cardholder notice that it was amending the terms of the cardholder agreement to allow the bank to apply a higher “penalty” interest rate at the beginning of the billing cycle if she, at any time, exceeded her credit limit twice within any rolling twelve-month period. After twice exceeding the credit limit and incurring the retroactive penalty rate, the borrower sued, alleging violations of Regulation Z, which implements the Truth in Lending Act (TILA). Specifically, the plaintiff alleged that Regulation Z required the bank to provide notice fifteen days prior to the effective date of any change to any term in the agreement. By retroactively applying the penalty rate, the effective date of the change preceded the notice itself. The bank argued both that no “term” had been changed and that the penalty rate is no different than an over-limit fee, which is covered by a different provision not requiring advance notice. The bank also noted that the commentary to Regulation Z clarifies that no change-in-terms notice is required where a rate increase is set forth at the outset. The district court agreed with this assessment, and the circuit court affirmed. The court found that the language of the regulation and the commentary was ambiguous as to this issue but that it was a sensible conclusion that the regulation permits retroactive application. The court also noted that the Federal Reserve Board recently amended Regulation Z to add a new section, which will specifically prohibit the practice of retroactively applying penalty rates. However, this section is not effective until July 1, 2010. The court said that the plaintiff “effectively wants the benefit of tomorrow’s regulations, today,” but the defendant “wins under the law now in force.” Consequently, the court affirmed the judgment in favor of the bank. For a copy of the opinion, please see http://www.buckleysandler.com/Swanson_v_BoA.pdf.
Federal Court Rules TILA Rescission Unavailable to Borrowers Using Home as Collateral for Commercial Loan. On March 9, the U.S. District Court for the District of Maryland held that that the right to rescind afforded under the Truth in Lending Act (TILA) is inapplicable in a commercial transaction, even when a mortgage is placed on the borrower’s home as part of the transaction. Kuechler v. People’s Bank, Civ. No. 08-1735, 2009 WL 636125 (D. Md. Mar. 9, 2009). In Kuechler, the defendant bank loaned $500,000 to the business of the plaintiffs’ son, so that the business could purchase the commercial property on which it was located. The $500,000 loan was secured by a mortgage on the commercial property, as well as by an indemnity mortgage on the plaintiffs’ home. Two years later, the plaintiffs sought to rescind the transaction, alleging that they had a right to do so under TILA and subsequently filed suit, alleging violations of state law and of TILA. In granting the defendant’s motion for summary judgment on the TILA claim, the court emphasized that TILA applies exclusively to consumer credit transactions—that it is the purpose of the loan, not the status of the person taking out the loan or the nature of the collateral that ultimately determines whether the loan is subject to TILA. According to the court, the rescission remedy was unavailable to the plaintiffs because the proceeds of the loan at issue were used for a commercial purpose. Additionally, the court disagreed with the plaintiffs’ argument that, for purposes of rescission, the definition of “consumer” encompasses any individual whose home is subject to a risk of loss. The court further granted summary judgment for the defendant regarding the state-law claims. For a copy of the opinion, please see http://www.buckleysandler.com/Kuechler_v_Peoples_Bank.pdf.
Federal Court Grants Foreclosure Sale Injunction in TILA Violation Case. On March 16, the U.S. District Court for the Southern District of California granted an injunction to prevent a foreclosure sale because of an alleged failure to comply with the technical requirements of the notice of right to cancel set forth in the Truth in Lending Act (TILA). Horton v. California Credit Corp. Retirement Plan, No. 09-cv-274, 2009 WL 700223 (S.D. Calif. Mar. 16, 2009). In Horton, the plaintiffs alleged that the notice of right to cancel provided by the defendant creditor did not contain the exact date that the cancellation period expired. The plaintiffs argued that this alleged TILA violation entitled them to rescind the transaction for up to three years from origination. Further, the plaintiffs argued that, because they exercised the right of rescission within three years, the defendant’s security interest was void and that the defendant should be enjoined from proceeding with the sale. The court concluded that the evidence indicated that the defendant violated TILA. Relying on Semar v. Platte Valley Federal Savings & Loan Ass’n, 781 F. 2d 699 (9th Cir. 1986), the court found that a form stating that a right to cancel period exists for three days, but does not state the exact date upon which the rescission period ends, violates TILA and triggers a three-year rescission period. After considering additional factors, the court granted an injunction to prevent the defendant from foreclosing on the property until at least the conclusion of the current lawsuit. For a copy of the opinion, please see http://www.buckleysandler.com/Horton_v_CA_Credit.pdf.
