Court: District Court, D. New Mexico; September 25, 2018; Federal District Court
Plaintiff Navajo Nation filed a lawsuit on December 12, 2017, against Wells Fargo Company and its subsidiary, Wells Fargo Bank, for harmful banking practices that allegedly violate federal, state, and tribal laws. The claims include allegations of unfair, deceptive, and illegal practices that impact the Nation's sovereign interests. Defendants sought to dismiss the claims on grounds of res judicata, lack of standing, and failure to state a claim, or alternatively, a limited stay pending a related class action settlement.
The lawsuit follows revelations of widespread illegal practices at Wells Fargo, where employees faced pressure to meet high sales quotas, leading to fraudulent activities such as creating fake accounts and enrolling customers in services without their consent. Specific techniques included bundling unnecessary products, unauthorized PIN assignments for debit cards, and deceptive practices regarding account fees. The Consumer Financial Protection Bureau (CFPB) publicly exposed these practices in September 2016, resulting in a Consent Order against Wells Fargo for violations related to unauthorized account openings. Internal investigations revealed significant numbers of unauthorized deposit accounts and fees incurred.
Wells Fargo identified 565,443 potentially unauthorized credit card accounts, with 14,000 accounts incurring over $400,000 in fees. An external review suggested 3.5 million potentially fake accounts and 528,000 customers enrolled in online bill pay without consent. The Consumer Financial Protection Bureau (CFPB) found Wells Fargo Bank, N.A. (WFBNA) in violation of the Consumer Financial Protection Act (CFPA) for unfair practices, leading to a mandate for the bank to review practices, create a corrective action plan, allocate $5 million for consumer redress, and pay a $100 million civil penalty. Internal investigations revealed that employee misconduct was most prevalent in California and Arizona.
The Navajo Nation, reliant on Wells Fargo for banking services due to limited access to alternatives, sought clarification on whether unlawful sales practices affected its members. Wells Fargo's Vice President, Aaron Lemke, falsely assured that the Navajo community was unaffected and that no employees at Nation branches were terminated. Subsequent findings revealed that the Navajo community had indeed been targeted, with evidence showing that unlawful practices occurred on the Nation and that investigations into misconduct often concluded without resolution due to challenges in contacting customers.
Wells Fargo later communicated with affected Navajo citizens regarding the Jabbari class action, which addressed similar unlawful practices under the Fair Credit Reporting Act and state consumer protection laws. From 2011 to 2016, Wells Fargo employees, pressured to increase revenue, engaged in deceptive practices, enrolling vulnerable Navajo customers in unnecessary financial products without proper consent. Tactics included misleading non-English speaking elders about account requirements and coercing them into signing up for additional accounts under duress. Employees who spoke Navajo exploited their language skills to manipulate customers, occasionally accepting thumbprints instead of signatures for those unable to write.
Employees at Wells Fargo established email accounts for tribal members lacking computer access to facilitate online banking enrollment, specifically targeting often-illiterate Navajo women selling crafts at local events. Furthermore, Wells Fargo staff coerced family members into accepting unwanted products or services, falsely assuring them that accounts could be easily closed. Underage Navajo individuals were also illegally enrolled in multiple accounts by falsifying birthdates to bypass parental consent requirements. These practices harmed tribal members, leading to unauthorized account openings without necessary disclosures, unnecessary fees, and adverse impacts on credit reports due to coercive enrollments. The Navajo Nation incurred significant expenses to investigate Wells Fargo's actions.
The Court has jurisdiction under 28 U.S.C. §§ 1331 and 1367 for related claims under federal, state, and tribal law. In assessing a motion to dismiss, the Court accepts all factual allegations in the Complaint as true and evaluates them in the light most favorable to the nonmoving party. To survive dismissal, the Plaintiff must allege sufficient facts to elevate its claim beyond mere speculation. The Complaint does not require detailed allegations but must present enough facts for a plausible claim. The Court will only consider materials referenced in the Complaint or those subject to judicial notice when addressing a motion to dismiss.
The Nation has filed seventeen claims against Wells Fargo for unlawful sales practices, acting on its own behalf and as parens patriae. Defendants seek dismissal based on res judicata, lack of standing, and failure to state a claim. The first five claims allege violations of the Consumer Financial Protection Act (CFPA), directed solely at Wells Fargo and the Doe Defendants. The CFPA prohibits consumer financial service providers from engaging in unfair, deceptive, or abusive practices and from knowingly assisting violations of federal consumer financial laws.
