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Eleventh Circuit Is Not So Sweet To Consumer Plaintiffs Alleging FACTA Violations

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Supreme Court

A&B Abstract:

The Eleventh Circuit’s recent decision in Muransky v. Godiva Chocolatier, Inc., No. 16-16486 (11th Cir. Oct 28, 2020) marks a shift in the court’s position regarding what a consumer plaintiff must allege in order to demonstrate Article III standing under Spokeo, Inc. v. Robins.  Although a three-judge panel of the court previously held that a procedural violation of the Fair and Accurate Credit Transactions Act was sufficient to confer Article III standing, a split en banc Eleventh Circuit recently found that a plaintiff must allege more than a “bare procedural violation, divorced from any concrete harm.”  Through its ruling, the Eleventh Circuit is now aligned with the Second, Third, Seventh, and Ninth Circuits in requiring concrete harm as a necessary prerequisite for Article III standing.

Discussion:

In a 7 to 3 decision, the Eleventh Circuit vacated a previous ruling affirming a $6.3 million settlement between Godiva Chocolatier and a class represented by Dr. David Muransky on the ground that Muransky lacked Article III standing under Spokeo, Inc. v. Robins to sue Godiva for a violation of FACTA.

Muransky brought suit alleging that a Godiva cashier gave him a receipt showing his credit card’s first six and last four digits—too many digits under FACTA. FACTA prohibits retailers from printing “more than the last 5 digits of the credit card number or the expiration date” on the consumer’s receipt.  Retailers can face a statutory penalty of between $100 and $1,000 for each receipt featuring more than the permitted five digits, with the size of the penalty dependent on whether consumers can prove the retailer was willfully negligent.

Muransky claimed that Godiva’s failure to fully truncate his credit card digits led to an increased risk of identify theft.  Godiva ultimately agreed to pay $6.3 million to settle the suit.  During the approval process, a class member objected to the settlement on the basis that Muransky lacked Article III standing because he failed to allege a “concrete injury” and the alleged FACTA violation—an increased risk of harm—did not present a “material risk” of harm. After the district court approved the settlement, the objector appealed.  A three-judge panel of the Eleventh Circuit subsequently upheld the settlement after finding that an increased risk of identity theft was enough to bring FACTA claims.

In a ruling last week, the full court reconsidered the standing issue and changed course.  The Eleventh Circuit held that Muransky did not have standing under FACTA to either settle with Godiva or pursue a class action because he had not suffered any harm when Godiva printed 10 of his credit card digits.  The Eleventh Circuit began by rejecting Muransky’s argument that a bare procedural violation of FACTA—the printing of 10 digits on his credit card receipt—was enough to confer Article III standing.  Instead, the Supreme Court’s Spokeo decision requires a plaintiff to also allege concrete harm, something Muransky failed to do.

The Eleventh Circuit then addressed Muransky’s argument that Godiva’s FACTA violation exposed Muransky and the class members to an elevated risk of identity theft.  According to the court, Muransky’s “naked assertion” that he faced an increased risk of identity theft is the “kind of conclusory allegation” that is simply not enough to demonstrate concrete harm and therefore not enough to confer Article III standing.

Three of the judges—two of whom made up the original Eleventh Circuit panel that affirmed the settlement—dissented from the majority.  Judge Wilson believed that Muransky had plausibly alleged that Godiva’s FACTA violation elevated his risk of identity theft—something that was sufficient to demonstrate concrete harm.  Judge Martin dissented on the ground that the Supreme Court’s Spokeo decision held that “not all statutory violations result in concrete injury.”  According to Judge Martin, “a plaintiff need not allege anything more than a violation of the statute itself” and therefore she believed that Muransky “was not required to allege any additional harm beyond the statutory violation alleged in his complaint.”  Judge Jordan also dissented, agreeing with the points made by both Judge Wilson and Judge Martin.

The majority’s holding is consistent with prior decisions from the Second Circuit (Crupar-Weinmann v. Paris Baguette Am., Inc., 861 F.3d 76 (2d Cir. 2017)), Third Circuit (Kamal v. J. Crew Group, Inc., 918, F.3d 102 (3d Cir. 2019), Seventh Circuit (Meyers v. Nicolet Restaurant of De Pere, LLC, 843 F.3d 724 (7th Cir. 2016)), and Ninth Circuit (Bassett v. ABM Parking Services, Inc., 883 F.3d 776 (9th Cir. 2018)). Each of those cases involved a violation of the FACTA truncation requirement involving the printing of the credit card expiration date on the receipt.  In each case, the court held that the plaintiff lacked standing to sue.

