Broaden Credit Protections for Military Personnel

Four Democratic Senators and the Delaware Attorney General recently proposed a bill that would amend the Servicemembers Civil Relief Act (SCRA) to provide broader protections against abusive creditor conduct.  The bill was covered recently by American Banker magazine. 

The SCRA provides general protections to active-duty military personnel against unconscionably high interest rates in loans.  It also allows for the activated personnel to cancel residential leases and pause payments on a mortgage, and provides for debt-collection (and other) lawsuits, such as mortgage foreclosures, to be stayed while servicemembers are activated,and prohibits default judgments from being entered in such suits, so as to prevent the unfairness of making servicemembers litigate while otherwise engaged, often abroad or in a war zone.

The proposed bill, S. 3179, entitled the Servicemembers Housing Protection Act, would extend the SCRA's protections concerning leases and mortgage foreclosures to a broader array of activated personnel, and to deceased servicemembers' surviving spouses For the time being, the bill has been referred to the Senate Veteran's Affairs Committee.

It is about time the SCRA was strengthened, but the proposals are certainly not enough.  Private military contractors employed abroad in providing services to the military are in an equally unfair and untenable position in the event they are sued in a U.S. court, and should be equally able to invoke the SCRA's provisions concerning lawsuit stays as proper military personnel.  Spouses should be protected before the death of the servicemember.  

Finally, the weakest provision of the SCRA concerns the interest-rate cap.  For loans entered into before active-duty service began, the applicable interest rate is reduced to 6%.  This is one of the only federal caps on interest rates - generally the National Bank Act and Federal Deposit Insurance Act permit national banks and FDIC-insured banks to charge any rate of interest permitted in their home state, which allows banks to organize entities in states such as South Dakota and Nevada that have no usury limit through which they can make credit-card and other loans at unconscionably high interest rates.  

However, the SCRA limit is very narrow, and the SCRA permits predatory lenders to take unfair advantage of active-duty personnel by lending to them at unconscionable interest rates so long as the loan is executed during active military service.  

Congress did take some action in 2006 to address this situation, passing amendments to the 2007 Defense Authorization Act that cap interest rates on loans to military personnel at 36% and also prohibit certain payday lending transactions.  The provisions are summarized by the Center for Responsible Lending.   However, 36% is an absurdly high limit.  A financially marginal consumer with a substantial loan at 25% will often repay the loan multiple times over in interest payments over a period of years without ever reducing principal before finally defaulting as the result of an unexpected medical expense or loss of income. 

Some opponents of usury caps for servicemember loans argue that these will lead to tighter credit for servicemembers.  Allowing impoverished borrowers to further impoverish themselves by taking unsustainable loans that enrich unscrupulous lenders while preventing them from accumulating savings and ultimately ruining their credit is no good answer to this quandary.  Increased pay together with a federal low-interest lending program would present a far better solution.

Prison Law Roundup: Second and Sixth Circuits Fairly Uphold Rules of Procedure in Prisoner Cases; Fourth Circuit Strikes Blow for Religious Freedom; Seventh Circuit Upholds Prisoner's Right to Be Free from Unnecessary, Prolonged Pain

In three recent prisoners' civil rights cases, the Second and Sixth Circuits showed that they are prepared fairly to hold corrections defendants to their burdens under the rules of pleading and evidence when those defendants seek to have suits dismissed for failure to exhaust administrative remedies.  Meanwhile, the Fourth Circuit struck down an unreasonable prison regulation that impinged on a Muslim inmate's freedom to exercise his religion by wearing a short beard, and the Seventh Circuit reinstated inmate claims that had been dismissed without comment by a district court that apparently overlooked them, including a claim for deliberate indifference to serious medical needs in violation of the Eighth Amendment.

As a brief background for those unfamiliar with the general issue of exhaustion, Congress in 1995 passed the Prison Litigation Reform Act, 42 U.S.C. 1997e, which, among other things, required as a pre-requisite to any prisoner's filing of a federal lawsuit complaining of "prison conditions" that the prisoner first exhaust those administrative remedies that are "available" to them within the prison system.  In subsequent cases, the Supreme Court has in effect held that because Congress meant to broadly exclude inmates from the courthouse, the statute is interpreted as broadly as it can be fairly read, and thus, the Court rejected lower-courts' narrow readings that, for example, a discrete assault by a guard on an inmate is not a "prison condition" (not an ongoing circumstance), Porter v. Nussle, 534 U.S. 516 (2002), or that where a prison grievance system does not make money damages available as a remedy, so that it is not an "available" remedy and need not be exhausted, Booth v. Churner, 532 U.S. 731 (2001).  Indeed, the Court has showed a united front against prisoners' rights in these cases despite strong textualist arguments for a narrower construction.