Federal Court Enforces Clickwrap Agreement’s Forum-Selection Clause. On March 6, the U.S. District Court for the Eastern District of Missouri held that a website’s forum-selection clause is valid even if the customer does not create the account himself and fails to read the website’s terms of service. Burcham v. Expedia, Inc., No. 4:07CV1963, 2009 WL 586513 (E.D. Mo. Mar. 6, 2009). In Burcham, the plaintiff filed suit for an alleged violation of the Missouri Merchandising Practices Act, claiming that the defendant knowingly made false representations on its website regarding its services. The defendant argued that venue was improper because the website’s terms and conditions contained a forum-selection clause designating another jurisdiction. The plaintiff agreed to the terms and conditions via a “clickwrap” agreement. The plaintiff argued that the forum-selection was invalid because another person may have clicked the online button to agree and may have done so without plaintiff’s knowledge or assent. The court rejected this argument on three grounds. First, the court found that the plaintiff did not offer any facts supporting his claim. Second, the court discovered that there was a link to the full text of the user agreement at the bottom of one of the web pages the plaintiff submitted as evidence of the purchase of the service. Finally, the court cited to persuasive precedent holding that both the actual user of a website and the person for whom the user was using the website are bound by a website’s terms – i.e., even if someone else had used the plaintiff’s account, the plaintiff would still be bound by the clickwrap agreement. After determining that the parties formed an agreement, the court concluded that the form contract was not a contract of adhesion because the customer had a choice among competing services. As a result, the defendant’s motion to dismiss for improper venue was granted. For a copy of the opinion, please see http://www.buckleysandler.com/Burcham_v_Expedia.pdf.
Montana Supreme Court Rules “Bill Stuffers” Are Ineffective to Change Cardholder Agreement. On March 17, the Supreme Court of Montana held that a creditor could not unilaterally amend a cardholder agreement through use of a “bill stuffer.” Kortum-Managhan v. Herbergers NBGL, 2009 MT 79, 2009 WL 692466 (Mont. Mar. 17, 2009). In this case, the plaintiff alleged that the defendant credit card issuers improperly changed the terms of her agreement by adding an arbitration clause by way of an insert with the plaintiff’s monthly bill, in violation of the original card agreement. The arbitration agreement stated that continued use of the card constituted acceptance of the arbitration provision. When the plaintiff filed suit over issues with the account, the defendants moved to compel arbitration, which the trial court granted. The plaintiff appealed to the Montana Supreme Court. The court agreed with the plaintiff, noting two fundamental problems in the defendants’ attempt to amend the agreement. First, though the defendant had reserved the right to change any term in the original cardholder agreement unilaterally, the court noted that this right encompassed only the modification of existing terms, not the addition of new terms. Second, the court found that the defendants’ interpretation of the contract would create a contract of adhesion because the plaintiff would not have waived her right to a jury trial voluntarily, knowingly, and intelligently. As a result of these deficiencies, defendants’ unilateral attempt to amend the original cardholder agreement was ineffective and the trial court erred by granting the defendants’ motion to compel arbitration. For a copy of the opinion, please e-mail .
Federal Court Holds E-Mail is Acceptable Method of Serving Foreign Defendant. On February 17, the U.S. District Court for the Northern District of California ruled that e-mail is an acceptable method of service of process on a defendant residing in the U.K. Jenkins v. Pooke, No. C 07-03112, 2009 WL 41298 (N.D. Calif. Feb. 17, 2009). In Jenkins, the U.S. plaintiffs brought a Lanham Act claim against a website’s official administrator, who resides in Great Britain, regarding cyber-squatting allegations. The plaintiffs attempted service of process by e-mail, among other methods. In holding that service by e-mail was valid, the court noted that the Ninth Circuit has previously held that “other means” of valid service under the Federal Rules of Civil Procedure includes e-mail. In this case, the court reasoned that (i) there was no indication or error message suggesting that the e-mail was undeliverable, (ii) there was no evidence that the U.K. prohibited service by e-mail, (iii) the plaintiffs could prove that the e-mail address was functional and had been previously used to communicate with the defendant, and (iv) e-mail was sufficient to provide the defendant with notice and the opportunity to be heard. For a copy of the opinion, please see http://www.buckleysandler.com/Jenkins_v_Pooke.pdf.
