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Bank of America and Zelle Establish Compliance with the EFTA

Month: March 2024

Bank of America and Zelle Establish Compliance with the EFTA

Posted on by Christie Bowness

Introduction

In a comprehensive decision, the United States District Court for the Central District of California recently dismissed a class action complaint brought against Bank of America (the “Bank”) for violations of the Electronic Funds Transfer Act (“EFTA”) and the California Unfair Competition Law (“UCL”) relating to allegations that the Bank failed to properly investigate its customers’ claims on Zelle transactions. Tristan v. Bank of Am., No. 8:22-CV-01183-DOC-ADS, 2024 U.S. Dist. LEXIS 36463 (C.D. Cal. Feb. 29, 2024).

Background

Three bank customers sued the Bank for the failure to refund allegedly unauthorized transfers of funds from their respective bank accounts via Zelle. Zelle is an electronic, peer-to-peer fund transfer that is quicker than other methods of wiring money from one person to another. Zelle is owned by Early Warning Services, a company that works with financial institutions to give customers access to Zelle.

The Bank investigated each claim and denied the reimbursement based on the results of those investigations. Plaintiff Tristan then filed suit against the Bank, alleging violations of the EFTA, breach of contract, unjust enrichment, and negligence, among other claims. The other two individuals who had funds stolen also filed complaints alleging similar claims. These three individuals then brought a Consolidated Amended Class Action Complaint against the Bank and Early Warning Services.

The Bank filed a motion to dismiss all claims, which the Court granted, except for the “breach of the contracts’ express terms, [and] breach of the implied covenant of good faith and fair dealing.” Plaintiffs then filed their Second Amended Complaint, prompting a second motion to dismiss, which the Court granted in part and denied in part. Plaintiffs then filed a Third Amended Complaint, which prompted the Bank to file a motion to dismiss again. Three claims remained: Breach of Contract and Breach of the Covenant of Good Faith and Fair Dealing, violations of the EFTA, and violations of the UCL.

The Decision

Electronic Funds Transfer Act

Under Section 1693(f) of the EFTA, financial institutions must investigate any error reported by a consumer within ten business days of being notified. A bank can also recredit the account pending the conclusion of the investigation, which shall take no longer than 45 days after receipt of notification. “Errors” include unauthorized electronic transfers.

Additionally, Regulation E, which implements EFTA, allows a financial institution to review its own records regarding an alleged error if “(i) [t]he alleged error concerns a transfer to or from a third party; and (ii) [t]here is no agreement between the institution and the third party for the type of electronic fund transfer involved.” 12 C.F.R. § 205.11(c). Here, the Bank maintained that it complied with the EFTA and related regulations. The Court previously granted the Bank’s motion to dismiss this claim, asking the Plaintiffs to specify what investigative steps the Bank could have undertaken but did not. The Bank again moved to dismiss the EFTA claim, stating that the Plaintiffs alleged no new facts supporting a plausible inference that it failed to investigate the claims of error.

In its decision, the Court found that the record was clear that the Bank did review “previous valid account activity” before denying the Plaintiffs’ request to be re-credited. For example, the Bank’s denial of reimbursement was supported in the case of Ahuja by the transaction in question being validated through an authentication code sent to his phone number and confirmed by either text or a conversation with the bank’s fraud detection department. As to Myers, the Bank reviewed the account history and “any other relevant information” including all available information on the “Beneficiary of the disputed amount.” In so finding, the Court made clear that just because the Bank reached a different conclusion than the Plaintiffs does not mean that the Bank failed to comply with the EFTA.

California’s Unfair Competition Law

The Plaintiffs also seeking injunctive relief for violations of California’s UCL. Specifically, the Plaintiffs were alleging future harm for unfair and deceptive practices in marketing the Zelle service. “To establish standing for injunctive relief, ‘[t]he plaintiff must demonstrate that he has suffered or is threatened with a concrete and particularized legal harm, coupled with a sufficient likelihood that he will again be wronged in a similar way.’’’ Bates v. United Parcel Serv., Inc., 511 F.3d 974, 985 (9th Cir. 2007). The Court previously reasoned that the Plaintiffs “did not plausibly allege that they faced the threat of repeated injury as Defendant had stopped making those allegedly misleading statements.’’