Ignorance of both the requirements of the grievance system and of the requirement to use it before going to court, the known fact that grievance systems are totally useless and farcical, and fear of retaliation for complaints directed at guards who may already have assaulted them, predictably result in frequent non-use of prison grievance systems by prisoners.  The statute is thus well designed to keep legitimate constitutional violations from being addressed.  Corrections officials must still, however, actually prove non-exhaustion in order to obtain dismissal of the claims against them.  And they have surprisingly frequent difficulty in making effective efforts to do so, often putting in the kind of evidentiarily useless affidavits - witnesses with no personal knowledge, reliance on multiple hearsay and violations of the Best Evidence Rule - that one expects to see only in penny-ante debt collection cases.  Indeed, it is surprisingly common to have corrections officials' summary-judgment motions based on an alleged failure to exhaust administrative remedies denied due to such evidentiary failures.  See, e.g., Livingston v. Piskor, 215 F.R.D. 84, 85-86 (W.D.N.Y. 2003); Donahue v. Bennett, No. 02-CV-6430, 2003 U.S. Dist. LEXIS 12601, at *10 (W.D.N.Y. June 23, 2003).

In the first of the recent Sixth Circuit cases, Surles v. Anderson, No. 09-1825 (decision May 8, 2012), that is just what happened.  Correction officer defendants moved for summary judgment dismissing a prisoner's civil rights action on the ground of failure to exhaust administrative remedies under the PLRA.  The officers relied entirely on (a) a copy of their grievance policy, (b) copies of grievances submitted by the inmate plaintiff with his complaint, and (c) an affidavit attesting that a search of records showed that the inmate had not submitted any grievances since the dismissal of a prior federal complaint.  But the grievances themselves indicated on their face that they were re-submissions of grievances previously filed, and the inmate alleged the grievance system was made unavailable to him by officers' preventing the filing of grievances.  Thus, this record was patently insufficient to allow the court to grant summary judgment on the exhaustion issue.  The officers' only effort to save their motion was to argue, absurdly, that they did not bear the burden to prove non-exhaustion, but that rather, the burden of showing exhaustion was on the inmate.  The law is otherwise, as the court pointed out.  See Jones v. Bock, 549 U.S. 199 (2007) (nonexhaustion is affirmative defense); Napier v. Laurel County, 636 F.3d 218 (6th Cir. 2011).

In the second Sixth Circuit case, Davis v. Prison Health Services, No. 10-2690 (decision May 10, 2012), the prisoner plaintiff alleged that he was removed from a program because of corrections officials' animus against him as an out gay man.  The district court had accepted a magistrate's recommendation that the inmate's lawsuit be dismissed essentially because the version of events set forth in grievance denials produced by the corrections defendants did not support plaintiff's version of events and set forth a nondiscriminatory rationale for the removal.  The Sixth Circuit rightly reversed the district court, explaining that it is plaintiff's allegations that control at the pleadings stage, and that plaintiff contested the version of events set forth in the defendants' self-serving documents.

The Second Circuit a few days later issued a decision in Johnson v. Killian, No. 10-4651-pr (decision May 16, 2012).  In that case the Muslim inmate was, as a matter of federal Bureau of Prisons policy, denied the right to engage in daily congregational prayer.  He fully exhausted the grievance process to complain of this, had his grievances and appeals denied, but the prison then ceased to enforce the policy.  Two years later, a new warden took over and again began to enforce the policy.  The inmate sued under the Religious Freedom Restoration Act, alleging violation of his religious free exercise rights.  The court dismissed the suit, holding that the inmate had to exhaust the new warden's renewed enforcement of the policy.  The Second Circuit, citing numerous decisions in accord, held that where the inmate had already exhausted the exact same issue (policy of forbidding daily congregational prayer), he need not re-exhaust that issue before filing suit over an injury that ultimately results from it.  The holding is narrow, limited to situations where the exact circumstance previously grieved has germinated into an injury that is the subject of a lawsuit, and the court makes clear that the grievance must identify the precise issue sued about with some precision.

