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OFFICE OF THE GENERAL COUNSEL

STATUS OF IMPORTANT BANKING CASES

March 5, 2010

NEW THIS MONTH

Page 2 Court overturns FDIC Temporary Cease and Desist order

blocking voluntary liquidation of bank, Advanta Bank v. Federal

Deposit Insurance Corporation

Page 39 Internet banking case will explore issue of what constitutes

commercially reasonable security for online transactions,

PlainsCapital Bank v. Hillary Machinery, Inc.

Page 40 Fourth Circuit clarifies rules for when a consumer may invoke the

remedy of rescission under TILA to recapture fees in an

abandoned loan transaction. Weintraub v. Quicken Loans, Inc.

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2

For Your Convenience…

Updates to the case entries appear in bold print, and

New cases that are added to the list are in bold print and marked with a

star in the margin.

ADMINISTRATIVE ACTIONS

* 1. Advanta Bank v. Federal Deposit Insurance Corporation, (United

States Court of Appeals for the District of Columbia Circuit, Case No. 10-

5051). This is a challenge to a Temporary Order issued by the FDIC seeking to

halt the voluntary liquidation of Advanta Bank, an FDIC-insured institution.

Issues and Potential Significance

This case presents a fascinating legal issue: may the FDIC block a voluntary

liquidation of a bank in an instance where the liquidation will ultimately make

it more difficult for the FDIC to recover its cost of resolving a failure at a

different institution?

Enacted as part of the Financial Institutions Reform, Recovery and

Enforcement Act in 1989, section 1815(e) of the Federal Deposit Insurance Act

allows the FDIC to recover the cost of resolving a failed institution by looking

to other FDIC-insured institutions within the same corporate family. Known

as “cross guarantee,” the statute survived a legal challenge as to its

constitutionality in the 1990’s. See Branch v. United States, 69 F.3d 1571, cert.

denied, 519 U.S. 810 (1995). In many instances, the amount of the assessment

(which may be made immediately due and payable) is enough to render

insolvent a well-capitalized institution insolvent.

In situations where a failure appears likely, holding company management

frequently attempts to take steps to shield the value of their healthy institutions

from this assessment in order to protect their investment. While it is not always

a practical option, the voluntary liquidation and termination of deposit

insurance at a healthy bank is one such strategy for shielding bank assets.

Advanta Bank has challenged the FDIC’s attempt to prevent such a voluntary

liquidation and immediately freeze the bank’s assets via an administrative

order issued under section 8(c) of the Federal Deposit Insurance Act. On

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February 16, 2010, Advanta scored a rare victory at the District Court level

when a magistrate judge upheld the bank’s challenge to the FDIC’s order,

ruling that government had exceeded its authority to halt the voluntary

liquidation of the bank. The matter is currently before the United States Court

of Appeals for the District of Columbia Circuit.

Proceedings/Rulings

The pleadings in this case reflect that Advanta Bank is a Delaware-chartered

bank that is insured by the FDIC. Advanta Bank does not take deposits from

the public; its primary activity is to provide deposit services for affiliate

companies. Advanta Bank is an indirect subsidiary of Advanta Corp.

Advanta Corp. owns another bank subsidiary, Advanta Bank Corp. of Draper,

Utah.

Advanta Bank Corp. has, for some time, experienced financial difficulties, and

entered into a Consent Cease and Desist Order with the FDIC in June of 2009.

The Consent Order requires the institution to maintain its Tier 1 Leverage

Capital Ratio at a minimum of five percent. The FDIC also ordered Advanta

Bank Corp. to submit a capital restoration plan. The bank, however, refused to

do so. The pleadings reflect that Advanta Bank Corp. suggested to the FDIC

that instead of recapitalizing the bank, the institution should be placed into

receivership.

On November 8, 2009, Advanta Corp. and several subsidiaries filed a

voluntary petition for reorganization under Chapter 11 of the United States

Bankruptcy Code. Advanta Corp. and several of its subsidiaries filed for

Chapter 11 bankruptcy in November of 2009. Despite these developments,

Advanta Bank and Advanta Bank Corp. remain open.

In 2008 the FDIC became concerned that Advanta Bank lacked any apparent

plans for profitable operations. Crucially, the FDIC advised Advanta Bank

that “Management must either formulate a plan for offering banking

activities to the public or submit a plan for voluntary liquidation and

termination of deposit insurance.” (Emphasis added) In November of 2009

the FDIC proposed that Advanta Bank consent to a Cease and Desist order.

The Cease and Desist order would have restricted transactions between the

Advanta Bank, Advanta Corp. and its affiliates, including a prohibition on

the payment of dividends.

Rather than submit to the Cease and Desist Order, Advanta Bank began to

voluntarily liquidate. The bank currently has no deposits, and it has applied

to the FDIC to terminate its deposit insurance.

On December 16, 2009, the FDIC initiated an enforcement action under Section

8(b) of the Federal Deposit Insurance Act, along with a Temporary Order

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(issued under Section 8(c)) aimed in large part at preventing the dissipation of

the bank’s assets as a result of the liquidation. The Bank denies that it has

engaged in any unsafe or unsound practices and maintains that the FDIC’s

allegations are a pretext for an attempt to freeze the Bank’s assets for a

potential cross-guarantee claim should Advanta Bank Corp. fail and be placed

into receivership.

On December 24, 2009, Advanta Bank filed suit in the United States District

Court for the District of Columbia to block the FDIC’s Temporary Order. On

February 16, 2010, the District Court ruled that the Temporary Order

exceeded the FDIC’s statutory authority. The court found that, because the

FDIC had previously informed the bank that it would have to either offer

banking services to the public or liquidate, the FDIC could not reasonably

argue that the orderly liquidation of the bank and termination of insurance

constitutes an “unsafe or unsound” practice or improper dissipation of assets,

necessary prerequisites for the issuance of a Temporary Order:

The Notice of Charges, however, does not indicate that the

termination of the Bank itself is an unsafe or unsound practice,

nor could it. The Bank was told by the FDIC that it either

needed to formulate a plan to become profitable (i.e. begin

community banking) or close and terminate its insurance. Given

the choice between the two, the bank chose termination and

began the process of returning money to its depositors and

otherwise winding up its affairs. The FDIC cannot ask the Bank

to begin termination, and then declare that termination, once it

begins and nears its conclusion, is an unsafe or unsound banking

practice. Nor does the FDIC claim that the unsafe banking

practices (i.e., the conflicting duties of the Board of Directors)

caused the termination. Thus, it is not the unsafe banking

practices which are causing the dissipation of assets, but rather

the process of termination, which the FDIC started, which are

“dissipating” the assets. Under the statute, the FDIC can only

issue a temporary cease and desist order where the possibility of

the dissipation of assets is more than a theoretical consequence of

the unsafe or unsound practice. Here the assets are being

dissipated because the FDIC asked the bank to liquidate and

terminate its insurance. While the liquidation (and thus the

dissipation of assets) may, theoretically, be linked somehow to

the unsafe or unsound practice, the statute and Congress, which

passed it, require more. Thus, the FDIC acted outside the clear

boundaries of §1818(c)’s grant of authority in issuing the

temporary cease and desist order.

The matter has been appealed to the United States Court of Appeals for the

District of Columbia Circuit. On February 25, 2010, the Court of Appeals

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granted a request by the FDIC for an emergency stay of the District Court’s

ruling. The Court of Appeals granted the stay in order to provide the court

“sufficient opportunity to consider the merits of the emergency motion for stay

pending appeal…” The Court of Appeals took care to note that the stay of the

lower court’s ruling “should not be construed in any way as a ruling on the

merits [of the request for a stay].”

A copy of the District Court order is attached as a PDF file.

ANTITRUST

2. Brennan v. Concord EFS Inc., et al. (Northern District of California,

Case No. 04-2676): This is one of a series of putative class-action suits brought in

the United States District Court for the Northern District of California by individuals

who have paid ―foreign ATM fees.‖ A ―foreign‖ ATM Transaction‖ is a cash

withdrawal in which an ATM cardholder uses an ATM owned by an entity other

than his or her own bank.


The litigation presents a challenge on antitrust grounds to the right of a non-

proprietary network to set network-wide ―interchange‖ fees that govern the

amount of money paid by an ATM card issuer – generally a bank – to the owner

of an ATM when the ATM is used by the issuer‘s customer. Customers at most

commercial banks receive ATM cards that allow them to make withdrawals from

their accounts electronically. Typically, these ATM cards permit withdrawals not

only from ATM machines at the bank where they hold their accounts, but also

from ATM machines owned or operated by other banks. The plaintiffs claim that

the entities named in the lawsuit, several large financial institutions (including

VISA, MasterCard, and Concord EFS, the entity that manages the interchange

system among various banks and ATMS) has engaged in illegal price fixing in the

setting the interchange fees that are charged for processing a ―foreign‖ ATM

transaction, i.e. a transaction at an ATM not owned or operated by the customer‘s

own bank. An adverse decision could have an impact on the smooth functioning

of the ATM system and the cost of providing a customer with near-universal

access to their accounts via any ATM machine. The disposition of this case will

also provide an analytical framework to assess future challenges to interchange

under the complex antitrust statutes.

Interestingly, the court may be pushing the parties toward settlement. In January

the court ordered the parties to submit pending issues to a mediator with anti-trust

experience to see if the case can be resolved.

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Proceedings/Rulings

The plaintiffs allege violations of federal antitrust laws against several large

financial institutions (including VISA and MasterCard, and Concord EFS, the entity

that manages the interchange system among various banks and ATMs). Those cases

are:

Pamela Brennan, et al. v. Concord EFS, Inc., et al., 04-2676-SBA

Peter Sanchez v. Concord EFS, Inc., et al., 04-4574-VRW

Deborah Fennern v. Concord EFS, Inc., et al., 04-4575-VRW

Miller v. Concord EFS Inc., et al., 04-4892-VRW

Melissa Griffin, et al. v. Concord EFS, Inc., et al., 05-00220-VRW

Cecilia Salvador, et al. v. Concord EFS, Inc., et al., 05-00382-VRW

Spohnholz v. Concord EFS, Inc., et al., 05-03725 CRB

The Court has consolidated the cases with Brennan as the lead case. By order

dated January 26, 2005, the court stayed the proceedings in the Sanchez, Fennern,

Miller, and Griffin cases.

―Foreign ATM transactions‖ involve four parties: (1) the ―cardholder,‖ i.e. the

customer who retrieves money from the ATM machine; (2) the ―card-issuer

bank,‖ i.e. that bank at which the customer holds an account and from which the

customer has received an ATM card; (3) the ―ATM owner,‖ i.e. the entity that

owns the ATM machine from which the customer withdraws money on his

account; and (4) the ―ATM network,‖ i.e. the entity that administers the

agreements between various card-issuer banks and ATM owners and thereby

ensures that customers can withdraw money from one network member‘s ATM as

readily as from another‘s.

Foreign ATM transactions involve multiple fees. Generally, a customer must pay

two fees — one to the ATM owner for the use of that entity‘s ATM machine

(known as a ―surcharge‖), and one to the bank at which he has an account (known

as a ―foreign ATM fee‖). Out of the money that a customer pays directly to his

own bank, the bank then also pays two fees. The first of the bank‘s fees is known

as a ―switch fee‖ and is paid directly to the ATM network. The second of the

bank‘s fees — and the one at issue in this lawsuit — is known as an ―interchange

fee‖ and is paid directly to the owner of the foreign ATM.

In this case, Plaintiffs contest the legality of the interchange fee. Since 2003, the

interchange fee at issue in the litigation has been set at $0.46 for on-premise

transactions (i.e., transactions at ATMs deployed on a bank‘s premises), and

$0.54 for off-premise transactions. In 2005, the United States District Court for

the Northern District of California ruled that Plaintiffs had stated a viable claim

for price-fixing. See Brennan v. Concord EFS, Inc., 369 F. Supp. 2d 1127 (N.D.

Cal. 2005) (Walker, C.J.). Specifically, the Court held that Plaintiffs had stated a

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claim of ―naked‖ price-fixing subject to analysis under the per se rule. In its

ruling, the Court first noted that the Plaintiffs‘ objection is not to the existence of

an interchange fee, but rather to its fixed nature. Further, the court noted that the

Complaint had described a ―naked‖ attempt to fix prices, as opposed to an attempt

to fix price that the Star network members determined was ―ancillary‖ to a

legitimate, pro-competitive venture. In other words, the Court construed the

complaint as alleging that Defendants fixed the interchange fee because they

could, not because a fixed fee was necessary to sustain the ATM network.

Because the Defendants could not defend against such allegations of ―naked price

fixing‖ without invoking evidence that was beyond the scope of the Complaint,

the Court denied the motion to dismiss.

Shortly after the ruling on the motion to dismiss, Defendants filed a motion for

partial summary judgment. The Court issued a Memorandum and Order on

November 30, 2006 directing the parties to address the fundamental question of

whether a ―per se‖ analysis applies to this case. The Court observed that ―if

Defendants can set forth evidence to support plausible, procompetitive

justifications for their agreement to fix the interchange fee,‖ then the ―per se‖ rule

would not apply.

Defendants moved for summary judgment on August 3, 2007, having adduced

evidence bearing on the applicability of the per se rule. In an order issued on

March 24, 2008, the Court granted Defendants‘ motion and held that the ―rule of

reason‖ analysis applies to this case, thereby determining that the price-fixing

challenged by Plaintiffs is not the kind of ―naked‖ horizontal restraint that lacks

any redeeming virtue. In re ATM Fee Antitrust Litig., 554 F. Supp. 2d 1003, 1016-

17 (N.D. Cal. 2008). The Court concluded that Plaintiffs‘ challenge to

Defendants‘ setting of a fixed interchange fee must be analyzed under the ―rule of

reason‖ because it challenged a ―core activity‖ of the defendants‘ joint venture,

citing the Supreme Court decision in Texaco Inc. v. Dagher. Moreover, the Court

found that the interchange fee is reasonably ancillary to the legitimate cooperative

aspects of a joint venture that requires horizontal restraints if the venture‘s

product is to be available at all.

Given substantial uncertainty in the law regarding which mode of analysis to

apply, the trial court certified for appeal the threshold issue of whether the per se

or ―rule of reason‖ should be employed in this case. The Ninth Circuit, however,

declined to hear the case. Plaintiffs subsequently filed a Second Amended

Complaint,

A number of the defendant banks filed motions to dismiss the Second Amended

Complaint filed by Plaintiffs on January 31, 2009. On September 4, 2009, the

Court issued an order partially dismissing the case.

The District Court resolved the threshold issue of whether plaintiffs have standing

to assert antitrust claims; it dismissed the causes of action alleged under Section 1

8

of the Sherman Act because the complaint failed to allege a relevant product

market that was cognizable under the antitrust laws. The term ‗relevant market‘

encompasses notions of geography as well as product use, quality, and

description. The geographic market extends to the area of effective competition

where buyers can turn for alternate sources of supply. The Plaintiffs defined

their ―relevant product market‖ at issue in the case as being ―the provision of

Foreign ATM Transactions‖ routed over the Star Network. Plaintiffs argued that

this ―relevant product market‖ was wholly derivative from and dependent on the

market for deposit accounts.

The Court disagreed. It determined that the primary problem with Plaintiffs‘

definition of the ―relevant product market‖ was that it consisted only of

transactions routed over the Star network, excluding other ATM networks.

Reduced to its essence, the Plaintiffs allege that the one brand – Star – was its

own market despite the presence of other competing ATM networks. The court

distinguished the ATM market from situations where courts have recognized

single brand monopolies that have the effect of locking in consumers after the sale

and exclude competition in the derivative aftermarket:

The prior single brand derivative aftermarket cases have focused

on the provision of expensive, durable goods. Once a consumer

buys such a good, like a photocopier, he is ―locked in‖ to

purchasing compatible parts and service for a considerable length

of time, given the expense and difficulty of buying a new

photocopier. In those circumstances, market imperfections prevent

customers from imposing market discipline in the derivative

market because of the difficulty of switching among competitors in

the primary market.

