Consumer Law & Policy Blog

What happens when lenders don't care if they are repaid?

by Christopher Peterson

In today's Wall Street Journal, Ted Frank, with the American Enterprise Institute, argues that the current meltdown in the subprime mortgage market justifies neither legislative nor judicial reform. In his view the market is currently adjusting to the problems in mortgage origination.  Everything will work out if we just leave the markets alone because "lenders have every incentive to lend only to those who can repay."

I disagree.  The current legal system creates the incentive for loan brokers and originators to (1)take large commissions and closing costs, (2) pass off bad loans to the secondary market, (3) distribute the revenue from lots of closings to management and employees, (4) wait for the bankruptcy code's preference window to close, then (5) declare bankruptcy when the secondary market tries to exert its recourse options.

Mr. Frank’s analysis ignores the agency costs of front line players in the industry, and it conflates the profitability of loan originating companies with the profits kept by the management of those companies.  While there is nothing inherently wrong with securitization of mortgage loans, or other financial assets, we must accept the reality that the current system of funding subprime mortgages does not preserve the traditional mortgage market’s underwriting incentives.  Instability and predatory lending will persist as long as the secondary market, and in particular, the investment banks that package mortgage backed securities can pass off bad loans to investors without fear of liability.

More on Punitive Damages in Exxon Valdez Litigation

We previously blogged here about the Ninth Circuit's ruling cutting in half (to $2.5 billion) the punitive damages award in the Exxon Valdez oil spill litigation, and here about Exxon's petition for rehearing en banc.  We've recently been sent the plaintiffs' response.  Plaintiffs' counsel informs us that the Ninth Circuit has yet to rule on the petition.

Brief Filed In Critical California Supreme Court UDAP Case

By Brian Wolfman

    Way back on September 15, I blogged here about an effort by Public Citizen and the Center for Auto Safety to convince the California Supreme Court to review a ruling that, if allowed to stand, would gut California's consumer protection laws.  The California Court of Appeal had ruled that California's Proposition 64 requires consumers to show "reliance" to prevail under those laws.  (As you may recall, Proposition 64 got rid of the so-called private attorney general provisions of California's consumer protection laws.)  Then, here, I blogged again after the California Supreme Court granted review.

    With the able representation of California consumer lawyer Jeff Fazio, Public Citizen and the Center for Auto safety have now filed their amicus brief on the merits.  Because a fundamental premise of modern consumer protection law has been that the plaintiff need not prove reliance, the California Supreme Court's decision in this case is likely to be very important. 

More On The Federal Judicial Center's New Report On CAFA From The Lead Author

by Tom Willging

[Ed. note:  Tom Willging is a Senior Researcher at the Federal Judicial Center and an expert on class actions.  Among other things, he helped write the Manual on Complex Litigation.  Note the request for assistance at the end of Tom's post]

    You probably haven't heard enough about CAFA lately. As the Federal Judicial Center's long-term study of the impact of CAFA on the federal courts plays out, we have delivered our third--that's right third, time flies--report on the Judicial Conference's Advisory Committee on Civil Rules. We blogged earlier, here and here, about whether our results were surprising. Now, with 16 months of data after CAFA went into effect, there's no surprise in the number of case brought into the federal courts: at least 300 and perhaps as many as 364 appear attributable to CAFA. More newsy, though, is a shift in the type of cases. The initial wave consisted mostly of cases filed in state courts and removed to federal courts. Most of the more recent increase, though, comes in the form of diversity cases filed originally in federal courts. Figure 4 in the report tells this story in graphic format. Diversity cases before CAFA typically came into federal court by removal. Now they more often arrive as original actions. We also present data on the courts where the increased cases were filed. Though dispersed across the district courts in all circuits, Figure 5 shows that the 9th seems to have had a special impact, particularly focused in Central (L.A.) and Northern (SF) California.  We're still looking for a partner to work with us in studying activity in one or more state courts. Anyone interested?