Meanwhile, on May 11, 2012, the Fourth Circuit issued a decision in Couch v. Jabe, 11-6560, in a case where an inmate challenged a prison's regulation forbidding the growth of any beard as a violation of his rights under the Religious Land Use and Institutionalized Persons Act (RLUIPA), as his Muslim faith required the wearing of a beard.  Under RLUIPA, a substantial burden on religious exercise can only be upheld if it is the the least restrictive alternative to achieve a compelling governmental interest.  Prison officials justified their "no beards" policy by the need to easily identify inmates and to prevent the smuggling of contraband in beards - effectively, security-based rationales.  Because wearing a beard would be punished by the removal of privileges and programs within the prison system, religious exercise was substantially burdened.  The court gave prison officials a pass on "compelling governmental interest," finding that an apparently factually thin affidavit asserting that beards could enable escaped inmates to avoid recognition (by shaving and changing their appearance) or that contraband could be smuggled in beards (of whatever length?) so that the prohibition served the compelling interest in prison security. The court did not require very much of a showing here, apparently deferring to the experience and expertise of the prison's affiant.

But the Court found the "least restrictive means" requirement not met.  Prison officials made no showing that a religious exemption allowing growth of a one-eighth-inch long beard would not equally serve the articulated security interest.  Nothing could be smuggled in such a beard and it would make little change in the inmate's appearance.  Here, the Fourth Circuit, like the Second and Sixth, fairly applied the rules of evidence to reject prison officials' attempt to introduce an attorney affirmation attesting to security threats occasioned by even a short beard.  Nobody with any prison administration experience apparently submitted evidence of any such threat.

Ordinarily in the prison context, restrictions on First Amendment rights are reviewed under the Turner v. Safley, 482 U.S. 78 (1987), test of "reasonable relationship to legitimate penological objectives."  This is much more like a rational basis test than strict scrutiny, and so often will result in upholding prison restraints on free speech that would not stand in other institutions.  Thus, the importance of RLUIPA's statutory imposition of "strict scrutiny" review with respect to religious freedom in prisons is apparent.  It is one of the few areas (prison rape is now another) in which Congress has actually stepped in to protect prisoners' rights, as opposed to the usual practice of stepping in to ensure that they can be denied with impunity.

Finally, the Seventh Circuit in Gomez v. Randle, 11-2962 (decision May 14, 2012), reinstated several inmate claims that a district court apparently overlooked.  The inmate was shot by a shotgun wielded by an unidentified correction officer, and then denied medical attention by several correction officers, and allegedly transferred to a different facility in retaliation for grieving all of this.  The lower court had appointed counsel for the inmate, but counsel concluded that there were no viable claims and moved to withdraw.  The court, apparently following counsel's lead, held that no viable claim existed and dismissed the suit.  The Seventh Circuit found most of the claims to have been prematurely dismissed.  First, though plaintiff had never identified and named the officer who shot him, time still remained on the statute of limitations for that claim because the statute was tolled during the administrative exhaustion process.  Thus, the claim should not have been dismissed as untimely.  Second, the district court did not even address the retaliation claim, which clearly alleged protected First Amendment activity (grieving) that officials punished with a transfer.  Third, plaintiff did state a claim for deliberate indifference to serious medical needs in violation of the Eighth Amendment by alleging that he made various officials aware of his shotgun wound yet went four days without treatment.  Significantly, the court explicitly rejected the notion that the delay in treatment could be actionable only if it exacerbated the injury, explaining:  "[E]ven though this delay did not exacerbate Gomez’s injury, he experienced prolonged, unnecessary pain as a result of a readily treatable condition."  (Slip op. at 11.)  

Unifund v. Youngman - Fourth Department's Significant Decision Will Stand in Debt Case

The Court of Appeals recently denied leave to review the Fourth Department's decision in Unifund CCR Partners v. Youngman, 89 A.D.3d 1377, 932 N.Y.S.2d 609 (4th Dep’t Nov. 10. 2011), lv. denied, 2012 N.Y. Slip Op. 72420.

In Unifund, the Fourth Department picked up where it left off in Palisades Collection, LLC v. Kedik, 67 A.D.3d 1329, 1331, 890 N.Y.S.2d 230, 231 (4th Dep’t 2009), holding debt buyers seeking to collect alleged debts strictly to the usual rules of evidence and procedure and rejecting motions for summary judgment that grossly fail to comply with those usual rules.

