4th Cir. Affirms Certification of Rule 23(b)(2) Settlement Class Where Mandatory Release of FCRA Statutory Damages Claims Incidental to Agreed Injunctive Relief

In Berry v. LexisNexis Risk and Information Analytics Group, Inc., et al., the U.S. Court of Appeals for the Fourth Circuit affirmed the certification of a class pursuant to Federal Rule of Civil Procedure 23(b)(2) and the settlement of class claims under the Fair Credit Reporting Act, 15 U.S.C. §§ 1681, et seq. (the “FCRA”), wherein the defendant would provide injunctive relief, while releasing all class member’s claims for statutory damages.

Rejecting the arguments of several objectors to the class and the settlement, the Court determined that plaintiffs’ statutory damages claims were “not the kind of individualized claims that threaten class cohesion.”  Op. at p. 18.  Noting that individual class members retained the right to pursue any FCRA claim for actual damages, the Court agreed with the trial court that plaintiffs’ statutory damages claims were “incidental” to the injunctive relief provided, which was indivisible and benefitting all members of the Rule 23(b)(2) class.  See id. at pp. 17, 18.

Moreover, the Fourth Circuit expressly rejected any argument that certain dicta in the U.S. Supreme Court’s opinion in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), demanded that due process requires opt-out provisions in a Rule 23(b)(2) class.  Rather the Court re-affirmed the Fourth Circuit’s precedent of permitting certification of mandatory Rule 23(b)(2) classes involving monetary relief so long as such relief is “incidental” to the injunctive or declaratory relief sought.  See Op. at p. 24.

A copy of the opinion is available here.  

Background

Defendants, including several related corporations (for convenience, “Defendants”) collectively serve as a data broker that sells identity reports used to locate people and assets, authenticate identities, and verify credentials (“Identity Reports”).  For years, Defendant issued Identity Reports without complying with the FCRA on the theory that such reports were not “consumer reports” that trigger the Act’s provisions.  Eventually, in 2011, several individuals who were the subject of Identity Reports filed a class action lawsuit against Defendant, claiming, inter alia, that Defendant violated the FCRA “by selling [Identity Reports] without first ensuring that buyers were purchasing the reports for uses permitted by the FCRA.”  Op. at p. 10.  Plaintiffs sought both actual and statutory damages, but did not seek injunctive relief, as the FCRA does not provide for such remedy.

Over one-year later, after months of discovery and a series of negotiations with the aid of several “highly skilled” mediators, the parties reached a settlement agreement (the “Agreement”), which included a two certified classes, one of which was certified under Federal Rule of Civil Procedure 23(b)(2) (the “(b)(2) Class”).  The (b)(2) Class included all individuals about whom the Defendant’s database contained information from November 2006 to April 2013, amounting to “roughly 200 million people.”  Op. at p. 11.  Under the Agreement, the (b)(2) Class members would retain their rights to seek actual damages, though they would release any claim for statutory damages, as well as punitive damages.  See id.  In exchange, the (b)(2) Class members would receive injunctive relief – that is, “a fundamental change in the product suite that [Defendant] offers the debt-collection industry that will result in a significant shift from the currently accepted industry practices.”  Id. (internal citations omitted).

The trial court granted the parties’ joint motion for preliminary certification of the (b)(2) Class for settlement purposes.  Several Objectors filed motions challenging certification.  The trial court ultimately certified the (b)(2) Class and approved the Agreement, and the Objectors appealed.

Discussion

On appeal, the Fourth Circuit affirmed the certification of the proposed (b)(2) Class for settlement purposes.  The appellate court noted that, absent a “clear abuse of discretion,” it would give the trial court “substantial deference,” recognizing that a “district court possesses greater familiarity and expertise than a court of appeals in managing the practical problems of a class action.”  Op. at pp. 14-15 (citing Ward v. Dixie Nat’l Life Ins. Co., 595 F.3d 164, 179 (4th Cir. 2010)).

Under Rule 23(b)(2), certification of a class is permitted where “the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.”  Op. at p. 16 (citing Fed. R. Civ. P. 23(b)(2)).  A Rule 23(b)(2) class is assumed to be “a homogenous and cohesive group with few conflicting interests among its members,” such classes are “mandatory,” in that “opt-out rights” for class members are not provided.  Op. at pp. 16-17 (citing Allison v. Citgo Petroleum Corp., 151 F.3d 402, 413 (5th Cir. 1998)). 