It is unclear to the Court that a holder of a bank account, on the

other hand, faces such hurdles in simply moving his business

elsewhere.

The court, however, granted Plaintiffs leave to amend their complaint to permit

them to allege an adequate relevant market. The court also dismissed Citigroup‘s

motion to dismiss with prejudice on the grounds that Plaintiff had failed to make

any allegations specific to the holding entity, Citigroup.

On October 16, 2009, Plaintiffs filed a Third Amended Complaint. Motions to

dismiss the complaint were filed. On January 12, 2010, the Court (1) set the

hearing on the motion to dismiss for February 26, 2010, and (2) ordered counsel

to meet and confer in selecting a mediator with anti-trust knowledge. Once

selected, the mediator is directed to see if the remaining issues in the case can be

resolved prior to the hearing. On February 22, 2010, the parties agreed via

stipulation to remove the hearing on the pending motions to dismiss from the

court’s calendar in order to pursue mediation.

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3. Robert Ross v. Bank of America, et al., (Case No. 06-4755, United

States Court of Appeals for the Second Circuit; Case No. 05-cv-7116, United

States District Court for the Southern District of New York). This case presents a

class action brought by holders of credit cards containing mandatory arbitration

clauses. The complaint, which was filed in the United States District Court for

the Southern District of New York, alleges that the defendant banks illegally

colluded to force cardholders to accept mandatory arbitration clauses and class

action waivers in their cardholder agreements in violation of the Sherman Act.


The Complaint sets forth two antitrust claims. The first claim alleges a

conspiracy to impose mandatory arbitration clauses in violation of Section 1 of

the Sherman Act, 15 U.S.C. § 1. The second claim alleges that the banks

participated in a group boycott by refusing to issue cards to individuals who did

not agree to arbitration, also in violation of Section 1.

If successful, litigation would invalidate the arbitration clauses contained in the

credit card agreements at issue in this case. The Complaint seeks the entry of an

order enjoining the banks from continuing their alleged ―collusion‖ relating to

arbitration clauses, invalidating the existing mandatory arbitration clauses, and

forcing the Appellants to withdraw all pending motions to compel arbitration. See

15 U.S.C. § 26. It would also provide a troubling precedent – attacking the

industry-wide use of arbitration provisions using via the antitrust statutes.

A number of the defendants (including Bank of America, Capital One, Chase, and

HSBC) have tentatively settled – the proceedings to approve those settlements are

currently scheduled to be completed this summer. Discovery is ongoing for the

remaining defendants (which include Citigroup, Discovery, and National

Arbitration Forum).

Proceedings/Rulings

On September 20, 2006, the District Court dismissed the Complaint on the

grounds that the cardholders had failed to establish standing under Article III of

the Constitution. In re Currency Conversion Fee Antitrust Litig., No. 05 Civ.

7116 (WHP), 2006 U.S. Dist. LEXIS 66986 (S.D.N.Y. Sept. 20, 2006). The

District Court‘s decision acknowledged certain of the antitrust injuries asserted by

the cardholders, but ultimately agreed with the banks that these injuries were

entirely speculative and, therefore, insufficient to establish Article III standing.

Specifically, the district court found that the cardholders‘ injuries are ―contingent

on their speculation that someday (1) Defendants may engage in misconduct; (2)

the parties will be unable to resolve their differences; (3) Plaintiffs may

commence a lawsuit; (4) the dispute will remain unresolved; and (5) Defendants

10

will seek to invoke arbitration provisions.‖ Id. at *14-15. Further, the District

Court found that any ―alleged anticompetitive effects are inchoate.‖

The Second Circuit took up the case to consider whether the presence of

mandatory arbitration clauses found in credit card contracts issued by the

Appellees, assuming they are the product of illegal collusion among credit

providers, can give rise to a cognizable ―injury in fact.‖

In a decision issued April 25, 2008, the Second Circuit reversed the District

Court, finding that the complaint adequately alleged a harm that satisfied Article

III of the Constitution. The Court found that

[t]he harms claimed by the cardholders, which lie at the heart of

their Complaint, are injuries to the market from the banks‘ alleged

collusion to impose a mandatory term in cardholder agreements,

not injuries to any individual cardholder from the possible

invocation of an arbitration clause. The antitrust harms set forth in

the Complaint – for example, the reduction in choice for

consumers, many of whom might well prefer a credit card that

allowed for more methods of dispute resolution – constitute

present market effects that stem directly from the alleged collusion

and are distinct from the issue of whether any cardholder‘s

mandatory arbitration clause is ever invoked. The reduction in

choice and diminished quality of credit services to which the

cardholders claim they have been subjected are present anti-

competitive effects that constitute Article III injury in fact.

Significantly, the Court did not address the merits of the cardholder‘s claims or

whether the cardholders‘ alleged injuries would survive a heightened antitrust

standing analysis. The Court noted, however, that ―there is no heightened

standard for pleading an injury in fact sufficient to satisfy Article III standing

simply because the alleged injury is caused by an antitrust violation.‖ While it

recognized that Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007), requires a

heightened pleading standard ―in those contexts where [factual] amplification is

needed to render [a] claim plausible,‖ plausibility is not at issue in the case

because the Court was only considering the adequacy of the cardholder‘s Article

III standing.

The case was remanded back to the District Court for further proceedings.

On January 21, 2009, the District Court denied Discover‘s motion to dismiss for

lack of Article III standing and antitrust standing, finding that the plaintiffs had

successfully tied Discover‘s conduct to their alleged harm. The District Court

found that the plaintiffs had adequately plead sufficient facts to support their

claims –the occurrence of alleged meetings between the defendants (including

times and purpose of those meetings), the specific product of the alleged

conspiracy, and the claimed anti-competitive effect. With respect to ―anti-trust‖

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standing, the court concluded that the complaint alleged sufficient anti-trust injury

(reduced choice and diminished quality of credit card services) and that the class

is an ―efficient enforcer.‖

On January 23, 2009, the District Court ordered the current stay on discovery be

lifted with respect to Novus Credit Services, Inc. and Discover.

On October 6, 2009, the Court granted a class certification pursuant to Rule

23(b)(2) that was reached via a stipulation between the parties. The class

includes:

“A class consisting of all persons holding during the period in suit

a credit or charge card under a United States cardholder agreement

with any of the Bank Defendants (including, among other cards,

cards originally issued under the MBNA, Bank One, First USA

and Providian brands), but not including members of the proposed

Subclass, subject to an arbitration provision relating to their cards.

A subclass consisting of all persons holding during the period in

suit a credit card under a United States cardholder agreement with

Discover Bank, which cardholders have not previously

successfully exercised their right to opt-out of the Arbitration of

Disputes.”

On October 22, 2009, the Court granted final approval of a proposed settlement

between the parties. The settlement embodied terms of a previous Stipulation and

Settlement Agreement that was reached between the parties as the result of

mediation in 2005 - 2006. The terms of the settlement include the creation of a

fund ($336 million) with which to pay class members and counsel, and an

agreement by the bank defendants to enhance their disclosures concerning foreign

transaction fees.

On December 18, 2009, the Court received and docketed the settlement

agreements between the class and defendants J.P. Morgan Chase, Bank of

America, and Capital One. A conference with the settling parties was scheduled

for January 8, 2010.

On January 15, 2010, the Court issued a scheduling order governing the approval

of settlements with a number of the defendants (including Bank of America,

Capital One, Chase, and HSBC). Final settlement agreements shall be filed with

the Court on or before February 19, 2010. All papers supporting preliminary

approval of these settlements shall be filed with the Court on or before February

26, 2010. Oppositions to preliminary approval, if any, must be filed with the

Court on or before March 5, 2010. The Court shall hear argument from all

interested parties who desire to be heard on preliminary approval on March 12,

2010 at 11:30 AM. Should preliminary approval be granted, the Court shall hold

12

a hearing on the final approval of these settlements, the payment of attorneys' fees

and the reimbursement of litigation expenses on July 15, 2010.

On January 18, 2010, the Court dismissed the motion to dismiss the first amended

class action complaint filed by the National Arbitration Forum.

On February 9, 2010, the court issued a scheduling order directing The

National Arbitration Forum’s opposition to the class certification to be filed

on or before May 28, 2010. Class Plaintiffs must respond to the opposition

on or before July 2, 2010.

4. In re: Payment Card Interchange Fee and Merchant Discount

Antitrust Litigation, (Case No. 1:05-md-01720-JG-JO)(Eastern District New

York). This is a consolidation of 23 separate suits (eight actions in the Southern

District of New York, three actions in the District of Connecticut, two actions in

the Northern District of California, one action in the Northern District of Georgia,

and nine actions in the Eastern District of New York) into a multi-district class

action lawsuit against Visa USA, MasterCard, Inc., and dozens of major banks

alleging that they colluded in setting excessive credit card fees, in violation of

applicable federal antitrust laws. These cases were consolidated in to this

proceeding after a ruling from the Multidistrict Litigation Panel on October 19,

2005.


The litigation by a number of retail merchants challenges the process by which

the credit card industry sets interchange fees, which retail merchants pay to

issuing banks in order to receive payments for transactions on the banks‘ cards.

The complaints allege that the ―contracts, combinations, conspiracies, and

understandings‖ allegedly entered into by the numerous defendants ―harm

competition‖ and cause retail merchants to ―pay supra-competitive, exorbitant,

and fixed prices for General Purpose Network Services, and raise prices paid by

all of their retail customers.‖ The suit seeks damages, as well as declaratory and

injunctive relief.

This litigation presents a significant challenge to the fundamental pricing

structure of the credit card system. The Plaintiffs allege that the Bank

Defendants, by virtue of their control over the boards of directors of MasterCard

and Visa, dictate the amount charged as interchange fees for each network.

Further, because so many banks are members of both boards, they ―ensure that the

Interchange Fees of Visa and MasterCard increase in parallel and stair-step

fashion, rather than decreasing in response to competition from each other.‖ The

plaintiffs also challenged the networks‘ ―Anti-Steering Restraints,‖ a group of

rules promulgated by both Visa and MasterCard which they claim prevents

merchants from encouraging customers to use less expensive forms of payment.

The complaint also alleges that that Visa has engaged in monopolization in

13

violation of Section 2 of the Sherman Act and that both MasterCard and Visa

have engaged in prohibited tying and exclusive dealing arrangements.

Proceedings/Rulings

Due to their size and complexity, the progress of this litigation through the

District Court system has been relatively slow. Matters were further complicated

when, in May 2006, defendant MasterCard announced an IPO, in which it

proposed to sell approximately 60 million shares of MasterCard Class A common

stock to the public. To effectuate this offering, MasterCard first redeemed and

reclassified all of its outstanding common stock, approximately 100 million

shares, then held by its member banks. On May 22, 2006, Plaintiffs filed a

supplemental complaint based on the IPO. The Supplemental Complaint

contends that the MasterCard IPO was a pretext designed to insulate the company

from the prohibitions of Section 1 of the Sherman Act. Specifically, the

Supplemental Complaint alleges that the agreements leading to the IPO constitute

a conspiracy in restraint of trade in violation of Section 1 of the Sherman Act, and

that the stock transfers by which the IPO is effected violate Section 7 of the

Clayton Act. The Plaintiffs also argue the transaction constitutes a fraudulent

conveyance under New York law.

On February 12, 2008, the Magistrate Judge Orenstein issued an order

recommending that the Court grant in part and deny in part a motion filed by

MasterCard and the bank defendants to dismiss Class Plaintiffs' Supplemental

Complaint challenging MasterCard‘s public offering. The Magistrate Judge

Orenstein recommended that the claims against the bank defendants based on

alleged violations of Section 7 of the Clayton Act should be dismissed (with leave

to amend) because they are technically deficient. With respect to the Clayton Act

claim against MasterCard, the Magistrate Judge found that plaintiffs could not

plead a viable Section 7 claim based on MasterCard's acquisition of the stock of

another, but declined dismissal because plaintiffs‘ case was focused on

MasterCard's acquisition of assets, which was deemed to be viable claim. The

Magistrate Judge also recommended that the fraudulent conveyance claims should

be dismissed against all defendants, with leave to amend.

On November 25, 2008, Judge Gleeson issued a memorandum opinion granting

the Defendants‘ motions to dismiss Plaintiffs claims based on the IPO in their

entirety, rejecting (for now) plaintiffs‘ claims that the initial public offering of

MasterCard stock violated both federal antitrust law and state fraudulent

conveyance law. The Court, however, granted plaintiffs leave to amend their

complaint to address a number of issues identified in the Court‘s opinion.

Plaintiffs filed a Second Supplemental Class Action Complaint on February 20,

2009, supplementing its claims to encompass the restructuring of VISA via an

IPO in March of 2008.

14

At a hearing held April 16, 2009, Judge Orenstein reserved his decision on (1)

whether to grant defendants’ request for a hearing on the class Plaintiffs’ motion

for class certification, and (2) plaintiffs’ motion to consolidate the pending Rule

12(b)(6) and Rule 56 motions.

As reported by the parties in their joint status report filed on July 2, 2009, the

following dispositive motions are currently pending before the court:

1. Motion to Dismiss the Second Consolidated Amended Class Action

Complaint;

2. Motion to Dismiss the First Amended Supplemental Class Action

Complaint; and

3. Motion to Dismiss the Second Supplemental Class Action Complaint.

Oral arguments on Defendants‘ motion to dismiss were rescheduled for

November 18, 2009. The court also heard arguments on the Class Plaintiffs

motion for class certification, and defendants‘ motion to strike expert testimony

on November 19, 2009.

Judge Orenstein heard oral arguments on November 23, 2009, and is reserving a

ruling on the pending motions.

5. Pinon, et al. v. Bank of America, et al., (Case No. 08-15218, United

States Court of Appeals for the Ninth Circuit). On January 31, 2007, plaintiffs filed

a class action complaint against a number of national banks doing business in

California.


Plaintiffs in this case, credit card customers located in California, contend that a the

defendant bank or credit card issuers have conspired to impose penalty fees on credit

card customers that are (1) improbably uniform, and (2) legally excessive. They

allege that the penalty fees violate the National Bank Act, the Sherman Act

(Antitrust), and various provisions of the California Code. Their centerpiece

argument is that the National Banks that are defendants in the action are charging

excessive penalty fees that brush up against the constitutional limits of punitive

damages under the Due Process clause. Plaintiffs also allege that the defendant

banks have conspired to "fix prices and maintain a price floor for late fees" in

violation of the Sherman Act.

The suit also identifies various other ―firms, corporations, organizations, and other

business entities, some unknown and others known, not joined as defendants‖ as

―co-conspirators.‖ These ―co-conspirators‖ include ―financial institutions that issue

15

credit cards, payment industry media, third-party processors such as First Data

Resources(―FDR‖) and Total Systems Services, Inc. (―TSYS‖) that process payment

card transactions, credit card industry consultants, trade associations such as the

American Bankers Association, and the two major credit card networks, Visa U.S.A.

(―Visa‖) and MasterCard International, Inc. (MasterCard.).‖

The District Court’s dismissal of the case in late 2007 indicates that the Plaintiffs’

very aggressive theories are not viable as a matter of law. The case is currently

on appeal to the Ninth Circuit.

Proceedings/Rulings

Three additional class actions were filed in the District against the same

defendants alleging substantially the same facts and causes of action. (Case No.

C-07-0772-SBA; Case No. C-07-1113-SBA; and Case No. C-07-1310-MMC).