In this go-around, the Plaintiffs sought “corrective business practices concerning [the Bank’s] policies and procedures pertaining to Zelle transactions including: i) provisional credits to customer accounts during the investigation period, ii) investigation of unauthorized money transfers, and iii) reimbursements to consumers for unauthorized Zelle transactions, to benefit the California public who use Zelle and/or who may use Zelle in the future.” However, this argument failed for the same rationale the Court espoused earlier: there was no threat of imminent harm or injury that the Bank could prevent or would be responsible for. In that vein, the harm Plaintiffs alleged that they sought to prevent was that: (1) they would be scammed again and Plaintiffs would again, contrary to the Bank’s advice, send a Zelle payment to the fraudster as Tristan did, or (2) they would have a third-party criminal take possession of their cell phone as in the case of Ahuja.

Finally, the Court denied the Plaintiffs’ request for leave to amend, saying that although courts should freely grant leave when justice requires it, they do not have to allow endless bites at the apple. The Plaintiffs have had numerous chances to file an adequate complaint and have failed to do so for the final time.

Takeaways

This case offers two main takeaways for readers. First, while financial institutions must investigate any error in a customer’s account within the required time frame set forth in the EFTA, if they do so and document their efforts, they have complied with the statute and should not face liability. Second, this decision emphasizes that to obtain injunctive relief, Plaintiffs must show concrete, particularized legal harm and a real and immediate threat of being harmed again, not just speculative or theoretical harm.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Thomas Persico at tpersico@riker.com, Kevin Hakansson at khakansson@riker.com, or Kori Pruett at kpruett@riker.com.

Tenth Circuit Affirms ECOA’s Regulatory Decision to Limit Creditors’ Exposure

Posted on by Christie Bowness

Introduction

In a recent credit discrimination case, the Tenth Circuit affirmed the Western District of Oklahoma’s finding that appellant guarantors lacked standing to assert an Equal Credit Opportunity Act claim because the plain language of the statute considers guarantors to be applicants only for the limited purpose of the signature rules.  Miller v. First United Bank & Tr. Co., No. 23-6050, 2024 U.S. App. LEXIS 3820 (10th Cir. Feb. 20, 2024).

Background

The Appellants Marquise Miller, Dekoven Riggins, Richard Osei, and Chad Tyler (collectively “Individuals”) initiated a pro se complaint against First United Bank and Trust Co. (“First United”) for credit discrimination claims under the Equal Credit Opportunity Act (“ECOA”), the Fair Housing Act (“FHA”), and 42 U.S.C. § 1981 (“§ 1981”).  In their initial pro se complaint, the Individuals alleged that First United denied their application for financing because they are Black. In response, First United filed a motion to dismiss the Individuals’ FHA claim.  The district court granted First United’s motion but provided the Individuals with leave to amend their complaint.

The Individuals then employed an attorney and filed a motion for leave to add CDMR, LLC (“CDMR”) “as a necessary party-plaintiff because ‘the loan application guaranteed by the four individual Plaintiffs [was] directed to and made by . . . CDMR . . . which is owned by the four individual Plaintiffs.’”  The Individuals also moved to file a First Amended Complaint (the “FAC”).  The district court granted the motion and CDMR was added as a party with the Individuals (collectivity the “Plaintiffs”).

Subsequently, First United filed a 12(b)(6) motion to dismiss Plaintiffs’ FHA and ECOA claims and the Individuals’ § 1981 claim. The district court dismissed Plaintiffs’ FHA claims, dismissed the Individuals’ ECOA claim, and dismissed the Individuals’ § 1981 claim.  Accordingly, only CDMR’s ECOA and § 1981 claims remained.

Plaintiff’s counsel then filed a motion to withdraw from the case. The district court granted the motion and gave CDMR a month to find new counsel.  The Individuals “then filed a pro se ‘Motion to Add Necessary Party,’ seeking to add themselves back into the case as to the ECOA claim” and filed a motion for leave to file a second amended complaint (“SAC”).

The district court denied the motion to add necessary parties because it “found no reason to reconsider its earlier ruling.” As to the motion to amend, the district court denied the motion because the Individuals could not seek an amendment as “they were no longer parties to the case” and “the proposed SAC appeared to be offered in bad faith given the irreconcilable factual contradiction between the FAC and the SAC.”  Finally, the district court dismissed CDMR’s FAC without prejudice because CDMR failed to obtain an attorney pursuant to the court’s deadline. The Individuals then filed a motion to alter the judgment under Federal Rule of Civil Procedure 59(e).  The district court “concluded that the Individuals had not demonstrated clear error.”  The Individuals appealed.

Appeal

On appeal, the Court reviewed the district court’s denial of the Individuals’ motion to add necessary parties, motion for leave to file the SAC, and Rule 59(e) motion pursuant to the abuse of discretion standard.  The Circuit Court reviewed the Individuals’ arguments regarding the district court’s 12(b)(6) dismissal of the Individuals’ ECOA and § 1981 claim de novo.