Firm News
Margo Tank and Jerry Buckley were named in the Mortgage Banking Magazine March Technology issue as “e-Mortgage All-Stars.” The Magazine’s annual eMortgage All-Stars list honors a group of mortgage industry leaders who are pioneering the use of electronic records and signatures in the mortgage industry.
Colgate Selden participated in a webinar sponsored by the National Association of Federal Credit Unions regarding the RESPA Reform Rule on March 4. Mr. Selden’s presentation was entitled “Real Estate Settlement Overhaul: Complying with RESPA Reform.”
Joe Kolar gave speech on RESPA at the Old Republic National Title Insurance Company 2009 Annual Seminar in Columbus, Ohio on March 10.
Margo Tank spoke at the MBA Technology in Mortgage Banking Conference/Expo March 15-18 in Las Vegas, NV on eMortgage legal and risk managements issues.
Mortgages
Washington Regulator Issues Interpretive Statement Regarding Loan Modification Services. On March 10, the Washington Department of Financial Institutions, Division of Consumer Services issued a draft interpretive statement stating that loan modification service providers are acting as mortgage brokers or loan originators pursuant to the Washington Mortgage Broker Practices Act and the Washington Consumer Loan Act, and thus may require licensure. The guidance defines “loan modification” as “a change in one or more of the loan terms.” For a copy of the draft interpretive statement, please see http://www.dfi.wa.gov/cs/interpretive_statements/mortgage/IS-2009-01.pdf.
Wyoming Enacts Mortgage Loan Originator Licensing and Registration. On March 12, Wyoming Governor Dave Freudenthal signed HB 169, a bill that modifies the Wyoming Residential Mortgage Practices Act and Uniform Consumer Credit Code to provide for mortgage loan originator licensing and registration. Among other things, the bill details (i) the initial application process, (ii) pre-licensing education, (iii) testing requirements, (iv) the renewal process, and (v) continuing education requirements. While the bill goes into effect July 1, 2009, loan originators have until July 1, 2010 to register or obtain licensure. For a copy of the bill, please see http://www.buckleysandler.com/WY_HB_0169.pdf.
California Regulator Requires CFL, RMLA Licensees to Complete Online Survey. On March 16, the California Department of Corporations made available a survey form - the "National Mortgage Licensing System and Registry Survey" – (the “Form”) in connection with compliance with provisions of the S.A.F.E Mortgage Licensing Act of 2008. The Form must be completed by all California Finance Lender and Residential Mortgage Lending Act licensees, regardless of the types of loans made, brokered, or serviced. Completed surveys must be completed online and filed electronically by April 6, 2009. To access the online survey form, please see http://www.corp.ca.gov/fsd/survey/safe.asp.
Federal Court Rules TILA Rescission Unavailable to Borrowers Using Home as Collateral for Commercial Loan. On March 9, the U.S. District Court for the District of Maryland held that that the right to rescind afforded under the Truth in Lending Act (TILA) is inapplicable in a commercial transaction, even when a mortgage is placed on the borrower’s home as part of the transaction. Kuechler v. People’s Bank, Civ. No. 08-1735, 2009 WL 636125 (D. Md. Mar. 9, 2009). In Kuechler, the defendant bank loaned $500,000 to the business of the plaintiffs’ son, so that the business could purchase the commercial property on which it was located. The $500,000 loan was secured by a mortgage on the commercial property, as well as by an indemnity mortgage on the plaintiffs’ home. Two years later, the plaintiffs sought to rescind the transaction, alleging that they had a right to do so under TILA and subsequently filed suit, alleging violations of state law and of TILA. In granting the defendant’s motion for summary judgment on the TILA claim, the court emphasized that TILA applies exclusively to consumer credit transactions—that it is the purpose of the loan, not the status of the person taking out the loan or the nature of the collateral that ultimately determines whether the loan is subject to TILA. According to the court, the rescission remedy was unavailable to the plaintiffs because the proceeds of the loan at issue were used for a commercial purpose. Additionally, the court disagreed with the plaintiffs’ argument that, for purposes of rescission, the definition of “consumer” encompasses any individual whose home is subject to a risk of loss. The court further granted summary judgment for the defendant regarding the state-law claims. For a copy of the opinion, please see http://www.buckleysandler.com/Kuechler_v_Peoples_Bank.pdf.