The parties stipulated to a consolidation of these four cases, and an

amended/consolidated complaint was filed on May 8, 2007.

On November 16, 2007, the Court dismissed the complaint without prejudice.

The Court rejected plaintiff’s theory that defendants’ penalty fees constitute

punitive damages subject to limitation under the Due Process Clause because they

significantly exceed any actual damages that the defendants incur. Plaintiffs

argued that the Court must interpret federal banking statutes, principally the

National Bank Act to incorporate Due Process limits on credit card late and

overlimit fees. They also asserted that the remedial provisions of the banking

statutes, such as 12 U.S.C. § 86, provided a cause of action for such allegedly

excessive fees. The Court disagreed, finding that the Due Process Clause was not

implicated because the fees are not imposed by a court nor are they penalties

“advanc[ing] governmental objectives” to protect against behavior that harms the

“general public.” Rather, they are paid by one party to another pursuant to private

contract. The Due Process Clause constrains government action; it does not

restrain or protect against private conduct.

The Court also concluded that plaintiffs failed to allege sufficient facts to support

their claims of price-fixing under the Sherman Act or California’s Cartwright Act.

Finally, the Court also dismissed plaintiffs state law claims alleging violations of

the California Unfair Competition Law (UCL) (CAL. BUS. & PROF. CODE §§

17200 et seq.); the Consumers Legal Remedies Act (CLRA) (CAL. CIV. CODE

§§ 1750 et seq.); breach of the covenant of good faith and fair dealing; and unjust

enrichment.

The complaint was dismissed without prejudice. Plaintiffs were granted leave to

submit an amended complaint that would be viable under the law as stated in the

court’s order, if they can do so in good faith. Plaintiffs, however, notified the

court that they did not intend to file an amended complaint. On January 4, 2008,

the Court dismissed the case with prejudice.

16

On January 30, 2008, Plaintiffs filed a notice of appeal with the Ninth Circuit. On

November 4, 2008, Appellee Washington Mutual moved the court to substitute JP

Morgan Chase Bank, N.A. in its place. JP Morgan Chase purchased the assets

and liabilities of Washington Mutual after a receiver was appointed for the latter

institution in September, 2008.

Proceedings at the Ninth Circuit are stayed as a result of Washington Mutual’s

failure and the bankruptcy of the bank’s holding company. The stay will be in

place for 120 days pursuant to 11 U.S.C. section 362(a), after which time

Washington Mutual has been ordered to file a status report concerning the

bankruptcy proceedings. All pending motions have been held in abeyance.

6. Shawn Howard v. Canandaigua National Bank & Trust, (Case No.

09-cv-6513, United States District Court for the Western District of New York).

This case is one of a series of class action suits targeting ATM operators for

violations of ATM disclosure practices. On October 9, 2009, Plaintiff brought a

class action complaint alleging that the bank failed to provide an external notice

of its assessment of a fee for use of its ATMs, in violation of the Electronic Fund

Transfer Act (“EFTA”), 15 U.S.C. § 1693 et seq., and 12 C.F.R. § 205 et seq.


The issues raised in this litigation present a potential “gotcha” for banks that

operate ATMs. The EFTA requires that ATM operators provide notice of any

fees assessed to customers. Customers must be notified of these fees at the time of

the transaction or service and the amount of the fees must be revealed. These

notices must be posted in places where they will be visible to customers: such as

on the ATM screen or on the actual machine where it is conspicuous.

Plaintiffs in this case allegedly made cash withdrawals at an ATM operated by the

bank and were charged an access fee of $2.00. Plaintiffs claim that, at the time of

the transaction, no written notice was visible or “posted on or at” the ATM.

Significantly, the complaint does not allege that the ATM failed to display an ―on

the screen‖ notice that a fee of $2 would be charged, nor does Plaintiff deny that

they agreed to the $2 fee before proceeding with the transactions.

Notwithstanding the fact that Plaintiffs had actual knowledge of the $2 charge,

they argue that, because there was no external sign, the bank violated the

Electronic Fund Transfers Act (―EFTA‖), 15 U.S.C. § 1693 et seq., and its

implementing regulations, 12 C.F.R. § 205 et seq.

Proceedings/Rulings

This case is still in its early stages. On November 24, 2009, the bank filed a motion

to dismiss the complaint on the basis that the case is not suitable for disposition via a

17

class action, given the highly-particularized fact issues regarding each putative

class members‘ interaction with the ATM.

ARBITRATION

7. American Express Company, et al., v. Italian Colors Restaurant,

et al., No. 08-1473 (U.S. Supreme Court). This case takes up the issue of whether

arbitration clauses contained in merchant agreements with a credit card company

that contain


This case potentially very significant for banks that rely on arbitration agreements

containing class action waivers. It is expected that the United States Supreme

Court will authoritatively settle the issue of whether class action waiver clauses

are enforceable under the Federal Arbitration Act.

Proceedings/Rulings

This case was originally brought in the United States District Court for the

Southern District of New York, contending that American Express’s merchant

contracts contained illegal “tying” arrangements, in violation of Section 1 of the

Sherman Act and the Clayton Act. The merchant agreements contained

mandatory arbitration provisions which prohibited arbitration on a class-wide

basis. American Express moved to compel plaintiffs to arbitrate their claims, and

sought to dismiss plaintiffs’ complaints or stay the proceedings pending

arbitration.

On January 30, 2009, the Second Circuit ruled that the class action waiver

provision in the merchant agreement is unenforceable under the Federal

Arbitration Act.

On May 29, 2009, American Express filed a Petition for a Writ of Certiorari to the

United States Supreme Court. The ABA filed an amicus brief in support of the

petition on June 26, 2009.

The case was scheduled to be considered at the conference to be held on

September 29, 2009.

BANKRUPTCY

18

8. Milavetz, Gallop & Milavetz v. United States; United States v.

Milavetz, Gallop & Milavetz, (United States Supreme Court; Case Nos. 08-1119

& 08-1225).


This case takes up the constitutionality of certain provisions of the Bankruptcy

Abuse Prevention and Consumer Protection Act of 2005. It is potentially

significant for the financial services industry because an adverse ruling would

weaken the provisions designed to prevent abuses by creditors of the bankruptcy

system that were enacted as part of the Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005.

Section 526(a) and 528(b)(2)(B), of the Bankruptcy Code prevent a ―debt relief

agency‖ from counseling clients to incur added debt in anticipation of bankruptcy.

The Supreme Court will take up the issue of whether attorneys are considered

‗debt relief agencies and, if so, whether the portions of the statute that preclude a

―debt relief agency‖ from advising clients to take on more debt in advance of

filing for bankruptcy protection violate the First Amendment of the U.S.

Constitution.

Proceedings/Rulings

Milavetz, Gallop & Milavetz is a Minnesota law firm that offers counseling to its

clients who are contemplating bankruptcy. The firm claims that, as applied to

attorneys, the disclosure requirements of the statute and the limitation on the type

of advice that a ―debt relief agency‖ may offer a prospective debtor are an

―unconstitutionally overbroad restriction of free speech.‖

The Eighth Circuit ruled that attorneys who assist clients in bankruptcy matters

are indeed ―debt relief agencies‖ under the Bankruptcy code, and are therefore

subject to sections 526(a)(4) and 528(b)(2). The Court found that 526(a)(4),

which precludes a ―debt relief agency‖ from advising clients to take on more debt

in contemplation of a bankruptcy filing, is unconstitutional as applied to attorneys

because the language of the statute is ―neither narrowly tailored nor necessarily

limited to prevent only the speech that the government has an intent in

restricting.‖ The statutory prohibition on advising clients to incur more debt in

anticipation of filing bankruptcy was found to be overly broad because it made no

distinction in cases where an assisted person lacks any actual intent to manipulate

the bankruptcy system.

The Eighth Circuit, however, ruled that the portions of sections 528(a)(4) and

528(b)(2), requiring a ―debt relief agency‖ to place a disclosure on its bankruptcy-

related advertisements stating that they are ―debt relief agency‖ for purposes of

the Bankruptcy Code, are constitutional. The court reasoned that the disclosure

19

requirements are reasonably and rationally related to the government‘s interest in

preventing the deception of consumer debtors.

The issues certified by the Court for review are:

1. Whether the appellate court‘s interpretation of attorneys as ―debt relief

agencies‖ is contrary to the plain meaning of 11 U.S.C. § 101(12A).

2. Whether 11 U.S.C. § 528, as applied to attorneys, restricts commercial

speech by requiring mandatory deceptive disclosures in their

advertisements violates the constitutional First Amendment right to Free

Speech.

3. Whether 11 U.S.C. § 528 requiring deceptive disclosures in

advertisements for consumers and attorneys violates constitutional Fifth

Amendment right to Due Process.

4. Whether Section 526(a)(4) precludes only advice to incur more debt with

a purpose to abuse bankruptcy system.

5. Whether Section 526(a)(4), construed with due regard for the principle of

constitutional avoidance, violates the First Amendment.

Oral arguments before the Supreme Court were heard on December 1, 2009.

CONSUMER PROTECTION

9. Chawezi Mwantembe, et al. v. TD Bank, N.A., et al, (Case No. 09-

0135; United States District Court for the Eastern District of Pennsylvania). At issue

is whether state consumer protection laws regarding gift cards are preempted by the

federal National Bank Act and regulations of the Office of Comptroller of the

Currency.


In the aftermath of the Supreme Court‘s opinion on preemption in Clearinghouse

v. Cuomo, banking practitioners have been waiting for the dust to settle in order to

get a better sense of how the lower courts will interpret the court‘s ruling and

whether state law enforcement officials will ramp up their attempts to exert

regulatory oversight over national banks.

This case takes up an attempt to enforce a Pennsylvania gift card statute that

requires issuers to disclose that the issuer may deduct dormancy and replacement

fees from gift cards prior to their expiration dates.

Citing the ―sea change‖ in preemption jurisprudence effected by Cuomo, on

November 17, 2009, the Court ruled that the National Bank Act did not preempt

20

state law in this instance because enforcing state consumer protection laws

regarding the disclosures would not conflict with federal law governing gift cards

and would not unduly impair the ability of a national bank to engage in the

business of selling gift cards.

It will be worth watching to see whether, post Cuomo, there a renewed effort by

the states to bring litigation or administrative actions to enforce state gift card

statutes. There was litigation filed in 2004 by the attorney generals of New York,

New Hampshire, and Connecticut to enforce their respective state‘s laws. The

results vis-à-vis whether state law was preempted by the National Bank Act was

mixed. Compare, SPGGC, Inc., v. Kelly A. Ayotte, Attorney General (First Circuit)

(National Bank Act preempts state restrictions on sales of giftcards by National

Banks) and SPGGC, Inc. v. Richard Blumenthal (Second Circuit) (National Bank

Act does not preempt Connecticut statute concerning gift cards. The OCC took

the position in 2005 the National Bank Act did not preempt state law in this area.

The OCC‘s explained that, in its view, the National Bank Act did not completely

preempt state law because a federal statute creating an exclusive cause of action had

not supplanted the state gift-card statute. The OCC has subsequently offered

guidance on appropriate disclosures of fees relating to giftcards. OCC Bulletin 2006-

34, Gift Card Disclosures, 2006 WL 2384741 (Aug. 14, 2006)

Proceedings/Rulings

The suit was originally filed in the Court of Common Pleas of Delaware County

in 2008. The case was removed to federal court in January of 2009. Plaintiffs

allege that TD Bank failed to adequately disclose the terms and conditions of when it

would assess dormancy and replacement fees on gift cards sold by the bank.

Plaintiffs also allege that the undisclosed dormancy and other fees were deducted led

to diminished values of gift cards before their expiration in a way that was

―unlawful, deceptive and misleading.‖ Plaintiffs argued the failure is a violation of

Unfair Trade Practices and Consumer Protection Laws.

On March 3, 2009, TD Bank moved to dismiss the case on the grounds that the

Pennsylvania state consumer protection laws are preempted by the National Bank

Act, and by regulations issued by the Office of Comptroller of the Currency. The

hearing on the motion to dismiss was heard on July 22, 2009.

On November 17, 2009, Judge Timothy J. Savage denied the motion to dismiss. In

his opinion, he concluded that the state law imposing disclosure and marketing

requirements for gift cards did not ―prevent or significantly interfere‖ with the

activities of national banks, or the ability of federal regulators to exercise power.

Because state consumer protection laws regarding disclosure do not conflict with

federal law in this instance, and as such do not unduly interfere in defendant‘s ability

to engage in the business of selling gift cards, the Court concluded that the state law

claims were not preempted. The decision noted the ―sea change‖ in the

21

―perception of the preemptive effect of the NBA and the OCC regulations‖ as a

result of the Supreme Court‘s decision in Cuomo:

Before this pronouncement, courts appeared to be expanding the

scope of federal preemption for national banks. Cuomo reverses

this trend and has dispelled the popular notion that all state laws

that affect national banks in any way or to any degree are

preempted. (Citations omitted)

Defendant filed an answer to the complaint on December 7, 2009. The

Court issued a scheduling order setting a discovery deadline of March 19,

2010. Motions for class certification are due no later than April 16, 2010.

Oral arguments on the plaintiff‘s motion for class certification are

currently scheduled to be heard on June 16, 2010.

On January 22, 2010, TD Bank and Commerce Bank, N.A. petitioned the Multi

District Panel to have the case – along with several other similar actions -

transferred to the United States District Court for the District of New Jersey for

consolidated and coordinated pretrial proceedings. The cases are:

• Bradley Mann and Angelo Capizzi on behalf of themselves and all others

similarly situated v. TD Bank, N.A, et al., No. 1:09-cv-01062-RBK-AMD

(D.N.J)

• Chawezi Mwantembe, Margaret Munthali, and Fern Rutberg on behalf of

themselves and all others similarly situated v. TD Bank, N.A., et al., No.

2:09-cv-00135-TJS (E.D. Pa.)

• Sandra Elmoznino on behalf of herself and all others similarly situated v.

TD Bank, N.A., et al., No. 1:09-cv-09778-DC (S.D.N.Y.)

The defendants allege that the three cases raise similar issues of fact and law, and

may be properly consolidated.

10. Hickman, et al. v. Wells Fargo Bank, N.A., (Case No. 09-cv-5090;

United States District Court for the Northern District of Illinois). This case takes up

the issue of what a bank is obligated to disclose to a customer under the Truth-in-

Lending Act (―TILA‖) and Regulation Z if the institution reduces a customer‘s

home equity line of credit (―HELOC‖) due to a reduction in the value of the home.


Filed as a class action on August 18, 2009, plaintiff alleges that Wells Fargo illegally

reduced his home equity line of credit due to ―a substantial decline in the value of

the property securing the account,‖ citing alleged violations of TILA, Regulation Z,

and Illinois Consumer Fraud law. The suit contends that the bank failed to disclose

22

what it estimated the current value of his home to be, how it determined that value,

and what property value would be required to reinstate the full credit limit. Plaintiff

argues that it is ―unconscionable‖ to reduce plaintiff‘s HELOC in light of the bank‘s

―receipt of billions of dollars of taxpayer funds‖ that were designed to preserve the

flow of credit to consumers.

The issues raised in this case are a product of the current economic downturn. The

populist appeal of this theory may see copycat suits filed by other plaintiff-oriented

firms.

Proceedings/Rulings

An initial status hearing was held on October 22, 2009 and continued to January 21,

2010. The bank filed a motion to dismiss the case on October 16, 2009. Well Fargo

argues that the claims based upon the bank‘s reliance on an automatic valuation

method (―AVM‖) must be dismissed because nothing in TILA or Regulation Z

prohibits the use of AVMs or requires the provision of such information in a

reduction notice. The bank also argues that Plaintiff‘s allegations as set forth in

the Complaint establish that Wells Fargo did provide the basis for the reduction

upon request, but that Plaintiff did not follow-up for any further information.

