Client Alert

Financial Services Report, Summer 2006

Staying Ahead of the Summons, Vol. 2, No. 2


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In this issue:


MoFo Metrics

87            Percentage of Americans who seldom or never use dental floss
10            Percentage of marijuana users who will become addicted
89            Percentage of 18-29-year-olds who use the Internet
34            Percentage of those 65 and older who use the Internet
2              Millions of dollars, potentially, for each day of marriage for Anna Nicole Smith
1,500      Weeks on the Billboard charts, Pink Floyd’s "Dark Side of the Moon"

Editor’s Note

We got scooped.  In April, the media tripped over themselves rediscovering the United States Supreme Court, but we weren’t there.  This newsletter doesn’t go to press until June, so we missed the legal news equivalent of the "ivory-billed woodpecker" sighting:  The "Anna Nicole Smith" decision.  By now, the whole world knows that for Christmas the 26-year-old former Playboy centerfold gave her husband, 89-year-old Howard Marshall, an electric nose hair trimmer.  To pose the universal question:  What would Homer Plessy do? 

Our timing mishap meant having to shelve an entire issue that was to be devoted to Marshallv.Marshall , featuring a dialectic on the nuances of "probate jurisdiction."  (We’re in favor.)  The issue was going to be subtitled "Anna’s Assets," which we had planned to analyze from the perspective of, um, hindsight.  That would have been 20:20 except our glasses fogged up.  Dred Scott!  Our readers deserve better.

Everything else pales by comparison.  Among the lesser items, "firm offer of credit" litigation continues to be a huge deal.  There have also been a number of recent developments in the areas of data breach, preemption, and arbitration.  And in the mortgage world, we came to learn this quarter that just because a borrower refinances his loan doesn’t mean he can’t sue under TILA for rescission.  ( See article, "Is King Dead?")  Whether you can rescind a contract that has been extinguished is something the Supreme Court might have to sort out or, failing that, a committee of priests and rabbis.

If we were giving awards, this issue’s bobble-head doll would go to David Bershad.  On May 18, Milberg Weiss Bershad & Schulman and two of its partners (Messrs. Bershad and Schulman) were indicted by a federal grand jury in Los Angeles for paying some $11 million to litigants in exchange for their agreement to serve as named plaintiffs in securities cases.  It seems by this misunderstanding that the defendants would pay moneys from sources hard to trace, laundered through casinos and the like, dispensed out of a safe concealed in a credenza in Mr. Bershad’s office.  Have to ask:  Don’t the cops always check the credenza first?  Captain Renault would be "shocked."  And so are we. 

Meanwhile, in every life lesson there lurks a moral.  In this case:  Remember to change the combination on your credenza/safe.                                                                        
William L. Stern, Editor

Beltway Report

More Fact Act Action Facts

If you are asking yourself "What is a ‘Red Flag’ and "Do I salute if I see one?" take comfort.  You are not alone.  The federal regulatory agencies, pursuant to the FACT Act, have issued proposed rulemaking regulations regarding "Red Flag" guidelines and the Address Discrepancy Rules.  The agencies have requested comment on rules that would require a financial institution or creditor to establish a written, risk-based ID theft program.  The program would be required to take into account specified "Red Flags" such as the patterns, practices, and specific forms of activity that could suggest identity theft.  In addition, the agencies proposed rules that would require issuers or users of consumer reports to validate address changes and deal with address discrepancies. 

The full text of this article is available here.

Ahead Of The Summons

The Brave New World of E-Discovery Rules

The joys of e-discovery are about to increase.  Subject to Supreme Court and Congressional approval, beginning on December 1, 2006, Rules 26, 34, and 37 of the Federal Rules of Civil Procedure will be amended. 

The proposed amended Rule 26(b)(2) will establish a procedure to object to unduly burdensome or costly e-discovery. A new subsection at amended Rule 26(b)(5)(B) will allow a party to "claw back" privileged or attorney work-product information that was inadvertently produced during discovery. 

The full text of this article is available here.

Privacy Report

Four Compete in Bid for National Data Security Law

The House Financial Services Committee has approved data security legislation (H.R. 3997) that would establish a single national standard for customer notification in event of data security breaches, and that attempts to balance the need for security of financial data against the need for uniform and efficient rules.  The American Bankers Association has endorsed H.R. 3997, but at least three other data-breach bills are pending.

The full text of this article is available here.