Federal Court Grants Foreclosure Sale Injunction in TILA Violation Case. On March 16, the U.S. District Court for the Southern District of California granted an injunction to prevent a foreclosure sale because of an alleged failure to comply with the technical requirements of the notice of right to cancel set forth in the Truth in Lending Act (TILA). Horton v. California Credit Corp. Retirement Plan, No. 09-cv-274, 2009 WL 700223 (S.D. Calif. Mar. 16, 2009). In Horton, the plaintiffs alleged that the notice of right to cancel provided by the defendant creditor did not contain the exact date that the cancellation period expired. The plaintiffs argued that this alleged TILA violation entitled them to rescind the transaction for up to three years from origination. Further, the plaintiffs argued that, because they exercised the right of rescission within three years, the defendant’s security interest was void and that the defendant should be enjoined from proceeding with the sale. The court concluded that the evidence indicated that the defendant violated TILA. Relying on Semar v. Platte Valley Federal Savings & Loan Ass’n, 781 F. 2d 699 (9th Cir. 1986), the court found that a form stating that a right to cancel period exists for three days, but does not state the exact date upon which the rescission period ends, violates TILA and triggers a three-year rescission period. After considering additional factors, the court granted an injunction to prevent the defendant from foreclosing on the property until at least the conclusion of the current lawsuit. For a copy of the opinion, please see http://www.buckleysandler.com/Horton_v_CA_Credit.pdf.
Banking
FDIC Extends Portion of the Temporary Liquidity Guarantee Program; Imposes Surcharges on Guaranteed Debt. On March 17, the Federal Deposit Insurance Corporation (FDIC) voted to extend the debt guarantee portion of the Temporary Liquidity Guarantee Program from June 30, 2009 to October 31, 2009. As a result, the guarantee on debt issued before April 1, 2009 will expire no later than June 30, 2012, and the guarantee on debt issued on or after April 1, 2009 will expire no later than December 31, 2012. The FDIC also voted to impose surcharges on guaranteed debt that is issued on or after April 1, 2009 and has a maturity of one year or more. The FDIC will deposit the proceeds of these surcharges and the current fees for guaranteed debt into the Deposit Insurance Fund. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2009/pr09041.html.
Federal Reserve Bank of New York Revises TALF FAQs. On March 17, the Federal Reserve Bank of New York revised its frequently asked questions regarding the Term Asset-Backed Securities Loan Facility (TALF). The FAQs clarify, among other things, (i) borrower eligibility, (ii) collateral eligibility, (iii) operational mechanics, and (iv) “haircuts and rates.” This is the fourth revision of the FAQs since they were initially posted on December 19, 2008. For a copy of the current FAQ, please see http://www.newyorkfed.org/markets/talf_faq.html.
Circuit Court Holds That Bank Did Not Violate TILA When Enforcing Retroactive Penalty Rate. On March 19, the Seventh Circuit held that a defendant bank’s practice of retroactively applying a penalty rate to the beginning of the month in which the triggering default occurred did not violate the change-in-terms notice requirements under Regulation Z. Swanson v. Bank of America, N.A., No. 08 C 184, 2009 WL 702267 (7th Cir. Mar. 19, 2009). In this case, whose opinion was written by Chief Judge Easterbrook, the bank sent the plaintiff cardholder notice that it was amending the terms of the cardholder agreement to allow the bank to apply a higher “penalty” interest rate at the beginning of the billing cycle if she, at any time, exceeded her credit limit twice within any rolling twelve-month period. After twice exceeding the credit limit and incurring the retroactive penalty rate, the borrower sued, alleging violations of Regulation Z, which implements the Truth in Lending Act (TILA). Specifically, the plaintiff alleged that Regulation Z required the bank to provide notice fifteen days prior to the effective date of any change to any term in the agreement. By retroactively applying the penalty rate, the effective date of the change preceded the notice itself. The bank argued both that no “term” had been changed and that the penalty rate is no different than an over-limit fee, which is covered by a different provision not requiring advance notice. The bank also noted that the commentary to Regulation Z clarifies that no change-in-terms notice is required where a rate increase is set forth at the outset. The district court agreed with this assessment, and the circuit court affirmed. The court found that the language of the regulation and the commentary was ambiguous as to this issue but that it was a sensible conclusion that the regulation permits retroactive application. The court also noted that the Federal Reserve Board recently amended Regulation Z to add a new section, which will specifically prohibit the practice of retroactively applying penalty rates. However, this section is not effective until July 1, 2010. The court said that the plaintiff “effectively wants the benefit of tomorrow’s regulations, today,” but the defendant “wins under the law now in force.” Consequently, the court affirmed the judgment in favor of the bank. For a copy of the opinion, please see http://www.buckleysandler.com/Swanson_v_BoA.pdf.