Instead, nearly a year later, the plaintiff filed the lawsuit.

On January 26, 2010, the Court granted in part, and denied in part the Defendant‘s

motion to dismiss the complaint for failure to state a claim. The Court declined to

grant a dismissal of Plaintiff‘s claims that the bank reduced the Plaintiff‘s

HELOC in violation of TILA and Regulation Z because to do so would be

premature; ruling on the merits of the claim would require the Court to adduce

facts beyond those plead in the complaint.

The court found that, pursuant to TILA, a creditor may ―[p]rohibit additional

extensions of credit or reduce the credit limit applicable to an account under [an

open end consumer credit] plan during any period in which the value of the

consumer‘s principle dwelling which secures any outstanding balance is

significantly less than the original appraisal value of the dwelling.‖ 15 U.S.C. §

1647(c)(2)(B). Similarly, under Regulation Z, a creditor may not change any term

of a HELOC agreement, except that, a creditor may ―[p]rohibit additional

extensions of credit or reduce the credit limit applicable to an agreement during

any period in which [] [t]he value of the dwelling that secures the plan declines

significantly below the dwelling‘s appraised value for purposes of the [home

equity] plan.‖ 12 C.F.R. § 226.5b(f)(3)(vi)(A). The official staff commentary to

Regulation Z issued by the Federal Reserve Board further explains that

[w]hat constitutes a significant decline for purposes of §

226.5b(f)(3)(vi)(A) will vary according to individual circumstances.

In any event, if the value of the dwelling declines such that the

initial difference between the credit limit and the available equity

23

(based on the property‘s appraised value for purposes of the plan) is

reduced by fifty percent, this constitutes a significant decline in the

value of the dwelling for purposes of § 226.5b(f)(3)(vi)(A).

Thus, in order to state a claim for violation of TILA and Regulation Z, Plaintiff

must sufficiently allege that (i) the bank reduced his HELOC (ii) during a period

in which the value of his property did not decline to ―significantly less than the

original appraised value of the dwelling.‖ 15 U.S.C. § 1647(c)(2)(B); 12 C.F.R. §

226.5b(f)(3)(vi)(A).

Because the bank did not dispute the fact that it reduced the HELOC, the Court‘s

focus centered upon whether the plaintiff was required to make specific factual

allegations in his complaint regarding the value of his home in order to survive a

motion to dismiss. The court found that Federal Rule 8 did not impose such a

burden and that ―Plaintiff will have the opportunity to demonstrate the factual

basis for his allegation that the value of his home has not declined significantly

during the discovery process.‖

The Court did dismiss plaintiff‘s claim that the bank failed to provide him with an

adequate disclosure of the reason why his HELOC was reduced. Regulation Z

states that ―[i]f a creditor . . . reduces the credit limit applicable to a home equity

plan . . . the creditor shall mail or deliver written notice of the action to each

consumer who will be affected. The notice must be provided not later than three

business days after the action is taken and shall

contain specific reasons for the action. If the creditor requires the consumer to

request reinstatement of credit privileges, the notice also shall state that fact.‖ 12

C.F.R. § 226.9(c)(3).

The notice that the bank sent to Plaintiff informing him of the reduction in his

HELOC stated that the bank was ―lowering the credit limit of [Plaintiff‘s]

Account to $31,039.83 due to a substantial decline in the value of the property

securing the Account.‖ The court held that this was sufficient; Regulation Z lists

six specific scenarios under which a lender may reduce a borrower‘s credit limit,

including ―any period in which . . . [t]he value of the

dwelling that secures the plan declines significantly below the dwelling‘s

appraised value for purposes of the plan.‖ 12 C.F.R. § 226.5b(f)(3)(vi)(A). The

bank‘s letter specifically identified a statutorily permissible reason for reducing

Plaintiff‘s HELOC. Neither TILA, Regulation Z, nor the Official Commentary

require a bank to provide more information.

The Court also dismissed plaintiff‘s claim that shifting the cost to the borrower of

obtaining an appraisal in order to obtain a reinstatement of the original credit line

violated TILA. The Court found that ―neither the statute, regulations nor Official

Commentary contain any provisions prohibiting Defendant from ―shifting the

burden of obtaining and paying upfront for a property appraisal‖ to borrowers.

24

The Court also took up a number of state law claims, including a cause of action

under the Illinois Consumer Fraud Act.

Plaintiff filed an Amended Complaint on February 15, 2010.

11. Thomas v. US Bank, (Case No. 08-3302, United States Court of

Appeals for the Eighth Circuit).


This suit takes up the issue of whether a state statute governing the type and amount

of closing costs and fees that a lender can charge on residential second mortgage

loans secured by real estate are preempted by the Depository Institutions

Deregulation and Monetary Control Act (DIDA), 12 U.S.C. § 1831d.

On August 7, 2009, the Eighth Circuit issued an opinion concluding that DIDA

did not completely preempt state law because the language of DIDA ―does not

reflect Congress' intent to provide the exclusive cause of action for a usury claim

against a federally-insured state-chartered bank.‖ The court concluded that

DIDA does completely preempt state law because, by its own terms, the

proscriptions and remedies provided by federal law do not apply where the

interest rate allowed by state law exceeds the interest rate set forth in DIDA. The

Court concluded that because the usury limit provided by Missouri law exceeded

the interest rate permitted under DIDA, the federal law did not apply.

This result is at odds with the Fourth Circuit‘s decision in Vaden, and is

inconsistent with the Supreme Court's decision in Beneficial National Bank v.

Anderson, 539 U.S. 1 (2003), which held that the similar provisions in the

National Bank Act, 12 U.S.C. §§ 85-86, completely preempted state law usury

claims against national banks. A petition for rehearing was denied on November

24, 2009, and it is likely that the Supreme Court will be asked to resolve the split

in the Circuits.

Proceedings/Rulings

On August 7, 2009, the United States Court of Appeals for the Eighth Circuit

ruled that DIDA does not create an exclusive federal remedy for usury claims

against federally-insured, state-chartered banks. The court concluded that DIDA

only preempted state usury laws in situations where the state laws set a lower

allowable interest rate than that allowed by federal law. This conclusion conflicts

with Fourth Circuit‘s decision rendered in Discover v. Vaden, where the court held

that DIDA preempted a Maryland usury law claim.

Plaintiffs, who are Missouri homeowners, obtained "high loan-to-value" second

mortgages (reflecting a total debt of 125% of the appraised value) on their homes.

These loans were originated by FirstPlus Bank, a now-defunct FDIC-insured

25

California lending institution. The loans were subsequently purchased by the

defendants.

Plaintiffs originally brought their claims against a number of banks and lending

institutions who purchased FirstPlus loans in Missouri state court, alleging that

the loans violated the Missouri Second Mortgage Loans Act (MSMLA), Mo.

Rev. Stat. §§ 408.231-.241. That statute places limits on the type and amount of

closing costs and fees a lender can charge on residential second mortgage loans

secured by Missouri real estate. Plaintiffs argued that the subject loans violated

Missouri law because (1) the borrowers were charged nonrefundable finder's fees

or broker's fees which were not allowed by or in excess of the fees allowed by the

MSMLA; and (2) FirstPlus charged certain closing costs and fees on behalf of

third parties which were in excess of the bank‘s actual cost, with FirstPlus

keeping the mark-up for itself.

The defendants removed the case to federal court, arguing that the state law

claims were completely preempted by federal law in the form of the exclusive

remedies provided by DIDA. On August 7, 2009, the Eighth Circuit remanded

the case back to state court, finding that DIDA did not completely preempt state

law, and that DIDA did not provide an exclusive remedy.

The court found that ―complete‖ preemption, as opposed to ordinary or conflict

preemption, is rare, and only applies if the "federal statutes at issue provide[] the

exclusive cause of action for the claim asserted and also set forth procedures and

remedies governing that cause of action." The Eighth Circuit concluded that

DIDA did not completely preempt state law because the language of DIDA ―does

not reflect Congress' intent to provide the exclusive cause of action for a usury

claim against a federally-insured state-chartered bank.‖ The court concluded that

DIDA does completely preempt state law because, by its own terms, the

proscriptions and remedies provided by federal law do not apply where the

interest rate allowed by state law exceeds the interest rate set forth in DIDA. The

Court concluded that because the usury limit provided by Missouri law exceeded

the interest rate permitted under DIDA, the federal law did not apply.

This result is at odds with the Fourth Circuit‘s decision in Vaden, and is

inconsistent with the Supreme Court's decision in Beneficial National Bank v.

Anderson, 539 U.S. 1 (2003), which held that the similar provisions in the

National Bank Act, 12 U.S.C. §§ 85-86, completely preempted state law usury

claims against national banks.

On August 21, 2009, the defendants filed a petition for rehearing en banc. That

petition was denied on November 24, 2009.

Defendants filed a motion to stay the mandate pending a petition for writ of

certiorari. The Court denied this motion on December 11, 2009, and issued its

mandate on the same date.

26

On March 3, 2010, the Supreme Court extended the time within which to file

a petition for a writ of certiorari. The deadline is now March 24, 2010.

12. Vallies v. Sky Bank, Case No. 08-4160 (Third Circuit). This case

takes up the issue of whether detrimental reliance is a prerequisite for recovering

actual damages for violations of the Truth In Lending Act (―TILA‖).


The class plaintiffs, customers of Sky Bank (an Ohio-chartered institution doing

business in Pennsylvania) to received car loans from the institution, failed to receive

disclosures regarding charges associated with cancellation of the debt. The

plaintiffs, however, did receive the missing disclosure directly from the car dealer.

Faced with a technical violation of TILA, the bank agreed to pay statutory damages

in the amount of $500,000. Class plaintiffs, however, are pressing a much larger

claim for actual damages.

At issue is whether plaintiffs may pursue actual damages under TILA despite the

fact that the missing notice was provided by the dealer, leaving the customers no

worse off. An adverse decision would allow plaintiffs to easily circumvent the

statutory limitations on liability imposed by Congress, creating potentially massive

liability for technical violations of TILA.

Proceedings/Rulings

The United States District Court for the Western District of Pennsylvania dismissed

plaintiffs‘ claims, finding that TILA requires that a plaintiff establish reliance as a

part of a claim for actual damages under 15 U.S.C. § 1640(a). In granting summary

judgment in favor of the bank, the district court followed six circuit courts in

concluding that the ―actual damage‖ provision of the TILA‘s civil liability section

necessarily requires a showing of detrimental reliance. These decisions maintain the

balance Congress created in fashioning a remedy that enables consumers to recover

for injuries actually sustained as a result of inaccurate disclosures without subjecting

their creditors to ruinous liability for innocuous disclosure violations.

Plaintiffs have appealed the dismissal to the United States Court of Appeals for the

Third Circuit. On May 5, 2009, ABA (joined by several other amici) filed a brief

urging that the court affirm the dismissal.

The Third Circuit affirmed the lower court‘s dismissal of the claim. In an opinion

issued on December 31, 2009, the Court concluded that:

The plain meaning of § 1640(a) requires causation to recover

actual damages. In the context of TILA disclosure violations, a

creditor‘s failure to properly disclose must cause actual damages;

27

that is, without detrimental reliance on faulty disclosures (or no

disclosure), there is no loss (or actual damage).

The Court concluded that such an interpretation was consistent with the purposes

of TILA:

By providing for statutory and actual damages, the statute achieves

its dual purpose of deterrence and compensation. The compensatory

remedy of actual damages is permitted only in cases where the

violation caused harm—where harm was ―sustained by [the

consumer] as a result of‖ the violation. 15 U.S.C. § 1640(a)(1).

Without detrimental reliance, only statutory damages are available.

The court declined to ―evaluate which specific facts and circumstances constitute

detrimental reliance‖ because plaintiffs did not plead that they had in fact relied on

Sky Bank‘s disclosure violations.

The Third Circuit issued its mandate on January 27, 2010.

13. Sola v. Washington Mutual Bank, F.A., (CV 03-2566, Central District

of California; Ninth Circuit Case No. 08-55606). This case presents a variety of

claims invoking the Truth in Lending Act, Home Owners Loan Act, and

Washington state law based on the contents of Washington Mutual‘s (WAMU‘s)

promotional materials advertising its overdraft protection products.


This case is an excellent reminder that financial institutions (like all businesses)

should be mindful of the plaintiffs class action bar when advertising their products.

WAMU promoted its overdraft protection products with a campaign that contained

statements such as ―Don‘t worry, we‘ll cover you‖ and ―Automatic Protection.‖

Like most banks offering these products, the deposit account agreement and the

monthly customer account statements preserved the ability of WAMU to exercise

discretion in its payment of overdrafts.

Proceedings/Rulings

On April 26, 2004, the U.S. District Court for the Central District of California

dismissed a complaint filed by a consumer class alleging a variety of claims

invoking the Truth in Lending Act, Home Owners Loan Act, and Washington state

law based on the contents of Washington Mutual‘s (WAMU‘s) promotional

materials advertising its overdraft protection products.

The district court granted WAMU‘s motion to dismiss after ruling that the overdraft

charges were not ―interest‖ under the HOLA and not ―finance charges‖ under TILA

and, therefore, was outside of the reach of the statute. Plaintiffs appealed the

28

dismissal to the Ninth Circuit on May 17, and a coalition of consumer groups filed

as amici on September 23, 2004. OTS filed an amicus brief on November 19; ABA

and California Bankers Association filed an amici brief on November 29. The case

was argued in Pasadena on February 9, 2006.

On April 28, 2006, the Court directed the parties to file briefs addressing the

question of what deference, if any, this court owes to statements issued by the

Federal Reserve (and cited in the parties' initial briefs) regarding Truth in

Lending. Additionally, the Federal Reserve was invited to file an amicus brief

discussing Trust in Lending Act coverage, and the question of what deference, if

any, the court owes to the Federal Reserve statements regarding Truth in Lending.

The Federal Reserve filed its brief on June 5, 2006. The Court granted the parties

permission to file a short reply brief in response to the amici submission by the

Federal Reserve.

In an unpublished summary decision, on September 7, 2006, the Ninth Circuit

affirmed in part and reversed in part the district court‘s decision.

The Court found that the district court properly dismissed the plaintiffs‘

claims under TILA for allegedly failing to disclose the terms of credit and

for failing to disclose the annual percentage rate applicable to credit cards.

The Court ruled that the charges in question do not satisfy the definition of

―finance charges‖ because they are not incident to extensions of credit.

Rather, they are incident to overdrawn accounts.

The court, however, reversed the district court‘s dismissal of plaintiffs‘

other claims under TILA and 12 C.F.R. § 226.12, for unsolicited issuance

of credit cards and off-setting without an agreement to do so. The Court

found that the complaint filed in the case by the Plaintiffs does not

necessarily imply the existence of a formal, written deposit agreement.

Rather it alleges that a credit agreement governing the ATM cards exists

based on the promotional materials and the parties‘ courses of conduct.

Because the cards may fall within the definition of ―credit cards‖ court

remanded the case to provide plaintiffs with an opportunity to prove the

facts that are alleged. If the defendants introduce evidence of a written

deposit agreement with terms contrary to the promotional materials, the

cards may well not satisfy the definition of ―credit cards.‖

The Court affirmed the district court‘s dismissal of the plaintiffs‘ claim

under HOLA on the ground that the plaintiffs conceded that they could not

state a claim because California, not Washington, law applied.

The case was remanded back to the District Court for further proceedings.

