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Navajo Nation v. Wells Fargo & Co.

United States District Court, D. New Mexico

September 25, 2018

NAVAJO NATION, a federally recognized Indian Tribe, on its own behalf, by Ethel B. Branch, Attorney General of the Navajo Nation, and as parens patriae on behalf of the Navajo people, Plaintiff,
v.
WELLS FARGO & COMPANY, WELLS FARGO BANK, N.A., and DOES 1-10, Defendants.

          MEMORANDUM OPINION AND ORDER

         On December 12, 2017, Plaintiff Navajo Nation (Plaintiff or the Nation), a federally recognized Indian Tribe, filed suit on its own behalf and as parens patriae on behalf of the Navajo people against Defendants Wells Fargo & Company (WFC), a financial services company, and Wells Fargo Bank, N.A. (WFBNA), a national banking association that is the primary subsidiary of WFC, along with Does 1-10 (the Doe Defendants), who are yet-to-be identified agents and principals of WFC and WFBNA.[1] Plaintiff brings claims under federal, state, and tribal law arising out of unfair, deceptive, fraudulent, and illegal banking practices that Plaintiff alleges have harmed Plaintiff's sovereign and quasi-sovereign interests. WFC and WFBNA (together, Wells Fargo or Defendants) filed a motion on February 26, 2018, to dismiss Plaintiff's claims on the grounds of res judicata, lack of standing, and failure to state a claim.[2] Alternatively, Defendants request a limited stay as to Plaintiff's parens patriae claims pending settlement of nationwide consumer class action Jabbari, et al. v. Wells Fargo & Co., et al., Case No. 3:15-cv-02159-VC (N.D. Cal.).[3] The Motion is fully briefed.[4] The Court will grant the Motion.

         I. BACKGROUND[5]

         Wells Fargo is one of the biggest banks in the United States. Compl. ¶ 15. For years, Wells Fargo increased its sales by engaging in illegal banking practices, defrauding customers nationwide for its own financial gain. Id. ¶ 16. Wells Fargo employees were shamed, disciplined, demoted, and fired for failing to meet sales goals. Id. ¶¶ 20-23. They were incentivized to pad sales numbers by management's acceptance and sometimes even active encouragement of misconduct. Id. ¶ 23. As a result of the intense pressure to meet unattainably high sales quotas, Wells Fargo employees created fake accounts and signed customers up for debit cards, credit cards, and online banking services without their knowledge. Id. ¶¶ 23-25.

         Wells Fargo employees regularly practiced techniques such as (1) “bundling, ” in which a customer was falsely told that the account or product the customer desired was only available as part of a package with other unneeded products or services; (2) “pinning, ” in which an employee obtained a debit card and assigned it a PIN without customer authorization, and then used that PIN to enroll the customer in online banking services without permission; and (3) “sandbagging, ” in which the opening or processing of accounts was purposefully delayed without customer knowledge so that the accounts could be included in a new sales reporting period. Id. ¶ 24. Wells Fargo employees also lied to customers by representing that accounts did not have fees when they did, or by falsely telling customers that they were required to open a savings account to avoid a monthly checking account fee. Id. ¶ 25. Employees forged customer signatures or obtained customer signatures fraudulently by stating that forms to be signed were related to existing accounts, then using those forms to open additional accounts without customer knowledge or consent. Id. When Wells Fargo employees did inform a customer that an account had been opened and the customer would be receiving a credit card, they then told the customer to simply destroy the card if the account was unwanted and led the customer to erroneously believe that this would terminate the account. Id.