Although Rule 23(b)(2) certification is inappropriate where monetary relief predominates, see Op. at p. 17 (citing Thorn v. Jefferson-Pilot Life Ins. Co., 445 F.3d 311, 331-32 (4th Cir. 2006)), such classes may be certified where monetary relief is “incidental” to the injunctive or declaratory relief.  Op. at p. 17 (Allison, 151 F.3d at 415 413).

Here, several Objectors contested the certification of the (b)(2) Class, claiming that the statutory damages waived under the Agreement predominate over the injunctive relief awarded and are not “incidental” to such relief.  See Op. at p. 18.  Although the Court noted that there are individualized monetary damages claims at issue (i.e., those for actual damages under the FCRA), it emphasized that class member’s retained their rights to seek such damages.  Op. at p. 19.  However, with statutory damages under the FCRA, “what matters is the conduct of the defendant,. . . . which, as the district court emphasized, ‘was uniform with respect to each of the class members.’”  Op. at pp. 18-19.  Agreeing with the trial court, the Fourth Circuit concluded that the “meaningful, valuable injunctive relief” afforded by the Agreement is “indivisible,” “benefitting all members” of the (b)(2) Class at once. . . .  And the statutory damages claims released under the Agreement are not the kind of individualized claims that threaten class cohesion and are prohibited by Dukes.”  Op. at p. 18 (citing Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011)).

Although Objectors contended that statutory damages are not “incidental” because Plaintiffs’ original complaint did not seek any injunctive relief under the FCRA, the Court rejected such argument.  See Op. at pp. 20-23.  Although the FCRA does not provide for injunctive relief, the Fourth Circuit agreed with the trial court that, “[i]n the settlement context, ‘it is the parties’ agreement that serves as the source of the court’s authority to enter any judgment at all.’”  Op. at p. 20 (citing Local Number 93 v. City of Cleveland, 478 U.S. 501, 522 (1986)).  Likewise, Plaintiffs’ failure to seek injunctive relief in the original complaint does not independently preclude certification under Rule 23(b)(2).  Rather, by its express terms, Rule 23(b)(2) apples so long as “final injunctive relief . . . is appropriate respecting the class as a whole.”  Op. at p. 22 (emphasis in opinion); but see Op. at pp. 22-23 (explaining that Rule 23(b)(2) may preclude certification of a class when injunctive relief is “illusory” or “may only to justify a damages award that otherwise would be improper under Rule 23(b)(2)”).

Alternatively, relying on dicta in the Dukes decision that noted the “serious possibility” that due process requires opt-out rights, the Objectors asserted that the principles of due process precludes certification of the (b)(2) Class without opt-out rights.  See Op. at p. 23 (citing Dukes, 131 S. Ct. at 2559).  Again, the Fourth Circuit disagreed, explaining that federal courts have long permitted certification of mandatory Rule 23(b)(2) classes involving monetary relief so long as such relief is “incidental” to the injunctive or declaratory relief sought.  See Op. at p. 24.  In the context of Rule 23(b)(2) class certification, because the relief sought is uniform, so are the interests of class members, making class-wide representation possible and opt-out rights unnecessary.  Op. at pp. 25-26 (citing Dukes, 131 S. Ct. at 2558; Thorn, 445 F.3d at 330 & n.25; Allison, 151 F.3d at 413-14).  Again, the Fourth Circuit favorably noted that class members retain their right to pursue actual damages under the FCRA.  See Op. at pp. 26-27.

Next, the Objectors complained that the class settlement was “unfair and inadequate because it releases class members’ statutory damages claims without providing for any monetary relief in exchange.”  Op. at p. 30.  However, the trial court deemed the case to be “speculative at best,” which the Fourth Circuit characterized as a “generous” description.  Op. at p. 32.  Notably, “with agency guidance expressly specifying that [the subject] reports are not subject to the FCRA, . . .it is hard to see how [Defendant] can be said to have acted unreasonably by adopting that reading.”  Op. at pp. 32-33.  Moreover, the trial court described the injunctive relief as a “significant shift” in industry practices, making [Defendant] “the industry leader” in consumer-information protection.  Id. at p. 33.  Indeed, the Fourth Circuit observed that the record included a finding that the injunctive relief “provided consumers with benefits so substantial that their monetary value is in the billions of dollars.”  Id.