Following the Eleventh Circuit’s ruling, the D.C. Circuit is currently the only federal appeals court to have concluded that a bare procedural violation of FACTA’s truncation requirement is sufficient to confer Article III standing. But, as the Eleventh Circuit recognized, that conclusion was based “on significantly different facts.”  In Jeffries v. Volume Services of America, 2019 WL 2750856 (D.C. Cir. July 2, 2019), the retailer printed all 16 digits of the plaintiff’s credit card number and the expiration date of the card on the receipt.  The D.C. Circuit held that the “egregious” FACTA violation of printing all 16 digits and the expiration date created a real risk of harm to the plaintiff because it created “the nightmare scenario FACTA was enacted to prevent” and provided “sufficient information for a criminal to defraud her.”

Takeaways:

The decision in Muransky solidifies the existing circuit court precedent holding that plaintiffs asserting FACTA claims will lack Article III standing if they allege nothing more than the simple procedural harm without any actual concrete harm.  The prior decision in Muransky provided plaintiffs with some authority for allowing a class action to proceed based on just the procedural violation, but that decision is no longer good law.

Therefore, in order to bring FACTA class actions, plaintiffs will need to allege facts sufficient to show something more than an increased risk of harm.  Given the nature of the underlying violation, it will remain difficult for plaintiffs to allege some identifiable harm as a result of the FACTA violation.

Maryland Issues Executive Order Restricting Foreclosure Actions and Prohibiting Evictions During COVID-19 Emergency

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A&B ABstract: Maryland’s Governor has issued an Executive Order providing that until the COVID-19 state of emergency is terminated: (1) foreclosure sales will only be valid if the servicer had notified the borrower of their rights to request a forbearance, and (2) residential and commercial evictions are prohibited if the tenant can show they suffered a “Substantial Loss of Income.” Similar to Section 4022 of the CARES Act, this Executive Order grants borrowers a right to request a forbearance if they are experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency. Additionally, until January 4, 2021, the Maryland Commissioner of Financial Regulation must discontinue acceptance of Notices of Intent to Foreclose, which effectively prohibits new foreclosure initiations until that date. Moreover, effective January 4, 2021 and until the COVID-19 state of emergency is terminated, Notices of Foreclosure will only be accepted if the lender or servicer certifies that they notified the borrower of their right to request a forbearance.

 

On October 16, 2020, the Governor of Maryland issued an Executive Order (No. 20-10-16-01), which amends and restates a previous Executive Order providing certain relief to tenants and homeowners impacted by the COVID-19 pandemic. This Executive order imposes restrictions on servicers’ ability to conduct foreclosure proceedings, and prohibits evictions where the tenant can show a “substantial loss of income,” during the COVID-19 state of emergency.

Restrictions on Residential Foreclosures

The Executive Order provides that “until the state of emergency is terminated and the catastrophic health emergency is rescinded,” foreclosures sales of “Residential Property” (defined as “real property improved by four or fewer single family dwelling units that are designed principally and are intended for human habitation”) under Maryland’s Real Property law will not be considered a valid transfer of title in the property unless certain requirements are met, depending on the type of loan secured by the property:

  • With respect to a property securing a Federal Mortgage Loan:
    1. at least 30 days prior to sending a notice of intent to foreclose to a borrower, the servicer must send a written notice to the borrower stating the borrower’s right to request a forbearance on the loan under Section 4022(b) of the CARES Act; and
    2. the servicer must comply with all of its obligations with respect to the loan owed to the borrower under the CARES Act or otherwise imposed by the federal government or a government sponsored enterprise.
  • With respect to a property securing a Non-Federal Mortgage Loan:
    1. the servicer must have notified the borrower, in writing, that if the borrower is experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency, the borrower may request a forbearance on the loan, regardless of delinquency status, for a period up to 180 days, which may be extended for an additional period up to 180 days at the request of the borrower;
    2. if the borrower did request a forbearance on the loan, the servicer must have provided such forbearance without requiring the borrower to provide additional documentation other than the borrower’s attestation to a financial hardship caused by COVID-19, and without requiring any additional fees, penalties, or interest; and
    3. during the forbearance period, the servicer must not have accrued on the borrower’s account any fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the loan.

Notably, as discussed in the next section, these requirements appear applicable only to foreclosure proceedings already in progress prior to January 4, 2021 (because the Executive Order effectively prohibits the initiation of new foreclosure actions until that date), and to those initiated between January 4, 2021 and the termination of the COVID-19 state of emergency.