An act or practice may be deemed unfair if it causes significant consumer injury that cannot be reasonably avoided, and this injury is not offset by benefits to consumers or competition. The CFPB may consider public policies in its assessments, but these cannot be the primary basis for its decisions. An act may be abusive if it either materially hampers a consumer's understanding of a financial product's terms or takes undue advantage of the consumer’s lack of knowledge regarding risks, inability to protect their interests, or reliance on a provider to act in their best interests.
The Nation has enforcement authority under the CFPA and can bring claims in its own name. Defendants argue that the Nation has only secondary enforcement authority, with the CFPB as the primary enforcer, and that the Nation's claims are barred by a CFPB Consent Order. Res judicata, or claim preclusion, applies if (1) there was a final judgment on the merits in a previous case, (2) the previous case involved identical claims, and (3) the same parties were involved. This defense can be raised in a motion to dismiss if the supporting facts are evident in the complaint or judicially noticeable documents.
Although the CFPB's resolution of WFBNA's CFPA violation through a consent order is treated similarly to a judgment for claim preclusion purposes, consent decrees are considered contractual and may modify preclusive effects. Defendants argue that the CFPB Consent Order is not a consent decree but an administrative adjudication, thus serving as a final judgment that precludes the Nation's claims against WFC. They maintain that the CFPB’s use of its adjudicatory authority, which included findings of fact and law, indicates that the Consent Order lacks the characteristics of a consent decree. However, the Amoco case addresses the criteria for whether a state agency’s decision is made in a judicial capacity, but does not clarify the distinction between administrative consent orders and judicial consent decrees regarding preclusion.
Defendants do not provide any authority indicating that the preclusion analysis differs between administrative consent orders and judicial consent decrees. The Court notes that both consent decrees and orders possess characteristics of both contracts and judicial decrees, typically arising from negotiations amid threatened litigation and requiring approval from a court or agency. While the CFPB Consent Order states it does not form a binding contract with the CFPB or the United States, this limitation does not necessitate a different preclusion analysis since the Court is not enforcing the Consent Order against these entities. Consent decrees are recognized as having elements of both contracts and final judgments, leading to varied treatment for different purposes.
The Court will interpret the CFPB Consent Order as a contract, applying common aids to construction, including the context of its formation and any incorporated documents. A consent decree has preclusive effect if the parties intended such an effect as part of their agreement. The Nation argues that the CFPB Consent Order is not meant to be preclusive, as it acknowledges the possibility of other legal actions concerning the same facts, such as the California Enforcement Action, and disallows using judgments from those actions to offset liability under the Consent Order. The Order defines "Related Consumer Actions" as private or governmental actions against the Respondent based on similar facts.
Moreover, the Consent Order clarifies that it does not prevent the Bureau or other agencies from pursuing further actions against the Respondent, except as stated in Paragraph 85. In that paragraph, the Bureau releases the Respondent from potential liability for violations based on practices described in the Order that occurred before its Effective Date, as long as the Bureau was aware of them at that time. Defendants argue that this release in Paragraph 85 precludes other actions under the CFPA related to the same illegal practices, contending that the other allowable legal actions pertain only to non-CFPA claims, which the CFPB could not have asserted and to which the release does not apply.
Paragraph 85 of the CFPB Consent Order releases WFBNA and its successors from all potential liability for CFPA violations known to the CFPB prior to the order date, effectively serving as a final judgment on those claims. The Nation argues this release does not extend to its CFPA claims against WFC, which was not a party to the order. Conversely, defendants assert that WFC, as a related entity, is in privity with WFBNA and thus can benefit from the release. The Tenth Circuit's decision in Lenox supports this view, where a related corporate entity was barred from litigation due to a prior judgment involving another entity based on the same events. Similarly, in Robinson, a parent corporation could invoke a judgment favoring its subsidiary to defend against related claims.
