United States: CFPB Wins MTD, But Loses On Scienter Standard For Aiding-And-Abetting Claims

A federal judge has rejected the CFPB's argument that the CFPA should incorporate a lower standard for "recklessness" than that to secondary liability under the Securities and Exchange Act of 1934 ("SEC Act"). On September 1, 2015, in one of the first decisions substantively interpreting standards for aiding and abetting under the CFPA, Consumer Financial Protection Bureau v. Universal Debt & Payment Solutions, LLC, No. 15 CV 00859 (N.D. Ga. Sept. 1, 2015), Judge Richard W. Story held that the standard for "recklessness" under the CFPA, as under the SEC Act, was "severe" recklessness, a higher bar than that for recklessness in civil law cases. Judge Story also adopted the standard that courts typically apply for "substantial assistance" under the SEC Act, holding that proximate cause was relevant but not a necessary element of an aiding-and-abetting claim under the CFPA.

The Complaint

The Bureau's complaint alleged three payment-processing companies (the "Payment Processors") aided and abetted a scheme by individuals who allegedly used improper threats and harassment to coerce individuals to pay phantom debts to their firm, Universal Debt & Payment Solutions, LLC. The Bureau claimed that by facilitating the efficient collection of consumer funds through payments by credit and debit card, the Payment Processors provided substantial assistance to Universal Debt's and the other debt collectors' alleged scheme to defraud consumers, and directly committed unfair acts or practices. The complaint alleged that this conduct was "knowing or reckless" because the Payment Processors approved the debt collectors' applications to accept payments, which were "replete with indicia of fraud," ignored their own stated policies concerning whether to approve the debt collectors' applications, and ignored warnings from payment networks and others that the debt collectors were allegedly scheming to defraud consumers.

The Scienter Requirement: Knowledge or "Severe Recklessness"

As Judge Story noted, to date there had been no case law interpreting the CFPA's substantial assistance provision, which states that it is unlawful for "any person to knowingly or recklessly provide substantial assistance to a covered person or service provider in violation of the provisions of section 5531 of this title [prohibiting unfair, deceptive, or abusive acts or practices]." 12 U.S.C. § 5536(a)(3). In opposing the Payment Processors' motions, the CFPB argued that "recklessness" under the CFPA should be afforded its general common law meaning. The Restatement (Third) of Torts provides that a person acts recklessly if he or she "(a) knows of the risk of harm created by the conduct or knows facts that make the risk obvious to another in the person's situation, and (b) the precaution that would eliminate or reduce the risk involves burdens that are so slight relative to the magnitude of the risk as to render the person's failure to adopt the precaution a demonstration of the person's indifference to the risk."

Rejecting the CFPB's argument, Judge Story held that the proper scienter standard was the higher "severe recklessness" standard previously used by the Eleventh Circuit and other courts in connection with § 20(e) of the SEC Act, which mirrors the language of 12 U.S.C. § 5536(a)(3). "Severe recklessness" requires more than common law recklessness, i.e.:

Severe recklessness is limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it.

Order at 17 (citing Woods v. Barnett Bank of Ft. Lauderdale, 765 F.2d 1004, 1010 (11th Cir. 1985)) (additional citations omitted). Thus, under Universal Debt, recklessness under the CFPA is reserved for "extreme" departures, and is more akin to constructive knowledge than ordinary civil law recklessness or negligence.

Judge Story held that "severe recklessness" is the CFPA standard, even though when the Eleventh Circuit developed the "severe recklessness" standard, the SEC Act limited aiding-and-abetting liability to "knowing" substantial assistance and did not contain the word "recklessly." ("Recklessly" was added to Section 20(e) in 2010 as part of Dodd-Frank, along with the new CFPA provisions.) The Eleventh Circuit has explained in more recent cases, citing the legislative history of Dodd-Frank, that the addition of "recklessly" to Section 20(e) was not meant to lower the scienter requirement to that of common law recklessness but rather to correct the holding of a growing number of courts that conclude that "knowledge" meant actual knowledge and to clarify that recklessness could, in "severe" circumstances, create liability. Apparently, Judge Story agreed, choosing to apply the "severe recklessness" standard here.

Substantial Assistance: Proximate Cause Not Required

The Bureau and the Payment Processors largely agreed that the Second Circuit's standard for "substantial assistance" liability under § 20(e) of the SEC Act also applied under § 5536(a)(3). The parties disagreed, however, on the question of whether proximate cause is an element of the claim. The court looked to SEC v. Apuzzo, 689 F.3d 204 (2d Cir. 2012), for guidance. In Apuzzo, the court held that the SEC must allege that the defendant "in some sort associated himself with the venture, that the defendant participated in it as something that he wished to bring about, and that he sought by his action to make it succeed." Judge Story observed that while the Apuzzo court recognized that proximate cause is relevant to identifying substantial assistance, it expressly stated that proximate cause was not a distinct element of an aiding-and-abetting claim. Judge Story adopted the Apuzzo standard, and held that proximate cause is "relevant but not required" for CFPA aiding-and-abetting liability.

Judge Story further noted, as the Apuzzo court did, that the burdens of scienter and substantial assistance are inversely proportionate—that is, a high degree of actual knowledge lessens the burden in alleging substantial assistance.

To see how Judge Story applied these standards to the Bureau's allegations, check out his order—the punch line is that he denied the Payment Processors' motions to dismiss, finding the CPFB's factual allegations satisfied the aiding-and-abetting standards set forth in his opinion, including the higher bar for scienter. This may not be the long-term victory the Bureau was hoping for, though, because this first opinion interpreting the CFPA's aiding-and-abetting provision also denied the CFPB the additional leeway it sought for asserting claims of "reckless" secondary liability.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions