Client Alert

Financial Services Report, Fall 2006


In this issue:

Editor’s Note

A lot happened since our last issue. Pluto still orbits but is no longer a planet. The American Association of Trial Lawyers is now the American Association for Justice. President Bush is no masseur but gave German Chancellor Angela Merkel a rubdown. And soccer fan Chief Justice John Roberts, unhappy with Justice Kennedy’s tie-breaking opinions, has decided to institute penalty kicks to break Supreme Court deadlocks. "There is nothing in the Constitution that forbids it," he was quoted. But fellow Federalists disagree, citing Hamilton’s preference for the duel. As for us, we think the Founding Fathers intended a living Constitution. That’s why we’re partial to head butts.

Pluto may bellyache, but it was a good summer for banks and financial institutions. In fact, it is hard to recall a quarter in which so many rulings from so many sectors smiled so brightly.

Let’s recap. On the preemption front, a district court rejected a state Attorney General’s attempt to regulate gift cards issued by a national bank (see "The Gift Card Gift"), although in another case the U.S. Supreme Court granted certiorari and could take back the keys to the T-Bird (see "Watters Rising?"). And staying with plastic, a Seattle court in Washington is the third district court to hold that it’s OK for a card issuer to raise the default interest rate on credit cards without notice so long as the cardholder agreement explains that it could happen. The Seventh Circuit dealt a blow to the "firm offer" class action cases that have become this millennium’s Rodash. (See ‘Firm Offer’ Litigation: A Mixed Bag.") On the other hand, in arbitration news the New Jersey Supreme Court, feeling "California creep," held that "class action waivers" are unconscionable. (See "New Jersey Nixes Class Action Waivers.")

But the big news came from California. The courts began dismantling California’s unfair competition law, Bus. & Prof. Code § 17200, long the bane of business. The California Supreme Court held that the 2004 voter initiative to rein in California’s unfair competition law, Proposition 64, applies to cases pending at the time of the enactment. Then, within weeks, two California appellate courts held that Prop. 64’s new "reliance" requirement precludes class certification. (See "The Writ Hits the Fan" and "Up in Smoke.")

Until next time, remember: There’s no "I" in Team, but there’s no diphthong either.

William L. Stern, Editor

MoFo Metrics

2.5        Billions of dollars spent annually by Americans on pet grooming and boarding

44         Billions of dollars spent annually by Americans on lawn care

12         Millions of Internet bloggers

13         Percentage of bloggers who post daily

900       Hours per year the average American youth spends in school

1,500    Hours per year the average American youth watches television

54         Percentage of 4-6 year-olds who prefer watching TV to spending time with dad

53¾      World record, hot dogs consumed in 12 minutes

Beltway Report

The OCC’s Gift Card Guidance

In August, the OCC released guidance for national banks with respect to disclosures and marketing issues presented by gift cards. Specifically, the guidance states the OCC’s expectation that national bank gift card issuers take appropriate steps to ensure that important information is provided in a form that is likely to be available to both recipients and purchasers of gift cards. The OCC expects national banks to provide on the gift card (or on a sticker or tape affixed to the gift card) basic information key to a recipient’s decisions about when and how to use the card, including: expiration date; amount or existence of monthly maintenance, dormancy, usage, or similar fees; and a method for consumers to obtain information about their gift cards, such as a toll-free telephone number or Web site address.

The full text of this article is available at:


Ahead of the Summons

Are Class Actions Passé?

A Wall Street Journal article published August 26 reports that class actions and mass tort litigation are on the wane nationwide. Experts attribute the decline to a number of things: The growing scandal over and criminal investigations into fraudulent silicosis cases; state legislation that has curbed asbestosis cases brought by asymptomatic plaintiffs; the recent misfortunes of the Milberg Weiss law firm; the Class Action Fairness Act; and tort reform measures both legislative and judicial in former "jackpot justice" states such as Alabama and Mississippi.

The full text of this article is available at:

Privacy Report

State Data Security Breach Notice Legislation

More than half the states in the Union, including California, have enacted laws requiring companies to notify consumers about breaches of security in which certain personal information relating to those consumers was, or is reasonably believed to have been, acquired by an unauthorized person.  Although these laws are widely understood to be modeled on the California notification law requiring notice to consumers, the particular details of these state notification requirements vary widely.  For example, a few states have enacted laws that apply to paper records, as well as to computerized data.  In addition, some state notice laws also require specified state authorities to be notified about a security breach.  And others prescribe certain information to be included in a notice sent to consumers.

The full text of this article is available at:

Preemption Report

Watters Rising?

Ready for an early Halloween? The U.S. Supreme Court almost caused a 20-car pile-up when it granted certiorari in Wachovia Bank, N.A.v.Watters, 431 F.3d 556 (6th Cir. 2005). We like to imagine our glasses half full, but this one isn’t easy.