Consumer Finance
FTC Obtains Temporary Restraining Order Against Credit Repair Companies. On March 17, the Federal Trade Commission (FTC) obtained a temporary restraining order against seven companies that allegedly promised to remove negative information, including accurate information, from consumer credit reports. In violation of the FTC Act and the Credit Repair Organizations Act, the defendants purportedly (i) did not provide the advertized credit repair services, (ii) charged consumers up-front fees, and (iii) did not provide adequate written disclosures and/or contracts. In addition to a temporary injunction, the FTC’s original February 24 complaint seeks a permanent injunction, restitution to consumers, and recovery of costs. For a copy of the complaint, please see http://www.ftc.gov/os/caselist/0823211/090317ucacmpt.pdf. For a copy of the press release, please see http://www.ftc.gov/opa/2009/03/unitedcredit.shtm.
Litigation
Circuit Court Holds That Bank Did Not Violate TILA When Enforcing Retroactive Penalty Rate. On March 19, the Seventh Circuit held that a defendant bank’s practice of retroactively applying a penalty rate to the beginning of the month in which the triggering default occurred did not violate the change-in-terms notice requirements under Regulation Z. Swanson v. Bank of America, N.A., No. 08 C 184, 2009 WL 702267 (7th Cir. Mar. 19, 2009). In this case, whose opinion was written by Chief Judge Easterbrook, the bank sent the plaintiff cardholder notice that it was amending the terms of the cardholder agreement to allow the bank to apply a higher “penalty” interest rate at the beginning of the billing cycle if she, at any time, exceeded her credit limit twice within any rolling twelve-month period. After twice exceeding the credit limit and incurring the retroactive penalty rate, the borrower sued, alleging violations of Regulation Z, which implements the Truth in Lending Act (TILA). Specifically, the plaintiff alleged that Regulation Z required the bank to provide notice fifteen days prior to the effective date of any change to any term in the agreement. By retroactively applying the penalty rate, the effective date of the change preceded the notice itself. The bank argued both that no “term” had been changed and that the penalty rate is no different than an over-limit fee, which is covered by a different provision not requiring advance notice. The bank also noted that the commentary to Regulation Z clarifies that no change-in-terms notice is required where a rate increase is set forth at the outset. The district court agreed with this assessment, and the circuit court affirmed. The court found that the language of the regulation and the commentary was ambiguous as to this issue but that it was a sensible conclusion that the regulation permits retroactive application. The court also noted that the Federal Reserve Board recently amended Regulation Z to add a new section, which will specifically prohibit the practice of retroactively applying penalty rates. However, this section is not effective until July 1, 2010. The court said that the plaintiff “effectively wants the benefit of tomorrow’s regulations, today,” but the defendant “wins under the law now in force.” Consequently, the court affirmed the judgment in favor of the bank. For a copy of the opinion, please see http://www.buckleysandler.com/Swanson_v_BoA.pdf.