Attorney's Fees Litigation in the Supreme Court

By Brian Wolfman

Following up on yesterday's post from Steve Gardner, I wanted to let you know about two potentially important statutory attorney's fees cases before the Supreme Court.  In Davis v. Department of Justice, No. 06-1131, a fee-seeking plaintiff has asked the Court to address the question whether the rule limiting attorney's fees established in Buckhannon Board and Care Home, Inc. v. W. Va. Dep't of Health and Human Resources, 532 U.S. 598 (2001), applies in Freedom of Information Act cases.  An amicus brief written principally by my colleague Adina Rosenbaum -- filed on behalf of Public Citizen, Judicial Watch, the Electronic Frontier Foundation, and the National Security Archive -- explains why the Court should grant review and put the brakes on Buckhannon.  In an apparent response to the amicus brief, the government has been ordered to respond to the petition.

In addition, on April 17, the Supreme Court will hear oral argument in Sole v. Wyner, No. 06-531, which addresses the circumstances, if any, in which statutory attorney's fees may be awarded to a plaintiff who secures a preliminary injunction.  A host of organizations from all over the political spectrum, including Americans United, Public Citizen, and the Institute for Justice, have joined an amicus brief that lays out what is at stake in this important case.

Good guys win one: Kim v. Euromotors West

by Stephen Gardner

Of late, many courts seem to bend over backwards to find ways to deny reasonable attorneys’ fees to a successful plaintiff. The most notorious example of this is the United States Supreme Court’s decision in Buckhannon Board and Care Home, Inc. v. W. Va. Dep't of Health and Human Resources, 532 U.S. 598 (2001), where the Court held that the term "prevailing party" is a legal term of art that, according to the leading legal dictionary, means a “party in whose favor a judgment is rendered.”

Since many cases are resolved before final judgment, the effect of the Supreme Court’s ruling is to force parties to a judgment rather than disposing of a dispute simply by settling and then dismissing the underlying lawsuit. Of course, the number of former plaintiff lawyers on the Supreme Court, indeed on most benches, is pretty small, so most judges don’t actually understand anything other than monthly billing (where the law firm is the prevailing party!).

This issue is particularly acute when the object of a lawsuit is an injunction changing the defendant’s wrongful practice. Under the Court’s logic, all a defendant need do is change its practice, and then move to dismiss, getting a free bite at the apple. This encourages wrongful acts, since there is no sanction if caught. It’s like a bank robber nabbed leaving the bank, who only has to promise to stop robbing banks in the future to beat the rap — he doesn’t even have to give the money back!

Several Consumer Law Articles in the Times

by Jeff Sovern

The New York Times has had several interesting articles on consumer law issues today and yesterday.  First, yesterday's Times reported on a Senate Banking Committee hearing on subprime lending.  While criticizing regulators for failing to curb risky loans, senators also indicated that they were not inclined to push legislation on the issue.  A second article in yesterday's issue discussed the automated underwriting software subprime lenders use to identity those who are worth lending to: i.e., those who are less likely to default.  Though the article doesn't mention the Equal Credit Opportunity Act, it is likely that ECOA contributed to the development of such software, as well as credit scoring, by requiring that lenders provide specific reasons for denying loans, thereby making it more difficult to justify turning down applicants based on gut feelings, as those using judgmental systems formerly could.  Finally, in a particularly disturbing report, today's Times has an article about lawyers in a product liability case arising out of diet drugs who allegedly appropriated client settlement money and threatened to sue their clients and seek criminal charges against them if they ever revealed how much they received.  The settlement was for $200 million of which clients received $74 million; $20 million went to a charitable fund while the lawyers retained the remaining $106 million.  The lawyers themselves are said to be the target of a grand jury investigation.