The Nation's claims are based on WFBNA's sales practices, with allegations collectively directed at "Defendants" or "Wells Fargo," indicating a unitary conduct approach. While only Claim V explicitly involves WFC, it still implicates WFBNA due to the nature of the allegations. The Court finds that WFC's liability under the CFPA is contingent on WFBNA's actions, establishing privity for res judicata purposes. Therefore, WFC may invoke the CFPB Consent Order to bar the Nation's claims if they are identical to those resolved in the order and if privity exists between the Nation and the CFPB. Claims are deemed identical when they arise from the same transaction or occurrence.
Factual groupings that define a transaction or series of transactions are assessed pragmatically, considering factors such as temporal proximity, spatial relation, origin, motivation, trial convenience, and alignment with the parties' expectations. Defendants argue that the Nation's claims under the Consumer Financial Protection Act (CFPA) stem from the same series of transactions addressed in the Consumer Financial Protection Bureau (CFPB) Consent Order, as both arise from improper sales practices by WFBNA between 2011 and 2016, influenced by a high-pressure sales culture. They assert that the unauthorized accounts and services involved are central to both cases. Conversely, the Nation contends that its specific allegations of targeting Navajo consumers with predatory practices are distinct from the CFPB proceedings and do not constitute the same series of transactions. Nonetheless, both claims relate to systemic unfair, abusive, and deceptive practices outlined in the CFPB Consent Order, occurring within the same timeframe and locations, driven by similar motivations. The Nation presents particular facts regarding improper practices at specific retail branches affecting Navajo consumers while holding WFC accountable for actions at WFBNA branches as reflective of the corporate culture.
The Court concludes that these practices represent a connected series of occurrences, supporting the same cause of action for preclusion. However, preclusion applies only if the Nation is in privity with the CFPB, as the Nation was not a party to the Consent Order. The Supreme Court's Taylor decision identifies six exceptions to nonparty preclusion, which involve scenarios such as agreement to be bound, substantive legal relationships, adequate representation, control of the litigation, proxy actions, and statutory prohibitions against successive litigation. The concept of 'privity' is used to denote a sufficient relationship that allows for effective representation of interests in prior litigation. Defendants claim the Nation is in privity with the CFPB, arguing that the CFPA establishes the CFPB as a representative of the Nation's interests. However, the Nation counters that it operates as a separate sovereign with independent enforcement authority and asserts that the CFPB has not sufficiently represented its interests. The Defendants' invocation of the CFPA as a basis for nonparty preclusion may be flawed.
Taylor outlines statutes that prevent subsequent litigation by nonlitigants in specific contexts, such as bankruptcy and probate, indicating that the Consumer Financial Protection Act (CFPA) is designed to safeguard the public's interests and does not allow individual lawsuits. Although multiple governments can enforce the CFPA, there is no explicit prohibition against successive litigation by nonparties. The Court will evaluate whether the Consumer Financial Protection Bureau (CFPB) adequately represented the Nation's interests based on due process standards for nonparty preclusion. Adequate representation requires alignment of interests between the party and the nonparty, an understanding by the representative of their role, and sometimes notice of the original suit to the nonparty. The Nation contends that these conditions were not met, arguing that the CFPB did not protect nonparties' interests and that it was not notified of the CFPB's actions. However, specific protective efforts are only necessary if the party does not intend to represent the nonparty, and notice is not always required. The defendants assert that the CFPB's broad federal interests encompass those of the Nation, establishing it as an effective representative. The CFPB is the primary enforcer of the CFPA, capable of bringing civil actions against certain entities, while states and tribes have limited enforcement authority. The Court determines that the Nation’s interests align with those of the CFPB, which acted on behalf of all consumers, including the Nation, in its enforcement action. Since citizens are bound by governmental litigation of public rights, and the Nation seeks to assert a public interest already addressed by the CFPB, the Court concludes that the Nation is in privity with the CFPB regarding CFPA claims. Consequently, as the CFPB could have previously raised these claims, the Nation’s claims are barred by res judicata and will be dismissed.
