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Compliance Digest – July 12

Every week, AccountsRecovery.net brings you the most important news in the industry. But, with compliance-related articles, context is king. That’s why the brightest and most knowledgable compliance experts are sought to offer their perspectives and insights into the most important news of the day. Read on to hear what the experts have to say this week.

I’m thrilled to announce that Applied Innovation has signed on to be the new sponsor of the ARM Compliance Digest. Utilizing over 50 years’ experience in the collections industry and over 75 in technology, Applied Innovation is helping to shape the future of accounts receivable management.

Judge Dismisses FDCPA Suit Over Collection Letter

A District Court judge in Pennsylvania has dismissed a lawsuit filed against a collection agency after it was accused of violating the Fair Debt Collection Practices Act when it sent the plaintiff a collection letter that said “Your lack of communication may result in the enforcement of your current creditor’s rights on your contractual agreement,” because the defendant did not have the authority to file a lawsuit. More details here.

WHAT THIS MEANS, FROM BOYD GENTRY OF THE LAW OFFICE OF BOYD GENTRY: Don’t try this at home. Although the debt collector prevailed on this motion in front of this Magistrate Judge, it is rarely a good idea to mention consequences in a first letter. Here, the first letter said that the debtor’s failure to communicate with the debt collector “may result in the enforcement of your current creditor’s rights….”. The letter did not mention what that enforcement method would look like. I’ve met quite a few federal judges in the Midwest who would find this language purposefully vague and certify a class. Be careful!

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Ninth Circuit Ruling Could Lead to More Class Action Lawsuits

Legal experts are expecting to see a significant increase in the number of class-action lawsuits filed in California after the Ninth Circuit Court of Appeals ruled in three cases last week that the Federal Arbitration Act does not pre-empt a California Supreme Court ruling that said a contract prohibiting a party’s right to seek public injunctive relief in any forum is unenforceable in The Golden State. More details here.

WHAT THIS MEANS, FROM JUNE COLEMAN OF CARLSON & MESSER: Arbitration has been a hot topic over the last decade since the U.S. Supreme Court issued AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). Now there are a trio of recent Ninth Circuit decisions which bring arbitration clauses to the forefront again. These three cases follow a 2017 California Supreme Court case invalidating contractual waivers of public injunctive relief in arbitration provisions. And probably the most important lesson learned from these three cases is to ensure that if your arbitration clause contains a waiver of public injunctive relief that will be invalidated, does the language of the arbitration clause require that the entire arbitration clause also be stricken. 

By way of background, in 2005, the California Supreme Court struck arbitration provisions with class action waivers because they were unconscionable and unenforceable, creating the Discover Bank rule after the name of the defendant. The Discover Bank Rule invalidated many arbitration provisions in California. In 2011, the U.S. Supreme Court in the Concepcion case, struck down the Discover Bank rule, holding that such a state rule or statute was preempted by the Federal Arbitration Act (“FAA”) because it treated arbitration clauses differently and was an obstacle to the purposes and objective of the FAA. The Concepcion Court further explained that its ruling did not preclude parties to an arbitration provision from using “generally applicable contract defenses, such as fraud, duress, or unconscionability” to defeat arbitration clauses Class action waivers began to be reintroduced into arbitration clauses, creating a great defense to class actions. 

Prior to the Concepcion case, the California Supreme had ruled that arbitration provisions limiting claims for public injunctive relief to arbitration were unconscionable and unenforceable. (Cruz v. PacifiCare Health Sys., Inc., 30 Cal.4th 303 (2003); Broughton v. Cigna Healthplans of Cal., 21 Cal.4th 1066 (1999).) In 2013, the Ninth Circuit held that this Broughton-Cruz rule invalidating arbitration of public injunctive relief claims was preempted by the FAA. (Ferguson v. Corinthian Colleges, Inc., 733 F.3d 928, 934 (9th Cir. 2013).) In 2015, the California Supreme Court initially agreed to hear the McGill case to address whether the Court agreed with the Ninth Circuit’s Ferguson case. 