To paraphrase Jerry Jarzombek, the legendary Texas debt defense lawyer (he's lost something like six out of 4,000 cases or some such ridiculous number) (who I often paraphrase to this effect), the fact affidavit in the usual debt buyer case is essentially as though the plaintiff in a car accident case was to submit a witness affidavit that says "I wasn't there, and I didn't see the accident, but I did read about it, and that guy ran the red light."  Specifically, the debt buyer typically says: (1) although I have no assignment agreement that mentions this account, I do have these documents on Citibank letterhead with this account number on them, and how would I have those if I didn't own the account; (2) I can attest to the fact that these records came from Citibank and ended up in our records; (3) I've never worked for Citibank and know nothing about its records (I wasn't there and didn't see the accident), but these are records that Citibank created in the ordinary course of business at or about the time of the events recorded and maintained and reproduced in a reliable manner (that guy ran the red light).

In Kedik, the debt buyer actually did a bit better than the above, submitting a spreadsheet purportedly listing the assigned account, but its affiant failed adequately to explain where the spreadsheet came from and so failed to show that the spreadsheet was admissible under the business records exception to the hearsay rule.  Unifund takes the logical step of applying the principles of evidence that Kedik applied to proof of assignment to all the putative evidence submitted with such a motion for summary judgment, in particular, account statements.  An employee of Unifund does not have personal knowedge of Chase's records, so cannot authenticate them.  Only someone from Chase could authenticate them.

Even more significantly, the Fourth Department ordered that the defendant's cross-motion for summary judgment be granted and the complaint dismissed.  A debt buyer at least in the Fourth Department will face loss of its case if it makes a motion for summary judgment that inadequately proves standing or inadequately authenticates creditor records.

Lower courts in many places hesitate to treat debt collection suits as real lawsuits to which the usual rules of evidence and procedure apply.  There is often an assumption that the defendant owes the plaintiff money unless a defense of some kind can be marshaled.  See John Skiba's blog post, Are Judges Biased Against Consumers?  One hopes that Unifund helps change the culture in this respect.

The next step for the Fourth Department should be to address original creditors' evidentiary failings.  With routine use of robo-signers original creditors' records affidavits are no more compliant with personal-knowledge requirements than debt buyers', and never make the required threshold showings required under the business records exception in more than utterly conclusory, and thus inadequate, terms.  

Discover Bank Record Falsification Basis for Civil RICO Act Claims

A law firm in Pennsylvania recently filed a RICO class action against Discover Bank alleging systematic, nationwide litigation fraud through the use of falsified documents.  http://www.courthousenews.com/2012/03/14/44677.htm.

The specific conduct alleged in the lawsuit actually seems to occur in the bulk of credit-card lawsuits brought by every original creditor.  In any jurisdiction, to get a judgment in such a case, at some point the creditor must provide a copy of a putative cardmember agreement.  In almost every case, the creditor appears to provide basically a copy of the agreement it happened to be using for new accounts during some year that the account was open, often the last year it was open.  Then the creditor submits a records custodian's affidavit that states tersely that the exhibit attached is "a copy of the terms and conditions governing the account."

But it is indeed not.  To illustrate, if a debtor opened an account in 2008, they should have received a copy of a complete cardmember agreement in force in 2008.  The agreement may be modified from time to time, in which case the creditor should mail a copy of each amendment.  No creditor sends a complete new, revised copy of the agreement.  Thus, if the creditor provides a complete new, revised 2011 cardmember agreement and says that's the agreement that governed the account, that's just a complete, bald-faced falsehood.  It's not specific to Discover Bank.  Indeed, the same law firm has filed and settled numerous suits against other creditors based on the same behavior.  

We suggest that another fraudulent pattern of behavior on the part of credit-card plaintiffs is ripe for a RICO class action.  That is the use of falsified account statements.  It is occasionally obvious that account statements are fake, but most fakes are sophisticated enough that it is not obvious.  One situation where it is obvious, though, is where the account holder has moved during the time period covered by the account statements.  In those cases, generally what we see is that the creditor submits to the court as "true copies of the account statements sent to the defendant" accounts statements that all contain the current address, where the defendant did not live or receive mail during the first months covered.  This reveals that what the creditor has actually done is to essentially merge whatever is currently in its database into a form to generate current account statements.  The statements cannot purport to be "copies" of something mailed to the debtor (as required to make out an "account stated" claim), but are instead falsely described in those terms in the custodian's affidavit.