On March 17, 2008, the Court granted WAMU’s motion for summary judgment

and dismissed the case. The Court found that the brochures and promotional

29

materials relied upon by Plaintiffs did not constitute a credit agreement and as a

result TILA and Regulation Z did not apply to the overdraft fees because they

were not an extension of credit. The Court also dismissed Plaintiffs state law

claims (California‘s Business & Professions Code § 17200, California Consumer

Legal Remedies Act, Cal. Civ. Code § 1750 et seq., and a common law claim for

unjust enrichment) were preempted by the Home Owner‘s Loan Act (―HOLA‖)

and regulations issued by the Office of Thrift Supervision, 12 C.F.R. §§ 557.11

and 560.2.

Sola filed a Notice of Appeal with the Ninth Circuit on April 7, 2008.

The proceeding at the Ninth Circuit has been stayed as a result of the appointment

of a receiver for WAMU on September 25, 2008. The FDIC as receiver for

WAMU filed motion to stay the case while plaintiffs attempt to pursue their claims

through the FDIC‘s administrative claims process mandated by 12 U.S.C. §§

1821(d)(3) through (13). On January 26, 2009, the court granted the motion in part

and stayed the appeal till May 8, 2009.

On July 6, 2009, the court continued the stay of proceeding originally granted to the

FDIC (as receiver for WAMU) in January.

On December 11, 2009, the FDIC completed its review of Plaintiffs administrative

claim. The administrative claim was disallowed by the FDIC, giving Plaintiffs sixty

days from the date of review (December 11), pursuant to 12 U.S.C. § 1821 (d)(6), to

continue with litigation.

14. Jordan v. Paul Financial, LLC et al., (Case No. 07-04496, Northern

District of California). This case is a putative class action suit involving

payment-option ―Option ARM‖ mortgages issued Paul Financial in order to

finance a purchaser‘s primary residence.


Plaintiff alleges that the loans in question were a ―deceptively devised‖ financial

product. Specifically, it is alleged that Paul Financial promised that the loans

would have a low, fixed interest rate, and that the lender breached an agreement to

apply plaintiff‘s monthly payments to both the principal and interest owed on the

loan. It is also alleged that Paul Financial disguised from plaintiff that his option

ARM loan was designed to cause negative amortization. Plaintiff brought claims

under the Truth in Lending Act (―TILA‖), 15 U.S.C. §§ 1601, et seq.; and

California‘s Unfair Competition Law (―UCL‖), Cal. Bus. & Prof. Code §§ 17200

et seq.; as well as common law claims for fraud, breach of contract, and breach of

the covenant of good faith and fair dealing.

In July of 2009, the trial court has dismissed a significant portion of plaintiffs‘

case. The court dismissed plaintiff‘s TILA claim for damages as being outside

30

the one-year statute of limitations. The court partially granted the Defendants‘

motion for summary judgment with respect to the rescission claims. The court

concluded that because the variable rate feature of the product was disclosed by

the bank, an alleged failure to disclose the risk of negative amortization would not

be a ―material‖ non-disclosure that would trigger the three-year statute of

limitation for rescission.

The court reached a different conclusion with respect to the alleged failure to

disclose the annual percentage rate. Unlike the risk of negative amortization,

disclosure of the APR is a ―material‖ disclosure; if it is not made, a borrower is

entitled to the extended three-year period for rescission of the loan transaction.

The court also allowed claims under California‘s Unfair Competition Law

(―UCL‖), Cal. Bus. & Prof. Code §§ 17200 et seq., to go forward (to the extent

they are not time barred) because the UCL claim is predicated on the TILA

violations. The court declined to dismiss claims that defendants fraudulently

failed to disclose material information about plaintiff‘s loan. The court found that

there are factual disputes on each of the elements of plaintiff‘s fraud claim that

precluded summary judgment.

Proceedings/Rulings

Plaintiffs sought to certify two classes of plaintiffs; a national class consisting of

all individuals who received an Option ARM loan through Paul Financial on their

primary residence in the United States from August 30, 2003 to the present, and a

California class consisting of similar borrowers located in the state of California.

In filing their motion for class certification, plaintiffs also moved to enjoin Paul

Financial from resetting of the interest rates.

On January 27, 2009, the court denied plaintiff‘s motion for class certification and

for a preliminary injunction.

The court concluded that the named plaintiff lacked standing to represent the

national class with respect to TILA claims because they were time barred under

the statute. The plaintiffs also lacked standing to represent the California class

because they were unable to establish ―traceability‖ – that the defendants held or

serviced the loans at issued. Plaintiff‘s proposal to conduct class discovery to

identify all possible defendants, and to then join them in the litigation, was

rejected by the court. The court also concluded that plaintiff could not establish

that their loans were ―typical‖ of those held by other class members.

Defendants moved for summary judgment with respect to all claims on December

30, 2008. On March 11, 2009, the court denied most of Plaintiff‘s motion

pursuant to defer the Court‘s consideration of Paul Financial‘s motion for

summary judgment. In the interim, Plaintiff sought leave of the Court to file a

Third Amended Complaint.

31

On July 1, 2009, the court granted in part and denied in part the Defendants‘

motions for Summary Judgment. The court granted Defendant‘s Summary

Judgment on Plaintiff‘s TILA claim for damages. TILA contains a one year

statute of limitations for damages claims. Since Plaintiff‘s loan was

consummated in January 2006 and the action was not filed until August 2007, the

Court agreed that the one-year statute of limitations had passed.

The court partially denied Defendants‘ motion for summary judgment with

respect to the rescission claims. Generally, TILA provides that borrowers have

until midnight of the third business day following the consummation of a loan

transaction to rescind the transaction. 15 U.S.C. § 1635(a). A borrower‘s right of

rescission is extended from three days to three years if the lender (1) fails to

provide notice of the borrower‘s right of rescission or (2) fails to make a material

disclosure. 12 C.F.R. § 226.23(a)(3). Here, plaintiff did not contend that Paul

Financial failed to provide notice of his right of rescission. Rather it focused on

whether defendants‘ alleged failure to disclose either (1) the risk of negative

amortization, or (2) the annual APR was ―material.‖

With respect to the risk of negative amortization, Regulation Z provides that

―[t]he term ‗material disclosures‘ means the required disclosures of the annual

percentage rate, the finance charge, the amount financed, the total payments, the

payment schedule, and the disclosures and limitations referred to in § 226.32(c)

and (d).‖ 12 C.F.R. § 226.23(a)(3) n.48. The Commentary on this regulation

states that only one of the required disclosures regarding variable-rate loans – that

the transaction contains a variable-rate feature – is considered ―material‖ such that

it triggers the extended rescission period. The court concluded that because the

variable rate feature was disclosed, an alleged failure to disclose the negative

amortization feature would not be a ―material‖ non-disclosure that would trigger

an extended right of rescission.

The court reached a different conclusion with respect to the alleged failure to

disclose the annual percentage rate. Unlike the risk of negative amortization,

disclosure of the APR is a ―material‖ disclosure; if it is not made, a borrower is

entitled to the extended three-year period for rescission of the loan transaction.

The loans in question stated that the APR was 6.99% and explains that the APR is

―[t]he cost of your credit as a yearly rate.‖ At the same time, the Note states that

―I will pay interest at a yearly rate of 1%. The interest rate I will pay may

change.‖ In plaintiff‘s view, the reference to two ―yearly‖ rates of interest is

confusing and therefore fails to comply with TILA‘s requirement that the

disclosure of the APR be clear and conspicuous. The court denied summary

judgment in favor of the defendants because it concluded that a factual dispute

exists as to whether an ordinary consumer would be confused by a reference to

both an APR and a different ―finance charge‖ as ―yearly‖ rates of interest.

32

The court also allowed claims under California‘s Unfair Competition Law

(―UCL‖), Cal. Bus. & Prof. Code §§ 17200 et seq., to go forward (to the extent

they are not time barred) because the UCL claim is predicated on the TILA

violations. The court declined to dismiss claims that defendants fraudulently

failed to disclose material information about plaintiff‘s loan. The court found that

there are factual disputes on each of the elements of plaintiff‘s fraud claim that

precluded summary judgment.

Finally, plaintiffs were granted leave to file an amended complaint, which added

two additional plaintiffs. A fourth amended complaint has also been filed against

HSBC. HSCB has filed an answer, while others have moved to dismiss the

amended complaint.

The case management conference and the hearing on RBS’s motion to

dismiss have been continued to until March 12, 2010.

15. Gorman v. Wolpoff & Abramson, LLP, (Case No. 06-17226, Ninth

Circuit). This case takes up the issue of a credit card issuer‘s duty of care to

investigate a dispute between a customer and a retailer in a transaction where the

card was used.


The customer in this case sued the credit card issuer, MBNA, alleging that it

breached its duty under the Fair Credit Reporting Act by failing to adequately

investigate the dispute prior to reporting adverse information regarding the

dispute to a credit reporting agency.

This case fleshes out the requirements for a legally-sufficient investigation into a

customer dispute involving credit card. The Ninth Circuit ruled that a creditor has

a duty under the Fair Credit Reporting Act to conduct an investigation once

receives a notice of consumer dispute. Section 681s-2(b)(1)(A) of the FCRA

mandates that once creditor/furnisher receives notice of a dispute over the

inaccuracy of information furnished to a credit reporting agency, the

creditor/furnisher must ―conduct an investigation with respect to the disputed

information.‖ The investigation cannot be cursory – it requires ―some degree of

careful inquiry‖ and diligence on the part of the creditor/furnisher. This, the court

said, is because the creditor/furnisher is in a better position than the credit

reporting agency to investigate a disputed debt. The Ninth Circuit upheld the

District Court‘s grant of summary judgment in favor of MBNA, finding that it had

done an adequate investigation.

However, the court also held that section 1681s-2(b) of the FCRA permits the

Plaintiffs to bring a private claim against MBNA alleging that it failed to inform

the Credit Reporting Agencies that, despite the outcome of the bank‘s

investigation, the customer continued to dispute the charge. The Ninth Circuit

33

also affirmed the district court‘s grant of summary judgment dismissing the

plaintiff‘s libel claim, but it recognized plaintiff‘s right to bring a private action to

enforce a California credit reporting law, California Civil Code section

1785.25(a), ruling that it is not preempted by the FCRA.

It appears likely that MBNA will seek review of this ruling to the United States

Supreme Court. An application for an extension of time within which to file a

petition for a writ of certiorari to the United States Supreme Court was granted by

Justice Kennedy on January 12, 2010. MBNA has until March 15, 2010, to file

its petition.

Proceedings/Rulings

Plaintiff in this case purchased a satellite television using his MBNA Visa credit

card. After having the TV delivered and installed in his house, Plaintiff later felt

unsatisfied with the merchandise and attempted to seek a refund of the $760

charge to his credit card. The seller declined to refund the credit card unless the

merchandise was returned. Plaintiff in turn notified MBNA of the disputed

charge. MBNA removed the charges, but later reinstated them on the grounds

that it could not act unless the merchandise had been returned. MBNA informed

major credit reporting agencies that the account was a ―charge off,‖ and in later

communications with the reporting agencies stated that the delinquency was not

erroneous. Plaintiff sued MBNA on the basis of FCRA violations and libel.

On January 12, 2009, the Ninth Circuit ruled that a creditor has a duty under the

Fair Credit Reporting Act to conduct an investigation once receives a notice of

consumer dispute. Section 681s-2(b)(1)(A) of the FCRA mandates that once

creditor/furnisher receives notice of a dispute over the inaccuracy of information

furnished to a credit reporting agency, the creditor/furnisher must ―conduct an

investigation with respect to the disputed information.‖ The investigation cannot

be cursory, but requires ―some degree of careful inquiry‖ and diligence on the part

of the creditor/furnisher. This, the court said, is because the creditor/furnisher is

in a better position than the credit reporting agency to investigate a disputed debt.

On granting summary judgment to the plaintiff, the court found that Plaintiff had

presented enough evidence to prevail on summary judgment and that Plaintiff had

a private right of action to go after MBNA for failing to notify the credit reporting

agencies that the matter was disputed after MBNA received notification under

Section 1681s-2(b) of the consumer‘s dispute. The court also granted summary

judgment to MBNA on the libel claim.

On February 24, 2009, MBNA filed a petition for rehearing en banc with the

Ninth Circuit.

On October 21, 2009, the Court amended its January 12, 2009 opinion and denied

Appellee‘s petition for rehearing and petition for rehearing en banc. The Court

34

also denied Appellee‘s petition for panel rehearing and petition for rehearing en

banc.

The amended decision, consistent with the Fourth and Seventh Circuits, held that,

when notified of a disputed charge, the FCRA requires that furnishers of credit

information to a credit reporting agency must first undertake ―an inquiry likely to

turn up information about the underlying facts and positions of the parties, not a

cursory or sloppy review of the dispute. ― This is because the purpose of the

FCRA is to protect consumers against inaccurate and incomplete credit

reporting.‖ The court concluded that the district court‘s finding that MBNA‘s

investigation was reasonable was a matter for the finder-of-fact, and that summary

judgment was appropriate. The Court also held that section 1681s-2(b) of the

FCRA permits plaintiff to bring a private claim against MBNA alleging that it

failed to inform the CRAs that the information about his delinquency was

―incomplete or inaccurate‖ after investigating the December 2004 notice from the

CRAs because he continued to dispute the charge; and that plaintiff submitted

sufficient evidence to survive summary judgment on this claim.

The Ninth Circuit also affirmed the district court‘s grant of summary judgment

dismissing the plaintiff‘s libel claim, but it recognized plaintiff‘s right to bring a

private action to enforce a California credit reporting law, California Civil Code

section 1785.25(a), ruling that it is not preempted by the FCRA.

MBNA filed a motion to stay the court‘s mandate on October 28, 2009 pending

the filing of a petition for writ of certiorari in the Supreme Court.

On November 4, 2009, the Ninth Circuit granted the motion and stayed its

mandate until January 19, 2010. An application for an extension of time

within which to file a petition for a writ of certiorari to the United States

Supreme Court was granted by Justice Kennedy on January 12, 2010.

MBNA has until March 15, 2010, to file its petition.

16. McCoy v. Chase Manhattan Bank, Case No. 09-329 (U.S. Supreme

Court). This case takes up the issue of whether the notice requirements of the

Truth in Lending Act (―TILA‖) and Regulation Z, 12 C.F.R. § 226, as interpreted

by the Federal Reserve Board‘s Official Staff Commentary, apply to discretionary

interest rate increases that occur because of consumer default.


In March of 2009, the Ninth Circuit ruled that a credit card customer has a valid

cause of action under TILA/Regulation Z if the bank failed to give him notice of

an interest rate increase ―because of the consumer‘s delinquency or default‖ or if

his credit card contract with the bank ―allows the creditor to increase the rate at its

discretion but does not include the specific terms for an increase.‖ 12 C.F.R. §

226.9(c)(1). This result directly conflicts a interpretations of Regulation Z offered

35

by the Federal Reserve, as well as a contemporaneous decision by the United

States Court of Appeals for the Seventh Circuit in Swanson v. Bank of America.

While the prospective regulatory issue has been dealt with by recent amendments to

Regulation Z, the issue of lingering retrospective liability for complying with the

Federal Reserve‘s own guidance regarding Regulation Z has provided impetus for

an appeal to the United States Supreme Court.

Proceedings/Rulings

Plaintiff, a cardholder at Chase Manhattan bank, alleged that the bank increased

his interest rates without notice, applied retroactively to the beginning of his

payment cycle, after his account was closed to new transactions as a result of a

late payment. The cardholder argued that the rate increase violated TILA and

Delaware law because Chase gave no notice of the increase until the following

periodic statement, after it had already taken effect. The district court dismissed

McCoy‘s complaint with prejudice, holding that because Chase discloses the

highest rate that could apply due to McCoy‘s default in its card member

agreement with McCoy no further notice was required.