         In September 2016, Wells Fargo's actions were exposed to the public when the Consumer Financial Protection Bureau (CFPB) announced that “Wells Fargo employees secretly opened unauthorized accounts to hit sales targets and receive bonuses.” Id. ¶ 3. The CFPB entered into a Consent Order (CFPB Consent Order, Doc. 26-1) with WFBNA and its “successors and assigns, ” finding that WFBNA had violated the Consumer Financial Protection Act of 2010 (CFPA) by opening unauthorized accounts, submitting unauthorized credit card applications, enrolling customers in unrequested online banking services, and ordering and activating debit cards without customer knowledge or consent. Id. ¶ 27; CFPB Consent Order ¶¶ 3(k), 9-37. Wells Fargo's own analysis concluded that 1, 534, 280 deposit accounts may not have been properly authorized or funded, and that 85, 000 of these accounts had incurred $2 million in fees. Compl. ¶ 28. Similarly, Wells Fargo found that 565, 443 credit card accounts may have been unauthorized, and 14, 000 of those accounts had incurred over $400, 000 in fees. Id. One outside record review reported a total of 3.5 million potentially fake accounts and 528, 000 Wells Fargo customers who had been enrolled in online bill pay without their consent. Id. ¶ 26. The CFPB found that WFBNA had violated the CFPA's ban on unfair, deceptive, or abusive practices. See 12 U.S.C. § 5536(a)(1). The CFPB ordered Wells Fargo to (1) review and report on its practices; (2) develop a plan to correct any deficiencies; (3) develop and implement a plan to redress harm to its consumers, for which it was required to segregate $5 million; and (4) pay a $100 million civil penalty. See CFPB Consent Order ¶¶ 39-42, 49-50, 52, 57.

         Wells Fargo's internal investigations demonstrated that the employee misconduct had been most prevalent in California and Arizona. Compl. ¶ 35. The Nation reached out to Wells Fargo after the CFPB disclosures, seeking to determine whether any of the unlawful sales practices had affected Navajo tribal members. Id. ¶ 68. Wells Fargo is the primary provider of banking and financial services to the Nation, which is located in the states of Arizona, New Mexico, and Utah. Id. ¶ 15. Wells Fargo operates five branches in Arizona and New Mexico that are inside the boundaries of the Nation, along with additional branches in Arizona, New Mexico, and Utah within half an hour's drive from the Nation's borders. Id. Wells Fargo is the only brick and mortar national bank that serves this geographic area. Id. ¶ 75. And because Navajo tribal members living on the Nation often have limited access to computers, Wells Fargo is the only banking option for many Navajo people. Id. ¶¶ 44, 49, 75. Wells Fargo, through its Vice President Aaron Lemke, assured the Nation that the improper actions had not impacted the Navajo community, that no tribal members in Arizona or New Mexico had been harmed, and that no Wells Fargo employees at branches located on the Nation had been terminated. Id. ¶¶ 69- 70. The Nation later discovered that these representations were false, and that the Navajo community had not only been impacted, but had been specifically targeted. Id. ¶¶ 43, 60, 71. Interviews with former Wells Fargo employees and the limited internal records that have since been produced demonstrate that unlawful practices did occur on the Nation and that internal investigations into reports of misconduct were often closed as unsubstantiated because of difficulty contacting customers. Id. ¶ 57. Wells Fargo later sent notices of the Jabbari class action to affected Navajo citizens. Id. ¶ 71. Jabbari settled claims based on the same unlawful practices found by the CFPB that were brought under the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq., state consumer protection laws, and a common law theory of unjust enrichment. See Jabbari, No. 3:15-cv-02159-VC, Class Action Complaint (Doc. 5).