Federal Court Rules TILA Rescission Unavailable to Borrowers Using Home as Collateral for Commercial Loan. On March 9, the U.S. District Court for the District of Maryland held that that the right to rescind afforded under the Truth in Lending Act (TILA) is inapplicable in a commercial transaction, even when a mortgage is placed on the borrower’s home as part of the transaction. Kuechler v. People’s Bank, Civ. No. 08-1735, 2009 WL 636125 (D. Md. Mar. 9, 2009). In Kuechler, the defendant bank loaned $500,000 to the business of the plaintiffs’ son, so that the business could purchase the commercial property on which it was located. The $500,000 loan was secured by a mortgage on the commercial property, as well as by an indemnity mortgage on the plaintiffs’ home. Two years later, the plaintiffs sought to rescind the transaction, alleging that they had a right to do so under TILA and subsequently filed suit, alleging violations of state law and of TILA. In granting the defendant’s motion for summary judgment on the TILA claim, the court emphasized that TILA applies exclusively to consumer credit transactions—that it is the purpose of the loan, not the status of the person taking out the loan or the nature of the collateral that ultimately determines whether the loan is subject to TILA. According to the court, the rescission remedy was unavailable to the plaintiffs because the proceeds of the loan at issue were used for a commercial purpose. Additionally, the court disagreed with the plaintiffs’ argument that, for purposes of rescission, the definition of “consumer” encompasses any individual whose home is subject to a risk of loss. The court further granted summary judgment for the defendant regarding the state-law claims. For a copy of the opinion, please see http://www.buckleysandler.com/Kuechler_v_Peoples_Bank.pdf.
Federal Court Grants Foreclosure Sale Injunction in TILA Violation Case. On March 16, the U.S. District Court for the Southern District of California granted an injunction to prevent a foreclosure sale because of an alleged failure to comply with the technical requirements of the notice of right to cancel set forth in the Truth in Lending Act (TILA). Horton v. California Credit Corp. Retirement Plan, No. 09-cv-274, 2009 WL 700223 (S.D. Calif. Mar. 16, 2009). In Horton, the plaintiffs alleged that the notice of right to cancel provided by the defendant creditor did not contain the exact date that the cancellation period expired. The plaintiffs argued that this alleged TILA violation entitled them to rescind the transaction for up to three years from origination. Further, the plaintiffs argued that, because they exercised the right of rescission within three years, the defendant’s security interest was void and that the defendant should be enjoined from proceeding with the sale. The court concluded that the evidence indicated that the defendant violated TILA. Relying on Semar v. Platte Valley Federal Savings & Loan Ass’n, 781 F. 2d 699 (9th Cir. 1986), the court found that a form stating that a right to cancel period exists for three days, but does not state the exact date upon which the rescission period ends, violates TILA and triggers a three-year rescission period. After considering additional factors, the court granted an injunction to prevent the defendant from foreclosing on the property until at least the conclusion of the current lawsuit. For a copy of the opinion, please see http://www.buckleysandler.com/Horton_v_CA_Credit.pdf.
Federal Court Enforces Clickwrap Agreement’s Forum-Selection Clause. On March 6, the U.S. District Court for the Eastern District of Missouri held that a website’s forum-selection clause is valid even if the customer does not create the account himself and fails to read the website’s terms of service. Burcham v. Expedia, Inc., No. 4:07CV1963, 2009 WL 586513 (E.D. Mo. Mar. 6, 2009). In Burcham, the plaintiff filed suit for an alleged violation of the Missouri Merchandising Practices Act, claiming that the defendant knowingly made false representations on its website regarding its services. The defendant argued that venue was improper because the website’s terms and conditions contained a forum-selection clause designating another jurisdiction. The plaintiff agreed to the terms and conditions via a “clickwrap” agreement. The plaintiff argued that the forum-selection was invalid because another person may have clicked the online button to agree and may have done so without plaintiff’s knowledge or assent. The court rejected this argument on three grounds. First, the court found that the plaintiff did not offer any facts supporting his claim. Second, the court discovered that there was a link to the full text of the user agreement at the bottom of one of the web pages the plaintiff submitted as evidence of the purchase of the service. Finally, the court cited to persuasive precedent holding that both the actual user of a website and the person for whom the user was using the website are bound by a website’s terms – i.e., even if someone else had used the plaintiff’s account, the plaintiff would still be bound by the clickwrap agreement. After determining that the parties formed an agreement, the court concluded that the form contract was not a contract of adhesion because the customer had a choice among competing services. As a result, the defendant’s motion to dismiss for improper venue was granted. For a copy of the opinion, please see http://www.buckleysandler.com/Burcham_v_Expedia.pdf.