The Bank argued that the Federal Reserve‘s Official Staff Commentary interprets

Regulation Z to require no notice to a cardholder where the agreement permits the

bank to increase the interest rate. The Court disagreed.

The Court‘s analysis focused on the fact that the staff commentary permitted the

bank to forego notice of a change in terms where a specific change is set forth

initially. The Court found that the cardholder agreement in question did not

disclose in advance the specific changes that would be made – such as the actual

amount of the increase and whether it will occur. The Court reasoned that

[t]he Card member Agreement states that Chase ―may‖ change

McCoy‘s interest rate and impose a non-preferred rate ―up to‖ the

maximum rate described in the pricing schedule. The agreement

further states that McCoy‘s account ―may‖ lose its preferred rates

if he defaults. Although the agreement defines what constitutes a

―default‖ triggering Chase‘s ability to exercise this discretion, a

default is only one of the conditions required for an increase; it

may be necessary, but apparently it is not sufficient. Chase

outlines several other criteria it ―may‖ obtain and use to review

McCoy‘s account ―for the purposes of determining its eligibility

for Preferred rates,‖ including McCoy‘s consumer credit reports,

his payment history and level of utilization over the life of his

account, and his other relationships with Chase and its affiliates.

Chase does not disclose to McCoy how it may use this information

and provides McCoy with no basis for predicting in advance what

retroactive interest rate Chase will choose to charge him if he

36

defaults. Under the agreement, when McCoy defaults, he will not

know whether his rate will stay the same, increase slightly, or rise

to the maximum default rate until he receives his next periodic

statement listing the new rate. Worse yet, this new rate would then

apply retroactively.

The Court rejected arguments that the terms for an increase are adequately

specified because the concept of a ―default‖ is defined and because consumers are

aware of the maximum rate they might pay in the ―worst case scenario.‖ The

Court also declined to consider Federal Reserve clarification of the Commentary

that is contained in an Advance Notice of Proposed Rulemaking that was issued

in 2007.

On April 27, 2009, Appellee Chase Manhattan Bank filed a petition for rehearing,

and a petition for rehearing en banc. The court has issued an order for Appellant‘s

response.

On May 7, 2009, the ABA and the Consumer Bankers Association filed an amici

brief in support of Chase Bank USA, N.A.‘s Petition for Panel Rehearing and

Rehearing En Banc.

On June 16, 2009, the court denied the petition for rehearing and the petition for

rehearing en banc.

On June 23, 2009, Appellee Chase Manhattan Bank filed a motion seeking the

court to stay the mandate for 90 days, in anticipation of seeking a Writ of

Certiorari with the United States Supreme Court.

On July 14, 2009, the Ninth Circuit granted Appellee‘s motion for a stay of the

mandate in order for facilitate the filing of a writ of certiorari at the United States

Supreme Court. The mandate was stayed until September 14, 2009.

On September 14, 2009, Appellee Chase Manhattan Bank filed a Petition for a

Writ of Certiorari with the United States Supreme Court. The ABA submitted an

Amicus Curiae brief on October 16, 2009.

On January 25, 2010, the Supreme Court invited the Solicitor General to file a

brief in this case expressing the views of the United States.

17. State of California v. Wells Fargo Investment, LLC et al., (Case

No. CGC-09-487641, San Francisco Superior Court). On April 23, 2009,

California Attorney General Edmund Brown filed suit in Superior Court against

three Wells Fargo affiliates, alleging that the affiliates sold auction-rate securities

to several investors based on ―false and deceptive‖ advice in violation of

California law. The securities, it is alleged, were sold on the basis that they were

as ―safe and liquid‖ as cash.

37


The complaint alleges that Wells Fargo violated California law by:

1. Misrepresenting auction-rate securities as safe, liquid, and cash-like

investments, similar to certificates of deposit or money market funds, in

violation of Corporation Code section 25401

2. Knowingly offering for sale auction-rate securities by means of using

untrue and misleading statements that were manipulative, deceptive and

fraudulent in violation of Corporation Code section 25216(a)

3. Marketing and selling auction-rate securities to investors for whom these

investments were unsuitable, in violation of Corporation Code section

25216(c), and Cal. Code of Regs., tit 10, section 260.218.2

4. Failing to supervise and provide adequate training to sales agents on

auction-rate securities, in violation of Corporation Code section 25216(c)

and Cal. Code Regs., tit. 10, section 260.218.4

The complaint seeks to enjoin any future violations, require Wells Fargo to

restore the cash value of the securities, disgorge its profits tied to the securities,

and to impose civil penalties in the amount of $25,000 per violation.

Proceedings/Rulings

On May 14, 2009, the State of California filed an amended Complaint against all

defendants.

A case management conference initially scheduled for September 25, 2009 was

held on November 6, 2009.

On January 4, 2010, the parties filed a notice with the Court announcing that they

had reached a conditional settlement, and asked the Court for a five month stay of

proceedings in order to execute the terms of the agreement. The granted the stay.

Under the terms of the settlement, WFI and Wells Fargo Institutional Broker-

Dealers will buy back certain Auction Rate Securities purchased at WFI or Wells

Fargo and subsequently failed at auction at least once since February 13, 2008.

18. Patco Construction Company Inc v. Peoples United Bank d/b/a

Ocean Bank, (Case No. 09-CV-00503; United States District Court for the

District of Maine).


This issue takes up the issue of whether and under what conditions a bank may be

liable to a customer when an account has been illegally accessed and funds stolen.

Specifically, the case involves the issue of whether a password-only form of

38

security is sufficient to authorize sizable ACH transfers from a business account

via the internet, without a manual form of additional authorization such as a token

or confirming phone or fax.

Originally filed in state court, the suit alleges that Ocean Bank didn‘t comply with

Maine law, 11 M.R.S.A. § 4-1201 et. seq., governing funds transfers. The

complaint also alleges various common-law causes of action including

negligence, breach of contract, and breach of fiduciary duty.

Proceedings/Rulings

Plaintiff Patco Construction is a family-owned business operating out of Sanford

Maine. In May 2009, Plaintiff apparently was the victim of identity theft when an

unknown third party used the user ID and employee password to initiate a series

of ACH transfers. Nearly $600,000 was withdrawn from Patco‘s account before

the fraud was brought to a halt. Ocean Bank was able to recover and block about

$244,000 of the transfers leaving Plaintiff‘s total loss of funds at about $345,000,

plus the interest paid on the withdrawal on Patco‘s line of credit to cover the

outgoing fraudulent transfers that were in excess of the funds that were on

deposit.

The complaint was originally filed in late 2009 in state court. The matter was

subsequently removed to federal court in October of 2009.

Ocean Bank filed a motion to dismiss the suit on November 3, 2009. In their

motion, the Bank argues that it Ocean Bank followed the security procedures

contractually agreed upon by the parties with respect to electronic funds transfers.

As a result, they argue that Patco cannot now claim that Ocean Bank was

negligent under a duty of care not contained in the parties‘ agreements. In

addition, the Bank argues that, under the express exculpatory provisions in the

eBanking, Bill Payment, and Automated Clearing House agreements acquiesced

to by Patco, the Bank it is liable only for conduct rising to the level of gross

negligence and willful misconduct.

Regarding the alleged violation of Maine statutes, 11 M.R.S.A. § 4-1201 et. seq.,

governing funds transfers, the Bank argues that the choice of law provision in the

Bank‘s customer agreements selects Connecticut law – the location of the bank‘s

main office – as being applicable to the agreement.

On January 13, 2010, the Court heard arguments on a motion to dismiss and

issued an oral order denying the motion that same day. Defendant argued, in its

motion to dismiss Plaintiff‘s complaint that Plaintiffs attempt to shift

responsibility for its losses from third party cybercriminals to Ocean Bank is a

disregard of the express agreement entered into by both parties that prevent

Plaintiff‘s claims.

39

Plaintiffs have since filed an Amended Second Complaint against People‘s United

Bank. The bank has answered the amended complaint, and filed a counterclaim

action against Patco for breach of contract. Under the terms of the bank‘s

eBanking, Bill Payment, and ACH Agreements, Patco agreed to assume all

liability and responsibility to monitor its commercial checking account on a daily

basis. Patco also agreed that it would indemnify Ocean Bank from any suits

arising from its failure to abide by the terms of the Modified eBanking Agreement

and the ACH Agreement. The bank is seeking reimbursement of its costs and fees

in defending the action brought by Patco.

19. PlainsCapital Bank v. Hillary Machinery, Inc. (Case No. 09-

00653, E.D. Texas)


This case presents one litigation strategy for banks who may be in a dispute with a

customer who‘s account has been hacked: file a preemptive action in court to

declare that the institution‘s remote banking security systems are sufficiently

secure. The case could also test the extent to which customers should be held

responsible for protecting their online accounts from compromises.

Last November, a customer at PlainsCapital Bank was the victim of a cybertheft

incident. Hackers based in Romania and Italy initiated a series of unauthorized

wire transfers from the customer‘s bank accounts, draining it of approximately

$800,000. About $600,000 of the amount was later recovered by PlainsCapital.

The customer made demand on the bank that it should reimburse the customer for

the rest of the stolen money. The customer alleges that the theft occurred

because PlainsCapital had failed to implement adequate security measures.

The bank responded by filing suit in the U.S. District Court for the Eastern

District of Texas. Styled as a declaratory judgment action, the complaint asks the

court to rule that the bank‘s systems are reasonably secure. The bank seeks no

relief against the customer.

Proceedings/Rulings

The complaint was filed on December 31, 2009. Defendants filed an Answer

and a Counterclaim to the Complaint on February 15, 2010. In its answer,

Hillary Machinery asserts that the bank failed to protect its customers

against theft by failing to monitor transactions of its customers. Defendant

also asserts that Plaintiff failed to properly secure its internet banking

transactions. Hillary Machinery also asserts that Plaintiff violated FFIEC

regulations by failing to adhere to FFIEC guidelines, which suggest that a

bank should use multi-factor identification in an internet banking

transactions.

40

* 20. Weintraub v. Quicken Loans, Inc., (Case No. 08-2373; United

States Court of Appeals for the Fourth Circuit). This case takes up the issue

of loan rescission under the Truth in Lending Act (“TILA”), U.S.C. §

1635(a).


This case clarifies the rules for when consumers may apply TILA’s rescission

remedy to obtain a refund of application fees and deposits on abandoned

mortgage loans.

Proceedings/Rulings

Plaintiffs Rita and Barry Weintraub applied for a loan from Quicken Loans

to refinance their home in February of 2008. After receiving a Good Faith

Estimate and an Interest Rate Disclosure forms, the Weintraubs paid

Quicken Loans a $500 deposit along with the signed documents. An

appraisal of their home provided a value that was $32,000 less than the

estimate used to prepare the loan application. As a result, Quicken Loans

added a half-point adjustment which included a TILA statement, along with

a “Notice of Right to Cancel.” The Plaintiffs decided not to go through with

the refinancing and requested a refund of the $500 deposit according to the

terms of the Notice of Right to Cancel.

Quicken Loans, inc refused to return the deposit on the grounds that the

Deposit Agreement between the two parties provided that “the deposit will

not be refunded if you … choose to withdraw your application, or choose not

to close the transaction for any reason ….” The Weintraubs sued Quicken

Loans.

The District Court ruled in favor of Quicken Loans on the grounds that

Plaintiffs had withdrawn the loan application prior to closing, meaning that

the loan was never consummated. As a result, there was no “consumer credit

transaction” that would support a right to rescind under TILA.

The United States Court of Appeals for the Fourth Circuit affirmed the

District Court on February 5, 2010. The Court of Appeals held that a

consumer cannot exercise the right to rescind a loan created by § 1635(a)

until after the loan has been consummated. The Court called it a “common-

sense” reading of TILA which supported that the right to rescind applies in a

“consumer credit transaction,” which only exists when a loan has been

consummated. Until consummation takes place, a consumer is seen to have

incurred no binding legal obligation from which legal protection is required.

A copy of the opinion is attached as a PDF file.

41

FEDERAL PREEMPTION

21. Capital One Bank, N.A. et al. v. Darrel V. McGraw, (Case No. 08-

CV-00165; United States District Court for the Southern District of West

Virginia).


In the aftermath of the Supreme Court‘s opinion on preemption in Clearinghouse v.

Cuomo, banking practitioners have been waiting for the dust to settle in order to get

a better sense of how the lower courts will interpret the court‘s ruling and whether

state law enforcement officials will ramp up their attempts to exert regulatory

oversight over national banks.

On June 26, 2009, the Attorney General for the State of West Virginia was

enjoined from ―issuing subpoenas or demanding the inspection of the books and

records‖ of Capital One Bank (USA), N.A., in connection with the Attorney

General‘s investigation into credit card lending. Relying upon the Supreme

Court‘s decision in Wachovia Bank v. Watters and the OCC‘s preemption

regulations, the court concluded that the Attorney General, in subpoening Capital

One and its servicing subsidiary, was ―attempting to exercise visitorial power‖ in

violation of the National Bank Act.

Three days later, on June 29, 2009, the United States Supreme Court issued its

opinion in Cuomo v. Clearing House Association, which permits Attorneys

General to issue subpoenas to national banks in the context of litigation.

On January 4, 2010, the Attorney General of West Virginia obtained relief from

the prior injunction prohibiting it from issuing subpoenas to Capital One and to

allow the state to proceed with its case against Capital One Bank. The Attorney

General moved swiftly, filing suit against Capital One bank later in the month

(see below, McGraw v. Capital One Bank (USA) N.A., et al., (Case No. 10-cv-7;

Circuit Court of Mason County, West Virginia)).

Proceedings/Rulings

On October 5, 2009, the Court denied the Attorney General‘s motion for a

hearing.

On January 4, 2010, the court issued an order granting the Attorney General‘s

motion. The Court ruled that the prior ruling is vacated ―insofar as it prohibits the

Attorney General from bringing lawsuits to enforce non-preempted, substantive

42

state laws.‖ This ruling essentially mirrors the result reached by the Supreme

Court in Cuomo v. Clearing House Association.

22. State of West Virginia, ex rel. Darrell V. McGraw v. Capital One

Bank (USA) N.A., et al., (Case No. 10-cv-7; Circuit Court of Mason County,

West Virginia).


This is the follow-up action to the Capital One Bank, N.A. et al. v. Darrel V.

McGraw, (Case No. 08-CV-00165; United States District Court for the Southern

District of West Virginia), which is reported above.

On June 26, 2009, the Attorney General for the State of West Virginia was

enjoined from ―issuing subpoenas or demanding the inspection of the books and

records‖ of Capital One Bank (USA), N.A., in connection with the Attorney

General‘s investigation into credit card lending. Relying upon the Supreme

Court‘s decision in Wachovia Bank v. Watters and the OCC‘s preemption

regulations, the court concluded that the Attorney General, in subpoening Capital

One and its servicing subsidiary, was ―attempting to exercise visitorial power‖ in

violation of the National Bank Act.

Three days later, on June 29, 2009, the United States Supreme Court issued its

opinion in Cuomo v. Clearing House Association, which permits Attorneys

General to issue subpoenas to national banks in the context of litigation.

On January 4, 2010, the Attorney General of West Virginia obtained relief from

the earlier injunction, allowing the state to proceed with its case against Capital

One Bank. The Attorney General moved swiftly, filing this suit against Capital

One bank later in the month. The complaint alleges that

Capital One Bank and four other defendants engaged in ―unlawful debt

collection‖ practices that violate West Virginia consumer protection laws.