Contact me if you have received such an affidavit and exhibits in New York.  Provided you can defeat the creditor's suit, you may be able to turn around and sue them in a class action.

State Lower Courts and Agencies Still Disregarding Indian Child Welfare Act Requirements

In a number of recent cases, state Supreme Courts had to slap down lower court decisions that failed to adequately account for Indian sovereign interests in rendering child custody decisions.  The cases are a reminder that although Congress recognized and mandated respect for those interests in 1979 when it passed the Indian Child Welfare Act, 25 U.S.C. §§ 1901-1963 (ICWA), that recognition has been very slow to penetrate the consciousness of the non-Indian bar and judiciary.

The ICWA recognized the role that child protective agencies have played in furthering the genocide of Indian peoples by separating Indian children from their families and placing them with non-Indian households.  See 25 U.S.C. § 1901(3).  The removal of Indian children from their native territorial and cultural context by Euro-American social workers, as such children had long been removed by other government bureaucrats to attend forced boarding schools, was recognized as one among many examples of paternalism run amok.  And it was recognized that genocidal results were being achieved without the need for conscious prejudice or double standards, because the mainstream culture values imposed in every case by child-protective workers have a disparate impact on indigenous peoples who are economically deprived and whose lifestyles, such as reliance on extended kin networks to supervise children, differ from those common in the mainstream.  

The ICWA sought to deal with this history and continuing impact by giving the Indian sovereign nation itself a stake in child custody proceedings involving native children, requiring notice to the tribe and giving it the opportunity to appear to advocate placement with an Indian family.  Having involved the Indian sovereign itself, the ICWA then requires state courts adjudicating child placement matters to apply an order of preferences favoring Indian placements “in the absence of good cause to the contrary.” 25 U.S.C. § 1915(a)-(b). The preferences favor placement with members of the child’s extended family as a first choice, and generally require preference to placement of Indian children with Indian families. Id. According to the House Report accompanying the ICWA, the purpose of § 1915 is “to protect the rights of the Indian child as an Indian and the rights of the Indian community and tribe in retaining its children in its society.” H. R. Rep. No. 95-1386, at 23 (1978) (hereinafter House Report).  As the Supreme Court  explained in Mississippi Band of Choctaw Indians v. Holyfield, 490 U.S. 30 (1989), the ICWA expresses “a Federal policy that, where possible, an Indian child should remain in the Indian community” and seeks to ensure that “Indian child welfare determinations are not based on a ‘white, middle-class standard which, in many cases, forecloses placement with [an] Indian family.’” 490 U.S. at 37 (quoting House Report at 23-24).   

The ICWA thus exists to protect individual and collective rights that have no place in a traditional "best interest of the child" inquiry.  Yet states have often been resistant to the ICWA preferences, and have often effectively expanded the "good cause to deviate" exception so as to entirely efface the ICWA placement preferences and replace it with a traditional "best interest" inquiry.  Compare, e.g., In re. Bird Head, 331 N.W.2d 785 (Neb. 1983) (child's "best interest" provided "good cause" to deviate); Adoption of M., 832 P.2d 518 (Wash. Ct. App. 1992) (same); Adoption of F.H., 851 P.2d 1361 (Alaska 1993) (same); Interest of A.E., 572 N.W.2d 579 (Iowa 1997) (same); and Interest of C.G.L., 63 S.W.3d 693 (Mo. Ct. App. 2002) (same), with Yavapai-Apache Tribe v. Mejia, 906 S.W.2d 152 (Tex. App. 1995) (“the use of the best interest standard when determining whether good cause exists defeats the very purpose for which the ICWA was enacted, for it allows Anglo cultural biases into the picture.”); Matter of C.H., 997 P.2d 776 (Mont. 2000) (similar); and Matter of S.E.G., 521 N.W.2d 357 (Minn. 1994) (similar); see also Michael J. Dale, State Court Jurisdiction Under the Indian Child Welfare Act and the Unstated Best Interest of the Child Test, 27 Gonz. L. Rev. 353.  The Bureau of Indian Affairs has articulated Guidelines that provide an alternative explication of "good cause" that does not reduce to traditional "best interest" analysis, which many state courts have followed.  Guidelines for State Courts; Indian Child Custody Proceedings, 44 Fed. Reg. 67584-67595, 67594 (1979) (defining “good cause” to include (i) request of the biological parents or of the child if of sufficient age; (ii) extraordinary physical or emotional needs; or (iii) unavailability of suitable families for placement after a diligent search for families meeting the preference criteria).  See Matter of S.E.G., 521 N.W.2d at 363; Matter of C.H., 997 P.2d at 782.

