On Tuesday a federal judge in Pennsylvania dismissed a proposed class action against Bank of America over collection litigation on accounts Bank of America had previously securitized.

The case, Willard v. Bank of America, et. al (Case No. 2:16-cv-01199, United States District Court, Eastern District of Pennsylvania) had been filed in March of this year. insideARM had written about the initial filing. See our March 17, 2016 article: Bank of America Hit with Class Action Over Debt Collection Litigation on Securitized Accounts.

The very next day insideARM wrote another story regarding a similar case that had been filed by the same attorney in 2014. See: Bank of America Debt Securitization Case is Actually Round Two.

Background & Procedural History

On March 15, 2016, Plaintiff filed a class action Complaint pursuant to the Fair Debt Collection Practices Act (FDCPA), the Pennsylvania Fair Credit Extension Uniformity Act (PFCEUA), the Unfair Trade Practices and Consumer Protection Law (UTPCPL), and the Racketeer Influenced and Corrupt Organizations Act (RICO). Plaintiff also raised state law claims for unjust enrichment and fraudulent misrepresentation. Plaintiff sued Bank of America (B of A), Bank of America Consumer Card Services (BACCS), BA Credit Card Funding (Funding) (collectively the “Bank Defendants”), Blatt, Hasenmiller, Leibsker & Moore, LLC (BHLM), and 100 John Does.

The summary allegations were that B of A had “engaged in a scheme whereby they issue credit cards to consumers and, then seek to collect the amounts allegedly due from each card holder’s use of the credit card, despite the fact that B of A has sold, transferred, assigned or otherwise conveyed its beneficial interest in each consumer’s credit card account to a trust as part of a financial transaction known as a credit card securitization. Having relinquished its beneficial interest, B of A no longer has a debt obligation owed to it by Plaintiff or the Class.”

The complaint alleged very specific elements of the B of A “sale” process from account creation through securitization; a process that shows an account moving via “sale” from Bank of America to Bank of America Consumer Credit Services to Bank of America Funding LLC to Wilmington Trust Company.

The complaint then alleged:

“Wilmington Trust Company then underwrites a bond offering. The bonds are placed into tranches from senior debt to junior debt and each tranche has a certain amount of assets. Bank of America Consumer Credit Services still services the account by sending out bills and accepts payment, but Bank of America has given up ownership rights as required to Wilmington Trust Company, therefore Bank of America and its entities have given up its rights to sue its cardholders when they default on their debt.”

Finally, the complaint alleged:

“Despite the fact that Bank of America intentionally relinquished its beneficial interest in Bank of America accounts, it has continued to pursue, along with its affiliates and the defendant law firms, collection lawsuits against Plaintiffs and members of the Class to recover the obligations allegedly owed on the Bank of America accounts.”

On May 11, 2016, B of A filed a motion to dismiss the Complaint. On May 18, 2016, BHLM moved for leave to join the motion. Plaintiff then sought in an unopposed motion additional time “to respond to the Motion to dismiss,” which the Court granted.

However, on June 30, 2016, instead of filing a response to the motion to dismiss, Plaintiff filed an Amended Complaint. The Amended Complaint is substantially the same as the original Complaint. Most of the changes represent argument against assertions made by the Bank Defendants in their first motion to dismiss and the addition of paragraphs concerning the filing of UCC termination statements. Plaintiff also adds a seventh count for civil conspiracy, essentially alleging that numerous organizations have engaged in the alleged scheme, including Defendants.

In July and early August, the Defendants filed motions to dismiss the Amended Complaint. On August 22, 2016, Plaintiff filed a response to the motions to dismiss the Amended Complaint.   On August 24, 2016, the Court held oral argument regarding the pending motions. Without leave from the court to do so, Plaintiff then filed a supplemental response on August 28, 2016.

The Court’s Memorandum and Opinion

The Honorable Eduardo C. Robreno presided over the case. He issued a 14-page Memorandum. A copy of the memorandum can be found here.

