By Erich M. Paetsch, Creditors’ Rights & Bankruptcy and Litigation Attorney

Two very different courts recently issued opinions on issues routinely impacting financial institutions. In Multnomah County, a jury considered whether a financial institution should pay damages for a violation of the Fair Credit Reporting Act.[1] Across the Columbia River, the Supreme Court for the State of Washington considered the scope and application of the Securities Act of Washington on residential-mortgage backed securities.[2] The outcomes in each case hold valuable information for financial institutions.

 FCRA Litigation

               In Oregon, an identify thief fraudulently opened an automotive loan account and purchased a used car in Southern California. The identity theft victim attempted to delete the debt from his credit report in connection with the fraudulently obtained loan. To support his request to the lender, the victim presented confirmation from a police detective that the loan was fraudulent, the supporting police report, the thief’s guilty plea and credit card statements showing that the victim was out of the country when the car was purchased. The lender received multiple notices of the alleged fraud but failed to remove delete the account from the victim’s credit report for 14 months.

               The Fair Credit Reporting Act (“FCRA”), 15 U.S.C. § 1681 et seq. imposes obligations upon lenders to ensure that credit reporting is fair and accurate. It also creates private rights of action for violations of the act and allows for the recovery of damages, attorney fees and punitive damages. The identity theft victim alleged that the lender negligently and willfully violated FCRA when it failed to delete the account after receiving notice of identify theft. Based on the alleged willful and negligent conduct of the lender, the victim sought damages, including punitive damages from the lender.

                The lender admitted that it failed to properly handle the prior reports from the victim and noted the volume and number of complaints it handles annually related to consumer disputes. In admitting human error, the lender attempted to convince an eight-person federal jury that punitive damages under FCRA were inappropriate. Following deliberation, the jury awarded the victim over $100,000 in noneconomic damages but failed to award punitive damages against the lender.

 Federal Home Loan Bank of Seattle

                In two consolidated cases before the Washington State Supreme Court, the Federal Home Loan Bank (“FHLB”) appealed prior decisions about the scope and requirements of the Securities Act of Washington (the “Securities Act”). The cases emerged out of the financial crises and the Great Recession. Immediately prior to the Great Recession, FHLB purchased certificates for residential-mortgage backed securities from Credit Suisse and Barclays Capital. In 2009, FHLB sued, alleging violations of the Securities Act due to false statements about loan-to-value ratios, the occupancy status of the properties in the collateral pool, and the quality of underwriting among other allegations.

                In both cases, the underlying courts found that the FHLB cases could not proceed under Section 21.20.010(2) of the Securities Act because reliance was a requirement of an action under that section of the Securities Act. The Washington State Supreme Court was asked to decide, contrary to federal cases and the prevailing interpretation of federal securities law, that reliance is not an element of a claim under RCW 21.20.020 of the Securities Act.

                The majority opinion found that reliance is not a required element of a claim under the Securities Act. In its opinion, the majority of the court found that the plain language of RCW 21.020.020(2) does not reference or incorporate the concept of reliance. In addition, the Court found that its opinion supports the broader purpose of protecting the public and investors under the Securities Act. The Court also explored and distinguished a number of opinions that Credit Suisse and Barclays Capital identified as requiring reliance into a claim under the Securities Act.

                The Court went to significant lengths to support why a claim under the Securities Act should be distinguished from a claim under federal securities law. The Securities Act is identical to section 101 of the Uniform Securities Act of 1956 (the “USA”). However, this is different from Rule 10b-5 of the Securities and Exchange Commission which is similar but not identical to the Securities Act. The requirement under federal law for showing reliance derives from Rule 10b-5 and not the USA according to the Court. The Washington State Supreme Court reasoned that because the Securities Act is modeled after the USA and not Rule 10b-5 the federal requirement of reliance should not be read into the Securities Act. As a result, the cases were remanded to the lower court for further proceedings.  

 Conclusion

                Each recent case highlights the challenges and complications that confront financial institutions. While human error and oversight can create liability under FCRA, taking proactive steps and adopting a robust compliance system can mitigate or eliminate risks, including punitive damages claims. The impact of the Washington State Supreme Court case will take time to be fully realized. In the opinion of counsel for Credit Suisse and Barclays, the elimination of a reliance requirement will open the flood gates to future litigation and claims under the Securities Act.

[1] Sponer v. Wells Fargo Bank N.A., Case No. 17-cv-0235-HZ (U.S. District Court for the District of Oregon).

[2] Federal Home Loan Bank of Seattle v. Credit Suisse Securities (USA) LLC f/k/a Credit Suisse First Boston LLC et. al., 2019 WL 4877437 (Supreme Court of Washington, En Banc) October 3, 2019.

Erich Paetsch is a partner in the Litigation and Creditors’ Rights & Bankruptcy practice groups and the Financial Services Industry Group. The information in this article is not intended to provide legal advice. For professional consultation, please contact Erich Paetsch at Saalfeld Griggs PC.  503.399.1070.  epaetsch@sglaw.com  © 2019 Saalfeld Griggs PC

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