In 2017, the California Supreme Court issued its decision in McGill v. Citibank, N.A., 2 Cal. 5th 945 (2017), invalidating the waiver of public injunctive relief. The Court based its decision on California Civil Code section 3513, which provides that a private agreement cannot circumvent a law established for a public reason, or in other words, parties cannot agree through a contract to waive public injunctive relief. This analysis bypassed the FAA preemption argument. Because public injunctive relief is afforded under several California statutes, the parties could not waive this relief. 

The California Supreme Court then addressed whether the entire arbitration clause should be struck. The McGill arbitration clause stated that “[i]f any portion of the arbitration provision is deemed invalid or unenforceable, the entire arbitration provision shall not remain in force.” Given that the parties had not briefed or argued how to interpret this contractual language if a portion of the arbitration clause was stricken, the California Supreme Court remanded the case to address this issue. 

It is against this judicial landscape that three arbitration cases were decided in the Ninth Circuit two weeks ago, on June 28. In Blair v. Rent-A-Ctr., Inc., No. 17-17221, 2019 WL 2701333 (9th Cir. June 28, 2019), the Ninth Circuit used the McGill rule to invalidate a waiver of public injunctive relief found in the arbitration provision. In so doing, the BlairCourt found that the McGill rule is not preempted by the FAA. The Blair Court also held that public injunctive relief can be arbitrated. Then, the Blair Court followed the McGillCourt’s analysis and reviewed the arbitration agreement language to determine if the entire arbitration clause should be struck. The arbitration provision provided that if a court precluded enforcement of the arbitration provisions limitations as to a particular claim for relief, “that claim (and only that claim) must be severed from the arbitration” to be heard in the court. Defendant Rent-A-Center argued that the contractual language meant that the injunctive relief only would be heard by the Court, but the Blair Court used a strict reading of the clause to hold that the claims that gave rise to the public injunctive relief would be heard by the District Court, not just the injunctive relief portion. 

In McArdle v. AT&T Mobility LLC, No. 17-17246, 2019 WL 2718474 (9th Cir. June 28, 2019), the parties had been compelled to arbitration and received the arbitration award. Plaintiff sought to vacate the arbitral award. The District Court vacated the award, and Defendant appealed. Relying on the McGill decision, the McArdle Court held that the agreement to waive the right to pursue public injunctive relief was void and unenforceable. The arbitration provision stated that “if this specific provision is found to be unenforceable, then the entirety of this arbitration provision shall be null and void.” As such, the District Court’s decision was affirmed, the arbitral award remained vacated, and the case was remanded to be heard in the District Court. Similarly, in Tillage v. Comcast Corp., No. 18-15288, 2019 WL 2713292 (9th Cir. June 28, 2019), the arbitration agreement contained a waiver of collective relief, i.e., relief for others in addition to the plaintiffs. And the arbitration agreement stated that “THIS WAIVER OF CLASS ACTIONS AND COLLECTIVE RELIEF IS AN ESSENTIAL PART OF THIS ARBITRATION PROVISION AND CANNOT BE SEVERED FROM IT. Therefore, the collective relief waiver was stricken, and thus, by the contract terms, the entire arbitration agreement was stricken. These cases highlight that the contractual arbitration clauses should ensure that they survive striking the public injunctive relief waiver, as noted above.

California has been on the forefront of defeating class action waivers and waivers of class relief or public injunctive relief, first with the Cruz-Broughton rule that was created in 1999 and 2003, then with the 2005 Discover Bank rule, and now with the 2017 McGill rule. The first two California rules were defeated by FAA preemption in federal court. But these three decisions from a California federal District Court reject the federal preemption argument to rule favorably for the McGill rule. This is a startling reversal for arbitration provisions and a blow to the ability of parties to waive class action relief through contract. This will put a kink in the long running use of class action waivers to force employees and consumers to resolve their disputes individually. The Plaintiff’s bar will see this as an opportunity to increase the number of cases on which they can recover fees and increase the amount of fees that can be recovered. In California, if a case results in a public benefit or class relief, California law provides that plaintiffs can recover attorneys’ fees. Although most of the cases in California against ARM industry players involve statutes that already have fee provisions, there are some cases where plaintiffs and their attorneys will benefit from public injunctive relief awards. 