         Wells Fargo systematically preyed on Navajo tribal members by instituting unfair, deceptive, fraudulent, and illegal practices in connection with the financial products and services Wells Fargo offered to tribal members. Id. ¶ 57. From at least 2011 until 2016, Wells Fargo employees, under pressure from their supervisors to increase Wells Fargo's revenue, enrolled Navajo customers in a variety of banking services and financial products without permission or by obtaining the customers' consent through fraud or deception. Id. The pressure on employees was especially strong on the Nation, where unemployment rates reach 42 percent. Id. ¶¶ 22, 45. Wells Fargo employees coerced vulnerable Navajo citizens into signing up for unnecessary accounts by falsely telling Navajo elders who did not speak English and were unfamiliar with banking services that a savings account was required to have a check cashed, or by insisting that they open a different savings account for each type of expense, and by refusing to give them their money until they signed up for additional accounts. Id. ¶¶ 49-50. Sales personnel who spoke Navajo used their language skills to gain the trust of non-English speaking tribal members, and then asked them to sign documents that they did not understand, accepting a thumb print in place of a signature for those who could not write their names. Id. ¶ 50. Employees created email addresses for tribal members who did not have computer access so that they could enroll the customers in online banking, and they targeted often-illiterate Navajo women selling native crafts at local events. Id. ¶¶ 54, 56. Wells Fargo employees pressured their own family members to agree to unwanted products or services, telling them falsely that the accounts could easily be closed at any time; and they illegally enrolled underage Navajos in multiple accounts by falsifying birthdates to avoid the requirement for parental consent. Id. ¶¶ 52-53. Navajo tribal members were harmed by these practices, which resulted in accounts that were opened without the required disclosures and consent, unauthorized or unnecessary monthly service charges or other fees, and collections actions and damage to credit reports that would not have occurred but for the unauthorized or coercive enrollments. Id. ¶¶ 59, 74. Additionally, the Nation has been forced to expend significant funds to investigate the extent of Wells Fargo's misdeeds. Id. ¶ 75.

         II. LEGAL STANDARD

         The Court has jurisdiction under 28 U.S.C. §§ 1331 and 1367 because the Nation brings related claims under federal, state, and tribal law. In evaluating a motion to dismiss, the Court takes all allegations of material fact in the Complaint as true and construes them in the light most favorable to the nonmoving party. Warth v. Seldin, 422 U.S. 490, 501 (1975). In order to survive a dismissal motion, however, Plaintiff must allege facts that are enough to raise its right to relief “above the speculative level.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). The Complaint “does not need detailed factual allegations, ” but “requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action[.]” Id. A plaintiff must allege “enough facts to state a claim to relief that is plausible on its face, ” not just conceivable. Id. at 570.

         The Court will not consider materials outside of the pleadings when resolving a motion to dismiss, other than those referenced in the Complaint and central to Plaintiff's claim, or court documents of which the Court may take judicial notice. See Pace, 519 F.3d at 1072-73 (In deciding a motion to dismiss, district courts may properly consider documents referred to in the complaint and central to the plaintiff's claim, and may take judicial notice of adjudicative facts.); St. Louis Baptist Temple, Inc. v. FDIC, 605 F.2d 1169, 1172 (10th Cir. 1979) (“[F]ederal courts, in appropriate circumstances, may take notice of proceedings in other courts, both within and without the federal judicial system, if those proceedings have a direct relation to matters at issue.”).

         III. DISCUSSION

         The Nation brings seventeen claims for relief based on Wells Fargo's unlawful sales practices, acting on its own behalf and in its capacity as parens patriae. Defendants assert that dismissal of Plaintiff's claims is warranted based on res judicata, lack of standing, and failure to state a claim.

         A. Claims for Violation of the CFPA, 12 U.S.C. § 5536(a)

         The Nation's first five claims, alleging violations of the CFPA, are only against WFC and the Doe Defendants. The CFPA prohibits any provider of consumer financial products or services from “commit[ting] any act or omission in violation of a Federal consumer financial law[, ] . . . engag[ing] in any unfair, deceptive, or abusive act or practice[, or] . . . knowingly or recklessly provid[ing] substantial assistance to a covered person or service provider in violation of the provisions of section 5531 of this title[.]” 12 U.S.C. §§ 5481(6), 5536(a)(1)(A)-(B), 5536(a)(3). Section 5531 defines the parameters of what the CFPB may consider unfair or abusive contrary to the CFPA. An act or practice may be declared unfair if it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers[] and . . . is not outweighed by countervailing benefits to consumers or to competition.” § 5531(c)(1)(A)-(B). The CFPB “may consider established public policies [in making this determination, but they] may not serve as [its] primary basis[.]” § 5531(c)(2). An act or practice may be considered abusive if it:

(1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
(2) takes unreasonable advantage of--
(A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
(B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
(C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

§ 5531(d). The Nation has the authority to enforce the CFPA, see 12 U.S.C. §§ 5481(27), 5552, and it brings the CFPA claims in its own capacity. Defendants argue that Plaintiff only has secondary enforcement authority under the CFPA, while the CFPB is the primary enforcer, and that Plaintiff's claims are precluded by the CFPB Consent Order.