Directives to the Maryland Commissioner of Financial Regulation

The Executive Order also directs Maryland’s Commissioner of Financial Regulation to alter certain practices regarding its processing of residential foreclosures.

Specifically, as of the date of the Executive Order, and until January 4, 2021, the Commissioner is directed to suspend the operation of the Commissioner’s Notice of Intent to Foreclose Electronic System, and to discontinue acceptance of Notices of Intent to Foreclose. This effectively imposes a moratorium on the initiation of new foreclosure actions. Under Section 7-105.1(c) of the Real Property Article of the Maryland Code, as the first step in the foreclosure process, a Notice of Intent to Foreclose is required to be sent to the borrower at least 45 days before an action to foreclose a mortgage can be filed, and a copy of that notice must be submitted to the Commissioner within 5 business days thereafter via the Commissioner’s Notice of Intent to Foreclose Electronic System. (COMAR 09.03.12.02(E)). Citing the Executive Order, the Notice of Intent to Foreclose Electronic System website currently states that “no new [Notice of Intent] submissions will be accepted until January 4, 2021.” As such, this directive effectively prohibits the initiation of new foreclosure proceedings until December 28, 2020 (the earliest date a Notice of Intent can be mailed to the borrower and then submitted to the Commissioner within 5 business days).

Moreover, the Executive Order provides that effective January 4, 2021, and until the state of emergency is terminated and the catastrophic health emergency is rescinded, when a servicer submits to the Commissioner the Notice of Foreclosure required under Section 7-105.2(b) of the Real Property Article of the Maryland Code, the Commissioner must obtain a “certification” from the servicer or secured party that the servicer complied with the Executive Order’s requirement that the borrower be informed of their right to request a forbearance, as discussed above.

Prohibition on Residential and Commercial Evictions

The Executive Order provides that until the state of emergency is terminated and the catastrophic health emergency is rescinded, Maryland courts shall not effect any evictions by giving any judgment for possession or repossession on residential, commercial, or industrial real property, if the tenant can demonstrate to the court, through documentation or other objectively verifiable means, that the tenant suffered a “Substantial Loss of Income.”

The Executive Order defines “Substantial Loss of Income” as follows:

  1. with respect to an individual, a substantial loss of income resulting from COVID-19 or the related proclamation of a state of emergency and catastrophic health emergency, including, without limitation, due to job loss, reduction in compensated hours of work, closure of place of employment, or the need to miss work to care for a home-bound school-age child; and
  2. with respect to an entity, a substantial loss of income resulting from COVID-19 or the related proclamation of a state of emergency and catastrophic health emergency, including, without limitation, due to lost or reduced business, required closure, or temporary or permanent loss of employees.

This prohibition applies to evictions for failure to pay rent under Section 8-401 of the Real Property Article of the Maryland Code, as well as evictions based on a tenant’s breach of the lease under Section 8-402.1 of the Real Property Article of the Maryland Code.

Takeaways

Notably, the forbearances that servicers are required to offer with respect to non-federally backed loans under this Executive Order present forbearance terms and conditions that substantially parallel those offered for federally backed loans under the CARES Act. It is possible that other states will follow suit with Maryland and create similar state mandates effectively applying to non-federally backed mortgages the forbearance rights available for federally backed mortgages under the CARES Act, in addition to state-mandated foreclosure restrictions. We will continue to monitor for such state requirements.

FHFA Expands Mortgage Translations Online Clearinghouse

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A&B ABstract:  The Federal Housing Finance Agency has expanded the number of languages for which it provides translated documents as part of its Mortgage Translations clearinghouse.

On September 30, the Federal Housing Finance Agency (“FHFA”) announced that it has added Korean, Tagalog, and Vietnamese language resources to its Mortgage Translations clearinghouse.  The update represents the first since October 2019, when the FHFA added Mandarin Chinese documents to the clearinghouse (which also includes Spanish translations).

The FHFA first launched Mortgage Translations two years ago.  According to the 2018 announcement, the FHFA intends the site to provide “a centralized source of industry-standard resources to assist lenders, servicers, housing counselors, and other real estate professionals in serving borrowers with limited English proficiency (LEP). “  In its most recent expansion, the FHFA also added to the clearinghouse industry resources relating to oral interpretation services, including for languages for which translated documents are not available.

Takeaway:

The final anticipated expansion of the Mortgage Translations site gives servicers access to needed resources to assist LEP consumers.