The Nation asserts various federal, state, tribal, and common law claims against all Defendants as parens patriae on behalf of the Navajo people, alongside CFPA claims against WFC. The federal claims include allegations of violations of the Equal Credit Opportunity Act (ECOA), Electronic Funds Transfer Act (EFTA), Truth in Lending Act (TILA), and Fair Credit Reporting Act (FCRA). The parens patriae doctrine allows a state to sue to protect its quasi-sovereign interests, binding its citizens to the outcome. However, Defendants argue that the Nation lacks standing to bring these claims, asserting they belong to individual tribal members and that the relevant statutes do not grant the Nation a right to sue. They reference case law, including Standard Oil, which denied Hawaii standing to recover damages under the Clayton Act due to private remedies and insufficient congressional intent for parens patriae claims. Additionally, cases like Connecticut v. Physicians Health Services of Connecticut highlight that statutory limitations on who can sue preclude parens patriae standing, as only specific individuals under ERISA can pursue civil actions.
The Second Circuit Court of Appeals clarified that the absence of a specific statutory provision for parens patriae standing does not preclude states from suing in that capacity. While the court acknowledged that states can often enforce federal statutes lacking explicit standing provisions, it cited Standard Oil Co. as a case where parens patriae standing was denied due to insufficient congressional intent, specifically concerning concerns about double recovery. It noted that successful claims under federal statutes typically involve broad civil enforcement provisions, which allow for suits by any injured party, contrasting this with Section 1132 of ERISA that restricts the parties entitled to seek relief. The Nation argues that parens patriae suits are permissible under statutes with broad enforcement capabilities, while defendants contend that the relevant statutes provide limited enforcement rights and should not grant standing to the Nation. Specific statutes like the ECOA and EFTA allow claims by aggrieved applicants and consumers respectively, but the court expressed skepticism about whether the Nation qualifies as either an "aggrieved applicant" or a "consumer" under these laws. The court emphasized that this issue does not affect Article III standing or its jurisdiction to hear the case, which must be addressed separately.
Standing must be evaluated sua sponte to confirm the presence of an Article III case or controversy. Parens patriae standing allows a state to sue on its behalf, provided it articulates a sovereign or quasi-sovereign interest beyond merely representing individual citizens. The state must demonstrate an interest distinct from private parties, as established in Alfred L. Snapp & Son, Inc. v. Puerto Rico, ex rel. Barez, which clarifies that a state cannot sue solely to assert private rights. Courts have recognized that statutes may grant broader parens patriae authority than common law, allowing a state to act even without common law standing. However, the statutes cited by the Plaintiff do not explicitly authorize such public interest lawsuits. For instance, while the Equal Credit Opportunity Act (ECOA) permits the U.S. Attorney General to act for the public, the Electronic Fund Transfer Act (EFTA) lacks civil liability provisions for the public, and the Truth in Lending Act (TILA) restricts state enforcement to certain sections. Additionally, the Fair Credit Reporting Act (FCRA) allows actions by states but excludes tribes from the definition of "State." Consequently, the Plaintiff must show a quasi-sovereign interest related to the health of its residents or its status within the federal system to pursue statutory parens patriae claims, though no exhaustive definition of such interests exists.
Quasi-sovereign interests encompass the state's role in addressing public nuisances, preventing environmental pollution, and mitigating significant economic damages that impact the state's overall welfare. For a state to claim parens patriae standing, it must demonstrate that the harm affects a substantial segment of the population, not just identifiable groups of individuals. The state must articulate a concrete interest that creates a genuine controversy with the defendant, and plaintiffs carry the burden of establishing this standing.
In the context of the Nation's claims against Wells Fargo, the Nation argues it has standing based on its quasi-sovereign interest in the economic health of its citizens, particularly against fraudulent financial practices that target specific demographics, including Native Americans. The Nation contends that Wells Fargo's practices have broadly harmed its citizens and that the bank's unique position in the region exacerbates this harm.
Economic health is recognized as a quasi-sovereign interest when the alleged damage affects the broader economy, in contrast to individual consumer interests. The state must seek remedies for injuries that transcend individual claims; merely pursuing monetary damages for individuals does not suffice to protect the state's quasi-sovereign interests. A state cannot act as a volunteer for private individuals' claims—it must address injuries to its own interests. Thus, the Nation's claims, which focus on unauthorized actions affecting individual tribal members, may lack the requisite standing if they do not sufficiently address broader state interests.
The Nation seeks compensatory damages for individual harms, including improper fees, service charges, penalties from unauthorized accounts, damage to credit reports, emotional distress for tribal members, and potentially punitive or treble damages. It argues that the Defendants' predatory practices have harmed the entire Nation due to the vulnerability of the Navajo people and their limited banking options. The Nation seeks civil penalties and injunctive and declaratory relief alongside compensation for personal losses. However, it must adequately demonstrate its standing for each claim and form of relief in its Complaint.