Montana Supreme Court Rules “Bill Stuffers” Are Ineffective to Change Cardholder Agreement. On March 17, the Supreme Court of Montana held that a creditor could not unilaterally amend a cardholder agreement through use of a “bill stuffer.” Kortum-Managhan v. Herbergers NBGL, 2009 MT 79, 2009 WL 692466 (Mont. Mar. 17, 2009). In this case, the plaintiff alleged that the defendant credit card issuers improperly changed the terms of her agreement by adding an arbitration clause by way of an insert with the plaintiff’s monthly bill, in violation of the original card agreement. The arbitration agreement stated that continued use of the card constituted acceptance of the arbitration provision. When the plaintiff filed suit over issues with the account, the defendants moved to compel arbitration, which the trial court granted. The plaintiff appealed to the Montana Supreme Court. The court agreed with the plaintiff, noting two fundamental problems in the defendants’ attempt to amend the agreement. First, though the defendant had reserved the right to change any term in the original cardholder agreement unilaterally, the court noted that this right encompassed only the modification of existing terms, not the addition of new terms. Second, the court found that the defendants’ interpretation of the contract would create a contract of adhesion because the plaintiff would not have waived her right to a jury trial voluntarily, knowingly, and intelligently. As a result of these deficiencies, defendants’ unilateral attempt to amend the original cardholder agreement was ineffective and the trial court erred by granting the defendants’ motion to compel arbitration. For a copy of the opinion, please e-mail .
Federal Court Holds E-Mail is Acceptable Method of Serving Foreign Defendant. On February 17, the U.S. District Court for the Northern District of California ruled that e-mail is an acceptable method of service of process on a defendant residing in the U.K. Jenkins v. Pooke, No. C 07-03112, 2009 WL 41298 (N.D. Calif. Feb. 17, 2009). In Jenkins, the U.S. plaintiffs brought a Lanham Act claim against a website’s official administrator, who resides in Great Britain, regarding cyber-squatting allegations. The plaintiffs attempted service of process by e-mail, among other methods. In holding that service by e-mail was valid, the court noted that the Ninth Circuit has previously held that “other means” of valid service under the Federal Rules of Civil Procedure includes e-mail. In this case, the court reasoned that (i) there was no indication or error message suggesting that the e-mail was undeliverable, (ii) there was no evidence that the U.K. prohibited service by e-mail, (iii) the plaintiffs could prove that the e-mail address was functional and had been previously used to communicate with the defendant, and (iv) e-mail was sufficient to provide the defendant with notice and the opportunity to be heard. For a copy of the opinion, please see http://www.buckleysandler.com/Jenkins_v_Pooke.pdf.
E-Financial Services
Federal Court Enforces Clickwrap Agreement’s Forum-Selection Clause. On March 6, the U.S. District Court for the Eastern District of Missouri held that a website’s forum-selection clause is valid even if the customer does not create the account himself and fails to read the website’s terms of service. Burcham v. Expedia, Inc., No. 4:07CV1963, 2009 WL 586513 (E.D. Mo. Mar. 6, 2009). In Burcham, the plaintiff filed suit for an alleged violation of the Missouri Merchandising Practices Act, claiming that the defendant knowingly made false representations on its website regarding its services. The defendant argued that venue was improper because the website’s terms and conditions contained a forum-selection clause designating another jurisdiction. The plaintiff agreed to the terms and conditions via a “clickwrap” agreement. The plaintiff argued that the forum-selection was invalid because another person may have clicked the online button to agree and may have done so without plaintiff’s knowledge or assent. The court rejected this argument on three grounds. First, the court found that the plaintiff did not offer any facts supporting his claim. Second, the court discovered that there was a link to the full text of the user agreement at the bottom of one of the web pages the plaintiff submitted as evidence of the purchase of the service. Finally, the court cited to persuasive precedent holding that both the actual user of a website and the person for whom the user was using the website are bound by a website’s terms – i.e., even if someone else had used the plaintiff’s account, the plaintiff would still be bound by the clickwrap agreement. After determining that the parties formed an agreement, the court concluded that the form contract was not a contract of adhesion because the customer had a choice among competing services. As a result, the defendant’s motion to dismiss for improper venue was granted. For a copy of the opinion, please see http://www.buckleysandler.com/Burcham_v_Expedia.pdf.