Wachovia Bank held that the National Bank Act and OCC regulations preempted state regulation of operating subsidiaries of national banks. This was not a controversial holding. The Second, Sixth, and Ninth Circuits had already so held, so there was no split among Circuits. The Fourth Circuit recently joined the ranks. (See "Prepayment Penalties Preempted," this issue.) Even critics of NBA preemption had pretty much thrown in the towel and conceded that op-subs of national banks are beyond the regulatory reach of the states.

The full text of this article is available at:

Operations Report

What Consumers Understand About Disclosures

On August 7 the Federal Reserve Board released "Credit Card Disclosures, Solicitations, and Privacy Notices: Survey Results of Consumer Knowledge and Behavior." Brace yourself. It turns out that many consumers are aware of the various required disclosures, have generally favorable attitudes towards the disclosures, and often use the disclosures for the purposes envisioned. Consumers who use their cards for credit rather than as a convenient payment device are more likely to review four times or more per year the disclosures in credit card solicitations on APRs and to review disclosures regarding the cost of credit. With respect to privacy, the survey results were more down to earth: Institutional privacy policies are important, but for the most part consumers tend not to closely examine their privacy notices.   

Telemarketing Bulletin

The OCC thoughtfully reminded national banks last month in OCC Bulletin 2006-37 that if they conduct telemarketing either directly or through a third party, they are covered by the Telephone Consumer Protection Act. This is true even if they make calls only to existing customers. National banks must have a written policy for maintaining a do-not-call list, and must provide that policy to any person that requests it.

For more information, contact Obrea Poindexter at

Scrub Those "Scrubbed" Lists

The Federal Trade Commission recently announced a stipulated judgment of over $1.138 million against a California mortgage company, Executive Financial Home Loan Corp., that unwittingly violated the federal Do Not Call ("DNC") rules when it called tens of thousands of individuals named on a telemarketing lead list purchased from a list broker. Executive Financial believed the lead list had been "scrubbed" by the list broker against the national DNC Registry to remove individuals who had registered there, but that turned out not to be the case. The FTC was not sympathetic. "The bottom line is that telemarketers are responsible for complying with the DNC provisions of the Telemarketing Sales Rule, and cannot hide behind the claims of their service providers."

The lesson: Anyone engaged in telemarketing has an independent obligation to ensure that the federal DNC rules are strictly complied with.

Arbitration Report

New Jersey Nixes Class Action Waivers

The New Jersey Supreme Court rejected "class action waiver" clauses in a case decided August 9. In Muhammedv.County Bank of Rehoboth Beach , 2006 N.J. LEXIS 1154, at *40 (N.J. Aug. 9, 2006), the court held that "the presence of the class-arbitration waiver in Muhammed’s consumer arbitration agreement, which is a contract of adhesion, renders that agreement unconscionable as a matter of New Jersey contract law." Muhammed essentially followed the California Supreme Court’s reasoning in Discover Bankv.Superior Court ( Boehr ), 36 Cal. 4th 148 (2005). These cases mean that companies that use consumer arbitration in those states run the risk that they may be forced to undergo class-wide arbitration.

For more information, contact Rebekah Kaufman at

California Report

Prop. 64 Applies to Pending Cases

In a decision intended to curb abuses of California’s consumer protection laws and the first judicial test of Proposition 64 standards for consumer class actions, California’s Supreme Court handed down a long-awaited ruling holding that voter-approved changes to the state’s unfair competition law apply to all cases, not just those that were recently filed.  (Californians for Disability Rightsv.Mervyn’s, LLC, 39 Cal. 4th 223 (2006), rehearing denied (Aug. 30, 2006).)

The full text of this article is available at:


Mortgage Report

"Firm Offer" Litigation: A Mixed Bag

If you have been following these pages, you will recall that the "firm offer" class action cases are this century’s " Rodash "—taking a hyper-technical interpretation of a consumer protection statute and threatening creditors with potentially ruinous exposure. In this case, the statute is the Fair Credit Reporting Act ("FCRA"), and the claim is that creditors who make improper use of consumers’ credit profiles in order to solicit customers through a pre-screened solicitation have violated the FCRA. No one is harmed by these infractions. Still, the potential billions of dollars in exposure gives one pause.

The full text of this article is available at:

Credit Card Report

Post-default Rate Increase Requires No Notice

It is OK to raise the default interest rates on credit cards without notice. So said a Washington district court on August 1, when it dismissed a class action suit. ( Penner v. Chase Bank USA, N.A ., ___ F. Supp. 2d ___, 2006 U.S. Dist. LEXIS 53179 (W.D. Wash. Aug. 1, 2006).) Plaintiffs contended that the bank’s practice of raising interest rates retroactively on their credit card accounts violated the federal Truth in Lending Act ("TILA"). The banks, represented by the Firm, countered that their policy for raising rates complied both with the TILA and with the customers’ cardholder agreements.

