Reyes v. Netdeposit, LLC
| Decision Date | 02 September 2015 |
| Docket Number | No. 14–1228.,14–1228. |
| Citation | 802 F.3d 469 |
| Parties | Reynaldo REYES, on behalf of himself and all others similarly situated, Appellant v. NETDEPOSIT, LLC ; MP Technologies d/b/a Modern Payments ; Teledraft, Inc.; National Penn Bank; Wells Fargo Bank, N.A.; Wachovia Bank, N.A.; Zions First National Bank. |
| Court | U.S. Court of Appeals — Third Circuit |
Howard I. Langer, Esq. (Argued), John J. Grogan, Esq., Edward Diver, Esq., Irv Ackelsberg, Esq., Peter E. Leckman, Esq., Langer, Grogan & Diver, P.C., Philadelphia, PA, Attorneys for Appellant.
Jason A. Snyderman, Esq. (Argued), Grant S. Palmer, Esq., William R. Cruse, Esq., Bridget E. Mayer, Esq., Blank Rome LLC, Philadelphia, PA, Attorneys for Appellees.
Charles L. Becker, Esq. (Argued), Kline & Specter, PC, Philadelphia, PA, Attorney for Amici Curiae, Public Interest Law Center of Philadelphia and Community Legal Services.
Julie Nepveu, Esq., AARP Foundation Litigation, Washington, DC, Attorney for Amici Curiae AARP, National Association of Consumer Advocates, National Consumer Law Center and Consumer Federation of America.
Richard B. Tucker, III, Esq., Tucker Arensberg, Pittsburgh, PA, Attorney for Amici Curiae American Bankers Association and Independent Community Bankers of America.
Robert J. LaRocca, Esq., Kohn, Swift & Graf, Philadelphia, PA, Attorney for Amici Curiae Richard Blumenthal, Robert Casey, Edward J. Markey and Allyson Y. Schwartz.
Francis X. Riley, III, Esq., Charles M. Rowan, Jr., Esq., Saul Ewing, Princeton, NJ, Attorney for Amicus Curiae Risk Management Association.
Before: McKEE, Chief Judge, SMITH and SHWARTZ, Circuit Judges.
Reynaldo Reyes appeals the District Court's denial of his motion to certify a class to sue for alleged civil violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1962(c), (d). The defendants are Zions First National Bank (“Zions Bank”) and its payment-processor subsidiaries, Netdeposit, LLC and MP Technologies (together, “Modern Payments”).
Reyes alleges that the defendants conspired to conduct a fraudulent telemarketing scheme that caused unauthorized debits from bank accounts owned by himself and members of the proposed class.
The District Court held that class certification was inappropriate because there were no issues common to the class and Reyes could therefore satisfy neither the commonality requirement of Federal Rule of Civil Procedure 23(a), nor the predominance requirement of Rule 23(b)(3). This interlocutory appeal followed.1
Reyes alleges that the defendants conspired to conduct a fraudulent scheme whereby certain telemarketing firms would contact unsuspecting individuals and offer them something of little or no value.
Reyes alleges that, during unsolicited phone calls with unsuspecting consumers, the telemarketers would obtain bank account information which was used to make unauthorized debits from the consumers' bank accounts.2 In Reyes' case, in an unsolicited phone call in November 2007, telemarketer NHS Systems told Reyes that he qualified for a free government grant. NHS Systems then requested Reyes' bank account information, which he provided.
Telemarketers such as NHS Systems cannot readily obtain funds directly from consumers' bank accounts because most banks are extremely reluctant to allow them to debit accounts. Accordingly, telemarketers usually contract with payment processing entities that debit bank accounts on the telemarketer's behalf. In Reyes' case, NHS Systems did exactly that. It provided Reyes' bank account information to Modern Payments, a third-party payment processing agency and subsidiary of Zions Bank. Modern Payments then caused Zions Bank to initiate an Automated Clearing House (“ACH”) debit of Reyes' bank account at Commerce Bank. Pursuant to Zions Bank's request, Reyes' funds on deposit with Commerce Bank were transferred to Modern Payments' account at Zions Bank, and ultimately transferred to NHS Systems, the Originator. Two debits were processed from Reyes' account using this ACH debit process, one for $29.95 and another for $299.95.3 Reyes v. Zions First Nat'l Bank, Civ. Action No. 10–345, 2013 WL 5332107, at *1 (E.D.Pa. Sept. 23, 2013).