However, these cases and the McGill rule actually support arbitrators determining public injunctive relief, if the contract terms do not invalidate the entire arbitration provision. This keeps alive the possibility of using class action waivers in arbitration provisions to defeat class claims and their associated class damages. And maintaining the viability of class action waivers will also help to decrease attorneys’ fees awards to successful plaintiffs and the associated defense costs to defend class actions. It will be interesting to see if these cases make it to the U.S. Supreme Court and whether the U.S. Supreme Court will view the McGill rule as it did the Discover Bank rule. It took the U.S. Supreme Court 6 years to address the Discover Bank rule, so it might be a long wait.

Law Firm Fighting CID From CFPB Files Petition With Supreme Court

As expected, a law firm fighting a Civil Investigative Demand from the Consumer Financial Protection Bureau has petitioned the Supreme Court to hear its argument that the agency’s leadership structure is unconstitutional. More details here.

WHAT THIS MEANS, FROM MITCH WILLIAMSON OF BARRON & NEWBURGER: Seila Law LLC recently filed a Petition (the legal equivalent of a “Hail Mary” pass ) for A Writ of Certiorari with the U.S. Supreme Court presenting the question: “Whether the vesting of substantial executive authority in the Consumer Financial Protection Bureau, an independent agency led by a single director, violates the separation of powers.” 

To provide some background and context, “Seila Law LLC, [is] a law firm that provides a wide range of legal services to its clients, including debt-relief services. The CFPB is seeking to determine whether Seila Law violated the Telemarketing Sales Rule, 16 C.F.R. pt. 310, in the course of providing debt-relief services to consumers.” Consumer Fin. Prot. Bureau v. Seila Law LLC, 923 F.3d 680, 682 (9th Cir. 2019). The CFPB served Seila with a CID (Civil Investigative Demand) seeking information relating to possible violations of the “Telemarketing Sales Rule (16 C.F.R. 310) which requires telemarketers to make specific disclosures of material information; prohibits misrepresentations; sets limits on the times telemarketers may call consumers; prohibits calls to a consumer who has asked not to be called again; and sets payment restrictions for the sale of certain goods and services.” FTC Website

Rather than defend against the potential claims that could be raised by the CFPB, Seila went on the attack and made the same arguments previously shot down by the D.C. Circuit Court in PHH Corp. v. Consumer Fin. Prot. Bureau, 881 F.3d 75 (D.C. Cir. 2018) (en banc). After losing in the United States District Court of Central California, Seila appealed to the 9th Circuit Court of Appeals. The 9th Circuit affirmed the District Court and denied Seila’s argument that the CFPB’s structure violates the Constitution’s separation of powers because the agency is headed by a single Director who exercises substantial executive power but can be removed by the President only for cause. In doing so the 9th Circuit referenced and relied on the various decisions in PHH Corp v CFPB stating, “We see no need to re-plow the same ground here.” CFPB v Seila, Id. at 682. 

But that was then and this is now. Newly appointed Justice Brett M. Kavanaugh, then Circuit Court Judge Kavanaugh dissented in PHH Corp. v CFPB writing: 

Because the CFPB is an independent agency headed by a single Director and not by a multi-member commission, [comparing it to the FTC] the Director of the CFPB possesses more unilateral authority — that is, authority to take action on one’s own, subject to no check — [*166] than any single commissioner or board member in any other independent agency in the U.S. Government. Indeed, other than the President, the Director enjoys more unilateral authority than any other official in any of the three branches of the U.S. Government. 

That combination — power that is massive in scope, concentrated in a single person, and unaccountable to the President — triggers the important constitutional question at issue in this case. 

PHH Corp. v. Consumer Fin. Prot. Bureau, 881 F.3d 75, 165-66 (D.C. Cir. 2018). 

The argument simply put by the dissent in PHH is that because the President cannot simply remove the Director at will and because the power is not shared among several Directors thus limiting the power any one individual has, the single director structure is unsound. The majority on the D.C. Circuit did not agree. Now, however, Justice Kavanaugh would appear to have a second opportunity to review the issue. Will he now be able to persuade others on the Supreme Court to revisit and reverse the PHH ruling? It’s certainly a possibility. And what if he does? What happens if the leadership structure of the CFPB is ruled unconstitutional? That does not make the entire organization unconstitutional. It is highly unlikely we will collectively wake up one day in the future as if we all had a bad dream and things will go back to the way they were pre-CFPB. More likely there would simply be a re-organization of the Bureau to conform to the findings of the Supreme Court. 