Proceedings/Rulings

The complaint alleges that Capital One lured consumers into debt repayment

plans that were disguised as offers of new credit. The offer was sent to

consumers who had charged-off accounts with Capital One or other creditors,

meaning the bank had already written off the accounts as uncollectible. It is

alleged that, under the terms of the offer, Capital One agreed to provide the

consumer $1 of new credit in exchange for an agreement to transfer the entire

account balance of a charged-off account to the new credit card account. The

attorney general alleges that the consumer was required to make payments on the

old debt in order to receive further increases in the credit limit on their new credit

card. By transferring the old debt onto a new credit card, it is alleged that Capital

One was able to charge interest, late fees and over-the-limit fees on debt that was

43

deemed uncollectable. The complaint alleges that the arrangement allowed

Capital One to re- age the debts so that the applicable statute of limitations period

started anew.

23. Monroe Retail, Inc., et al. v. RBS Citizens, N.A., f/k/a/ Charter One

Bank, N.A., et al., (United States Court of Appeals for the Sixth Circuit; Case No.

07-4263).


This case examines the interplay of state laws regarding garnishment and their

application to federally chartered institutions, specifically national banks. A class-

action suit was brought against a number of defendant banks by a class of companies

and individuals who sought to garnish bank accounts belonging to debtors in the

state satisfy court judgments. Ohio statue, specifically Ohio Revised Code §

2716.12, provides that a garnishment action must be accompanied by a one dollar

fee to the garnishee, in this case, the banks who hold the debtors‘ funds in

customer accounts. The banks also frequently charge an additional $25 to $80

service fee to the customer whose account is being garnished. When debtors have

insufficient funds to satisfy both the service fee and the garnishment order, the

Banks extract the service fees from the garnished funds before releasing the

remainder of the funds sought by the creditor who is garnishing the account.

This suit, brought as a class action, challenged the right of banks in Ohio –

particularly national banks - to charge more than the one dollar fee provided by the

statute. The Sixth Circuit‘s decision affirming the dismissal of the suit demonstrates

that federal preemption is not totally dead post-Cuomo. It also provides some

guidance to national banks in a particularly thorny area of operations – the treatment

of state garnishment law.

Proceedings/Rulings

Initially filed in the Court of Common Pleas, this case was removed to the United

States District Court for the Northern District of Ohio, whereupon it was dismissed.

In dismissing the claim, the district court found that the National Bank Act

―preempted the Plaintiffs claims‖ as to national banks but not as to state banks.

Plaintiffs appealed the decision to the Sixth Circuit.

Affirming the district court‘s dismissal, the Sixth Circuit found that while the

National Bank Act does not preempt general state laws governing the rights of all

entities, Plaintiffs‘ specific conversion claim under the Ohio statute is preempted by

the National Bank Act‘s grant of authority to banks chartered under the statute to set

and collect fees. Under the OCC‘s regulations, national banks have explicit

―[a]uthority to impose charges and fees.‖ 12 C.F.R. § 7.4002(a). Interestingly, the

Court found that while there is a ―presumption against preemption‖ with respect to

the interplay of federal and state law, it found that general presumption does not

44

apply with respect to national banks, citing Watters v. Wachovia Bank, N.A. 550

U.S. 1, 12 (2007).

In a vigorous dissent, Circuit Judge Cole opined that majority‘s decision

begs the central question when it states that the garnishment law

―‗significantly interfere[s]‘ . . . with the Banks‘ ability to collect

their service fees.‖ No one disputes that. In fact, it does not just

significantly interfere with their ability to collect garnishment

fees—it forbids it.

Judge Cole concluded that ―[t]he garnishment law at issue is a law of general

applicability that only incidentally affects national banks, with negligible effect

on their ability to perform their business‖ and that ―[b]oth Supreme Court

precedent and the plain language of the OCC regulation‘s savings clause strongly

suggest that preemption is inappropriate here.‖

Plaintiffs have filed a motion requesting an extension of time to file a petition for

rehearing en banc until January 19, 2010. The motion was granted on December

23, 2009 and the petition was filed on January 19, 2010.

PATENT/INTELLECTUAL PROPERTY

24. Bilski v. Doll, (United States Supreme Court No. 08-964). This fall the

United States Supreme Court will take up a variant of an age-old query: can you

own an idea? The case, Bilski v. Doll, will decide the legal question of whether

an “idea” – in this case a method for predicting and hedging risk in commodities

markets – is properly patentable under United States law. By agreeing to grant

certiorari in Bilski, the Court has positioned itself to decide the fate of a relatively

new species of intellectual property – the business method patent (BMP).


The case, In re Bilski, 545 F.3d 943 (Fed. Cir. 2008) (en banc) takes up the issue

of patent eligibility for business methods and non-tangible products. At issue is

an application for a ―business method‖ patent covering a strategy for hedging

risks in commodities trading. The Federal Circuit in Bilski rejected patent claims

involving a method of hedging risks in commodities trading, concluding that the

applicable test for determining patent eligibility is the ―machine-or-transformation

test‖ – a process qualifies for patent protection only if (1) it is implemented with a

particular machine, that is, one specifically devised and adapted to carry out the

process in a way that is not concededly conventional and is not trivial; or else (2)

it transforms an article from one thing or state to another.

45

It is too early to say whether Bilski will result in the invalidation of BMPs.

Financial institutions and companies that own BMPs are looking for the court to

support the Federal Circuit’s previous interpretations that permitted BMPs and

bring closure to whether business methods and software are patentable subject

matters. However, there are many who have suffered during the emergence of

BMPs and are currently licensees of business methods that are essential aspects of

their business. Check 21 processing is a good example. For these members of

this camp, an invalidation of BMPs might signal the end of licensing and fees

associated with business methods that the court declares to be invalid.

Proceedings/Rulings

The issues to be considered by the Supreme Court are:

Whether the Federal Circuit erred by holding that a "process" must be tied

to a particular machine or apparatus, or transform a particular article into a

different state or thing ("machine-or-transformation" test), to be eligible

for patenting under 35 U.S.C. § 101, despite Supreme Court precedent

declining to limit the broad statutory grant of patent eligibility for "any"

new and useful process beyond excluding patents for "laws of nature,

physical phenomena, and abstract ideas."

Whether the Federal Circuit's "machine-or-transformation" test for patent

eligibility, which effectively forecloses meaningful patent protection to

many business methods, contradicts the clear Congressional intent that

patents protect "method[s] of doing or conducting business." 35 U.S.C. §

273.

Oral arguments were heard on November 9, 2009.

PRIVACY

25. Bloomberg LP v. Board of Governors of the Federal Reserve

System, (Case No. 08-9595, United States District Court for the Southern District of

New York).


The present appeal presents an attempt by the judiciary to strike a balance between

two competing public interests: the public‘s interest in transparency in government

that is reflected in the Freedom of Information Act, and the well-recognized need to

preserve confidential regulatory information pertaining to the nation‘s financial

institutions. On August 24, 2009, the U.S. District Court for the Southern District of

New York ruled that the Federal Reserve must disclose the names of companies and

banks that benefitted from its ―emergency‖ lending programs (including the

Discount Window) pursuant to a request for information filed by the Bloomberg

46

News Service under the Freedom of Information Act. Contemporaneous to this

decision, and based on essentially the same facts, the same District Court ruled to

withhold the same documents from Fox News. Fox News Network v. Board of

Governors of the Federal Reserve System, 639 F. Supp. 2d 384 (S.D.N.Y. 2009).

Both cases are now at the United States Court of Appeals for the Second Circuit.

ABA has submitted an amicus brief in the Bloomberg case, urging the Court to

withhold disclosure. The ABA submits that it is contrary to the public‘s interest to

compel the release agency documents under FOIA that could, if misinterpreted,

cause the public to lose confidence in insured depository institutions and cause a run.

Indeed, as noted by the District Court in the Fox News Network decision,

The Board's concerns, that rumors are likely to begin and runs on

banks are likely to develop, cannot be dismissed. Similarly, the

Board's concern is real that disclosure would reveal proprietary

trading information of borrowers, their trading strategies and the size

and nature of their portfolios of assets. The national economy is not

so out of danger, and the frailty of banks so different now than when

their Discount Window borrowing began, as to make the Board's

concern academic.

Fox News Network, 639 F. Supp. 2d at 401.

Oral argument was heard on January 11, 2010.

Proceedings/Rulings

The dispute arose when two Bloomberg reporters, Mark Pittman and Craig Torres,

each submitted FOIA requests to the Board of Governors that sought information

about the Federal Reserve‘s emergency loan recipients in early 2008. Their request

focused on the New York Federal Reserve Bank‘s decision to extend credit to the

Bear Sterns firm via loans and other credit to JP Morgan Chase.

The Board, in response to the request, conducted an internal search for records it

held, and identified certain documents as responsive to the FOIA requests, and

withheld other documents as protected under Exemptions 4 and 5 of the FOIA Act.

Bloomberg sued the Board, challenging the adequacy of the Federal Reserve‘s

search for documents and seeking the disclosure of all records pertinent to the

requests.

The court dismissed the Board‘s argument that the loan records should not be

subject to disclosure because doing so would inflict an ―imminent competitive

harm‖ upon institution that, for whatever reason, chooses to borrow from the Federal

Reserve System. The court concluded that the Federal Reserve had failed to meet its

burden that the documents in question – a series of reports know as ―Remaining

Term Reports‖ that shows outstanding extensions of credit to a borrower – were

47

sufficiently confidential so as to preclude disclosure under the relevant FOIA

exemptions. The court also took the Federal Reserve to task for taking the position

that documents in the possession of the Federal Reserve Banks are not necessarily

records of the agency for the purposes of FOIA.

The Federal Reserve has requested that the court stay the enforcement of its order

pending an appeal. The district court granted the stay on August 28, 2009.

On September 30, 2009, the Federal Reserve filed an appeal with the United States

Court of Appeals for the Second Circuit. The case has been combined with an appeal

involving a similar FOIA request filed by Fox News.

On November 17, 2009, the American Bankers Association was granted leave to file

(and has filed) an Amicus Curiae brief with the Second Circuit Court of Appeals.

SARBANES-OXLEY

26. Free Enterprise Fund v. Public Company Accounting Oversight

Board, Case No. 08-861 (United States Supreme Court) (D.C. Circuit, Case No. 07-5127).


This is an action challenging the constitutionality of the Public Company

Accounting Oversight Board (PCAOB). The PCAOB was created by the

Sarbanes-Oxley Act to ―oversee the audit of public companies that are subject to

the securities laws.‖ In carrying out this mandate, the PCAOB is authorized to

exercise broad governmental power, including the power to ―enforce compliance‖

with the Act and the securities laws, to regulate the conduct of auditors through

rulemaking and adjudication, and to set its own budget and to fund its own

operations by fixing and levying a tax on the nation‘s public companies.

Plaintiffs argue that, notwithstanding the Act‘s effort to characterize the Board as

a private corporation, the PCAOB is a government entity subject to the limits of

the United States Constitution, including the Constitution‘s separation of powers

principles and the requirements of the Appointments Clause. They contend that

the PCAOB‘s structure and operation, including its freedom from Presidential

oversight and control and the method by which its members are appointed,

contravene these principles and requirements. As a result, they contend that the

PCAOB violates the Constitution.

This case is now at the United State Supreme Court.

48

Proceedings/Rulings

The United States intervened in the case and, on March 21, 2007, the District

Court granted the government‘s motion for summary judgment. With respect to

the challenge to the statute under the Appointments Clause of the Constitution,

the Court concluded that PCAOB members are ―inferior officers‖ and that the

Constitution permits Congress to vest the appointment of such officials in the

President, Courts of Law, or ―Heads of Departments.‖ The Court also rejected

plaintiff‘s arguments that (1) the SEC is not a ―Department‖ and (2) if the SEC is

deemed to be a Department, PCAOB members may only be appointed by the SEC

Chairman – the ―Head of the Department‖ – and not the entire Commission. The

Court found that the SEC is a ―Department‖ for purposes of the Constitution, but

declined to rule regarding whether the Constitution requires that the SEC

Chairman appoint PCAOB members, finding that plaintiffs lacked standing to

raise this claim because their injury is not traceable to this Constitutional infirmity

since the Chairman voted for each of the current PCAOB members.

The Court quickly disposed of arguments that the statute violated the separation

of powers between Congress and the Executive by stripping the President of the

ability to remove PCAOB members. SEC Commissioners may be removed by

the President ―for cause,‖ and PCAOB members can be removed by the SEC ―for

good cause shown.‖ The Court found that a facial challenge to the

constitutionality of the statute fails unless the SEC interprets its removal authority

regarding PCAOB members in a way that is unduly severe in all circumstances.

The Court also rejected arguments that Congress unconstitutionally delegated the

authority to set auditing, quality control, and ethics standards.

The Free Enterprise Fund has appealed this decision to the D.C. Circuit. Oral

argument was held on April 15, 2008.

On August 22, 2008, the D.C. Circuit affirmed the District Court’s decision,

finding that PCAOB board members are “inferior officers” subject to the direction

and supervision of the Commission and are therefore not required to be appointed

by the President. The Court held that the “for-cause” limitation on the power of

the Commission to remove board members and the power of the President to

remove Commissioners does not take away from the power of the President to

influence the PCAO board. The separation of powers doctrine embraces

independent agencies, such as the Commission, and the power of the Commission

to exercise general authority over their subordinates.

On January 5, 2009, Appellant Free Enterprise Fund filed a petition for a writ of

certiorari with the United States Supreme Court. On May 18, 2009, the Supreme

Court granted the petition for a writ of certiorari.

Oral arguments were held on December 7, 2009.

49

SUBPRIME LENDING

27. City of Memphis, et al. v. Wells Fargo Bank, N.A., et al, (Case No.

09-cv-02857; United States District Court Western District of Tennessee).


This case is a suit brought under the Fair Housing Act of 1968 by the City of

Memphis and Shelby County in Tennessee. It seeks redress for injuries allegedly

caused by Wells Fargo in what both the City and the County claim to be Wells

Fargo‘s ―pattern or practice‖ of discriminatory mortgage lending.

Ironically, this suit was filed shortly after two district courts dismissed similar

suits filed by the cities of Cleveland and Baltimore. The complaint alleges causes

of action very similar to those raise in the Baltimore litigation, which was

dismissed on January 6, 2010.

Proceedings/Rulings

On December 30, 2009, the City of Memphis and Shelby County, Tennessee,

brought suit against Wells Fargo Bank seeking redress for injuries allegedly

caused by Wells Fargo Bank, Wells Fargo Financial Tennessee, Inc. and Wells

Fargo Financial Tennessee LLC. The complaint alleges that Wells Fargo engaged

in a pattern of illegal and discriminatory mortgage practices in their respective

jurisdictions. Plaintiffs are suing Wells Fargo for violations of the Fair Housing

Act of 1968, as amended, 42 U.S.C. §§ 3601 et seq. The suit claims that Wells

Fargo‘s alleged pattern of ―reverse redlining‖ caused a disproportionate number

of foreclosures (and resulting blight) in minority neighborhoods.

28. Mayor and City Council of Baltimore v. Wells Fargo, (Case No. L

08-CV-062) (D. Maryland).


This case presents an attempt by the city of Baltimore to recover some of the cost

(including lost tax revenue) associated with the increased number of foreclosures

within its jurisdiction. The Mayor of Baltimore and the City Council have filed

suit against Wells Fargo Bank and Wells Fargo Financial Leasing in federal

district court seeking to recover damages under the Fair Housing Act for harm

arising from the increased number of mortgage foreclosures in the city of

Baltimore. The Complaint alleges that the high foreclosure rate in Baltimore‘s

minority neighborhoods is the result of ―reverse redlining‖ by the bank – the

targeting of a specific geographic area for unfair or predatory lending practices

because of the race or ethnicity of the area‘s residents. The suit contends that the

50

result of this alleged practice was to place inexperienced borrowers into loans that

they could not afford, causing disproportionately high foreclosure rates.

