The State of Missouri allows for prejudgment interest in breach of contract cases, as well as other types of claims. In breach of contract cases, prejudgment interest typically begins to accrue on the date of the breach or the date payment was due. The interest rate is set at nine percent unless the parties contractually agreed to a different rate. Under Missouri law, most contracts are subject to a maximum annual interest rate of ten percent, or the market rate. However, the legislature has carved out an exception to the interest rate cap for small-installment consumer loans. These loans are designed to provide borrowers with relatively small loan amounts and longer repayment options, but often have high interest rates.
In a recent court opinion by the Missouri Court of Appeals Western District, the court ruled on the enforceability of prejudgment interest in cases which occurred before August 28, 2021, the effective date of 2021 amendments to Missouri Revised Statute Chapter 408, including Section 408.553 regarding Lender Recovery Upon Default. In its amendments, the legislature appears to have intended to resolve confusion around the applicability of prejudgment interest statues and ensure prejudgment interest is provided for within the statute 408.553.
However, the Western District was still left with the problem of determining the applicability of the statute prior to its amendment. In the recent Mm Fin. v. Rose case, Judge Karen King Mitchell wrote the majority opinion on behalf of herself and Judge Gary D. Witt. No. WD84379, 2022 Mo. App. LEXIS 193 (Mo. App. W.D. Apr. 12, 2022). Presiding Judge Mark D. Pfeiffer drafted a separate opinion concurring in part and dissenting in part. In this case, MM Finance LLC appealed a trial court damages award, asserting that the trial court erred in failing to award the company prejudgment and post-judgment interest at the contracted annual rate of 360%. The Court of Appeals reversed and remanded for recalculation.
In this case, all three judges agreed that the applicable post-judgment interest rate was the one contracted for by the parties, here 360%. The court followed its own precedent from Ponca Finance Company v. Esser, 132 S.W.3d 930 (Mo. App. W.D. 2004). In Ponca, the court held that even an obscenely high contract rate was permitted as a post-judgment interest rate under the statutory exception for consumer installment lenders in place at the time, and noted that “if the legislature believes that this rate is excessive, then the legislature can change the law. Id. at 932.
However, with regard to prejudgment interest, the court found no applicable precedent to follow. The majority opinion held that MM Finance, LLC, a licensed consumer installment lender, is permitted under Chapter 408 to create contracts and receive interest at higher rates, and therefore, the underlying contract is authorized by the legislature and the contracted interest rate is enforceable, including with regard to prejudgment interest, absent an exception or limitation.
Judge Pfeiffer, in his dissent, argued that Statute 408.553 is the exception. The pre-2021 version of the statute stated:
Upon default, the lender shall be entitled to recover no more that the amount which the borrower would have been required to pay upon prepayment of the obligation on the date of final judgment together with interest thereafter at the simple interest equivalent of the rate provided for in the contract.
§ 408.553, RSMo 2016. Judge Pfeiffer argued that the phrase, with interest thereafter, along with the legislature’s 2021 changes to this section (making explicit that prejudgment interest was permitted), indicate that the pre-2021 version did not permit prejudgment interest.
The majority opinion held that while the pre-2021 version of Section 408.553 did not explicitly authorize prejudgment interest, Section 408.100 did by stating that “[o]n any loan subject to this section, any person, firm, or corporation may change, contract for[,] and receive interest on the unpaid principal balance at rates agreed to by the parties.” § 408.100, RSMo 2016. The majority further noted that they found the pre-2021 language of Section 408.553 to be plain and unambiguous, and therefore not subject to statutory interpretation. Judge Mitchell also cited a recent 2020 decision by the Western District, recognizing that “a later statutory enactment may not always be a reliable guide to the interpretation of the pre-amendment statute” and the purpose of a change in existing law can be to clarify rather than change the law. Spire Mo. Inc. v. Mo. Pub. Serv. Comm’n, 607 S.W.3d 759, 774 (Mo. App. W.D. 2020).
Ultimately, the court’s opinion confirms that prejudgment and post-judgment interest are both available to licensed consumer installment lenders under the pre-2021 statutes, even in cases of high interest rates.
In this 2021 year-end summary, the Financial Services Law Blog analyzes several of the most impactful financial services decisions and regulatory developments at both the national and local state level. 2021 was a year marked by several significant United States Supreme Court and other federal court decisions affecting financial servicing issues and legislation across the country and closer to home. Additionally, the impact of the CARES Act on mortgage servicing continued to play out, while the CFPB issued the important 2021 COVID Serving Rule amending Regulation X.
Split Supremes Hold Concrete Injury Was Required in FCRA Class Action Case
In June, the United States Supreme Court, in a split 5-4 decision reversing the Ninth Circuit Court of Appeals, affirmed the once fundamental – yet at one point, seemingly eroding – legal principle that a plaintiff must actually suffer harm before being able to sue on a federal statutory claim. The decision (TransUnion LLC v. Ramirez, 141 S. Ct. 2190, 210 L. Ed. 2d 568 (2021)) reversed a $40 million class action judgment award based upon a finding that thousands of class members had demonstrated “no concrete harm” and therefore no standing for two of three Fair Credit Reporting (“FCRA”) claims.