The court rejected the TILA claim. Reg. Z requires banks to give cardholders notice of a change in terms. But it also absolves banks of any duty to notify cardholders "if the specific change is set forth initially, such as: [r]ate increases under a properly disclosed variable-rate plan." (2006 U.S. Dist. LEXIS 53179, at *7.) The cardholder agreements established a range of interest rates and clearly set forth the terms of rate increases under the cards’ variable rate plans. Hence, Reg. Z imposed no duty to notify cardholders when the banks raised rates because they already provided that notice in the initial agreement.

The court also concluded that retroactive rate increases were not illegal. Again, TILA permits this so long as the bank discloses its practice in the initial account agreement. In Penner , the cardmember agreement "states that the increase in rates will take effect as of the first day of the billing cycle in which the default occurs, and will apply to purchase balances from the previous billing cycle for which periodic finance charges have not been already billed." ( Id ., at *10.) Given this disclosure, the retroactive rate increases were permissible.

For more information, contact Angela Padilla at

AG Spitzer Settles with Subprime Card Issuers

NY Attorney General Spitzer settled charges with two subprime card issuers, Columbus Bank and Trust and CompuCredit Corporation, in a way that would require them to reform their business practices and provide $11 million in restitution. According to Spitzer, "This agreement sets a new standard in the way subprime credit cards are marketed and collected, and reflects the state’s ongoing commitment to protect those most vulnerable to fraud and deception."

Foreign Currency Conversion Settlement

Class actions against Visa, MasterCard, Diners Club, and numerous large card-issuing banks alleging violations arising from foreign currency conversions were settled for $336 million. The money will go toward a settlement fund for cardholder claims and related expenses, including administration of the settlement and attorneys’ fees. The settlement covers claims related to the price assessed on cross-border and foreign currency credit and debit card purchases and ATM transactions between February 1, 1996, and the preliminary approval of the settlement by the court, which is anticipated to happen in the fall. 

Creditor’s Report

BAPCPA Is Not Bupkas

October 17 is the first anniversary of the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, and filings are way down. Personal and business bankruptcy filings fell 9.3 percent, according the Administrative Office of the Courts. Filings under Chapters 7, 11, and 13 all fell.

BAPCPA Partly Unconstitutional

It is unconstitutional to prohibit bankruptcy attorneys from advising clients to incur more debt while contemplating bankruptcy, including debt to pay attorney or petition-preparer fees. So held a Texas district court in July, in an early case interpreting the Bankruptcy Abuse Prevention and Consumer Protection Act. ( See Hershv.United States , __ F. Supp. 2d ___, 2006 U.S. Dist. LEXIS 53970 (N.D. Tex. July 26, 2006).) The code provision (11 U.S.C. § 526(a)(4)) is "facially unconstitutional" because of the restrictions that provision puts on the content of attorneys’ speech. Noting that there are circumstances where it would be financially prudent to incur more debt prior to bankruptcy (such as refinancing debt at lower interest rates, which could help the debtor avoid bankruptcy), the court concluded that the provision "is overinclusive in at least two respects: (1) it prevents lawyers from advising clients to take lawful actions; and (2) it extends beyond abuse to prevent advice to take prudent actions." The ruling may have a limited effect in the short run; the government will appeal.

For more information, contact Eric Olson at

Bankruptcy and TILA Rescission—Tricky Mix

The recent decision by the Eleventh Circuit in Ajakav.BrooksAmerica Mortgage Corp. , 453 F.3d 1339 (11th Cir. 2006), illustrates the huge mess—and the need for extra vigilance by lenders—that can be created when a debtor attempts to rescind a mortgage loan after filing for bankruptcy. In Ajaka , the debtor filed for protection under Chapter 13 two years after obtaining a second mortgage, then demanded rescission of his loan under the federal Truth in Lending Act ("TILA"). The lender and its assignee denied the rescission demand. The debtor sued in district court for violations of TILA, but before getting served, the assignee filed an action for declaratory judgment in the bankruptcy proceeding. In the district court action, the defendants obtained summary judgment on the grounds that the debtor’s failure to timely list his contingent TILA claim in the reorganization plan judicially estopped him.

The Eleventh Circuit reversed, holding there is a question of material fact as to whether the debtor intended to "manipulate the judicial system" by delaying the formal disclosure of his claim. (453 F.3d at 1346.) Significant in the court’s ruling was the fact that the creditors had actual knowledge of the claim during the 180-day period for objecting to the debtor’s plan of reorganization, and that they could have objected to the plan or moved for conversion of the case from Chapter 13 to Chapter 7.



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