Another Week, Another Ninth Circuit CAFA Ruling

Brian Wolfman

It appears that the Ninth Circuit has a rule requiring it to issue at least one decision about the Class Action Fairness Act every week.  I recently blogged here and here on new Ninth Circuit CAFA decisions, the latter of which (Progressive West v. Preciado) addressed when a post-CAFA amendment to a pre-CAFA state-court complaint “relates back” to that complaint.  In its most recent decision, McAtee v. Capital One, No. 07-55065 (9th Cir. Mar. 16, 2007), the Ninth Circuit expounded on Preciado and held that any amendment to an original class action complaint filed in California state court, whether to add new causes of action, to add or replace plaintiffs, or to add or replace defendants, does not change the commencement date of the action for CAFA purposes, which is the date the original complaint was filed.  That holding arguably goes beyond the ordinary scope of the relation-back doctrine.  Cf. Fed. R. Civ. P. 15(c)(2) and (3).  The Ninth Circuit’s relation-back holding was based on California procedural  law, which the Ninth Circuit said it was required to apply under Erie.  Cf. Fed. R. Civ. P. 15(c)(1).

Governmental Privileges for Private Corporations: What's the Stopping Point?

by Deepak Gupta

Consider these questions for a moment:

• Does a private debt collector become an "arm of the state" -- meaning that it enjoys the same sovereign immunity from suit in federal court as the state itself -- when it collects on bad checks under a business partnership with a state prosecutor?    

• Does a major tobacco company constitute a "person acting under [a federal] officer" -- meaning that it enjoys the same ability as a federal official to remove a suit against it from state to federal court -- because the Federal Trade Commission has regulatory authority over the way cigarettes are marketed?

These might seem like outlandish possibilities that are hardly worth discussing . . . were it not for the fact that federal courts have recently answered yes to both questions.   In one case, a district court in Florida dismissed a consumer class action against a private debt collector on the grounds that the company was entitled to state sovereign immunity.  Last week, I filed this brief in the Eleventh Circuit urging the court to reverse the district court's ruling.   In another case, the Eighth Circuit allowed Philip Morris to remove an unfair trade practices suit to federal court under the federal officer removal statute.  (I previously blogged about the case here and here.)  My colleague Scott Nelson has just filed this brief in the Supreme Court urging the Court to reverse the Eighth Circuit's ruling.

Although the two cases involve very different legal doctrines, there are some interesting parallells.  In both cases, the lawyers for private corporate defendants in consumer class actions made long-shot arguments that invoked special privileges ordinarily reserved for the government itself.  And in both cases, they won, allowing them to deprive the consumer plaintiffs of their chosen forum.  Both decisions extend the privileges at issue well beyond the purposes for which they were originally designed-- protecting the autonomy of governmental actors within a federal system.  The federal officer removal statute protects federal officers from potentially hostile state courts, while state sovereign immunity protects the dignity and solvency of the sovereign states by immunizing them from federal legal process.  Under these two decisions, for reasons that are hard to discern and even harder to apply in a principled way, the same privileges would protect private corporations as well.  This is federalism run amok.

Ninth Circuit Issues New CAFA Holding

By Brian Wolfman

In Lowdermilk v. United States Bank National Assoc., No. 06-36085 (3/2/07),the Ninth Circuit has issued a new ruling under the Class Action Fairness Act.  The topic?  What a removing defendant must show to establish CAFA jurisdiction when the plaintiff's state-court complaint claims less than the $5 million jurisdictional amount.  Judge Bybee posed the question and answered it concisely in the first paragraph of his opinion:

In this case we are called upon to resolve a question of first impression: Under the Class Action Fairness Act of 2005 ("CAFA"), Pub. L. 109-2, 119 Stat. 4 (2005), when the plaintiff has pled damages less than the jurisdictional amount,what must the defendant prove in order to remove the case to federal court? We reserved this question in Abrego Abrego v. The Dow Chemical Co., 443 F.3d 676, 683 n.8 (9th Cir. 2006) (per curiam). We answer that the party seeking removal must prove with "legal certainty" that the amount in controversy is satisfied, notwithstanding the prayer for relief in the complaint. We conclude that the defendant in this case failed to meet this burden, and we affirm the judgment of the district court.

Judge Kleinfeld dissented.  In his view, the complaint was vague and self-contradictory and did not specify the amount in controversy.  When that occurs, he said, a preponderance-of-the-evidence standard -- and not the "legal certainty" test -- applies.  He would have remanded to the district court for a determination of the amount in controversy under the preponderance standard.