Saturday, June 3, 2017

Supreme Court Says No FDCPA Liability for Time-Barred Claims

By Louis Robin
Law Offices of Louis Robin
Longmeadow, MA

The Supreme Court, in Midland Funding, LLC v. Johnson, issued on May 15, 2017, has ruled that the filing of a proof of claim which is otherwise barred by the applicable statute of limitations is not a violation of the Fair Debt Collection Practices Act. 

There were two issues before the Court.  First, whether the filing of a proof of claim constituted a “false, deceptive, or misleading representation”, and, second, whether the creditor was using any “unfair or unconscionable means” to collect a debt.  §§1692e and 1692f.  Regarding the first, the Court found that the creditor was not making a false, deceptive or misleading representation because a claim under the Bankruptcy Code is a “right to payment” and under many (but not all) state laws the “passage of time extinguishes the remedy but not the right”.   Similar, the Bankruptcy Code defines claims broadly, nothing restricts the definition to only enforceable claims, and Bankruptcy Code §502(b)(1) provides that, if a “claim” is “unenforceable” it will be disallowed (recognizing the difference between the claim and enforceability). 

The Court had a more difficult time concerning the standard of “unfair or unconscionable means”.  Justice Breyer, writing for the 5 – 3 majority, essentially ruled that the Bankruptcy Court case was not a civil action commenced by the creditor (where most courts find the assertion of a stale claim is an FDCPA violation).  Justice Breyer also ruled that Rule 9011 standards, may not be applicable to filing of stale claims.

Justice Breyer usually writes with a clarity that may be lacking in this case.  It is troubling that a creditor can knowingly file a claim which the creditor knows will be voided when a trustee or debtor files an objection.  Perhaps I am relying more on common sense than technicalities (which, as lawyers, we should be familiar), but there must be an element of practicality in the application of standards, otherwise routine reliance on the laws may be questioned.   

The dissent, written by Justice Sotomayor (and joined by Justices Ginsburg and Kagan), provides such clarity (which may be easier to provide in a dissent).  After providing some background and history of the practices of debt collectors seeking collection in state courts for stale debts (and finding severe penalties), Justice Sotomayor states that statutes of limitations “are not simply technicalities” but represent strong public-policy determinations that “promote justice”.  Justice Sotomayor then provides several pages of discussions on how the majority’s reasoning does not serve the dynamics nor purposes of the Bankruptcy forum and purposes.  I will not try to summarize the Justice’s words further, but suggest that one read these words as they give some solace to bankruptcy practitioner and the issues they struggle with on a day to day basis.  Ironically, Justice Scalia, on occasion, provided similar empathy; see Justice’s Scalia’s dissent in Dewsnup v. Timm, 502 U.S. 410 (1992).  I understand that Justice Scalia had some background in the bankruptcy forum in the 1970’s, and perhaps Justice Sotomayor had some similar experiences.  There would be an element of irony if Justice Sotomayor took up the mantel from Justice Scalia. 

Now that I’ve said my peace, it might be fair to give you my perspective as my practice concentrates (although is not limited to) debtor representation.  Despite my (presumably) vigorous representation of debtors, I would tell you the following - I have occasionally told debtors that, after receiving a bankruptcy discharge, if circumstances change wildly, they should consider paying discharged debts (and such circumstances include winning the lottery).  Similarly, I do not have an issue with a creditor whose claim is time barred communicating with a debtor as long as it is plainly and conspicuously stated that the debt cannot be pursued in any civil action – debtors, presumably, have received benefits from the extension of credit, and there is a moral responsibility to pay debts.  I would remind all that debtors also have a moral responsibility to provide for themselves and their families food, shelter, and other necessities. 

But I still have issue with filing of claims that are time barred.  Even if trustees and/or debtors have Rule 9011 options, Rule 9011 requires the service of a motion prior to filing the motion so that the creditor has the opportunity to withdraw the claim prior to litigation.  This causes expenses are not reimbursed to the estate.  There may even be time restraints (see Massachusetts Local Rule 13-13 which requires filing of objections to claims within 30 days of the bar date deadline).  Filing of proof of claims, for which a plain affirmative defense is applicable, does not serve the bankruptcy forum.

Monday, April 10, 2017

Bad Proofs of Claim Can Be Very Expensive

Barbara M. Barron
Stephen W. Sather
Barron & Newburger, P.C.
7320 N. Mopac Expwy., Suite 400
Austin, TX  78701

The goal of filing a proof of claim is to collect money.   However, errors in submitting claims can prove costly.  Six different problems to avoid are illustrated below.

Failure to Attach Supporting Documentation

Cases Prior to 2011

B-Line, LLC v. Wingerter (In re Wingerter), 594 F.3d 931 (6th Cir. 2010)

            Creditor filed a proof of claim without supporting documentation.    The creditor withdrew the claim after the debtor objected.   The Court then issued an order to show cause directing the creditor to explain its business practices and the handling of this specific claim.   The Court found that B-Line violated Fed.R.Bankr.P. 9011 because it did not make a reasonable pre-filing inquiry that the claim was valid and supported by the evidence.   However, because the creditor cooperated in response to the order to show cause, the Court did not assess sanctions.   On appeal, the Court found that the controversy was not moot even though no monetary sanctions were assessed.   The Court found that the creditor could appeal a non-monetary sanction to avoid injury to its reputation.    The Court reversed the bankruptcy court’s sanctions order.   It found that because the creditor obtained warranties from the entity from whom it purchased the debt as to its validity and had a track record of purchasing claims from this buyer that were not objected to 99.5% of the time, the creditor had done a reasonable pre-filing inquiry.