ECOA Claim

On appeal, the Individuals argued that “as guarantors of the loan to CDMR they had statutory standing to bring their ECOA claim.”  The Court rejected the Individuals’ argument and determined that “[t]he plain language of the statute does not include guarantors.”  The Court reasoned that even though ECOA regulation 12 C.F.R. § 1002.2(e) includes “guarantor” in its definition of “applicant,” “a guarantor is to be considered an applicant for one limited purpose—violation of the signature rules.”  The signature rules provide that if an applicant individually qualifies for a loan a creditor is prohibited from requiring a spouse’s signature on the note.  The Court specifically rejected the Individuals’ reliance on RL BB Acquisitions, LLC v. Bridgemill Commons Development Group, 754 F.3d 380 (6th Cir. 2014) and found that the Sixth Circuit actually “observed that treating guarantors as applicants for the limited purpose of the signature rules was ‘a result that the regulators reached with caution.’”  The Court noted that the Sixth Circuit reviewed the history of the regulation and found that “the final version limited the definition of applicant so it would only apply to the spouse-guarantor rule[]” and the Federal Reserve made this decision due to “the concerns of industry commenters who believed that the unlimited inclusion of guarantors and similar parties . . . might subject creditors to a risk of liability for technical violations of various provision of the regulation.”

In furtherance of their claim, the Individuals argued that the language of 12 C.F.R. § 1002.2(e) “includes guarantors because a guarantor may become contractually liable for repayment of a loan[.]”  The Court rejected this argument and noted that the Individuals’ reading of the regulation “would render the next sentence of the definition superfluous” because under their interpretation “there would have been no need to specify that guarantors are applicants for purposes of the signature rules.”  In sum, the Court determined that a guarantor falls under the definition of applicant only within the context of the signature rule.

Principal Borrower and Co-borrower Theory 

The Individuals then attempted to argue that “they were the principal borrowers for ECOA purposes because CDMR has no credit or financial history[.]” In support, they relied on a Tenth Circuit bank fraud case recognizing that banks should consider the character of the borrower and guarantor. The Court discarded the Individuals’ argument regarding the Tenth Circuit case and surmised that the case “only heightens the distinction between a borrower (applicant) and a guarantor.”

As to their co-borrower theory, the Individuals proclaimed that “although a guarantor does not become the principal borrower, he can act in the principal borrower’s place ‘vicariously in his individual capacity’” and that “renders them co-borrowers.”  This line of argument primarily concerned “state or common law principles and causes of action.”  The Court acknowledged that state and common law principles must be considered when a question regarding a federal claim cannot be resolved through a statutory interpretation.  However, the Court did not need to analyze such principles because it had already determined “that the ECOA and its implementing regulations adequately answer[ed] the question[.]”   Further, the Individuals reliance on Durdin v. Cheyenne Mountain Bank, 98 P.3d 899 (Colo. App. 2004) was inapposite because there the plaintiff “was both a guarantor and a co-borrower” because he submitted an application to the subject bank as a co-borrower.  The Court affirmed the district court’s finding that the Individuals failed to show that they submitted the loan application as co-borrowers nor demonstrated that they asked First United to consider “the loan a personal one secured by their assets.”

§ 1981 Claim

To sustain a § 1981 claim, a plaintiff must “identify injuries flowing from a racially motivated breach of their own contractual relationship, not of someone else’s.”  In support of their claim, the Individuals asserted the following: “a guarantor can (1) be sued individually, (2) act in place of the principal borrower, and (3) sue a creditor directly.”  The Court rejected the Individuals’ arguments because a guarantor is prohibited from asserting an individual § 1981 claim when the harm that the individual alleges is derivative of the harm suffered by the corporation.  The Court held that “the Individuals have not shown that any harm they experienced is not derivative of any harm CDMR may have sustained[.]”

Denial of Leave to File the SAC

Finally, the Court held that the FAC was the operative complaint and superseded the pro se complaint for purposes of comparing the allegations. However, the Court noted that any statute of limitations arguments could still rely on the pro se complaint.  The Court agreed with the district court that the “contrary allegations in the FAC and the SAC were indicative of bad-faith, because the Individuals would have been aware, when the FAC was filed, whether they were co-borrowers.”