On January 6, 2010, the Court dismissed the case. The Court‘s opinion cut to the

heart of the city‘s case, finding that the causal connection between the bank‘s

alleged misconduct and the city‘s claim of damages from a decline in home

values and a loss of tax revenue was ―not plausible.‖ The Court also noted that

―[t]he alleged connection is even more implausible when considered against the

background of other factors leading to the deterioration of the inner city, such as

extensive unemployment, lack of educational opportunity and choice,

irresponsible parenting, disrespect for the law, widespread drug use and

violence.‖ It will be interesting to see if this practical approach to the problem of

causation is adopted in the other ―reverse redlining‖ litigation that is currently

pending.

Proceedings/Rulings

The suit seeks a declaratory judgment pursuant to 42 U.S.C. §§ 3604 and 3605

that Wells Fargo‘s lending practices violated the Fair Housing Act. It also seeks

an award of compensatory and punitive damages. The request for compensatory

damages is based upon a claim that the increase in the number of foreclosures in

Baltimore has resulted in decreased property tax revenue and an increase in

administrative costs in dealing with abandoned and vacant homes as well as social

services for those who have lost their homes.

On March 21, 2008, Wells Fargo moved the court to dismiss the case. Wells

Fargo‘s motion argued that:

The Court does not have subject matter jurisdiction over this action. In

particular, Wells Fargo argues that the City lacks Article III standing to

bring its claims because it cannot allege it has suffered a discrete or

palpable injury that is fairly traceable to the conduct of Wells Fargo.

The Fair Housing Act (―FHA‖) does not permit disparate impact claims,

such as the City‘s claims, as a matter of law. The Supreme Court‘s

decision in Smith v. City of Jackson, 544 U.S. 228 (2005), makes clear that

disparate impact liability is available only when it is expressly authorized

by statute, and that authorization is absent in the FHA.

Even if the FHA authorized disparate impact liability, the City has failed

to plead factual allegations that plausibly support its disparate impact

claims. In particular, the complaint fails to show an actual disparate

impact or demonstrate a causal connection between the specific

challenged practices or policies and the alleged disparate impact.

In advance of the hearing on the Motion to Dismiss, the court allowed the parties

some limited discovery concerning residential mortgage loans originated by Wells

Fargo in Baltimore City from January 1, 2005 to February 15, 2009.

51

On March 6, 2009, the court scheduled a hearing for the pending motion to

dismiss for June 29, 2009. During the hearing, the court heard arguments and

evidence on the following dispositive questions:

1. Whether the City of Baltimore has Article III standing in light of the

results of the ongoing damages discovery.

2. What evidence the City has to support its claim that Wells Fargo targeted

black borrowers in the City.

3. Whether the City adequately states a claim for disparate impact. This

would require the City to establish that black borrowers received

materially less favorable loan terms than similarly situated white

borrowers.

4. What evidence does the City have in support of it generalized claim that

Wells Fargo employees, with or without authorization, engaged in

subjective or discretionary fees to loans issued to black borrowers?

On July 2, 2009, the court issued a brief four-page order denying Wells Fargo‘s

motion to dismiss and granting the City leave to file their amended complaint.

The court found that ―[b]ased on the new affidavits submitted by former Wells

Fargo employees Elizabeth Jacobson and Tony Paschal, the City has proffered

sufficient proof to proceed with its claim for disparate treatment discrimination

under the Fair Housing Act.‖ The order also noted that the City‘s ―alternative

theory of liability, disparate impact, has not yet been tested factually.

Nevertheless, because the case will proceed on liability in general, the City is

entitled to discovery on both of its theories of liability, including disparate

impact.‖ The court found that, with regard to the fundamental issue of whether

the City had appropriate standing to bring the action, the ―facts in support of the

City‘s claim of standing are sufficiently plausible and grounded in fact to permit

the case to proceed to merits discovery.‖ Moreover, the Court found that the

―hearing demonstrated that the standing questions are inextricably intertwined

with the facts central to the merits of the dispute‖ and that ―it is appropriate to

permit discovery and to revisit the standing questions later at the summary

judgment stage.‖

On September 18, 2009, Wells Fargo filed a motion to dismiss the Amended

Complaint. Wells Fargo‘s arguments are reinforced by the recent decision in City

of Birmingham v. Citigroup Inc. The City of Birmingham litigation – a ―copycat‖

suit filed after the Baltimore litigation - advanced the same Fair Housing Act

allegations made in the instant case. The court in City of Birmingham found that

the City‘s complaint required ―a series of speculative inferences . . . to connect the

injuries asserted with the alleged wrongful conduct by the Defendants‖ in light of

the fact that ―the minority borrowers in this case could have defaulted on their

mortgages for a number of reasons, none of which related to the Defendants‘

alleged ‗reverse redlining.‖ In addition, the City of Birmingham Court found, just

as is the case in Baltimore, that ―loss of tax revenue from property taxes and the

52

increase in spending, like the depreciation in home values, could have been

caused by any number of factors having nothing to do with the Defendants‘

alleged ‗reverse redlining.‘‖ Id.

On January 6, 2010, the Court dismissed the complaint. The court concluded that

the contention that Wells Fargo was solely responsible for the economic damage

done to the city as ―implausible.‖ Judge Frederick Motz held that a causal

connection between the bank‘s alleged misconduct and the city‘s claim of

damages from a decline in home values and a loss of tax revenue was ―not

plausible.‖ The Court also noted that ―[t]he alleged connection is even more

implausible when considered against the background of other factors leading to

the deterioration of the inner city, such as extensive unemployment, lack of

educational opportunity and choice, irresponsible parenting, disrespect for the

law, widespread drug use and violence.‖

The Court granted the City leave to file a second amended complaint before

February 3, 2010, if it so chooses. The deadline to file a second amended

complaint has been rescheduled for March 12, 2010.

29. City of Cleveland v. Deutsche Bank Trust Company, et. al (Case

No. 08-cv-00139, United States District Court for the Northern District of Ohio)

(Case No. 09-3608, Sixth Circuit).


This case presents an attempt by the city of Baltimore to recover some of the cost

(including lost tax revenue) associated with the increased number of foreclosures

within its jurisdiction. This case is interesting because, unlike the litigation in

Baltimore and Birmingham, this suit is based upon a common law tort theory –

that the investment banks facilitating subprime loans by making funding available

to lenders are engaged in a ―public nuisance.‖

This novel theory was unsuccessful at the District Court level – the matter is now

on appeal.

Proceedings/Rulings

The plaintiff in this case, the City of Cleveland, Ohio, brought suit against a

number of investment banks that they claim have played a role in proliferating

subprime loans in the city. The complaint contends that the funding of subprime

loans by the defendants has caused an “epidemic” of foreclosures that has harmed

the city. The complaint contends that the defendants’ role in funding these loans

constitutes a nuisance under Ohio law.

This case was originally filed on January 10, 2008, in the Cuyahoga County Court

of Common Pleas. The case was removed to Federal Court. On October 8, 2008,

53

city of Cleveland filed a Second Amended Complaint. The defendants (both

individually and collectively) moved to dismiss the Second Amended Complaint

on a number of grounds, including –

Ohio law (Ohio Rev. Code Section 1.63), which prevents municipalities

from regulating lending practices ―directly or indirectly‖ by ordinance ―or

other action,‖ bars the City of Cleveland from pursuing a public nuisance

claim to attack the mortgage lending practices alleged in the complaint.

The ―economic loss doctrine‖ bars the City‘s claim for public nuisance

where it seeks recovery exclusively for alleged financial harm.

The City has failed to state a claim for public nuisance where (1)

defendants did not proximately cause the increase in defaults and related

foreclosures in Cleveland, which are the result of a complex confluence of

economic factors; (2) defendants‘ alleged conduct did not ―unreasonably

interfere‖ with a ―public right‖ because the very loan structures

challenged in the City‘s complaint were understood, regulated, and

promoted by federal banking regulators over the past decade and the

original mortgage transactions at issue (as well as any later foreclosures)

concerned contractual relationships between individual parties.

Cleveland‘s public nuisance and all of its associated allegations in the

Second Amended Complaint are preempted by the National Bank Act and

implementing federal regulations.

On December 3, 2008, the OCC filed an amicus brief on behalf of Wells Fargo

National Bank. In its brief, the OCC took the position that the defendants are

entitled to exercise federally authorized powers to engage in real estate lending,

loan securitization, and loan servicing activities subject to those federal standards,

administered under the exclusive supervision of the OCC. The city‘s cause of

action, styled as an action in public nuisance, ―would have the de facto effect of

imposing local standards upon national bank operations and is therefore precluded

by federal law and the operation of the Supremacy Clause.‖ The OCC argued that

the suit must be dismissed because (1) the cause of action would obstruct, impair

or condition the exercise of national bank powers and is preempted because it

conflicts with federal law; and (2) the cause of action constitutes the exercise of

unauthorized visitorial authority over national bank activities that is expressly

precluded by federal statute and OCC regulations.

On May 15, 2009, Judge Sara Lioi dismissed the City‘s case with prejudice. In

her opinion, Judge Lioi held that the City‘s nuisance claim fails as a matter of law

failed for several reasons. First, the claim is preempted by Ohio Revised Code §

1.63, which prohibits local jurisdictions from adopting ordinances or taking ―other

action‖ designed to regulate financial institutions. Second, the nuisance claim is

barred by the ―economic loss rule‖ – this precludes recovery in tort for economic

losses not arising from tangible physical harm to persons or property. Third, the

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court found that the complaint failed to state a ―public nuisance‖ because the

behavior at issue did not constitute an ―unreasonable interference with a public

right.‖ The funding of loans via the securitization of mortgages is subject to strict

regulation and, within that framework, is actually encouraged. Because the banks

complied with the regulatory scheme then in place, they cannot be sued for a

public nuisance under the theory that the activity was performed in a negligent

manner. Finally, the City‘s allegations were insufficient to demonstrate that

defendants‘ conduct was the proximate cause of its alleged damages.

The City filed an appeal to the Sixth Circuit on May 18, 2009. Briefing is

complete, and a date for oral argument is pending.

MISCELLANEOUS

30. In re Wells Fargo Home Mortgage Overtime Pay Litigation

(Mevorah v. Wells Fargo Home Mortgage), (06-01770-MHP, Northern District

of California).


The plaintiffs in the case, persons employed as ―Home Mortgage Consultants‖ by

Wells Fargo Mortgage, contend that they were improperly classified as ―exempt‖

under the Fair Labor Standards Act and improperly denied overtime pay. Wells

Fargo Mortgage classified all of their their Home Mortgage Consultants as being

―exempt‖ employees under the Fair Labor Standards Act. The trial court (the

United States District Court for the Northern District of California, located in San

Francisco) certified the case as a class action involving all of Well Fargo‘s Home

Mortgage Consultants nationwide.

The primary issue in the case - at least with respect to whether the Court will treat

this as a class action – focuses on whether a nationwide class was appropriate.

The District Court concluded that it was appropriate to certify the litigation as a

class action because the employees worked under the same basic compensation

structure and were subject to a uniform policy at Wells Fargo that all Home

Mortgage Consultants were treated as ―exempt‖ employees. Wells Fargo argues

that the certification was inappropriate because the duties and responsibilities of

its various Home Mortgage Consultants are not uniform, meaning that a

determination of whether a position is properly exempt under the statute would

have to be made on a case-by-case basis.

Proceedings/Rulings

On November 13, 2007, the ABA and a number of other amici filed a brief in

support of Well Fargo‘s petition.

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On July 7, 2009, the Ninth Circuit reversed the district court‘s order certifying the

California class, and remanded the case for a new certification analysis. The

Ninth Circuit ruled that while it was appropriate for a court to consider a uniform

exemption policies (such as was in place at Wells Fargo) as a factor in

determining whether to certify a class under Rule 23(b)(3), it was an abuse of

discretion for the Defendants to rely on such policies to the ―near exclusion‖ of

other relevant factors. The Court was persuaded that sufficient individual

differences existed with respect to job responsibilities to justify remanding the

question back to the District Court for further proceedings.

The Court issued its mandate on July 29, 2009. A new hearing on class

certification was held in district court on November 30, 2009.

On January 13, 2010, the District Court denied Plaintiff‘s renewed motion for

class certification ruling that Plaintiff had failed to present ―any viable method for

certifying the action as a class action,‖ by failing to meet the requirement under

Rule 23(b)(3) that ―common issues of law or fact‖ would predominate in the case.

In order to adjudicate Wells Fargo‘s defenses, especially the outside sales person

exemption, a substantial quantity of individual inquiries will be necessary.

Although there are some issues in this case amenable to common proof, the court

concluded that individual inquiries will predominate over common questions.

31. Martinez v. Wells Fargo Bank, N.A., (Case No. C-06-03327 RMW

(N.D. Cal.), Case No. 07-17277 (Ninth Circuit)).


This matter raises the issue of whether a bank must disclose the actual cost of any

fees or charges that the bank collects in connection with settlement on residential

mortgage loans. The plaintiff in this case alleged that Wells Fargo added a mark up

to underwriting fees and tax service fees, as well as other fees charged for other

services. The complaint also alleged that the bank failed to disclose the actual cost

to the bank of the underwriting, tax service, and other related fees.

The United States District Court for the Northern District of California granted a

partial dismissal of the case. The matter is now before the Ninth Circuit.

Proceedings/Rulings

In a decision issued July 31, 2007, the United States District Court for the Northern

District of California partially dismissed a class action against Wells Fargo Bank

alleging that the bank improperly charged and collected fees for settlement services

in connection with residential mortgage loans. According to the complaint, the bank

allegedly charged the borrower marked-up fees underwriting fees and tax service

fees, as well as other fees charged for other services. The complaint also alleged that

56

the bank failed to disclose the actual cost of the underwriting and tax services and

related costs of the mortgage contract.

Wells Fargo moved to dismiss the state law claims (based upon the California

Business and Professional Code § 17200). The court had previously dismissed the

Plaintiffs‘ claims alleging unfair and deceptive business acts under California law on

the grounds that those claims were preempted by the National Bank Act and OCC

regulations. The court‘s latest order reaffirmed its prior dismissal of the unfair and

deceptive practices claims as being preempted by the National Bank Act, citing the

Watters decision. The court found that ―the [National Bank Act] explicitly confers

upon national banks such as Wells the authority to engaged in real estate lending,

and the determination of interest and non-interest charges and fees associated with

the business of real estate lending are incidental powers of that authority.‖

The District Court also dismissed the unlawful business practices or acts claim under

section 17200. Plaintiffs alleged that the bank had a duty under state and federal law

to disclose the actual cost of the services charged in connection with the mortgage.

The court rejected the notion that state law could impose a duty not to ―suppress that

which is true‖ or to disclose material facts in its sole possession which it knows are

not known to or are reasonably discoverable by the other party. The court concluded

that the requirements of state law were preempted; under the federal scheme the

bank is required to disclose its settlement charges in the HUD-1 form, but is not

required to additionally disclose its actual costs. The court also concluded that the

disclosure requirements of applicable federal regulation or the HUD-1 form did not

serve as a predicate unlawful act under section 17200. The court found that federal

regulations and the HUD-1 form do not require the bank to disclose its actual costs

of settlement services or the components that make up the actual charges that are

imposed.

In order to facilitate an immediate appeal of the decision, on September 19, 2007,

the parties stipulated to the dismissal of Count One (Violation of RESPA –

Markups) of the Second Amended Class Action with prejudice. The Court

entered final judgment on November 7, 2007, dismissing the case with prejudice.

Plaintiffs have appealed to the Ninth Circuit.

Briefing in the case is complete, and the parties are awaiting a setting on the

argument calendar.

The Ninth Circuit held an oral hearing of the case on December 9, 2009.

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