Client Alert

Financial Services Report, Spring 2006


In this issue:

MoFo Metrics

200      Average daily e-mails received by U.S. executives
50        Percentage of those e-mails having no value even after spam removed
140      Americans who watched the Super Bowl, in millions
122      Americans who voted in 2004 election, in millions

50+      Percentage Americans able to name two characters from "The Simpsons"
20        Percentage Americans who think First Amendment guarantees right to own a pet

Editor’s Note

Space Alien’s Love Child.  Imagine trying to square that headline with a law firm newsletter that has aspirations of seriousness.  What’s more, consider this.  Once you launch that luge, how do you apply the brakes?  Newsletter readers will soon come to expect frolic, and the next thing you know readers will be demanding Paris Hilton’s Latest Romp.  Some have asked about our editorial policy, so let me say this about that:  Yes to ponder, pander, candor, and rancor.  But sorry Angelina and Brad, we have standards.

This issue finds mortgage class action litigation at center stage, with "firm offers of credit" litigation as the diva.  These are class action cases (most named "Murray") in which a creditor sends out a prequalified offer of credit, which draws a suit alleging violations of the Fair Credit Reporting Act and seeking millions in un-capped statutory damages.   The Seventh Circuit’s decision in Murrayv GMAC makes class certification more likely and settlement more costly.  See article "Firm Offer of Credit Litigation—Class Certification."  That’s one thing to watch for.

Another, awaiting curtain call just offstage, is consumer arbitration.  Last issue we were ready to write an obituary about consumer arbitration as a way to manage class action exposure.  But, soft! What light through yonder window breaks?  All is not lost, not even in California.  See "Consumer Arbitration Gets A Boost" in these pages. 

More Miracle Cancer Cures The Government Isn’t Telling Us About.  An Orange County attorney who filed thousands of frivolous lawsuits under California’s Business & Professions Code section 17200 was sentenced to 15 days in jail.  "You’re basically an extortionist," said the judge, as he ordered the lawyer led from the court in handcuffs.  Now that’s something to ponder.  If you were a politician needing to justify spending more tax dollars on jails, accommodating extortionate plaintiff’s lawyers is not a bad start.  On the other hand, are we willing to retrofit several Houston Astrodomes?  Or we could all just take up quail hunting.

Finally, former special prosecutor Kenneth Starr’s decision to join the debate over lethal injection prompts this question:  Wouldn’t listening to radio ads for mortgage loans be just as effective?

Until next time, may you have only intelligent designs.

Beltway Report

Deposits Reformed

Finally, after a six-year battle, deposit reform legislation was enacted February 8, 2006.  The legislation merges the two deposit insurance funds; increases coverage for retirement accounts to $250,000; and  indexes the insurance level for inflation.  Ceilings on all other accounts would remain as they are, but would be indexed every five years for inflation, subject to limited regulatory discretion. 

For more information, please contact Obrea Poindexter at

Where, Oh Where, Is A National Bank?

In December, the U.S. Supreme Court gave national banks a victory in their efforts to be treated like state banks.  (Wachovia Bank, N.A.v.Schmidt, 126 S. Ct. 941 (2005).)  The decision also made it easier for national banks to remove cases to federal court based on diversity of citizenship.  Before Wachovia Bank, the circuits were split, with some circuits holding that under 28 U.S.C. § 1348 a national bank was a citizen of every state in which it had a branch.  This meant that a national bank could not remove to federal court if suit was brought in a state in which the bank had a branch.  The Supreme Court rejected that interpretation.  It held that a national bank has its citizenship in the state in which its main office is located.

Preemption Report

Consensus Builds On OCC Preemption

The Sixth Circuit recently ruled, in Wachovia Bank, N.A.v.Watters, 431 F.3d 556 (6th Cir. 2005), that the National Bank Act prohibits state officials from regulating mortgage subsidiaries of national banks.  This decision reinforces the observation we made in our last issue that a pro-OCC consensus has emerged.  With this decision, the Sixth Circuit joins the Second and Ninth Circuits, whose decisions in Wachovia Bankv.Burke, 414 F.3d 305 (2d Cir. 2005), and Wells Fargo Bankv.Boutris, 419 F.3d 949 (9th Cir. 2005).  Thus far, no court has held that the OCC exceeded its authority in issuing its preemption regulations.