Finally, as to one Objector’s challenge to the approval of class counsel’s fees for securing injunctive relief, amounting to approximately $5.3 million, the Fourth Circuit found no reversible error.  Acknowledging that the trial court’s discussion of the fee award was brief, the Fourth Circuit noted that the trial court did provide a sufficient basis for such award: “that class counsel ‘expended large amounts of time and labor,’ and ‘achieved an excellent result in this large and complex action.’” Op. at p. 39 (citing Berry v. LexisNexis Risk & Info. Analytics Grp., Inc., No. 3:11-CV-754, 2014 WL 4403524, at *15 (E.D. Va. 2014)).

Accordingly, the Fourth Circuit affirmed the decision of the trial court in its entirety.

4th Cir. Holds Allegations of Verbal Notice of Bankruptcy Sufficient to State Claim for Willful Violation of Automatic Stay; Debtor Can Bring Suit in District Court

In Houck v. Substitute Trustee Services, Inc., et al., the United States Court of Appeals for the Fourth Circuit determined that a debtor alleged a plausible claim under 11 U.S.C. § 362(k), so as to survive a motion to dismiss, against a foreclosure trustee (the Substitute Trustee) for willful violation of the automatic stay where she alleged the trustee sold her homestead at a foreclosure sale after her fiancé had called to verbally notify them of her bankruptcy filing.  Rejecting the trustee’s argument that a willful violation required written notice, the Court explained that Section 362(k) “does not include any provision that a particular form of notice be given. Rather, it imposes liability for a willful violation of the automatic stay.”  Op. at 29.

A copy of the opinion is available here. 

In Houck, the Debtor filed a Chapter 11 bankruptcy petition, which stayed the North Carolina foreclosure proceedings filed against her.  A few weeks later, the bankruptcy court dismissed the bankruptcy petition, because the Debtor failed to file the requisite bankruptcy schedules.  Less than 180 days after dismissal, a subsequent sale was scheduled.  Prior to the sale, Debtor filed a second bankruptcy petition.  Debtor claimed that, on the same day, her fiancé called the Substitute Trustee’s lawyers to notify the firm of the bankruptcy filing, spoke with an employee who acknowledged they had a file for the Debtor, and provided the case number for the bankruptcy proceeding to the employee.  Debtor also claimed her fiancé called the lender to inform it of the bankruptcy filing as well, who indicated that it would wait for notice from the bankruptcy court before taking any action.

Nevertheless, two days later, the bankruptcy court ordered Debtor to show cause why her petition should not be dismissed.  Another two days later, the Substitute Trustee sold the homestead at a foreclosure sale.  Thereafter, the following day the bankruptcy court dismissed the second bankruptcy petition.

Debtor filed an action in the federal district court asserting a claim for a willful violation of the automatic stay under § 362(k) of the Bankruptcy Code, which provides in pertinent part, “an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.”  11 U.S.C. §362(k)(1).

The district court dismissed the claims against the Substitute Trustee, determining that Debtor failed to allege that the Substitute Trustee was aware of the bankruptcy petition at the time it conducted the foreclosure sale, concluding that Debtor had “failed to allege that [she] sent notice of the second petition to [the Substitute Trustee] or that [the Substitute Trustee] had any notice of the [bankruptcy] petition.”  Op. at 6.  The Court also granted the lender’s motion to dismiss for lack of subject matter jurisdiction, which argued that Debtor’s § 362(k) claim could not be adjudicated outside of the bankruptcy court.  Id.  On appeal, the Fourth Circuit reversed.

As an initial matter, the Court rejected the argument the Debtor’s claim should have been brought in the bankruptcy court rather than the district court, holding that “the district court had subject matter jurisdiction over Houck’s § 362(k) claim and therefore that the court had authority to rule on the Substitute Trustee’s motion to dismiss Houck’s claims against it, . . . .”  Op. at 22.

The Court explained that a claim under 11 U.S.C. § 362(k) “creates a cause of action for an individual injured by a violation of the automatic stay imposed by § 362(a). To recover under § 362(k), a plaintiff must show (1) that the defendant violated the stay imposed by § 362(a), (2) that the violation was willful, and (3) that the plaintiff was injured by the violation. See, e.g., Garden v. Cent. Neb. Hous. Corp., 719 F.3d 899, 906 (8th Cir. 2013).” Op. at 24-25.

Disagreeing with district court, the Fourth Circuit determined that “the complaint adequately alleged that the Substitute Trustee had notice of Houck’s second bankruptcy petition and that Houck sustained injury as a result of the violation.” Op. at 25.  Notably, Debtor had alleged that she had noticed the lender in her bankruptcy petition itself, that her fiancé called both the Substitute Trustee and the lender, that the lender received notice through PACER, and that defendants “were noticed of the second petition the same way they were under notice of the first petition.” Op. at 27.  

