Limits on the Credit Union’s Exposure to Liability
By Styskal, Wiese & Melchione
A key goal of any credit union is limiting its exposure to liability and lawsuits. Sometimes it means taking steps to follow best practices and adopt procedures which will (hopefully) reduce the chance of the credit union being named in a lawsuit. Or, sometimes the limitations on liability come as “gifts” from the court, when the court interprets statutory laws in a favorable manner. Below we’ve listed some actions a credit union can take, and a few “gifts” the courts have given, all of which go toward limiting liability.
An Easy (and Obvious) Way to Avoid Being Named in a Lawsuit
Auto financing is a large part of the lending activity in many credit unions. As a result many credit unions are listed as a “lienholder” on many auto registrations. But, when the loan is paid off, what do you do? Many credit unions send the title to the borrower, and advise the borrower to remove the credit union from the registration. Many borrowers never actually remove the credit union from the registration. However, leaving the credit union listed on the registration after the loan has been paid off can leave the credit union vulnerable to problems later. The better practice is to send the title to the borrower and remove the credit union from the registration yourself!
Here’s why. As long as the credit union remains listed on a vehicle registration (some credit unions have remained listed as “lienholders” up to 10 years after the loan is paid off!), that credit union remains vulnerable to being named as a defendant in a lawsuit. While a “lienholder” is generally not liable for injuries or damage in an automobile accident, under California Vehicle Code Section 17156, human error does occur – police reports mistakenly list the lienholders as “registered” owners, then, months later, the injured driver brings a lawsuit and names everyone who was listed in the police report as a “registered” owner – and, suddenly the credit union is named in an auto accident lawsuit – even though the loan was paid off years ago!
The process of obtaining a registration history on a vehicle to prove that the credit union was not a registered owner at the time of the accident, in order to establish that the credit union is not liable and should be dismissed from the lawsuit, can be burdensome and difficult, especially if an insurance company has totaled the vehicle. The DMV generally will not provide the registration history to a person or entity with no current interest in a vehicle. Once the car is totaled by the insurance company, the insurance company is the only entity with a current interest in the vehicle! Bottom line – remove the credit union from the registration when the loan is paid– don’t rely on the borrower to do it. Removing the reference is much less time, trouble and expense than trying to extricate the credit union from the lawsuit later.
The California Court of Appeal Limits the Types of Statutes that Can Support UCL Claims
A “UCL” claim is made under California’s “Unfair Competition Law” and it is a favorite claim made against credit unions. These claims are made under Business and Professions Code Section 17200 (hence they are also called 17200 claims). Generally, the basis of a UCL claim is any practice alleged to be “unlawful” “unfair” or “fraudulent”. An “unlawful” practice under the UCL is one that allegedly violates a statute.
Recently, the California Court of Appeal limited the type of statutory violations that can support an “unlawful” UCL claim. Specifically, the Court determined that statutes which cannot be privately enforced cannot support a UCL claim. An example of a statute which cannot be privately enforced is the Truth in Savings Act (TISA) implemented through Regulation DD (for banks) and through 12 CFR 707.1 (for credit unions). There are many other statutes, both state and federal, that have no private enforcement method, and according to this recent opinion, those statutes also cannot be used as the basis for a UCL claim.
California Court of Appeals Clarifies the Commonality Requirement in UCL Class Actions
Many credit unions have recently been served with class action lawsuits, many of which involve UCL claims based on allegedly “unlawful,” “unfair,” or “fraudulent” practices. To certify a “class” the plaintiff must generally show that all class members share common facts to support the claims. But, until recently, there was some confusion in the courts about how much commonality was required for a UCL class action. Recently, the California Court of Appeal clarified that the same standard applies in UCL class actions as applies in any other class action. Therefore, for example, if the UCL claim involves allegations of false advertising, in order to certify a class it must be established that all members of the class were exposed to the same allegedly false advertising. If the UCL claim involves an allegation of misrepresentation, in order to certify a class it must be established that the same misrepresentation was made to all class members. The party bringing the lawsuit has the burden to establish the common facts. If the burden cannot be met, a class cannot be certified. As such, the more difficult it is to establish commonality, the less chance that a class can be certified.
As with almost every aspect of any business, an ounce of prevention is worth a pound of cure. And, in this context, the time and effort to avoid (or at least reduce the risk of) being named in a lawsuit is far and away much less onerous than the time, effort, and money that will be expended trying to get out of one.