Power of the People Stronger Than the Power of the Bankers

Fight Back! News reports on people's victory in New Jersey where, through coordinated popular mobilizations and legal action, sufficient pressure was put on the state government and the bank that the bank finally conceded that it did not own the mortgage and that its default foreclosure was illegitimate and should  not go forward.  See http://www.fightbacknews.org/2012/5/11/people-s-power-nabs-banksters-their-attempted-nj-home-heist.

This is some truly inspiring organizing and one hopes to see more of it in this economy.  During the Great Depression, of course, we had troops of armed farmers showing up at Sheriff's sales and ensuring that nobody bid against the current owner, or showing up at evictions and moving the evictee's stuff back into their house.  Illegitimate bank action brought, in response, sharp community solidarity.  There is some of this out there today.  We need more.    

Increasing Awareness of Credit Card "Robo-Signer" Abuses

A recent series in the American Banker magazine has led to greater public awareness of abusive and fraudulent litigation tactics in consumer debt-collection lawsuits brought by credit-card originators.  Business Week takes up the story as well.

So-called "robo-signing" - in which bank employees sign off on thousands of litigation documents that they have not read and the contents of which they have no knowledge - has caused a public scandal for many of the same companies in the mortgage foreclosure context, leading some banks to institute foreclosure moratoria while they supposedly put some internal controls in place to ensure that their litigation documents are legitimate.  The phenomenon has long been strongly suspected by credit-card defense attorneys and in some cases confirmed by deposition or trial testimony.  It has not, until now, led to public scandal, however, and indeed, the banks have taken action more in the nature of covering it up than of the contrition shown in the foreclosure context.  

For example, an examination of Citibank's records-custodian affidavits in credit-card cases reveals a progressive removal of information suggesting that the affiants are robo-signers.  Affiants described a few years ago as essentially third-party debt collectors with the full-time job of supervising outside attorneys and no role in record-keeping other than that of transmitting records to counsel are described in current versions of the same form affidavits vaguely as records custodians and agents of Citibank and fully participatory and knowledgeable of the record-keeping process.  The likelihood remains that the same individuals in the past as now basically go to work and sit around signing affidavits all day at a pace rendering it humanly impossible to have obtained personal knowledge of the facts of a single case.

The specific impetus for the new public revelations are the assertions of a whistleblower from JPMorgan Chase named Linda Almonte.  Ms. Almonte was fired after raising her concerns internally at Chase, and subsequently "told all" in a letter to the SEC.  She tells of Chase employees absent-mindedly working through stacks of records-custodian affiavits, signing huge piles of them while attending unrelated meetings, without having reviewed or obtained knowledge of underlying records.  No surprise there for debt defense lawyers, though the revelations are notable for their publicity. Of more interest is that Ms. Almonte reveals that an internal audit at Chase actually disclosed that the bulk of the credit-card account records reviewed did contain significant errors, apparently stemming from Chase's blending of various record-keeping systems over the course of its various corporate mergers and reorganizations.  

Indeed, there appears to be more to the process of spitting out a current account balance owed in a credit-card lawsuit than just pressing a button on a computer.  Chase's various systems had to be reconciled essentially by hand by low-level employees whose work basically wasn't checked but was simply trusted by the "robo-signers."  As Chase is not the only bank that has gone through mergers and reorganizations over the years, this certainly suggests that all originators' assertions regarding the contents of their records should be treated with skepticism and potential sources of error in merged or revised record-keeping systems investigated.

