Cobb v. PayLease LLC

Citations: 34 F. Supp. 3d 976; 2014 U.S. Dist. LEXIS 99114; 2014 WL 3611800Docket: Civil No. 13-3091 (JRT/JJK)

Court: District Court, D. Minnesota; July 22, 2014; Federal District Court

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Plaintiff Jeremy Cobb alleges that Defendant PayLease LLC violated the Electronic Fund Transfer Act (EFTA) and asserts claims for conversion and unjust enrichment related to a fee deducted from his bank account due to insufficient funds. The issue arose when Cobb applied for an apartment rental and authorized a $37.95 ACH debit, which was returned by his bank for insufficient funds on May 16, 2013. Subsequently, PayLease assessed a $25.00 returned fee without obtaining Cobb's prior authorization. Cobb contends he was not informed nor did he consent to any fees related to a returned debit payment.

Cobb filed an Amended Complaint on January 2, 2014, stating three claims against PayLease: 
1. **EFTA Violation** - Cobb argues PayLease initiated a funds transfer to collect an NSF fee without his authorization, lacking any notice regarding potential fees.
2. **Conversion** - Cobb claims PayLease unlawfully collected or benefited from the NSF fees.
3. **Unjust Enrichment** - Cobb asserts that PayLease was unjustly enriched by collecting these fees unlawfully.

The court denied PayLease's motion to dismiss, ruling that Cobb's allegations sufficiently state claims under the EFTA and support the conversion and unjust enrichment theories. Cobb seeks actual damages for the unlawfully collected fees, statutory damages, and attorney fees related to his EFTA claim.

In reviewing a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the court accepts all facts in the complaint as true to evaluate whether the claim is plausible. A complaint must present factual content that allows reasonable inferences of the defendant's liability, moving beyond mere labels or formulaic recitations. If the facts only suggest consistency with liability, the claim is insufficient and must be dismissed. Rule 12(b)(6) also permits dismissal based on a clear legal issue.

The Electronic Fund Transfer Act (EFTA) establishes the rights and responsibilities in electronic banking, aiming to protect consumer rights. The Federal Reserve Board has the authority to create regulations, known as Regulation E, to enforce EFTA. Under EFTA, any entity failing to comply with its provisions is liable to consumers, with provisions for class actions and damages, including statutory damages and attorney fees.

Cobb's EFTA claim pertains to 12 C.F.R. 205.3(b)(3), which mandates consumer authorization for electronic collection of returned item fees. Specifically, the regulation requires that consumers be notified of a fee's electronic collection and the amount involved.

PayLease's motion to dismiss argues several points: (1) no electronic fund transfer occurred, (2) the fee has been refunded to Cobb’s account, and (3) the transaction was authorized by telephone. Furthermore, PayLease contends that Cobb has not sufficiently alleged a lack of required notice to Common Properties, undermining the EFTA claim. The court acknowledges that an EFTA claim should be dismissed if the statute or Regulation E does not apply to the defendant's actions and will evaluate PayLease's arguments accordingly.

PayLease contends that Cobb's claim under the Electronic Fund Transfer Act (EFTA) is invalid because no electronic fund transfer was completed. PayLease argues that a fee was merely assessed but never paid, thus no transfer occurred. EFTA defines an "electronic fund transfer" as any transfer initiated through electronic means to debit or credit an account, excluding transactions by check or similar instruments. For EFTA claims to be valid, a completed electronic fund transfer is necessary, as demonstrated in case law where claims were dismissed due to the absence of such transfers. The Court notes that Cobb's complaint and PayLease's bank statement indicate a transaction on May 29, where $25 was withdrawn from Cobb's account. Cobb alleges this fee was unlawfully assessed, which constitutes a completed electronic fund transfer under EFTA. The Court finds the allegations sufficient to support Cobb's claim, despite PayLease's argument that it may not have received the funds. Consequently, the Court denies PayLease's motion to dismiss, affirming that a completed transfer has been sufficiently alleged.

