McNamara v. Katten Muchin Rosenman LLP
| Decision Date | 19 July 2019 |
| Docket Number | Case No. 4:16-cv-01203-SRB |
| Parties | THOMAS W. MCNAMARA, as the Court-Appointed Receiver for SSM Group, LLC; CMG Group, LLC; Hydra Financial Limited Fund I; Hydra Financial Limited Fund II; Hydra Financial Limited Fund III; Hydra Financial Limited Fund IV; River Elk Services, LLC; OSL Marketing, Inc., a/k/a OSL Group, Inc.; and related subsidiaries and affiliates, Plaintiff, v. KATTEN MUCHIN ROSENMAN LLP Defendant. |
| Court | U.S. District Court — Western District of Missouri |
Before the Court is Katten Muchin Rosenman LLP's Motion for Summary Judgment (Doc. #141), Katten Muchin Rosenman LLP's Motion for Partial Summary Judgment (Doc. #137), and Plaintiff's Motion for Summary Judgment on Defendant's Affirmative Defense Nos. 1 and 10 (Doc. #127).
For the following reasons, Katten Muchin Rosenman LLP's Motion for Summary Judgment (Doc. #141) is DENIED, Katten Muchin Rosenman LLP's Motion for Partial Summary Judgment (Doc. #137) is GRANTED IN PART and DENIED IN PART, and Plaintiff's Motion for Summary Judgment on Defendant's Affirmative Defenses Nos. 1 and 10 (Doc. #127) is GRANTED IN PART and DENIED IN PART.
Richard Moseley Sr. ("Moseley") was the owner and operator of a payday lending operation that issued and serviced small, short-term loans, known as "payday loans," through the internet to customers across the United States. The operation consisted of lending, marketing, and customer service entities. The lending entities were "shell corporations" incorporated under Nevis law until December 2011. In January 2012, new lending entities were incorporated under New Zealand law. The lending entities had no physical locations, operations, or employees overseas. The customer service and marketing entities were incorporated under Missouri law and physically located in Kansas City, Missouri. The customer service entities employed U.S.-based employees who processed and serviced loans and handled all other aspects of the payday lending operation. Correspondence sent to the overseas entities was collected by an overseas registered agent and forwarded back to the Kansas City-based offices. Until the spring of 2011, OSL Marketing, based in Kansas City, was used for loan servicing and processing. Subsequently, River Elk Services, also based in Kansas City, was formed to perform those tasks.
The payday lending operation generally functioned as follows. Potential borrowers would submit their personal information to a third-party website for loan consideration. A company called eData used the potential borrowers' information to create a loan packet, including a pre-filled loan agreement, and sent it electronically to the potential borrowers and to one of Moseley's companies. Then a customer service representative would call the potential borrowers to confirm whether they wanted the loan. The representative would either speak directly with the potential borrowers or leave a voicemail. Even if the representative did not speak directly with a potential borrower, the representative would approve the loan. Once the representative approved a loan, the loan would be sent to a third-party processer, at which point the loan would be funded and deposited in the borrower's bank account.
On June 27, 2018, Moseley was convicted in the United States District Court for the Southern District of New York and judgment was entered against him on 6 counts related to hispayday lending operation: Count 1, conspiracy to collect unlawful debts in violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO");1 Count 2, collection of unlawful debts in violation of RICO;2 Count 3, conspiracy to commit wire fraud;3 Count 4, wire fraud;4 Count 5, aggravated identity theft;5 and Count 6, False TILA ("Truth in Lending Act") disclosures.6 The Court determined that for the time period of 2008-2013, the payday lending operation generated gross profits of $69,623,528.10. The Court entered a money judgmentagainst Moseley in the amount of $49,000,000, representing the amount of proceeds traceable to the offenses charged in Counts 1-4.
On September 8, 2014, the Consumer Financial Protection Bureau ("CFPB") filed a six-count complaint in the Western District of Missouri against the payday lending entities (the "Receivership Entities"), Moseley, and other individuals involved in the payday lending operation for alleged violations of the Consumer Financial Protection Act ("CFPA"), TILA, and the Electronic Fund Transfer Act ("EFTA"). Specifically, the CFPB alleged 3 counts of CFPA violations: Count 1, misrepresentations that consumers authorized the loans and were bound by their terms; Count 2, misrepresentations about loan terms; Count 3, unfair billing practices. The CFPB alleged one TILA violation: Count 4, inaccurate loan term disclosures, and two violations of EFTA: Count 5, not obtaining authorization for electronic fund transfers; and Count 6, conditioning credit on preauthorized electronic fund transfers. The Court appointed Thomas McNamara as Receiver over the Receivership Entities to manage and exercise control of the Receivership Entities and their assets. The case was stayed during the resolution of the criminal proceedings against Moseley. The case settled after Moseley's conviction and a Stipulated Final Judgment and Order was entered on August 10, 2018, which included a monetary judgment of $69,623,528. The judgment was suspended against the defendants of the civil case upon satisfaction of certain conditions.
Katten Muchin Rosenman LLP ("Katten") formed an attorney-client relationship with OSL Marketing, one of the Receivership Entities, in August 2009. Katten's representation generally consisted of responding to inquiries from state regulators regarding the Receivership Entities' payday lending activities and advising Moseley regarding the structure of his operations and the loan documents he utilized. The attorney-client relationship terminated in 2012.Receiver brings the present action against Katten, alleging Katten committed legal malpractice and breached its fiduciary duty to the Receivership Entities. Receiver alleges Katten gave negligent legal advice as to the applicability of TILA, EFTA, and CFPA to the Receivership Entities' operations.
As to TILA, Receiver alleges Katten failed to advise the Receivership Entities that they were legally bound by TILA and that therefore their loan documents were required to conform to TILA requirements. TILA requires that loan terms and costs disclosures be clear and accurate. Beach v. Ocwen Fed. Bank, 523 U.S. 410, 412 (1999). The CFPB complaint alleges that the automatic renewal, or "auto-rollover" provision in the loan documents violated TILA. The disclosures in the "TILA box" on the loan documents assumed the consumer would repay the loan with a single simultaneous payment of principal, interest, and fees. The disclosure failed to clarify the automatic renewal term. The effect of this was that consumers' loans automatically rolled over and consumers incurred repeated finance charges without repayment of the principal. As to EFTA, Receiver alleges Katten failed to advise the Receivership Entities that they were legally bound by EFTA and that loan documents legally needed to conform to EFTA requirements. The CFPB complaint alleged the loan document provision conditioning the issuance of loans on the requirement that repayment be made by preauthorized electronic fund transfers (EFT or ACH processing) violated EFTA. 15 U.S.C. § 1693k(1); 12 C.F.R. § 1005.10(e)(1). As to CFPA, Receiver alleges Katten should have recognized that under the CFPA the customer service entities were liable for any of the lending entities' violations and should have advised the Receivership Entities that CFPA required the loan documents to comply with TILA and EFTA, which was enacted in July 2010 and went into effect no later than July2011. Receiver alleges this negligent legal advice resulted in the civil suit CFPB v. Moseley and the Receivership Entities' joint and several liability on the resulting damages award.
Katten moves for summary judgment on two grounds: 1) Moseley's criminal conviction collaterally estops the Receiver's malpractice claims; and 2) undisputed facts demonstrate Katten did not act negligently and Receiver cannot prove "but for" causation. Katten moves in the alternative for partial summary judgment on two grounds: 1) Katten's negligence did not cause the Receivership Entities' unauthorized debits of consumers' bank accounts; and 2) the $69 million suspended judgment from the civil case is unrecoverable damage. Receiver moves for summary judgment on two of Katten's affirmative defenses: 1) in pari delicto; and 2) intervening cause.
Federal Rule of Civil Procedure 56(a) requires a court to grant a motion for summary judgment if 1) the moving party "shows that there is no genuine dispute of material fact" and 2) the moving party is "entitled to judgment as a matter of law." A nonmoving party survives a summary judgment motion if the evidence, viewed in the light most favorable to the nonmoving party, is "such that a reasonable jury could return a verdict for the nonmoving party." Stuart C. Irby Co. v. Tipton, 796 F.3d 918, 922 (8th Cir. 2015) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). While a plaintiff opposing summary judgment "may not simply point to allegations in the complaint," Robbins v. Becker, 794 F.3d 988, 993 (8th Cir. 2015) (internal quotation marks and citation omitted), the "standard for avoiding summary judgment" is "relatively lenient." Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 568 U.S. 455, 479-80 (2013) (citing Anderson, 477 U.S. at 248). The purpose of summary judgment "is not to cut litigants off from their right of trial by jury if they really have issues to try." Hughes v. Am.Jawa, Ltd., 529 F.2d 21, 23 (8th Cir. 1976) (internal quotation marks omitted) (quoting Poller v. Columbia...
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