Federal Court Holds E-Mail is Acceptable Method of Serving Foreign Defendant. On February 17, the U.S. District Court for the Northern District of California ruled that e-mail is an acceptable method of service of process on a defendant residing in the U.K. Jenkins v. Pooke, No. C 07-03112, 2009 WL 41298 (N.D. Calif. Feb. 17, 2009). In Jenkins, the U.S. plaintiffs brought a Lanham Act claim against a website’s official administrator, who resides in Great Britain, regarding cyber-squatting allegations. The plaintiffs attempted service of process by e-mail, among other methods. In holding that service by e-mail was valid, the court noted that the Ninth Circuit has previously held that “other means” of valid service under the Federal Rules of Civil Procedure includes e-mail. In this case, the court reasoned that (i) there was no indication or error message suggesting that the e-mail was undeliverable, (ii) there was no evidence that the U.K. prohibited service by e-mail, (iii) the plaintiffs could prove that the e-mail address was functional and had been previously used to communicate with the defendant, and (iv) e-mail was sufficient to provide the defendant with notice and the opportunity to be heard. For a copy of the opinion, please see http://www.buckleysandler.com/Jenkins_v_Pooke.pdf.
Credit Cards
Circuit Court Holds That Bank Did Not Violate TILA When Enforcing Retroactive Penalty Rate. On March 19, the Seventh Circuit held that a defendant bank’s practice of retroactively applying a penalty rate to the beginning of the month in which the triggering default occurred did not violate the change-in-terms notice requirements under Regulation Z. Swanson v. Bank of America, N.A., No. 08 C 184, 2009 WL 702267 (7th Cir. Mar. 19, 2009). In this case, whose opinion was written by Chief Judge Easterbrook, the bank sent the plaintiff cardholder notice that it was amending the terms of the cardholder agreement to allow the bank to apply a higher “penalty” interest rate at the beginning of the billing cycle if she, at any time, exceeded her credit limit twice within any rolling twelve-month period. After twice exceeding the credit limit and incurring the retroactive penalty rate, the borrower sued, alleging violations of Regulation Z, which implements the Truth in Lending Act (TILA). Specifically, the plaintiff alleged that Regulation Z required the bank to provide notice fifteen days prior to the effective date of any change to any term in the agreement. By retroactively applying the penalty rate, the effective date of the change preceded the notice itself. The bank argued both that no “term” had been changed and that the penalty rate is no different than an over-limit fee, which is covered by a different provision not requiring advance notice. The bank also noted that the commentary to Regulation Z clarifies that no change-in-terms notice is required where a rate increase is set forth at the outset. The district court agreed with this assessment, and the circuit court affirmed. The court found that the language of the regulation and the commentary was ambiguous as to this issue but that it was a sensible conclusion that the regulation permits retroactive application. The court also noted that the Federal Reserve Board recently amended Regulation Z to add a new section, which will specifically prohibit the practice of retroactively applying penalty rates. However, this section is not effective until July 1, 2010. The court said that the plaintiff “effectively wants the benefit of tomorrow’s regulations, today,” but the defendant “wins under the law now in force.” Consequently, the court affirmed the judgment in favor of the bank. For a copy of the opinion, please see http://www.buckleysandler.com/Swanson_v_BoA.pdf.
Montana Supreme Court Rules “Bill Stuffers” Are Ineffective to Change Cardholder Agreement. On March 17, the Supreme Court of Montana held that a creditor could not unilaterally amend a cardholder agreement through use of a “bill stuffer.” Kortum-Managhan v. Herbergers NBGL, 2009 MT 79, 2009 WL 692466 (Mont. Mar. 17, 2009). In this case, the plaintiff alleged that the defendant credit card issuers improperly changed the terms of her agreement by adding an arbitration clause by way of an insert with the plaintiff’s monthly bill, in violation of the original card agreement. The arbitration agreement stated that continued use of the card constituted acceptance of the arbitration provision. When the plaintiff filed suit over issues with the account, the defendants moved to compel arbitration, which the trial court granted. The plaintiff appealed to the Montana Supreme Court. The court agreed with the plaintiff, noting two fundamental problems in the defendants’ attempt to amend the agreement. First, though the defendant had reserved the right to change any term in the original cardholder agreement unilaterally, the court noted that this right encompassed only the modification of existing terms, not the addition of new terms. Second, the court found that the defendants’ interpretation of the contract would create a contract of adhesion because the plaintiff would not have waived her right to a jury trial voluntarily, knowingly, and intelligently. As a result of these deficiencies, defendants’ unilateral attempt to amend the original cardholder agreement was ineffective and the trial court erred by granting the defendants’ motion to compel arbitration. For a copy of the opinion, please e-mail .