Banks and Stolen Money/Westbrook Law of Grand Rapids, Michigan

It is surprisingly common for company bookkeepers, controllers and accountants to steal company funds and funnel the money to their banks and other creditors.  Today’s Ponzi schemes (think Bernie Madoff, or the closest local analogue, CyberNET) also cannot survive without using bank services like credit accounts, deposit accounts and wire transfer facilities.  More than once in my practice I have faced the questions: when the fraudster no longer has the ill-gotten funds, what can the victim do?  Do the banks and other creditors have to account for the stolen funds?  These are simple questions with complex answers.

In the case of CyberNET (also called Cyberco), the company was engaged in a Ponzi-like scheme amounting to a $100 million fraud on its creditors, mostly consisting of equipment leasing companies.  CyberNET’s line bank, Huntington National Bank, saw warning signs that CyberNET’s business was not what it appeared to be.  It even went so far as to tell CyberNET to find a new bank, and negotiated accelerated paydowns of its $17 million line of credit to CyberNET.  That credit line was fully repaid just before an FBI raid of the company effectively shut it down. The creditors left holding the bag asked the question: would Huntington have to account for any of the tens of millions it received that were proceeds of the fraud?  The answer was yes, but not without a complicated and protracted legal fight.

Michigan law and the bankruptcy code each provide specific means of recovering stolen money and fraudulent transfers of funds.  In Huntington’s case, while the bank successfully defended claims that it had “aided and abetted” the CyberNET fraud, it ultimately lost in an adversary proceeding in bankruptcy court on theories of avoidance of fraudulent transfers.  These theories depended upon the bank failing to prove that it accepted the illegitimate funds “in good faith.”  The judgment against Huntington, totaling over $80 million, is currently on appeal to the Sixth Circuit.

An avoidance theory may also be useful outside the bankruptcy context, where defrauded parties may be able to make use of Michigan’s Uniform Fraudulent Transfers Act to pull back ill-gotten funds that were subsequently transferred to a bank, creditor or another.  In that instance, the pivotal questions are again the recipient’s “good faith,” along with an inquiry whether the recipient “gave value” for the transfer.

Even negligence and unjust enrichment theories may be relied upon to hold recipient of stolen or fraudulently obtained funds accountable.  In Michigan, for example, a common-law “duty of inquiry” exists whereby a bank must conduct a “reasonable inquiry” to ensure that when it receives funds from a third party that does not owe it money (through, e.g., a company check stolen by its bookkeeper), that the presenter is authorized to use those funds.  Otherwise, it accepts third-party funds at its own peril.  It cannot simply look the other way and accept what it should know are stolen or ill-gotten funds.

Litigating against banks is never a simple proposition, and should not be done lightly.  Banks are accustomed to fighting lawsuits and can afford teams of skilled attorneys.  However, in the right case, and pursuing the right legal strategy, they are not untouchable–as the Huntington case clearly shows.

John Oliver, Consumer Advocate/Westbrook Law of Grand Rapids, Michigan

As an attorney representing individuals in disputes with large corporations for nearly a decade, it has frequently occurred to me that most consumers are unaware of substantial legal rights they have, including laws that exist for the express purpose of protecting consumers from specific unfair business practices.  I have been surprised to find a kindred spirit in comedian John Oliver of HBO’s Last Week Tonight with John Oliver, whose concern with consumer affairs on the show has included major problems with credit reporting as well as debt collection and debt buying scams (caution: strong language).  I am pleased to see these troubling issues discussed in a popular forum, by a public figure with a genuine passion for consumer rights.

What Mr. Oliver does not explore in these entertaining and informative pieces are the legal frameworks available under the Fair Credit Reporting Act (“FCRA”) and Fair Debt Collection Practices Act (“FDCPA”), which encourage aggrieved consumers and their attorneys to act as “private attorneys general” to regulate the industries that abuse credit reports and those that resort to unfair and deceptive means of collecting seriously delinquent debts–some of which may even be time-barred, or not owed in the first place.  While these statutes and the numerous precedents that interpret them are not the stuff of late night television, they are major tools in the arsenal of consumer advocates such as myself, and can form the basis for significant recoveries for consumers themselves.