As a final thought, while the issues raised are interesting (if you’re a constitutional scholar I guess) from a practical standpoint mounting a constitutional challenge of this nature to the Bureau would seem to be a losing proposition whether you win or lose in the end. In this case Seila still hasn’t addressed the question, did it violate the Telemarketing Sales Rule? Nothing stops other agencies or even consumers from going after Seila for said violations? If you’re going to spend the time and money to litigate, shouldn’t you consider what your ultimate goal is before you start?

Supreme Court Sets Date to Hear Arguments in FDCPA SOL Case

The Supreme Court has set a date for when it will hear arguments in a Fair Debt Collection Practices Act case regarding when the clock on its one-year statute of limitations begins. More details here.

WHAT THIS MEANS, FROM RICK PERR OF FINEMAN KREKSTEIN & HARRIS: This may be the first best test of the current United States Supreme Court’s statutory interpretation of the Fair Debt Collection Practices Act on a practical issue – when does the running of the statute of limitations occur? The FDCPA states that suit must be filed “within one year from the date on which the violation occurs.” According to the Third Circuit, the SOL begins to run when the violation occurs regardless of when the plaintiff learns of the violation. Thus, a wrongly filed collection lawsuit starts the FDCPA SOL on the date the lawsuit is filed, not the date the lawsuit is served on the plaintiff. The letter violation takes place on the date the letter is mailed, not the date the plaintiff receives the letter in the mail. If the unanimous opinions in Henson and Obduskey are any indication, then a strict statutory construction of this provision should be prove to be a win for the ARM Industry.

President Signs IRS Overhaul Bill, Will Adjust Which Accounts are Placed With Private Collection Agencies

President Trump yesterday signed into a law a bill that aims to overhaul the Internal Revenue Service, including which of the tax agency’s unpaid accounts are placed with one of four private collection agencies. More details here.

WHAT THIS MEANS, FROM ETHAN OSTROFF OF TROUTMAN SANDERS: The Taxpayer First Act of 2019 brings multiple changes to the IRS’ private debt collection program, which refers certain inactive tax receivables to private collection agencies. It will be interesting to follow the net effects of these changes, including whether they result in a substantial change in the number of taxpayers and/or tax receivables eligible for private collection, as well as if the increase in the length of installment agreements results in more agreements to pay.

With regard to tax receivables identify by the IRS after December 31, 2020, the Act adds three categories of taxpayers that are not eligible for collection by private debt collectors: (1) individuals with an adjusted gross income that does not exceed 200 percent of the federal poverty line; (2) persons whose income substantially comes from supplemental security income benefits under title XVI of the Social Security Act; and (3) persons whose income substantially comes from disability insurance benefit payments under section 223 of the Social Security Act. With the current poverty line set at $12,490 for one taxpayer, a four-person household with an annual income of less than $50,000 is likely to be exempt from the program. According to the National Taxpayer Advocate, an independent organization within the IRS, as of September 2017, 44% of the taxpayers who agreed to pay after being contacted by private collectors had incomes beneath 250% of the poverty line. The IRS uses the 250% level as a proxy for economic hardship in several situations, such as in administering the Federal Payment Levy Program and to identify taxpayers who cannot afford representation in IRS disputes, but Democrats apparently compromised at 200 percent.

Also, the Act modifies the definition of inactive tax receivable that is eligible for private collection, by replacing the condition that “more than 1/3 of the applicable statute of limitation has lapsed” with “more than two years has passed since assessment” of the tax obligation. While a number of event can extend the IRS collections statute expiration date, generally the IRA may only attempt to collect unpaid taxes for up to 10 years after they were assessed. Finally, effective for future contracts with private collectors, the Act also substitutes “seven years” for “five years” in a rule that currently allows private debt collectors to offer a taxpayer an installment agreement providing for payment over a period of time.

Thanks again to Applied Innovation — the team behind ClientAccessWeb, Papyrus, PayStream, and GreenLight — for sponsoring the Compliance Digest. 

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