Update: The Federal Moratorium On Residential Evictions Faces A New Class Action

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A&B ABstract: The National Apartment Association, along with several landlords, has challenged the order of the Centers for Disease Control and Prevention (“CDC”) that imposed a nationwide moratorium on certain residential evictions. This lawsuit follows one we previously covered, and could have a major impact on the scope of federal power during the pandemic.

Refresher on the Moratorium and CDC Emergency Order

As we previously discussed, the CARES Act imposed a temporary moratorium on certain residential evictions.  On August 8, President Trump directed executive agencies to “take all lawful measures to prevent residential evictions and foreclosures resulting from financial hardships caused by COVID-19,” and he ordered the CDC and the Department of Health and Human Services (“HHS”) to consider whether “temporarily halting residential evictions” was “reasonably necessary to prevent further spread of COVID-19” between states.

In response, on September 4, the CDC issued an emergency order imposing a nationwide moratorium on certain residential evictions through December 31, 2020 (“CDC Order”).  The CDC Order prevents the eviction of any tenant who certifies that he or she satisfies several financial hardship criteria.  However, the Order does not provide any compensation for landlords or property owners who are prevented from evicting non-paying tenants.

The New Class Action

Following on the Tiger Lily case (discussed in our September 23 post), on September 18, a group of landlords and the National Apartment Association filed Richard Lee Brown et al v. Alex Azar et al., No. 1:20-cv-03702 (N.D. Ga.), a purported class action lawsuit challenging the constitutionality of the CDC Order.  Plaintiffs also seek a preliminary injunction against enforcement of the CDC Order.

The Claims

Plaintiffs’ key claims are very similar to those asserted in Tiger Lily.  The Amended Complaint asserts that the CDC Order was promulgated in violation of the Administrative Procedure Act, violates landlords’ right to due process and access to courts, is unauthorized by the statute upon which it relies, and improperly seeks both to displace state eviction laws and to “commandeer” state resources to enforce its mandate.  Unlike Tiger Lily, Plaintiffs do not assert a Takings claim.

Our prior analysis is largely applicable to this new class action, and it seems probable that the outcome will turn on the general question of whether the scope of the CDC Order is consistent with past practice and the intent underlying the federal statute on which it purports to be based.  The CDC’s broad interpretation of its power would arguably give the Executive the power to restrict almost any type of activity, as applied to any “communicable” disease.  And the eviction moratorium is very different than exemplary public health measures listed in the statute, perhaps exceeding its intended scope.

Takeaways

Brown v. Azar has the potential to be quite significant regardless of its outcome.  It embodies the nationwide class action we previously predicted might flow from Tiger Lily, and may generate  more class action tag-along cases, miring the CDC Order in a morass of litigation akin to that involving the Paycheck Protection Program “agent fee” litigation.  The involvement of the National Apartment Association, which has nearly 83,000 members managing over 9.7 million rental homes in the United States, Canada, and the United Kingdom, credentializes and raises the profile of this matter as well.

As was true for Tiger Lily, success in this class action would result not just in restoration the ability for the plaintiff landlords to evict non-paying tenants, but it could yield important clarifications and limits on the regulatory power of the federal government in connection with the pandemic.  If the CDC Order is struck down, this could spur Congress to consider addressing residential evictions directly again, either through another statutory moratorium on evictions, or more stimulus payments for struggling renters.  For these reasons, Brown v. Azar is worth watching.

Pennsylvania Court Invalidates Statewide Pandemic Restrictions

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A&B ABstract:  In County of Butler v. Wolf, a federal court in Pennsylvania struck down as unconstitutional key aspects of the Pennsylvania Governor’s COVID-19 Emergency Order: limitations on the size of indoor gatherings and the “closure of all businesses that are not life sustaining.”  The decision has been appealed, but the breadth of the court’s order is striking and the issue now is whether other courts will follow suit.

Challenges to COVID-19 Restrictions Usually Fail

Federal courts have been hesitant to rule that COVID-19 regulations are unconstitutional.  Notably, the Seventh Circuit recently rejected the Illinois Republican Party’s challenge to the Illinois governor’s executive order limiting physical gatherings for a social event or a political rally but providing an exemption for religious gatherings.  Relatedly, the U.S. Supreme Court recently declined, in a 5-4 decision, to enjoin California’s restrictions on attendance at religious services.