For more information, please contact Will Stern at

And Then There’s California

A California court of appeal held that the OCC’s regulations may be privately actionable in a suit brought against a national bank under California’s Business and Professions Code section 17200.  (Smith v. Wells Fargo Bank, 135 Cal. App. 4th 1463 (2005).)  The plaintiffs contended that the account agreement and disclosures failed to adequately disclose that the bank could unilaterally charge certain fees for point-of-sale transactions when the customer did not have sufficient funds in the account:  "To the extent Smith’s UCL cause of action is based on the predicate act of Bank’s alleged violations of disclosure requirements under OCC regulations, that cause of action merely seeks to enforce federal regulations concerning disclosure requirements . . . . Because Smith’s UCL cause of action is not based on a predicate act involving an alleged violation of a state law requiring (or limiting) certain disclosures by Bank, it is not preempted by … part 7.4007(b)(2)."  (Id., at 1482.)  The Bank intends to petition for review to the California Supreme Court.

For more information, please contact Will Stern at

Privacy Report

Attorneys Exempt

The District of Columbia Circuit held in December that the FTC exceeded its authority by attempting to regulate attorneys in a 2000 privacy regulation issued under the Gramm-Leach-Bliley Act.  (American Bar Ass’nv.Federal Trade Comm’n, 430 F.3d 457 (D.C. Cir. 2005).)

ChoicePoint Settles

ChoicePoint agreed to pay $10 million in penalties and $5 million in consumer redress to resolve accusations that lax security measures resulted in at least 800 cases of identity theft.  (United Statesv.ChoicePoint Inc.(N.D. Ga. Jan. 26, 2006).)  This is the largest civil penalty ever recovered by the FTC.


Operations Report

"Wrongful Verb" Suit Tossed

More than a dozen "wrongful verb" class actions suits have been filed against ATM operators.  The claim is that the ATM operators, who are required to post stickers on their ATM machines that warn of the surcharge for non-customer cash withdrawals, are using the wrong verb.  Plaintiff-grammarians insist that only the verb "will" complies—as in "we will charge you"—and that saying "may" charge violates the Electronic Funds Transfer Act.  On this foundation, numerous class actions have been filed seeking an order requiring the banks to restore millions of dollars in fees wrongfully levied.  (These suits require a stiff measure of disbelief:  Every ATM operator uses a click-through screen that notifies users that the bank "will" charge a fee and requires an affirmative "Yes."  This means, by definition, that every class member is someone who instructed the bank "Please charge me.") 

The full text of this article is available at:

Arbitration Report

Class Action Waivers

On December 7, 2005, the California Court of Appeal issued its opinion in the Discover Bank v. Superior Court (Boehr) case, following remand from the Supreme Court.  (134 Cal. App. 4th 886 (2005).)  The Supreme Court, after reversing the prior decision on the ground that the Federal Arbitration Act would not preempt a state-law rule finding a class waiver to be unconscionable, remanded the case for resolution of whether the Delaware choice-of-law provision, which would presumably permit such waivers, would be enforced. 

The full text of this article is available at:

California Report

What’s New In 17-Two

Does Section 17200 require proof of reliance?  It depends who you ask.

In Anunziato v. eMachines, Inc., 402 F. Supp. 2d 1133, 1138 (C.D. Cal. 2005), a district court in Los Angeles held that Proposition 64, which amended California’s Business & Professions Code section 17200, did not impart a "reliance" element.  That was a putative class action alleging that a brand of defendant’s laptop computers contained a defect causing some of them to overheat.  Defendant argued that the "as a result of" language of Proposition 64 added a reliance element, and that because plaintiff did not allege that he even saw, let alone relied upon, any of the alleged misstatements by eMachines, his UCL claim must fail.  But two weeks later, another California district court reached the opposite conclusion:  "[A]fter Proposition 64, a person seeking to represent claims on behalf of others must show that (1) she has suffered actual injury in fact, and (2) such injury occurred as a result of the defendant’s alleged unfair competition."  (Laster v. T-Mobile USA, Inc.,  ___ F. Supp. 2d ___, No. 05 CV 1167 DMS(AJB), 2005 WL 3610616, at*12 (S.D. Cal. Nov. 30, 2005).) 

The full text of this article is available at:

Credit Card Report

Post-Delinquency Interest Litigation

On January 27, in a case handled by the Firm, a federal district judge in San Francisco dismissed a class action with prejudice against a credit card issuer seeking damages for its practice of increasing credit card interest rates when the cardholder defaults on his or her credit card or on another line of credit.  Plaintiffs had asserted a cause of action for violations of the federal Truth in Lending Act as well as numerous state law claims. 