Takeaways

This case sets forth with precision the limitations on guarantor statutory claims against creditors for alleged harm.  Critically, it affirms the ECOA’s regulatory decision to limit creditors’ exposure to potential liability for technical violations of various provisions of the regulation.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Thomas Persico at tpersico@riker.com, Kevin Hakansson at khakansson@riker.com, or Kori Pruett at kpruett@riker.com.

Renovations and Reckonings: Navigating Unjust Enrichment in Property Disputes

Posted on by Christie Bowness

Introduction

In February 2024, the New Jersey Appellate Division affirmed a trial court’s decision on a motion to dismiss rejecting a property owner’s unjust enrichment claims. The claims related to costly improvements made while the trial court’s order vacating final judgment in a tax foreclosure was on appeal. The decision was reversed, vesting title in the tax certificate holder. This decision reminds us that under the doctrine of unjust enrichment, there must be an expectation of compensation from the party against whom relief is sought. Adar Aleph, LLC v. TDJP Props., LLC, No. A-1727-22, 2024 N.J. Super. Unpub. LEXIS 245 (Super. Ct. App. Div. Feb. 16, 2024).

Background

Adar Aleph (“Adar”) owned property in Barnegat, New Jersey. After he failed to pay his taxes,  Barnegat Township sold a tax sale certificate on Adar’s property to TDJP Properties (“TDJP”). TDJP eventually moved forward with a foreclosure action on the property, on which Adar defaulted. After failing to redeem the tax sale certificate, judgment for foreclosure was entered.

The property that TDJP acquired was in disarray, with no working utilities and significant interior and exterior damage. TDJP began to repair the property. However, Adar moved to vacate the final judgment, which was granted contingent on “payment of reasonable costs and fees.”  Adar then redeemed the tax sale certificate and regained title to the property. TDJP appealed this decision.

Even though the appeal was pending, Adar began to repair the dilapidated home, improving the roof, floors, kitchen, and plumbing system, among other improvements. Adar allegedly made over $93,000 in improvements, increasing the property’s value.

In April 2022, the Appellate Division reversed the Chancery Judge’s order, vacating the final judgment and revested title to TDJP.

Adar then filed suit, seeking damages under the doctrine of unjust enrichment for the improvements undertaken while TDJP’s appeal was still pending. TDJP moved to dismiss for failure to state a claim. The motion judge granted TDJP’s motion to dismiss, citing Wilmington Sav. Fund Soc'y, FSB for Pretium Mortg. Acquisition Tr. v. Daw, 469 N.J. Super. 437, 265 A.3d 178 (Super. Ct. App. Div. 2021).

Appeal

On appeal, Adar argued that the motion judge’s reliance on Wilmington Savings was misplaced as that case was a mortgage foreclosure rather than tax sale foreclosure.

The Appellate Division held that Wilmington Savings was on point. Although that case dealt with a mortgage foreclosure, and the case at hand is a tax sale foreclosure, the motion judge was referring to the Court’s analysis of the duty of implied covenant of good faith and fair dealing. In Wilmington Savings, the Appellate Division held that “the homeowner's quantum meruit and unjust enrichment claims for repair costs were precluded under the parties’ mortgage contract because no ‘equitable basis to warrant’ reimbursement existed. Id. at 460-61.” While the motion judge was curt, the Appellate Division found that the judge intended to convey that Adar failed to allege an equitable basis for relief as Adar sought recovery based on a quasi-contract or a contract implied-in-law, which was not asserted.

Unjust enrichment occurs when an opposing party receives a benefit without payment, and retaining that benefit would be unjust. (Iliadis v. Wal-Mart Stores, Inc., 191 N.J. 88, 110, 922 A.2d 710 (2007)). To succeed on a claim of unjust enrichment based on a quasi-contract, the plaintiff needs to show that it expected remuneration from the other party and that the failure to remunerate enriched the other party beyond its contractual rights. (Thieme v. Aucoin-Thieme, 227 N.J. 269, 288, 151 A.3d 545 (2016)) (quoting Iliadis, 191 N.J. at 110).

Here, Adar could not have reasonably expected remuneration for TDJP. He never communicated with TDJP that he was making improvements while TDJP’s appeal was pending. Adar recklessly made costly improvements without knowing whether he would retain the Property. Adar accepted the risk and, thus, cannot be granted relief. The Court modified the motion judge’s order to be dismissed without prejudice.

Takeaways

This case provides an excellent analysis of an unjust enrichment claim and the perils of a party to take action while an appeal is still pending.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Thomas Persico at tpersico@riker.com, Kevin Hakansson at khakansson@riker.com, or Kori Pruett at kpruett@riker.com.

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