Securitization as Usury Laundering

Professor Adam Levitin has written an article in the Yale Journal of Regulation in which he argues that because the bulk of credit-card debt and much mortgage debt is securitized in transactions in which actual payment flows go to and from state-law entities (trusts), state regulators should be able to pursue otherwise unachievable consumer protection goals by regulating the activity of the state-law trust rather than the national bank or FDIC-insured bank sponsoring it, which would be immune to such regulation because of federal pre-emption.  Professor Levitin - who has been active for some years in advocating for federal action to regulate consumer credit, including testifying in Congress at hearings on credit-card practices, including hearings about the CARD Act - calls this concept "Hydraulic Regulation," the idea being that state regulators can in practice achieve regulation of the primary target, federally exempt actors, by regulating secondary targets (state-law trusts), with market mechanisms hydraulically transmitting the force of the latter onto the former.  This article stands as a laudable example of academic engagement in the real-life concerns of consumer attorneys and regulators, and provides an extremely worthwhile contribution to both worlds that should be closely considered.

Professor Levitin goes into some detail in evaluating the caselaw concerning federal pre-emption, including looking at the payday lender "charter-rental" cases, which essentially conclude that the mere fact that a loan was issued on national bank letterhead does not mean there is federal pre-emption.  If the debtor can show that the loan was in substance a loan from a non-exempt payday lender, the debtor may be able to invoke state-law protections.

In a subsequent blog post, Professor Levitin states more explicitly than in the article that he believes that in light of the securitization phenomenon, debtors should be able to raise a state-law usury defense against collection actions seeking to recover credit-card or other debt that has been securitized.  (Further discussed on Naked Capitalism)  This is a potentially very interesting argument for consumer law attorneys to pursue.

If published opinions are any gauge, debtors have had little luck raising securitization-related defenses to debt-collection lawsuits.  Many of the worst opinions have come in cases where pro se defendants attempted to pursue the defense, and all the negative opinions address efforts to raise securitization in an effort to show a lack of standing to sue or to argue that the trust must be joined to the lawsuit as the "real party in interest."  See, e.g., http://www.creditinfocenter.com/forums/there-lawyer-house/308095-yet-another-case-securitization-defense-failure.html.

These arguments are problematic insofar as the securitization transaction documents themselves generally provide some language to the effect that at charge-off securitized receivables revert back to the originator.  Sometimes the transaction documents clearly state that only receivables and not underlying contracts or accounts are assigned or transferred, adding further confusion.  In light of these transaction characteristics, courts have generally had little difficulty brushing off assertions that the trust is the only proper plaintiff, and hold that the originator can sue as the actual counterparty and as the party presently entitled to payment.

Indeed, Professor Levitin's discussion of the issue also seems to overlook these characteristics, as Professor Levitin appears to assume that the trusts are going around suing people and so that there should be a clear-cut issue presented of whether the trust succeeds to its sponsor's federal pre-emption (as he persuasively argues it does not).  But it is always the national bank or FDIC-insured originator actually filing lawsuits to collect these debts.  This makes it more difficult than would otherwise be the case to raise even a usury defense.  However, unlike previous attempts to invoke standing as an issue where securitized debt is concerned, state courts have long held with respect to usury that attempts to "launder" usury will not be tolerated, and state courts will look behind the form of a transaction that has been contrived to create a non-usurious appearance that deviates from a usurious economic substance.  For example, courts have often deemed otherwise exempt transactions, such as installment sales or leases, to be truly loans where the documentation of the transaction as not a loan was essentially a legal fiction.  Similarly, courts have treated exempt parties (corporations) as covered parties where the use of the exempt party was a subterfuge, as when the real recipient of the loan was a person and the insertion of a corporation into the transaction was for the sole purpose of evading the usury laws.  A similar argument can be made that where the credit-card loan transaction economically consists of a state-law trust obtaining money from public investors and passing it (perhaps through another trust and then) to the consumer while the originator stands in the background and performs contractual "servicing" duties in return for a fee, the fact that on paper the loans are from a national bank should not matter.

Welcome to Law Praxis

As practicing attorneys, our optimal success requires an active engagement with legal theory and with the concerns of the broader community - an engagement that reconciles and brings the two together.  We must aim for more than just legal practice.  We must aim for legal praxis.

Praxis "is not simply action based on reflection. It is action which embodies certain qualities. These include a commitment to human well being and the search for truth, and respect for others. It is the action of people who are free, who are able to act for themselves. Moreover, praxis is always risky. It requires that a person 'makes a wise and prudent practical judgement about how to act in this situation.'"  W. Carr & S. Kemmis Becoming Critical: Education, knowledge and action research 190 (1986). 

This blog is a place for reflection and discussion of legal praxis.  I am a sole practitioner, general litigator, consumer and civil rights lawyer, and legal scholar.  Join the discussion!