Preemption Report

To Preempt, or Not to Preempt

Two California courts disagree about the scope of National Bank Act preemption of claims brought under California’s unfair competition law, Business and Professions Code section 17200.  In Smithv.Wells Fargo Bank, N.A., 135 Cal. App. 4th 1463 (2005), a California appellate court held that a section 17200 claim was not preempted even if the "predicate" violation was a purported violation of a federal banking regulation.  On the other hand, in Silvasv.E*Trade Mortgage Corp., 421 F. Supp. 2d 1315 (S.D. Cal. 2006), a federal district court held that a cause of action under section 17200 was preempted despite alleging violations of the federal Truth in Lending Act as the predicate act.  According to the federal court, "a state’s provision of remedies for a violation of federal law amounts to a form of state regulation of the affected area . . . ."  On April 26, the California Supreme Court denied review in Smith.  The plaintiffs in E*Trade have appealed to the Ninth Circuit.  Stay tuned.

The full text of this article is available here.

Operations Report

OCC Advises Institutions on CAFA Settlement Notification

On April 24, the Office of the Comptroller of the Currency published a bulletin describing procedures to assist financial institutions in complying with settlement notification requirements in the Class Action Fairness Act of 2005.  Under that Act, regulated financial institutions who propose to settle class action cases must give notice to appropriate federal and state officials within 10 days of filing a proposed settlement with the court.  The notice is a prerequisite to final settlement approval; if it is not provided, class members may not be bound by the settlement.  The bulletin outlines specific notice requirements, and requires institutions to establish procedures for providing the bulletin to defense counsel representing them in class action litigation.

For more information, contact Jay Thomson at  

Conjugate This!

ATM operators won a victory in April when a San Francisco judge ruled against a class action plaintiff in a "wrongful verb" case.  This is the claim, fashioned from a perhaps too-literal reading of the Electronic Funds Transfer Act and Regulation E, that the ATM decal posted "on or at" the ATM machine has to warn that the bank "will" charge non-customers for cash withdrawals, and that any operator whose decal says it "may" charge is violating the law and must refund all of the fees wrongly collected.  In a 16-page ruling following a one-day bench trial, the judge held that no particular form of verb is mandated and that defendants’ decals comply.

For more information, contact Will Stern at

Reduce, Recycle, Reuse – Unless it’s a Checking Account Number

The July 1 deadline is approaching for compliance with California’s AB 1527, passed last year, which prohibits banks from reissuing checking account numbers that have not been closed for at least three years.

Arbitration Report

Class Action Waivers – The Latest Word

In our last issue, we reported that the California Court of Appeal issued its opinion in Discover Bankv.Superior Court, holding that, under Delaware law, class waivers are enforceable, and that choice of law clauses would be honored.  That ruling now stands as the final word in that case, after the California Supreme Court declined in March to review the decision, and rejected plaintiff’s request to depublish the opinion.  Discover Bankv.Superior Court,No. S140411 (petition for review denied Mar. 30, 2006).

First Circuit Strikes Class Action Ban

Cable television subscribers must arbitrate their antitrust claims against their cable provider, but the provisions in the arbitration agreement precluding treble damages, class arbitration, and attorney’s fees and costs should all be severed under a savings clause in the arbitration agreement, the First Circuit recently held in Kristianv.Comcast Corp., Nos. 04-2619, 04-2655, 2006 U.S. App. LEXIS 9881 (1st Cir. Apr. 20, 2006).  The court held that enforcing the ban on class arbitration could prevent the plaintiffs from vindicating their statutory rights because antitrust actions are complex and the value of each claim small, making it highly unlikely that an attorney would agree to take such a case.   

Want to Ban Class Arbitration?
Be Specific …

A judge who dismissed a suit against a debt management firm and ordered arbitration later upheld the arbitrator’s decision to allow the plaintiffs to pursue a class action in arbitration.  Genus Credit Mgmt. Corp.v.Jones, No. JFM-05-3028, 2006 U.S. Dist. LEXIS 16933 (D. Md. Apr. 6, 2006).  The court held that the agreement did not "clearly" preclude class arbitration because it only "forbids participation in a ‘class action lawsuit’ as a ‘representative plaintiff or as a member of a putative class.’"  According to the district court, given the ambiguity in the agreement, the arbitrator’s decision was "not even close to being in manifest disregard of the law."

For more information, contact Rebekah Kaufman at

California Report

What’s New in 17-Two

There were lots of new unfair competition cases to ponder this quarter.

Maybe there are standards after all.  In Camachov.Automobile Club of Southern California, No. B180134, 2006 WL 1163858 (Cal. Ct. App. May 3, 2006), the second appellate district ruled that, in a consumer case alleging violations of the "unfair" prong of section 17200, the FTC’s test of unfairness should be followed.  This decision rejects the amorphous "anything goes" standard so beloved by class action plaintiffs’ lawyers.  In Camacho, the court concluded that it was not unfair for an insurer, having paid its own insured’s losses on an uninsured motorist’s coverage, to send dunning letters to the uninsured third-party driver demanding payment.