Ramirez originated from the named plaintiff’s visit to a local car dealer. Mr. Ramirez had negotiated a price and even selected a color, the Court noted, before he was told that he was being denied financing because his name had showed up on an OFAC advisor “terrorist list.” He contacted TransUnion and was told that he in fact was listed as a “prohibited Specially Designated National (SDN).” Such designation was completely erroneous and was removed when Mr. Ramirez disputed it.
He sued on behalf of 8,185 class members, asserting claims that TransUnion failed to follow reasonable procedures to ensure the accuracy of credit files and also failed to provide consumers with complete credit files and a summary of rights upon request. The class was certified based on all of the class members having been falsely listed as prohibited SDNs, although only 1,853 of them had had their credit reports furnished to potential creditors. The Ninth Circuit found all of them had standing on these claims, disturbing the jury’s verdict and the magistrate’s judgment only insofar as to cut in half (as excessive) the $6,300-per-class-member punitive damages award.
But the Supreme Court reversed the judgment entirely, finding on the “reasonable procedures” claim that only the 1,853 class members whose credit reports had been provided to third parties actually suffered a concrete harm necessary for Article III standing. The Court also found that the class members other than Mr. Ramirez had failed to demonstrate any concrete harm with respect to the other claims.
The majority decision, penned by Brett Kavanaugh, contained the sound bite phrase, “No concrete harm, no standing.” The dissenting opinion, authored by Clarence Thomas, was grounded in disagreement on whether the class members had actually suffered a concrete harm, positing that a consumer’s receipt alone of an erroneous credit report should give rise to standing to sue on a FCRA claim.
Ramirez Decision Applied to Find No Sufficient Concrete Injury Allegation
The Ramirez decision was applied just weeks later in Grauman v. Equifax, No. 20-cv-3152, 2021 U.S. Dist. LEXIS 142845 (E.D.N.Y. July 16, 2021). In Grauman, although the plaintiff’s mortgage payments were suspended for a 2.5-month period in 2020, plaintiff continued to make his monthly mortgage payments on time. But his credit score suffered a 16-point drop, which he attributed to Well Fargo’s alleged improper reporting of his mortgage payment suspension.
Applying Ramirez, the court dismissed plaintiff’s FCRA claim for lack of subject matter jurisdiction, finding that plaintiff had failed to allege any concrete injury where there was no allegation of dissemination of his credit report to third parties.
Moratoriums and Modified Loss Mitigation Procedures under the CARES Act
Early in the COVID-19 pandemic in 2020, the CARES Act became law and established a foreclosure and eviction moratorium on federally backed mortgage loans. Section 4022 of the Act also provided for loan forbearance for borrowers on such loans “experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency.”
The federal foreclosure and eviction moratorium sunset at the end of July 2021. When Congress did not act to extend the eviction moratorium, the Centers for Disease Control purported to stand in for Congress and issue its own extension of the eviction moratorium. But that action was struck down by SCOTUS in August in Ala. Ass’n of Realtors v. HHS, 141 S. Ct. 2485, 210 L. Ed. 2d 856 (2021), on grounds that the CDC lacked the authority to issue such an extension. However, financial institutions and their counsel are advised to continue monitoring state-and-local-level limitations on evictions and foreclosures relating to the pandemic.
FHFA Structure Not Up to Constitutional Muster, Holds SCOTUS
Another significant but unsurprising Supreme Court decision came down in May – Collins v. Yellen, 141 S. Ct. 1761, 210 L. Ed. 2d 432 (2021). This decision held that the single-director, terminable only-for-cause structure of the Federal Housing Finance Agency (FHFA) was unconstitutional under the separation of powers clause, similar to last year’s CFPB decision.
The underlying lawsuit came from Texas and was brought by shareholders of Fannie Mae and Freddie Mac who alleged injury from a recent action of the FHFA Director that amended a purchase agreement in which the Treasury provided billions in capital in exchange for shares of Fannie and Freddie. Addressing, inter alia, the shareholder’s constitutional claim, the Court found the FHFA unconstitutional in its current form, particularly in light of the restriction in the 2008 Housing and Economy Recovery Act (which created the FHFA to oversee Fannie and Freddie) upon the President’s removal powers with respect to the FHFA Director.
Citing its 2020 Seila Law opinion regarding the unconstitutional structure of the CFPB,the Court reasoned that even “modest restrictions” on the President’s power to remove the head of an agency with a single top officer/director (here, of the FHFA) were unconstitutional. The case was affirmed in part, but reversed in part, and remanded to the district court for proceedings addressing whether the unconstitutional structure of the FHFA caused the shareholders’ alleged injury. Within hours, President Biden served walking papers on the previous FHFA Director Calabria and named Sandra Thompson as the new acting Director.