In its claims under federal statutes, the Court finds the Nation has not sufficiently shown harm to itself. For the Equal Credit Opportunity Act (ECOA), the Nation alleges Defendants targeted tribal members based on race and age, causing individual damages but not harm to the Nation as a whole. Under the Electronic Fund Transfer Act (EFTA), the Nation claims unrequested debit cards were issued without proper verification, but again, the injuries pertain to individuals rather than the Nation's interests. Similarly, in alleging violations of the Truth in Lending Act (TILA), the Nation does not demonstrate broader harm to its quasi-sovereign interests.
The Fair Credit Reporting Act (FCRA) claim, regarding unauthorized credit report pulls, also lacks allegations of distinct harm to the Nation. The Supreme Court has cautioned against vague quasi-sovereign interests, and the Nation's claims primarily reflect financial harm to individuals rather than the collective injury to the tribe. The assertion that the Nation's economy was damaged is not substantiated with sufficient facts beyond individual financial losses.
Allegations of discrimination based on race and age have been made, but no injuries beyond private financial and emotional damages are claimed. The Court asserts that no state has a legitimate quasi-sovereign interest in ensuring consumers receive a specific sum of money, referencing *Mid-Atlantic Toyota*. Consequently, the Plaintiff has not demonstrated a sufficiently concrete injury to establish an actual controversy, as per *Snapp*. The Plaintiff lacks standing in its parens patriae capacity to pursue claims based on purely private interests, supported by *Satsky*. As a result, the Court dismisses the Plaintiff’s claims under the ECOA, EFTA, TILA, and FCRA due to a lack of jurisdiction.
Remaining claims involve state and tribal statutes, including the New Mexico Unfair Practices Act, Arizona Consumer Fraud Act, and Navajo Nation Unfair Consumer Practices Act, alongside common law claims for fraud and unjust enrichment. The Plaintiff also seeks damages for fraud in its own capacity, asserting that Defendants misled the Nation regarding the impact of unlawful practices on tribal members. However, the dismissal of federal claims leads the Court to lack original jurisdiction over the state and tribal claims. The Court highlights that Indian tribes are not considered citizens for diversity jurisdiction and that alleged violations of tribal law do not present a federal question.
The Court notes that, upon dismissing federal claims, it typically should decline to exercise jurisdiction over remaining state claims, as established in *Koch* and supported by 28 U.S.C. § 1367(c)(3). It emphasizes that tribal courts are better suited to interpret tribal law. Therefore, the Court declines to exercise supplemental jurisdiction and dismisses the Plaintiff's state and tribal claims.
The final claim seeks a declaration of Defendants' reckless and willful violations of federal and state consumer law. However, the Declaratory Judgment Act does not provide an independent jurisdictional basis, and a declaratory judgment requires an actual live controversy. The Court asserts that a proper declaratory judgment must resolve a dispute affecting the defendant's behavior towards the plaintiff, distinguishing it from an advisory opinion.
The Court determined it lacks jurisdiction to resolve moot debates and evaluated whether granting a present determination would affect real-world outcomes. It found the Plaintiff's claims involving violations of the Clean Water Act (CFPA) barred by res judicata, and the Plaintiff lacked standing for parens patriae claims related to federal law. The Court declined to exercise supplemental jurisdiction over state and tribal law claims. Therefore, it concluded that granting declaratory relief would not resolve any ongoing disputes between the parties, leading to the dismissal of the claims. The Court ordered the following: (1) Defendants' motion to dismiss or stay parens patriae claims was granted; (2) Claims 1-5 were dismissed with prejudice; (3) Claims 6-9 and Claim 17 were dismissed without prejudice for lack of jurisdiction; and (4) Claims 10-16 were also dismissed without prejudice. The Court referenced the final approval of a class action settlement in a related case and noted ongoing appeals in the Ninth Circuit. The facts considered were drawn from the Complaint or judicially noticed documents, with all allegations viewed favorably towards the Plaintiff. Additionally, the Plaintiff withdrew Claim 14, which involved common law conversion.