The Court rejected the Substitute Trustee’s argument that it could not have willfully violated the automatic stay because it did not have written notice before it sold the homestead, noting that the requirements of § 362(k) “[do] not include any provision that a particular form of notice be given. Rather, it imposes liability for a willful violation of the automatic stay.”  Op. at 29.

The Court also determined that the complaint alleged injuries, noting that the Complaint alleged that Debtor and her fiancé were forced to move from the homestead to a smaller cabin, they suffered certain enumerated losses relating the loss of income from the property, loss of the use and possession of the property, as well as emotional injury. 

Finally, the Court rejected the trustee’s argument that no stay was in effect under 11 U.S.C. § 362(b)(21)(A) because the debtor was an “ineligible debtor” pursuant 11 U.S.C. § 109(g)(1), which bars an individual from being a bankruptcy debtor where a prior bankruptcy had been dismissed within 180 days of a subsequent bankruptcy petition and “the case was dismissed for willful failure of the debtor to abide by orders of the court, or to appear before the court in proper prosecution of the case; . . .”  Id.  The Court noted that neither the Substitute Trustee nor the record established that the Debtor had willfully failed to abide by the bankruptcy court’s order, and such determination “is a fact bound question that requires evidentiary support.”  Op. at 32.

Accordingly, the Fourth Circuit vacated the dismissal of the complaint, and remanded the case to the district court for further proceedings.

4th Cir Affirms Dismissal of Debtor’s FDCPA Claims Where Debt Collector Sought Estimated Attorneys’ Fees Within Contractual Limits

In Elyazidi v. SunTrust Bank, et al., the U.S. Court of Appeals for the Fourth Circuit affirmed the dismissal of a debtor’s alleged violations of the federal Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692, et seq. (FDCPA), which attempted to challenge debt collectors seeking estimated attorneys’ fees in its initial pleading.  Observing that the debt collectors sought no more than what applicable law allowed, and that they explained that the amount requested for attorneys’ fees was estimated, the Court held that this conduct was not misleading in violation of 15 U.S.C. § 1692e(2).  Nor was it unconscionable in violation of under 15 U.S.C. § 1692f(1), as it was proper for the debt collector to estimate an appropriate fee within the limits of its contract with the debtor.

 A copy of the opinion is available here.

Background

In opening a checking account with her banking institution (the “Bank”), Appellant (“Debtor”), agreed to be bound by the Bank’s rules and regulations, which included a provision on overdraft liability allowing for the Bank to recover an “attorney’s fee up to 25% . . . of the amount owed.”  In September of 2010, although the account held no more than a few hundred dollars, Debtor cut herself a check for $9,800.  After its own attempts to collect the overdraft were unsuccessful, the Bank hired a Maryland law firm (“Law Firm”) to bring a debt collection action.

 Thereafter, the Law Firm filed a warrant in debt in general district court in Virginia.  The warrant (a simple, standardized pleading available to creditors) indicated that the Debtor owed $9,490.82, plus 6 percent interest; $58 in costs; and $2,372.71 in attorneys’ fees.  In two supporting affidavits submitted to the court, an employee with the Bank affirmed that the amount for attorney’s fees represented 25% of the amount owed; while, an attorney with the Law Firm explained that the fees represent “a just and reasonable fee, which is equal to or less than the actual arrangement with client in this case.”

 Eventually, the general district court entered judgment “in the sum demanded for the plaintiff on the evidence.”  At a separate hearing, the Bank’s attorney submitted an updated affidavit supporting a claim for attorneys’ fees in the amount of $4,025 based on the amount of billable hours spent on the case.  In reducing the award to $2,372.71 (the amount originally sought), the court stated that such amount was “minimally more than that was spent in this entire matter.”

 Following the judgment in favor of the Bank in the collection suit, Debtor filed a separate lawsuit against the Bank and Law Firm in Maryland state court.  Challenging their efforts to recover allegedly unearned attorneys’ fees in the collection suit, Debtor brought two counts under Maryland state consumer protection laws, as well as two counts under Sections 1692e(2) and 1692f(1) of the FDCPA.  Additionally, Debtor sued the Law Firm under Section 1692f of the FDCPA for failing to redact Debtor’s social security number from bank statements filed with the Virginia general district court.

 After removing the case to federal court, the Bank and Law Firm filed separate motions to dismiss.  The district court dismissed the case, and this appeal followed.