Kansas Ban on Credit Card Transaction Surcharges Found Unconstitutional
A February decision of the United States District Court for the District of Kansas found, for purposes of the plaintiff and transactions at issue in that case, that the 35-year-old Kansas “no-surcharge” statute was unconstitutional as a violation of plaintiff CardX, LLC’s First Amendment right to commercial speech. The statute, K.S.A. 16-a-2-403, provides that “no seller or lessor in any sales or lease transaction or any credit or debit card issuer may impose a surcharge on a card holder who elects to use a credit or debit card in lieu of payment by cash, check or similar means.”
In CardX, LLC v. Schmidt, 522 F. Supp. 3d 929 (D. Kan. 2021), the court found the statute violative of the First Amendment and all three factors of the United States Supreme Court’s test (as set forth in Central Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n of New York, 447 U.S. 557, 561 (1980)) for determining the constitutionality of a statute restricting commercial speech. The court further (1) cited the need for surcharges to protect businesses with small profit margins from bearing the cost and burden of transaction fees imposed by credit card providers and (2) reasoned that the restriction placed an undue burden on merchants given the heightened demand for contact-free transactions in the COVID era.
While CardX was being decided, Kansas HB 2316 was introduced and would lift the statutory surcharge ban. That bill has since passed the Kansas House and has been referred to a Kansas Senate committee, where it currently sits. As noted in our April 2021 blog post, in the event that this bill does not pass the Kansas legislature, additional challenges to the current no-surcharge statute can be fully expected.
In an impactful and split Opinion, the United States Supreme Court has reversed a $40 million class action judgment award in light of its finding that thousands of class members had no standing for two of three Fair Credit Reporting Act (“FCRA”) claims, and that the majority of those class members lacked standing for the remaining claim.
As we advised in our December 2020 Financial Services Law Blog post, the Ramirez case, filed in the Northern District of California, arose when Mr. Ramirez faced an alarming situation at a car dealership: he was denied financing for a car loan due to an erroneous credit report alert indicating that he was listed on an OFAC advisor “terrorist list.” Although Mr. Ramirez’ wife was able to obtain approval to purchase the car, Mr. Ramirez later received a letter from TransUnion indicating that he was listed as a “prohibited Specially Designated National (SDN).” TransUnion removed the alert after Mr. Ramirez disputed the designation.
It was later learned that 8,185 other individuals had been falsely labeled as prohibited SDNs. Although only 1,853 of those individuals’ credit reports were furnished to potential creditors during the relevant time period, all 8,185 individuals were certified as class members and found by the lower courts to have Article III standing.
Mr. Ramirez filed suit on behalf of himself and the 8,185 class members, asserting that TransUnion failed to follow reasonable procedures to ensure the accuracy of credit files, and that it failed to provide consumers with complete credit files and a summary of rights upon request of the consumer. At trial, the jury awarded approximately $1,000 in statutory damages and $6,300 in punitive damages per class member. The Ninth Circuit Court of Appeals held that the class members all had standing but reduced the punitive damages award by roughly 50% on the basis that it was excessive. Now, the Supreme Court has reversed the judgment altogether.
The Supreme Court began its Opinion by citing the longstanding principle that, in order to have standing, claimants must have suffered a “concrete harm” that resulted from the defendant’s conduct and that is capable of being redressed by the Court.
Applying this standard to the “reasonable procedures” claim, the Court first found that the 1,853 plaintiffs whose credit reports were provided to third parties did suffer a concrete harm similar to the type of reputational harm that would be caused by a defamatory statement. The remaining 6,332 class members, on the other hand, suffered no such harm because the false information was not “published,” or furnished, to any third parties. The Court reasoned that the harm suffered from false information stored in a credit file would be similar to an insulting letter that sat in the author’s desk drawer – nonexistent.
The Court then considered whether any of the 8,185 unnamed class members had standing to assert their claims for failure to provide complete credit files and a summary of rights upon request. Plaintiffs did not demonstrate that TransUnion’s potentially faulty mailings caused any harm at all to plaintiffs. Therefore, the Court found there was no standing under Spokeo because these mere technical violations were “divorced from any concrete harm.” The Court rejected any argument by plaintiffs that there was a threat of future harm for any of the asserted claims.
The Opinion was bookended with this simple phrase, penned by Justice Kavanaugh: “No concrete harm, no standing.” And with that, the $40 million judgment out of the Ninth Circuit is reversed, and the case is remanded for proceedings consistent with the Supreme Court’s findings concerning standing.
The Court was split 5-4, and Justice Thomas authored the dissenting opinion.
The Ramirez case will, no doubt, have a reach far beyond FCRA claims. Baker Sterchi will continue to monitor for subsequent litigation interpreting the Ramirez decision.
About Financial Services Law Blog
Baker Sterchi's Financial Services Law Blog explores current events, litigation trends, regulations, and hot topics in the financial services industry. This blog informs readers of issues affecting a wide range of financial services, including mortgage lending, auto finance, and credit card/retail transactions. Learn more about the editor, Megan Stumph-Turner, and our Financial Services practice.
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