The Defendants had argued in their motions to dismiss that the Plaintiff’s basic assumptions about the securitization process were incorrect. Judge Robreno agreed with the defendants that “Plaintiff’s premise is fundamentally flawed. As a result, there is no need for the Court to address the individual counts in the Amended Complaint since they all stem from the erroneous allegations.”

Judge Robreno then wrote:

“Plaintiff’s first contention – that B of A loses all interest in the credit card account once it sells the receivables – has been raised previously by this Plaintiff’s counsel and rejected by this Court in a decision subsequently affirmed by the Third Circuit. Scott v. Bank of America, et al, No. 13-987, 2013 WL 6164276 (E.D. Pa. Nov. 21, 2013), aff’d, 580 F. App’x 56 (3d Cir. Nov. 3, 2014). Moreover, every time this argument has arisen across the country, it has been rejected.

The Bank Defendants argue that Plaintiff is relying on a flawed theory that when creditors securitize receivables, they somehow lose the ability to collect on the underlying debt. They contend that, as they explained in Scott, under the Pooling Agreement which controls these sales, the Bank Defendants transfer eligible credit card receivables to a trust, which then sells bonds backed by those receivables. So long as the accounts are in good standing, their receivables remain in the trust. However, if an account falls into default and has all of its receivables charged off as uncollectible, those receivables are immediately ejected from the trust and sold back to Funding, which then sells them back to B of A through BACCS. As the Pooling Agreement makes explicitly clear, the only items being sold to the trust are the receivables, not the underlying accounts. B of A maintains ownership of the related credit card accounts and the right to collect thereon throughout the entire process.

The identical argument, based on nearly identical facts was raised in Scott by this Plaintiff’s counsel. Judge Pratter in that case recognized that “both mortgage and credit card cases[] have rejected unequivocally the idea that securitizing receivables changes the relationship between a debtor and a creditor.” 2013 WL 6164276. She also noted that the Pooling Agreement controlling the transactions made “clear that only receivables, not entire accounts, are sold in the securitization process,” citing Section 2.01, just as the Bank Defendants have argued in this case. Ultimately Judge Pratter concluded that “Scott has not provided the Court with adequate allegations or legal arguments to conclude that the Bank Defendants violated any laws or contract provisions in their handling of her account.”

On appeal, the Third Circuit Court of Appeals affirmed Judge Pratter’s decision holding that,

Scott misapprehends the effect of securitizing a credit card receivable. ‘Credit card securitization involves the securitization solely of the receivables, not of the accounts themselves.’” Scott v. Bank of Am., 580 F. App’x 56, 57 (3d Cir. 2014).

This Court agrees with the analysis presented in these cases and holds that Plaintiff’s argument to the contrary is meritless.”

Plaintiff also argued that B of A needed to of File a UCC Termination Statement before removing the receivables from the trust and that since that was not done, B of A did not have rights to collect on the accounts.

Judge Robreno also rejected that argument. He wrote:

“Plaintiff’s arguments amount to a straw house built on the sand – their foundations shift and are ultimately insubstantial. Plaintiff admits that her theory regarding the necessity of a termination statement is novel. However, she provides no solid authority from which to build her argument and instead spins only gossamer allegations.

Plaintiff has failed to establish that before receivables associated with a defaulted credit card account may be transferred from a trust back to the bank that issued the card, the bank must request that the trust issue a termination statement.”

As a result of Plaintiff’s flawed premise, the Amended Complaint must be dismissed. Given this fundamental fault, any further amendment to the Complaint would be futile. As a result, the Court will dismiss the Amended Complaint with prejudice.”

insideARM Perspective

Three strikes and you are out? Plaintiff’s attorney has now lost this “securitization” argument three times; twice in the Scott case, and now again in the Willard case. Will there be an appeal of this case? Will there be future lawsuits filed with a different theory or in a different jurisdiction? insideARM will continue to monitor the case and similar cases and report on future developments.


Next Article: FDCPA Case Law Review for August 2016, ...