PayLease contends that liability under the Electronic Funds Transfer Act (EFTA) is negated because the $25 was recredited to Cobb’s account on June 4. The sole case cited in support is Raine v. Reed, 14 F.3d 280 (5th Cir. 1994), where the court considered a claim by Raine against the FDIC regarding deposit insurance for funds allegedly withdrawn without authorization by her fiancé. The bank had not recredited her account before becoming insolvent, leading the FDIC to argue that the unauthorized withdrawals did not constitute insured deposits at the time of insolvency. The court concluded that EFTA did not affect its decision because it only provides a cause of action for customers seeking recrediting after unauthorized withdrawals, not for determining what funds are insured. Consequently, the court held that while Raine could seek reimbursement, she did not have the funds in her account at the relevant time, thus they were not insured. This analysis is distinct from Cobb’s situation, as Raine’s case focused on deposit insurance implications rather than the ability to pursue a claim under EFTA after funds have been recredited. The court's interpretation of EFTA pertained specifically to error resolution between consumers and financial institutions and does not support PayLease's argument that Cobb cannot maintain a claim due to the recrediting of the fee.

Section 1693f mandates financial institutions to investigate reported errors in consumer accounts. If an error is confirmed, institutions must correct it promptly. The statute also allows for an extension of the investigation period if the institution provisionally re-credits the consumer’s account for the disputed amount. The court clarifies that Raine's interpretation of the Electronic Fund Transfer Act (EFTA) only pertains to the specific provisions governing consumer-institution relations and does not address the liability of entities other than financial institutions, even if funds were recredited before a lawsuit. PayLease failed to provide authority suggesting that recrediting absolves liability under EFTA's notice provisions. EFTA permits consumers to recover statutory damages, independent of actual damages, indicating that a plaintiff can still maintain a cause of action even if the funds have been returned. Courts have established that civil liability applies to non-compliance with any EFTA provisions, reinforcing that the right to a claim is preserved despite prior repayment of disputed amounts.

EFTA includes a provision allowing potential defendants to avoid liability by notifying the consumer of any failure, complying with EFTA requirements, and making appropriate adjustments to the consumer's account before litigation begins. Specifically, under Section 1693m(e), a person is not liable if they notify the consumer of the failure, comply with EFTA, and pay actual damages or applicable damages under section 1693h. This safe harbor mechanism indicates that simply reimbursing unauthorized fund transfers is not sufficient to avoid liability, as it would make the notification requirement redundant. Courts are advised against interpreting statutes in a way that renders any section meaningless or superfluous. Consequently, the court will deny PayLease's motion to dismiss based on the claim that Cobb's recovery of a $25 fee before litigation exempts them from liability. Additionally, PayLease contends that EFTA is not applicable because Cobb authorized a non-recurring ACH debit by telephone. However, EFTA defines electronic fund transfers to include those initiated via telephone but exempts transfers initiated in a single call to a financial institution employee that are not part of a prearranged plan or do not involve recurring transfers. The definition of a financial institution encompasses various types of banks and entities holding consumer accounts.

Legislative history indicates that electronic fund transfers initiated through phone conversations with financial institutions are exempt from the Electronic Fund Transfer Act (EFTA) due to their personal nature. Congress aimed to protect against fraud in impersonal transactions, thus excluding informal, consumer-initiated transfers, which are less susceptible to errors and abuse. PayLease contends that since Cobb authorized an initial fee over the phone with Common Properties, the subsequent $25 charge qualifies for this exemption. However, this argument fails because Common Properties is not classified as a financial institution under EFTA, meaning the exemption does not apply. PayLease's request for a broader interpretation of the exemption lacks statutory support, as EFTA clearly limits the exemption to conversations with financial institution representatives. Furthermore, the transaction in question was not authorized by the initial phone conversation, which only pertained to the $37.95 fee and did not mention the $25 fee. Since there was no personal interaction related to the latter transaction, the exemption's criteria are unmet. Consequently, the Court will deny PayLease's motion to dismiss Cobb's EFTA claims related to the telephone exemption.

PayLease contends that Cobb's claims under the Electronic Fund Transfer Act (EFTA) should be dismissed due to an alleged failure to demonstrate that PayLease did not provide required disclosures to Common Properties, which acted as Cobb’s agent in processing transactions. PayLease argues that it is unreasonable to hold it accountable for any failure by Common Properties to communicate these disclosures to Cobb, as it made all necessary disclosures to Common Properties. The company supports its position by citing official interpretations of the EFTA, suggesting that it can obtain consumer authorization through third parties.