The cases that have found COVID-19 regulations constitutionally defective have generally fallen into two camps: either the court finds the law is too poorly worded (i.e., unconstitutionally vague), or the application of the law is irrational (i.e., violates due process and/or equal protection).  These problems have usually been fixable once spelled out.  For example, a Wisconsin state court judge ruled in July that Racine’s regulations were unconstitutionally overbroad and vague, but held that the city would “maintain[] its full power to issue a new order addressing COVID-19.”

County of Butler v. Wolf Struck Down COVID-19 Restrictions

Unlike other courts, the U.S. District Court for the Western District of Pennsylvania found broad constitutional violations that could not be easily remedied in County of Butler v. Wolf.  The plaintiffs challenged Pennsylvania Governor Tom Wolf’s COVID-related “emergency” restrictions limiting the number of people permitted to attend gatherings and determining which businesses could remain open, based on whether they are “life-sustaining” in nature.  The challenge was rooted in alleged violations of equal protection, due process, and First Amendment rights.

Constitutional Issues

The court found three constitutional problems with the Governor’s orders.  First, the court held that the gathering limits—25 persons for indoor gatherings, and 250 for outdoor gatherings—violated the First Amendment right to assemble because the attendance caps for assemblies were more restrictive than the 25% or 50% occupancy restrictions on certain businesses.  Further, the court found that the 25-person restriction, and the fact that the restrictions applied equally across all counties regardless of their COVID statistics, was not rationally supported by evidence.

Second, the court held that the temporary closure of certain “non-life-sustaining” businesses violated plaintiffs’ substantive due process rights under the Fourteenth Amendment because it was too broad and harsh to pass constitutional muster, and violated the right to choose one’s profession.  Citing the century-old Supreme Court decision in Lochner v. New York, the court found that the order violated plaintiffs’ economic due process rights.

Finally, the court held that the closure of certain “non-life-sustaining” businesses also violated plaintiffs’ equal protection rights under the Fourteenth Amendment, finding no rational basis for the regulations because some businesses were treated differently than other, similar businesses.  The court illustrated its reasoning with an example that imposing constraints on a “mom-and-pop” hardware store while allowing Walmart to sell the same products would not keep a consumer at home; it would simply send her to Walmart, doing nothing to protect her or others from COVID.  As a result, the court found that the restrictions’ means did not rationally relate to their ends.

Impact of the County of Butler v. Wolf Decision

Governor Wolf has already sought a stay of the decision and filed an appeal to the U.S. Court of Appeals for the Third Circuit.  But even without a stay, the immediate impact of the decision is questionable because the challenged restrictions had, at the time of the court’s decision, already been eased by Governor Wolf as part of the Commonwealth’s phased reopening plan.  This raised questions of mootness that the district court brushed aside, but which are sure to be reviewed on appeal.  Moreover, the ruling does not impact other restrictions that are still in place involving teleworking, a mandatory mask order, and worker and building safety orders.

If the holding is affirmed in the Third Circuit, however, it will become precedential and could impact restrictions in other jurisdictions within the circuit, including New Jersey, Delaware, and the Virgin Islands.  At a minimum, until the Third Circuit decides the case, County of Butler will certainly be advanced as persuasive authority by other challengers in other courts.  Its reasoning and outcome could have far-reaching impacts if adopted elsewhere.

Takeaways

Constitutional challenges to pandemic restrictions are pending in other federal courts.  A federal court in Maine recently heard oral argument on challenges to Maine’s emergency rules, including a claim that the governor’s quarantine requirement is an unconstitutional restriction on people’s right to travel.  That court has not yet issued an opinion.  Other challenges to COVID-19 restrictions are pending in federal district courts across the country, including in Arizona, California, Massachusetts, and New York. County of Butler could influence these decisions.

There are also hints that the U.S. Supreme Court may have interest in considering these types of constitutional challenges.  County of Butler cited Justice Alito’s recent dissent in the Court’s denial of injunctive relief in Calvary Chapel Dayton Valley v. Sisolak.  That case involved a challenge to certain COVID-19 restrictions in Nevada.  Justice Alito’s dissent advocated for a stricter constitutional review of emergency health measures, stating, “we have a duty to defend the Constitution, and even a public health emergency does not absolve us of that responsibility.”  Justice Alito also noted that “a public health emergency does not give Governors and other public officials carte blanche to disregard the Constitution for as long as the medical problem persists.”  

The dissent (which was joined by Justices Thomas and Kavanaugh) signals that at least some members of the Supreme Court are mindful of these constitutional challenges, and may be ready to consider such a case when an appropriate petition for writ of certiorari is filed.  County of Butler could provide that vehicle for Supreme Court review.