         “Under res judicata, or claim preclusion, a final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in the prior action.” Satsky v. Paramount Commc'ns, Inc., 7 F.3d 1464, 1467 (10th Cir. 1993) (internal quotation marks omitted). “A claim is barred by res judicata if three elements exist: (1) a final judgment on the merits in the prior suit; (2) the prior suit involved identical claims as the claims in the present suit; and (3) the prior suit involved the same parties or their privies.” Id. Res judicata is an affirmative defense, but may be raised in a motion to dismiss if the facts supporting the defense appear on the face of the complaint, or in documents subject to judicial notice, or if there is no factual dispute. See Merswin v. Williams Cos., Inc., 364 Fed.Appx. 438, 441 (10th Cir. Feb. 3, 2010) (unpublished decision); Q Int'l Courier, Inc. v. Smoak, 441 F.3d 214, 216 (4th Cir. 2006) (“When entertaining a motion to dismiss on the ground of res judicata, a court may take judicial notice of facts from a prior judicial proceeding when the res judicata defense raises no disputed issue of fact.”).

         Although the CFPB resolved WFBNA's violation of the CFPA by consent order, “a consent decree is afforded the same effect as any other judgment.” Satsky, 7 F.3d at 1468. Consequently, a consent decree will generally support claim preclusion. See Arizona v. California, 530 U.S. 392, 414 (2000). “However, this circuit has recognized ‘that consent decrees are of a contractual nature and, as such, their terms may alter the preclusive effects of a judgment.'” In re Young, 91 F.3d 1367, 1376 (10th Cir. 1996) (quoting May v. Parker-Abbott Transfer & Storage, Inc., 899 F.2d 1007, 1010 (10th Cir. 1990)). Defendants contend that the CFPB Consent Order is not a consent decree at all, and is instead an administrative adjudication that specifically states that it is not a contract. They argue that the Consent Order is therefore a final judgment that precludes the Nation's claims against WFC.

         Citing Amoco Production Company v. Heimann, 904 F.2d 1405, 1417 (10th Cir. 1990), Defendants contend that the procedural framework of a decision determines whether an agency acted in its judicial capacity for the purposes of res judicata. Because the CFPB invoked its adjudicatory authority and included findings of fact and conclusions of law, Defendants maintain that the CFPB Consent Order is not a consent decree. However, Amoco addressed the circumstances under which the decision of a state agency is made in its judicial capacity so as to be entitled to full faith and credit by a federal court, resulting in the same preclusive effect to which the agency decision would be entitled in the state court. Amoco did not discuss or distinguish administrative consent orders and judicial consent decrees, and it did not address preclusion based on a consent order or decree.

         Relying on Saline River Properties, LLC v. Johnson Controls, Inc., 823 F.Supp.2d 670, 675 (E.D. Mich. 2011), Defendants argue that a party's consent does not determine whether an order constitutes a consent decree. Saline River differentiated between an administrative consent order and a judicial consent decree when holding that a breach of contract claim could not be based on alleged violations of an administrative consent order. Saline River is not binding on this Court, and the Court does not find the decision persuasive because it included no analysis or reasoning for the distinction and it did not discuss preclusion principles. Defendants present no authority suggesting that the preclusion analysis is different for an administrative consent order than for a judicial consent decree, and the Court is not aware of any.

Consent decrees and orders have attributes both of contracts and of judicial decrees or, in this case, administrative orders. While they are arrived at by negotiation between the parties and often admit no violation of law, they are motivated by threatened or pending ...

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