Defendants scored another win in Bardinv.DaimlerChrysler Corp., 136 Cal. App. 4th 1255 (2006).  There, the Court of Appeal applied tests of unfair business practices, and plaintiff flunked them both.  The Bardin court held that it was not "unfair" for a manufacturer to substitute a lower-cost alternative (tubular steel rather than cast iron) in the manufacture of exhaust manifolds in new vehicles. 

The full text of this article is available here.

Car Report

Showdown Over Auto Insurance Regulations

On April 26, 2006, the Insurance Department issued revised regulations that force companies to base insurance rates more on how individuals drive and less on where they live.  The insurance industry is now funding a $2 million ad campaign to educate the public about the regulations, which they claim will cause rates to go up.  Garamendi, who is running in a three-way primary for the Democratic nomination for lieutenant governor, claims that the ads are an attempt by the insurance industry to "blackmail" him into delaying the implementation of the revised regulations.  He has formally asked the FBI, the U.S. attorney’s office, and the Attorney General to look into what he called this attempted "blackmail."

Credit Card Report

Utah Approves Class Action Waivers

On March 15, 2006, Utah Governor Jon Huntsman, Jr., signed into law SB 252, which modifies the Utah Consumer Credit Code to expressly validate contract language in which borrowers waive their right to participate in a class action against the lender.  The law says creditors "may contract with the debtor … for a waiver by the debtor of the right to initiate or participate in a class action."  This will no doubt reinvigorate the debate over the validity of such clauses, including—especially—whether the validity must be decided under the state law specified in the choice-of-law provision.

For more information, contact James McGuire at

Creditor’s Report

Long-Term Effects of Bankruptcy Reform Unclear

Six months after the Bankruptcy Abuse Prevention and Consumer Protection Act went into effect, the National Foundation for Credit Counseling ("NFCC") reports that the industry still cannot fully gauge the long-term impact of the new law.  A record 619,000 individuals filed for bankruptcy in October 2005 just before the new law took effect.  After the law took effect, the number of new bankruptcy filings then dropped significantly below historical levels.  Accordingly, demands for credit counseling and related services also dropped, but the NFCC cautions that it is too soon to divine any long-term trends from the data from the first six months.  The NFCC’s report is available on its website:

For more information, contact Eric Olson at   

Insurance Report

Subpoenas Issued to Title Insurers

In our last issue, we reported that the California DOI was increasingly scrutinizing the title industry in the wake of the release of the hotly disputed findings by Texas economist Birny Birnbaum.  Since then, Commissioner John Garamendi has issued subpoenas to numerous title companies, mortgage lenders, and home builders in furtherance of his investigation of possible illegal kickbacks paid by title insurers.  On April 4, 2006, Garamendi began hearings in Los Angeles with witnesses scheduled to appear from two large title companies.

For more information, contact Steven Kaufmann at

Reynolds Wrapped

This update, though you’d probably sooner forget.  In April, the Ninth Circuit denied the insurer’s petition for rehearing en banc regarding its January 2006 ruling in Reynoldsv.Hartford Financial Services Group, Inc., 435 F.3d 1081 (9th Cir. 2006).  Recall, the holding was that an auto insurer who, as a result of information contained in a credit report, fails to quote a new customer the best and lowest rate available, must send an "adverse action" notice under the Fair Credit Reporting Act.  This came as a shock, since most of us assumed that the setting of an initial rate—to a new customer—could not be considered an "increase in any charge" under 15 U.S.C. § 1681a(k)(1)(B)(i).  The Ninth Circuit begs to differ. 

Practice tip:  This case suggests that if you quote an applicant an initial rate for homeowners or automobile insurance and the rate is influenced by a credit report, you have to send an "adverse action" notice under the FCRA if the given rate is not your best available rate.  This is true even if the rate is better than the applicant could have gotten elsewhere.  But the holding isn’t limited to insurance, either; it applies to anything to which the FCRA applies.

For more information, contact Michael Agoglia at

Mortgage Report

Mortgage Fraud Law Introduced

In February, Senator Barack Obama, D-Ill., along with Sen. Dick Durbin, D-Ill., and Robert Menendez, D-N.J., introduced a mortgage fraud bill entitled the Stop Fraud Act.  According to his website, Senator Obama was spurred to action after viewing a Chicago Tribune report on new forms of mortgage fraud in which "swindlers use high-tech identity theft and face-to-face scams to wrest control of homes, then secure hefty bank loans that go unpaid."  Obama’s legislation would provide increased funding for enforcement and reporting, would create a national registry of mortgage professionals who have been disciplined by state or federal agencies, and would make it a crime to engage in a scheme to defraud or make a misrepresentation in connection with a real property loan.  Although the Act appears to be motivated by the actions of criminals, it only applies to "mortgage professionals," which is defined to include appraisers, lawyers, real estate brokers, mortgage underwriters, and "any other provider of professional services engaged in the mortgage process."  And, yes, the bill provides for a private right of action….  

The full text of this article is available here



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