Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—N.D. Cal.: FDIC order cannot be enforced, borrowed for UCL claims, (Dec 19, 2014)

By Greg Hammond, J.D.

A debt-settlement consumer could not use a Federal Deposit Insurance Corporation (FDIC) cease and desist order to support her claims under all three prongs of the California Unfair Competition Law (UCL). The federal district court in San Francisco therefore partially granted summary judgment in favor of a payment processor and bank (Newton v. American Debt Services, Inc., December 16, 2014, Chen, E.).

Background. Consumer Heather Newton signed up for debt settlement and restructuring services with American Debt Services, Inc., whereby American would negotiate with creditors on Newton’s behalf for reduction of debt and for the formulation of a repayment plan. As part of the debt settlement enterprise, defendant Global Client Solutions created bank accounts for American clients and acted as a payment processor for consumers enrolled in debt settlement programs. Similarly, defendant Rocky Mountain Bank and Trust provided a special purpose custodial bank account in Newton’s name for debt settlement purposes.

In total, Newton paid $4,206.50 into the special purpose account at Rocky Mountain. $2,200 was paid to a single creditor, $70.04 was refunded to Newton, and the remaining $1,936.46 was charged as “Customer Fees” and “Transaction Fees.” During the time period when Newton was allegedly receiving the debt settlement and restructuring services, she settled debts with three creditors without American’s assistance. She filed suit, in part, against Rocky Mountain and Global, alleging violations of all three prongs of the UCL, which are predicated on Rocky Mountain’s alleged violation of an FDIC Order. Rocky Mountain and Global moved for summary judgment.

UCL claims. In support of its motion for summary judgment, Rocky Mountain argued: (1) the FDIC order is not an independent law that can be borrowed for purposes of establishing liability under the “unlawful” prong of the UCL; (2) Rocky Mountain did not violate any affirmative commands of the order, and thus could not have committed either “unlawful” or “unfair” acts under the UCL; and (3) any conduct in violation of the Order could not establish liability under the “fraudulent” prong of the UCL.

The court agreed with Rocky Mountain’s arguments, finding that an FDIC order cannot be “borrowed” under any of the UCL prongs. Specifically, it noted that 12 U.S.C. § 1818(i)(l) states that “no court shall have jurisdiction to affect by injunction or otherwise the issuance or enforcement of any notice or order under any such section, or to review, modify, suspend, terminate, or set aside any such notice of order.” To “borrow” the FDIC order as predicate authority for a UCL violation would definitely affect the enforcement of the FDIC order, the court found. Consequently, it determined that Section 1818(i)(l) expressly prohibits the court from enforcing, or even affecting the enforcement of the FDIC order.

The court also noted that if it vested exclusive enforcement jurisdiction over Section 1818 orders, it would be venturing into a complicated regulatory order, and it would most likely have to interpret it without the benefit of an administrative record of the expertise of the FDIC. This could lead to direct conflict between the court and the FDIC in interpreting and enforcing the order.

Lastly, the court concluded that the “fraudulent” prong claim under the UCL could be dismissed because Newton failed to address or respond to Rocky mountain’s arguments regarding this prong. Consequently, the court concluded that she conceded this claim as a matter of law.

Aided-and-abetted. Rocky Mountain and Global also moved for summary judgment on Newton’s UCL claims that alleged the companies aided-and-abetted American’s violations of the Proraters Law. The court previously found that both Global and Rocky Mountain could be held liable under the UCL for aiding-and-abetting American, and further held that Newton submitted sufficient evidence to proceed to trial on these claims. Consequently, the court found that the companies’ attempt to get a “third bite at the apple” was untimely, in violation of the court’s standing orders, and unpersuasive. The companies’ motion for summary judgment on the aiding-and-abetting claims was therefore denied.

The case number is C-11-3228 EMC.

Attorneys: Tavy Alice Dumont for Heather L. Newton. Jeffrey Aaron Backman (Greenspoon Marder PA) for Global Client Solutions, LLC and Rocky Mountain Bank and Trust.

Companies: American Debt Services, Inc.; Global Client Solutions, LLC; Rocky Mountain Bank and Trust

Cases: StateUnfairTradePractices CaliforniaNews