The full text of this article is available at:

Ahead Of The Summons

New Wave Of Arbitration Lawsuits

With consumer arbitration under assault, look for this theory to spread.  Increasingly, financial institutions (and others) are being sued in class actions merely for including a consumer arbitration clause in their agreements.  The theory of these lawsuits is that the inclusion of allegedly unenforceable terms in an arbitration agreement violates state unfair practices laws, whether or not arbitration is ever invoked. 

The full text of this article is available at:

Insurance Report

Title Insurers Under California Microscope

Texas economist Birny Birnbaum’s report about competitiveness in the title insurance industry has kept title insurers in the crosshairs of California Insurance Commissioner John Garamendi.  The Birnbaum report, strongly disputed by the industry, found that more than 75 percent of the title insurance market was controlled by three title companies and that prices have not decreased to reflect the reduced production costs resulting from technological advances.  The report spurred a recent hearing at the California Department of Insurance at which industry representatives argued that the Birnbaum report was flawed and lacked economic support for its conclusions.  The Department has yet to specify what actions it will take to lower insurance premiums and spur additional competition in the title insurance industry.

Recently, the title industry has been under increased scrutiny by the California DOI.  Earlier last year,  Commissioner John Garamendi accused certain title insurers of paying illegal kickbacks to builders, lenders, and real estate sales agents in exchange for referrals of business.  Three of the largest title insurance companies reached a settlement with the DOI last year and paid $37.8 million in refunds and penalties. 

The California Department of Real Estate has recently jumped on board, issuing a lengthy accusation against a California real estate brokerage, claiming that the brokerage took thousands of dollars in 2004 in exchange for steering home sellers to a particular title company. 

For more information, please contact Steven Kaufman at

GOP Jumps Aboard Title Company Bandwagon

Republican Michael Oxley, chair of the House Financial Services Committee, has written a letter to the Comptroller General requesting that the Government Accountability Office investigate the title insurance industry.  In a letter sent dated January 24, 2006, Representative Oxley asked that the GAO examine and issue a report on the title insurance industry and its potential anti-competitive practices.

Creditor’s Rights

Ninth Circuit Exacerbates FDCPA Split

The Ninth Circuit in Camacho v. Bridgeport Financial, Inc., 430 F.3d 1078 (9th Cir. 2005), held that debt collection notices cannot require a debtor to dispute a debt in writing.  The plain language of the Fair Debt Collection Practices Act "indicates that disputes need not be made in writing," and the court concluded that the defendant’s debt collection notice violated the FDCPA by stating that disputes must be made in writing. 

Practice Tip:  This decision conflicts with the Third Circuit’s decision in Graziano v. Harrison, 950 F.2d 107 (3d Cir. 1991),  but is consistent with the First Circuit’s holding in Brady v. Credit Recovery Co., 160 F.3d 64 (1st Cir. 1998).  Add this issue to the ever-growing list of Circuit conflicts that the U.S. Supreme Court may have to sort out one day.  In the meantime, the safe practice is to have a mechanism in place to receive oral debt-dispute notices from debtors. 

For more information, please contact Eric Olson at

Bankruptcy Courts Cannot Ignore Arbitration Clauses

A pair of recent decisions from the Second and Third Circuits have held that bankruptcy courts do not have the authority to ignore the arbitration provision in valid loan agreements.  In MBNA America Bank, N.A.v.Hill, No. 04-2086-bk, 2006 U.S. App. LEXIS 1786 (2d Cir. Jan. 25, 2006), the Second Circuit affirmed the validity of the arbitration provision in the debtor’s loan agreement and ruled that the bankruptcy court lacked discretion to deny arbitration of the debtor’s claim that the lender violated the automatic stay imposed by the Bankruptcy Code.  The court held that arbitration of the debtor’s automatic stay claim "would not necessarily jeopardize or inherently conflict with the Bankruptcy Code."  (Id., at *16; see also Mintze v. American General Financial Services, Inc. (In re Mintze), No. 03-4745, 2006 U.S. App. LEXIS 564 (3d Cir. Jan. 10, 2006).)

For more information, please contact Eric Olson at

Mortgage Report

Firm Offer of Credit—Class Certification

"Firm offer of credit" is the hottest topic in mortgage banking litigation, and lots of credit card issuers are concerned too.  As well they might be.  Judge Easterbrook’s decision in Murrayv.GMAC Mortgage, 434 F.3d 948 (7th Cir. 2006) paves the way for class certification and suggests that it will not be easy to settle these class actions cheaply.  In Murray, the Seventh Circuit faced "some fundamental questions about the management of consumer class actions," noting that more than 40 of these cases are pending in the Northern District of Illinois alone.

The full text of this article is available at:



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