 Discussion

 As a preliminary matter, the U.S. Court of Appeals for the Fourth Circuit rejected the Bank’s and Law Firm’s (collectively, the “Appellees”) argument that the district court lacked subject matter jurisdiction due to the Rooker-Feldman doctrine.  Although the doctrine prohibits federal courts from reviewing state court decisions, the Fourth Circuit explained that “a federal court is not stripped of its jurisdiction simply because the claim challenges conduct that was previously examined in a state court action.”  Op. at p. 9.  As the federal suit posed “no challenge to the Virginia Court’s judgment,” the district court was not barred from hearing it.  Id. at p. 10.

 As to the alleged FDCPA violations related to the claimed attorneys’ fees, the Fourth Circuit affirmed the district court’s dismissal of the Section 1692e count.  Pursuant to 15 U.S.C. § 1692e, a debt collector may not “use any false, deceptive, or misleading representation or means in connection with the collection of any debt.” 15 U.S.C. § 1692e.  Such prohibited conduct includes any “false representation of (A) the character, amount, or legal status of any debt; or (B) any services rendered or compensation which may be lawfully received by any debt collector for the collection of a debt.”  15 U.S.C. § 1692e(2).

 Noting that the representations must be viewed in context, the Court held that “where the debt collector sought no more than applicable law allowed and explained via affidavit that the figure was merely an estimate of an amount counsel expected to earn in the course of the representations cannot be considered misleading under 15 U.S.C. § 1692e(2).”  Op. at pp. 13-14.  According to the Court, under these circumstances, “any consumer – no matter how sophisticated – should have understood the nature of the Appellees’ request [for attorneys’ fees].”  Id. at p. 15.

 Likewise, the Court also affirmed the dismissal of the alleged Section 1692f(1) violation.  Under 15 U.S.C. § 1692f, a debt collector may not use “unfair or unconscionable means to collect or attempt to collect any debt.”  15 U.S.C. § 1692f.  As an example of such prohibited conduct, Subsection (1) condemns “[t]he collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.”  15 U.S.C. § 1692f(1).

 In the complaint, Debtor alleged that the attorneys’ fee request was “unauthorized” because “neither the agreement nor applicable law permit recovery of attorney’s fees for services not performed.”  Op. at p. 16.  However, the Fourth Circuit determined that this argument had no merit, explaining that “it was entirely proper for [the Bank] to estimate an appropriate fee within the limits prescribed in the September 2010 agreement.”  Id.  Although it drew all reasonable inferences in the Debtor’s favor, “the only reasonable inference here is that Appellees sought to enforce their contractual rights in compliance with state court procedure.”  Id. at p. 17.

 Addressing the alleged FDCPA violation related to the disclosure of the Debtor’s social security number, the Fourth Circuit again affirmed the dismissal.  Notably, the Court observed that the enumerated activities prohibited under 15 U.S.C. § 1692f all have “the capacity to harass the debtor or to pressure her to pay the debt.”  Op. at p. 18.  Although “alarming,” Appellees never threatened to disclose the social security number, and the Debtor was not “cowed into paying the debt.”  Id. at pp. 18-19.  Rather, the Court held that “the lapse occurred in the course of litigation and was easily remedied,” and therefore, “the disclosure cannot be considered unfair or unconscionable.”  Id. at p. 18.

 Finally, the Fourth Circuit affirmed the dismissal of the Debtor’s Maryland consumer protection claims, including counts under the Maryland Consumer Debt Collection Act (MCDCA) and Maryland Consumer Protection Act (MCPA).  Although the Debtor attempted to frame the challenged activities as having occurred in Maryland, the Court noted “[t]he critical point, however, is not whether Appellees conduct business in Maryland, but whether some significant portion of the challenged activity occurred there.”  Op. at p. 21.  Indeed, “[t]he act of sitting in a Maryland office and drafting court documents, or taking phone calls, is not the activity that [the Debtor] seeks to condemn in the case.”  As the challenged representations occurred in Virginia, and as any harm to the Debtor occurred in Virginia, these Maryland statutes had “no application here.”  Id. at 22; see also Consumer Prot. Div. v. Outdoor World Corp., 603 A.2d 1376, 1382 (Md. App. 1992) (holding that regulatory statutes are “generally construed as not having extra-territorial effect unless a contrary legislative intent is expressly stated”).

 Accordingly, the Fourth Circuit affirmed the district court’s dismissal of the Debtor’s claims in their entirety.