When Can FDCPA Claims Be Brought Based on Actions Taken in Bankruptcy Court?

Stephen W. Sather
Barron & Newburger, P.C.
Austin, TX

            The Bankruptcy Code protects debtors from their creditors.   The Supreme Court has stated that “(t)he principal purpose of the Bankruptcy Code is to grant a ‘fresh start’ to the ‘honest but unfortunate debtor.’”     Marrama v. Citizens Bank, 549 U.S. 365, 367 (2007).
The Fair Debt Collection Practices Act (“FDCPA”) has seeks to protect consumers from abusive debt collectors.  As explained in one recent opinion:
The FDCPA was enacted "with the aim of eliminating abusive practices in the debt collection industry." This legislation and its history "emphasize the intent of Congress to address the previously common and severe problem of abusive debt collection practices and to protect unsophisticated consumers from unscrupulous debt collection tactics."  The FDCPA "focuses on regulating interactions between 'debt collectors' and 'consumers.'" (internal citations omitted).

Cohen v. Ditech Financial, LLC, 2017 U.S. Dist. LEXIS 43443 (E.D. N.Y. 3/24/17) at *5-6.

Wednesday, March 22, 2017

Supreme Court Rules That Structured Dismissals Must Follow Priority Scheme

Stephen W. Sather
Barron & Newburger, P.C.
Austin, TX

In a blow to creative lawyering, the Supreme Court ruled today that a structured dismissal which allocates value contrary to the priority scheme of the Bankruptcy Code may not be approved.   Czyzewski v. Jevic Holding Corp., No. 15-649 (U.S. 3/22/17).   You can find the opinion here.

Thursday, March 16, 2017

CLLA Pursues Legislative Goals on Capital Hill

CLLA members blanketed Capital Hill on February 27, 2017 to pursue their legislative agenda with House and Senate staffers.   Members hailed from states across the country, including California, Georgia, Iowa, Massachusetts, Michigan, Ohio and Texas.   The league advanced proposals to reform the bankruptcy venue and preference law.   Links to the league's legislative positions can be found here and here.

On venue, the CLLA would like to eliminate state of incorporation venue and limit affiliate filing to cases where lower tier entities file with parent company instead of allowing the venue for one minor subsidiary to set venue for the entire group of companies.
The CLLA offered a package of three preference reforms:  requiring a meet and confer before filing suit, requiring that cases under $50,000 be filed in the defendant's forum and allowing payments under settlement agreements to fall within the ordinary course of business defense.   

Monday, March 13, 2017

Third Circuit Finds Homeowner's Mortgage Insurance Obligation Not Extended By Mortgage Modification

By Hon. Judith K. Fitzgerald (Ret.)
Tucker Arensberg, P.C.
Professor of Practice, University of Pittsburgh School of Law

      Mortgage insurance can be an expensive proposition for homeowners at the same time that it provides assurance to lenders.  Whether the term of paying insurance premiums can be extended as the result of a mortgage modification was the topic of the recent decision by the Court of Appeals for the Third Circuit in Ginnine Fried v. JP Morgan Chase & Co; JP Morgan Chase Bank NA, d/b/a Chase, --- F.3d ---- (3d Cir. 2017), 2017 WL 929752 (3d. Cir. Mar. 9, 2017).  The case involved a homeowner who sued JP Morgan Chase Bank (“Chase”) for unlawfully extending the requirement to purchase private mortgage insurance. In reaching its decision, the Court of Appeals examined the provisions of the Homeowners Protection Act (“Protection Act”), 12 U.S.C. § 4901 et seq., and concluded that the homeowner was correct.  Writing for the appellate court, Judge Ambro asked: “Does it [the Protection Act] permit a servicer to rely on an updated property value, estimated by a broker, to recalculate the length of a homeowner's mortgage insurance obligation following a modification or must the ending of that obligation remain tied to the initial purchase price of the home? We conclude the Protection Act requires the latter.” Ginnine Fried v. JP Morgan Chase & Co; JP Morgan Chase Bank NA, d/b/a/ Chase, No. 16-3069, 2017 WL 929752, at *1 (3d Cir. Mar. 9, 2017).

Thursday, March 9, 2017

Court Rules "Informational" Letters Did Not Violate Discharge

By Stephen W. Sather
Barron & Newburger, P.C.
Austin, Texas

A recurring problem in bankruptcy is how lenders can provide information about a debt to a borrower without violating the discharge or the automatic stay.    In some cases the borrower may wish to continue making payments and would appreciate receiving payment notices.   In other cases, the lender may be required to send notices to the borrower in order to comply with state laws governing foreclosures.    In these cases, lenders must walk a fine line between conveying information and coercively seeking to collect a debt.   In re Roth, 2017 U.S. Dist. LEXIS 28710 (M.D. Fl. 2017) illustrates how to send a notice that does not violate the Bankruptcy Code.