The ACH debit process is an alternative to traditional checking which is based on the transfer of paper instruments. When an ACH transfer occurs, an Originating Depository Financial Institution, like Zions Bank, initiates an ACH entry at the request of an Originator (such as NHS Systems). Such requests can also be made through third parties at the request of the Originator. As we have just explained, Reyes alleges that Modern Payments caused Zions Bank to take ACH debits from bank accounts owned by him and other members of the putative class at the request of the telemarketers, like NHS Systems.
The Originating Depository Financial Institution (here, Zions Bank) aggregates payments from customers and transmits the payments in batches to an ACH Operator (either the Federal Reserve or the Clearing House). The Operator receives and sorts the batched payments and makes the funds available to the Receiving Depository Financial Institution. That institution, in turn, debits or credits the relevant account based on the ACH entry. Here, Reyes alleges that Modern Payments credited the accounts of each of the telemarketers in the amount of funds fraudulently debited from unsuspecting victims. Both Modern Payments, as payment processor, and Zions Bank, as the processor's bank, would have collected a fee and then deposited the balance of amounts debited from consumers directly into the account of the telemarketer.4
Reyes alleges that his bank account and the accounts of other consumers subjected to this fraudulent enterprise did not have sufficient funds to satisfy many of the unauthorized debits.5 Reyes called NHS Systems to complain about the two withdrawals from his account, but he alleges NHS Systems provided him with a misleading audio recording.6
Thereafter, Reyes initiated this action on behalf of himself and a class of all individuals in the United States as to whom ACH debit entries or [remotely created check] drafts on their accounts were prepared by defendants Netdeposit, Modern Payments, or Teledraft during the four-year period immediately preceding the filing of this action and finally charged to the class members' bank accounts by a Telemarketer, or pursuant to information provided to defendants [Netdeposit, Modern Payments, or Teledraft] by the Telemarketers, or who otherwise incurred any bank charges as a consequence of such ACH debit entries or [remotely-created checks].
The legal theory underlying this suit is that the defendants were operating a RICO enterprise that was a total sham.7 The proof that Reyes offers to support that claim includes the inordinately high “return rates” of the telemarketers who did business with Modern Payments and Zions Bank. “Return rates” refer to how often an ACH debit cannot be completed. There are many reasons why a transaction may not be completed. These include (but are not limited to) insufficient funds or a customer complaint regarding the transaction. These complaints can result in the debited funds being credited back to the consumer's bank account. Return rates are collected by NACHA (previously known as the “National Automated Clearing House Association”), a not-for-profit association that administers and manages the ACH Network and other electronic transactions.
Reyes stresses that “the lowest return rate at issue [here] was 25 times the national average of 1.25%.” Appellant Br. at 26 (emphasis in original). Moreover, that was the telemarketer with the lowest rate. As Reyes notes, he produced testimony that “[m]ost were over 50 times that average.” Id. at 25–26 (citing JA 661, 663). According to Reyes, the high return rates establish that Zions Bank and Modern Payments had reason to know that the telemarketers were engaged in fraudulent conduct.
Reyes produced additional evidence to support his argument. That evidence included internal e-mails wherein Zions Bank, Netdeposit, and Modern Payments discussed the “staggering” return rates, JA 686, and the “alarm” that their high return rates had caused NACHA. Id. at 814–15. According to Reyes, “[w]ithin the first three months of opening Modern Payments, for example, Zions was notified of the likelihood of fraud by the Federal Trade Commission (“FTC”), NACHA, and its own officers.” Appellant Br. at 28. There was also evidence that these defendants communicated concern that they may be at risk for some of their business lines being used for money laundering. JA 692.
Reyes claims the evidence establishes that “[e]ach of the[ ] frauds operated in the same way, luring consumers with some kind of ‘card’ or ‘benefit’ to obtain their bank account information.” Appellant Br. at 18.8 These included “promises of un-secured loans, pre-paid credit cards, merchandise-club cards, identity-theft protection plans, and health-care discount plans.” Meyer Decl., JA 1639–40 ¶ 19. Thus, although there is some variation in the “benefits” offered and the particular way each fraud was perpetrated, Reyes asserts that there is no need to examine each individual transaction “[b]ecause the business model of these schemes is inherently fraudulent[.]” Appellant Br. at 19.
Reyes offered several witnesses at the hearing on class certification, including three experts. Amelia H. Boss, a Drexel Law School Professor, testified as an expert on banking and banking practices. Robert J. Meyer, a Wharton Business School Professor, and Barbara A. Blake, a former investigator for the Iowa Attorney General, both testified as experts on fraudulent marketing practices. Although we refer to their testimony throughout our discussion, it is helpful to provide an initial summary of the testimony of each.
Professor Amelia Boss repeatedly...
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