Spokeo v. Robins/Westbrook Law of Grand Rapids, Michigan

Many laws designed to protect individuals from corporate abuses rely in part on the imposition of “statutory damages.”  This typically means that if the plaintiff can show a violation of the law, there is some minimum amount of money that must be awarded.  These are exceptions to the general rule that a plaintiff’s recovery is limited to the amount of actual damages proven.

Statutory damages are an important part of the enforcement mechanisms in the Fair Debt Collection Practices Act (“FDCPA”), Fair Credit Reporting Act (“FCRA”), Real Estate Settlement Procedures Act (“RESPA”), Truth in Lending Act (“TILA”) and many other consumer protection laws.  This is because the availability of statutory damages acts as a deterrent to violations of the law that are destructive, but whose economic impact on any individual may be difficult to prove or speculative.  For example, where a statute such as the FCRA or FDCPA gives a consumer the right to receive certain information, a company’s failure to comply might not give rise to any provable “actual” damages.  Enforcement of those rights then depends upon statutory damages.

The United States Supreme Court was presented with a  far-reaching challenge to statutory damages in the recent case Spokeo v. Robins.  In that case, the plaintiffs in a class action had alleged that a web site used for personal investigations and background checks had violated the Fair Credit Reporting Act by failing to maintain procedures to ensure accuracy of its reports.  The plaintiff class sought statutory damages under the FCRA.  The defendant argued that because the plaintiff had not shown any “actual damages,” he lacked “standing” to bring the lawsuit under Article III of the Constitution–even though the FCRA itself provides for a cause of action that seeks only statutory damages.  Without standing, the plaintiff’s case could not be maintained.

The Spokeo case was on appeal from the United States Court of Appeals for the Ninth Circuit, which had held that violation of the FCRA itself was enough of an “injury” to satisfy the Article III standing requirements.  The United States Supreme Court disagreed in part, finding that the Ninth Circuit had failed to correctly analyze whether a “concrete” injury had been adequately alleged by the plaintiff.  The Court remanded the case for a new determination of this issue.

On its face, the Spokeo decision might appear harmful to the interests of consumers, given that many important protections in the FCRA, FDCPA, RESPA and TILA are only effectively enforceable through statutory–not actual–damages.  However, within the Court’s opinion are indications that those protections remain viable.  For example, the opinion acknowledges that a consumer’s injury need not be “tangible” in order to provide a basis for Article III standing.  It also notes that “risk of real harm” can satisfy the injury requirement for standing.  This is an especially important note in the context of statutes giving consumers the right to accurate information, where the failure to provide that information creates a real risk of harm.

In the coming months and years, it is expected that many corporations will rely on and attempt to expand on Spokeo to constrain consumer rights.  Vigilant consumer advocates should be cognizant of this and work to ensure that the courthouse doors are not closed to their clients.

Foreclosure as Debt Collection/Westbrook Law of Grand Rapids, Michigan

Michigan law is notoriously unfavorable to homeowners facing foreclosure.  Homeowners who have been unfairly treated by lenders, mortgage servicers or foreclosure lawyers have been denied relief in Michigan’s courts time after time, as the traditional legal theories used to combat wrongful foreclosures have slowly eroded.

One frequently neglected tool in the homeowner’s arsenal is the federal Fair Debt Collection Practices Act (“FDCPA”), which restricts the foreclosure activities of attorneys and default mortgage servicers.  The FDCPA, long used by consumer protection lawyers against debt collectors, also prohibits many types of misleading, deceptive and unfair activities by these servicers and foreclosure lawyers.  The Sixth Circuit confirmed the applicability of the FDCPA to foreclosure activity in the important case  Glazer v. Chase Home Finance LLC, paving the way for consumer lawyers to hold foreclosing parties accountable for money damages and attorney fees.  Thus, while the FDCPA may not preserve the homeowner’s property rights in cases of wrongful or unfair foreclosure, it may be used to obtain restitution for the homeowner’s economic losses and mental anguish.

Contact us if you have experienced wrongful, unfair or deceptive conduct in connection with a foreclosure on your home.  We may be able to help.

TJW