However, the court finds that dismissing the claims based on PayLease's assertions regarding its relationship with Common Properties would be premature. The relevant regulation mandates that the entity initiating an electronic transfer must obtain consumer authorization for fees, which is achieved by notifying the consumer. The allegations in Cobb's Amended Complaint indicate that PayLease was responsible for collecting the fee and that it did not ensure that Common Properties provided notice to Cobb, as there is no evidence suggesting Common Properties communicated any such notice. Furthermore, Cobb specifically alleges he never received notice, making PayLease's argument about disclosures to Common Properties irrelevant at this stage. The court concludes that PayLease cannot avoid liability by assuming a third party would provide consumer notice and authorization, especially when Cobb claims he was never informed of the fee. The court also notes that the idea of Common Properties acting as Cobb's agent is not substantiated in the Amended Complaint and cannot be considered at this motion to dismiss stage.

Cobb's Amended Complaint sufficiently alleges that he did not receive necessary notices regarding the electronic fund transfer, and PayLease had no reason to believe he did, leading the Court to deny PayLease’s motion to dismiss the claim under the Electronic Fund Transfer Act (EFTA). Under Minnesota law, conversion involves willful interference with personal property without lawful justification, requiring the plaintiff to prove a property interest and deprivation of that interest. PayLease contends that Cobb's conversion claim should be dismissed because the $25 fee was returned and not received by them. Cobb concedes recovering the fee but argues his claim is valid due to PayLease's retention and benefit from the fee until it was replaced by another transfer six days later. The Court notes that in conversion cases, damages are typically the property's value plus interest from the conversion time, thus awarding Cobb interest on the $25 from May 29 to June 4. Despite the likely minimal damages, Cobb has adequately pled a conversion claim based on the alleged retention of interest. The Court references precedent where a similar claim was upheld due to the retention of deposits that accrued interest, leading to the decision to deny PayLease’s motion to dismiss Cobb’s conversion claim. Lastly, for unjust enrichment under Minnesota law, a plaintiff must show that another party knowingly received something of value unjustly. Cobb's claim alleges that PayLease unlawfully collected NSF Fees from him and others, benefiting from these fees without legal entitlement, which PayLease knowingly accepted.

PayLease challenges the unjust enrichment claim on similar grounds to its defense against the conversion claim. Cobb acknowledges that the $25 fee charged by PayLease has been refunded but asserts that his unjust enrichment claim is based on PayLease's retention of the fee for six days, from May 29 to June 4. The court notes that, akin to the conversion claim, Cobb could only seek a minimal amount of interest accrued during this period. Nonetheless, the allegations in Cobb's Amended Complaint are deemed sufficient to allow the claim to proceed. The court cites a precedent where a motion to dismiss was denied for an unjust enrichment claim due to unfair retention of interest by a company. The court emphasizes that failing to require PayLease to pay interest could unjustly enrich it by allowing it to benefit from the wrongful retention of Cobb's funds. Consequently, the court denies PayLease's motion to dismiss. PayLease, as a limited liability company, processes payments for property management. In support of its motion, it submitted a declaration including Cobb’s bank statements, which the court notes can be considered as they are documents "embraced by the pleadings," meaning they are integral to the claims made. The court references applicable rules regarding the treatment of motions to dismiss when external documents are introduced.

Bank records central to the plaintiff's claims were considered in resolving a motion to dismiss, despite not being explicitly referenced in the Amended Complaint. The plaintiff, Cobb, did not dispute the accuracy of these records and referenced them in his opposition to the motion. The court noted that some jurisdictions have criticized expanding the scope of documents considered at this stage, emphasizing that documents must be specifically referenced in the pleadings, yet opted to include the bank statements here. 

Cobb's claims were tied to the Electronic Fund Transfer Act (EFTA), where some courts have held that a completed transfer is not necessary for liability under certain provisions. However, this position relates to specific EFTA sections that do not apply to Cobb's case, which requires authorization for each electronic fund transfer. The evidence indicated that a completed transfer had occurred, as demonstrated by the need to recredit a $25 fee to Cobb’s account.

Regarding Cobb's conversion claim against PayLease, the court rejected PayLease's argument that the plaintiff’s bank statements proved it never received the funds. The court determined that whether PayLease controlled the funds is a factual issue to be explored during discovery. The allegations and account statements suggested that PayLease initiated a withdrawal from Cobb's account, thereby gaining control over the funds during a six-day period. Consequently, the court ruled that PayLease's assertion of non-control could not be accepted at this stage, allowing Cobb's claims to proceed.