Friday, October 14, 2016

Consumer Financial Protection Bureau Brought Down A Notch


Beverly Weiss Manne
Tucker Arensberg, P.C.
Pittsburgh, PA

Earlier this week the United States Court of Appeals for the DC Circuit issued its 110 page opinion concerning the Consumer Financial Protection Bureau (“CFPB”) and CFPB enforcement action in Case No. 15-177, PHH Corporation Et al vs Consumer Financial Protection Bureau (D.C. Cir. 10/11/16)(which can be found here).  The opening sentence of the opinion declares “This is a case about executive power and individual liberty,” which reflects the seriousness of the issues addressed.

Tuesday, September 20, 2016

Fourth Circuit Rejects FDCPA Claim Based on Stale Proof of Claim

By Gary M. Weiner
and Robert E. Girvan, III
Weiner Law Firm, PC
Springfield, MA

The Fourth Circuit recently held in Dubois v. Atlas Acquisitions, LLC, No. 15-1945 (4th Cir. August 25,2016) that the filing of a proof of claim based upon a time-barred debt does not violate the Federal Debt Collection Practices Act (FDCPA)(click on the case name to read the opinion).

Congress enacted the FDCPA to prevent debt collectors from using abusive and unfair debt collection practices.  Federal courts have consistently held that filing lawsuits or threatening to file lawsuits debts where the statute of limitations has run out is a violation of the FDCPA.  However, the Bankruptcy Code in § 502(b)(1) disallows claims, upon objection, of claims that are “unenforceable against the debtor…under any agreement or applicable law.”  Therefore, the question becomes whether the filing of a proof of claim on a time-barred debt is a violation of the FDCPA (akin to filing a lawsuit), or whether the Bankruptcy Code provides protection for Debtors for this very type of action.  The Fourth Circuit recently held in Dubois v. Atlas Acquisition, LLC, No. 15-1945 (4th Cir. August 25, 2016) that filing proofs of claim based on time-barred debts does not violate the FDCPA.

Saturday, August 20, 2016

7th Circuit Holds Section 1329 Permits Post-Confirmation Plan Modification

Randall Woolley
Askounis & Darcy, PC
Chicago, Illinois

Section 1329 of the Bankruptcy Code permits modification of a confirmed plan to increase or reduce the amount of plan payments.  However, trustees and creditors are seemingly reluctant to disturb a confirmed plan, in part because Section 1329 does not specifically set forth when modification is appropriate.  The Seventh Circuit recently held in Germeraad v. Powers, No. 15-3237 (7th Cir. June 23, 2016) that an increase in the debtor’s income after plan confirmation may serve as a basis for modifying the Chapter 13 plan in order to increase the amount paid to unsecured creditors.    

Wednesday, August 10, 2016

Crawford's Claim Defeated By . . . the Statute of Limitations

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

When the Eleventh Circuit found that a creditor could be sued for violating the FDCPA for filing a proof of claim on a time-barred debt, it caused quite a stir.    Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014), cert den., 135 S.Ct. 1844 (2015).   However, when the case was remanded, it turned out that the suit, like the claim it sought to challenge, was beyond the statute of limitations.   Crawford v. LVNV Funding, LLC, 2016 U.S. Dist. LEXIS 104472 (M.D. Ala. 8/9/16).

Saturday, August 6, 2016

Eleventh Circuit Doubles Down on Crawford

Beau Hays
Hays, Potter & Martin, LLP
Peachtree Corners, GA

Following up on the recent post by Steve Sather reporting on the Eighth Circuit’s dismissive rejection of the Eleventh Circuit’s Crawford ruling that filing a time-barred claim in a bankruptcy case violates the FDCPA, we can report that the Eleventh Circuit recently doubled down on its position.  Johnson v Midland Funding, LLC, No. 15-11240, 2016 WL 2996372 (11th Cir. 5/24/2016)(the Nelson case, reported on by Steve, mentions this case)

What Happened

In March 2014, Aledia Johnson filed a Chapter 13 case in the Southern District of Alabama.  Midland Funding filed a claim for $1,879.71, to which Johnson objected.  On July 11, 2014, the Bankruptcy Court entered its Order granting the objection.  Coincidentally, on July 10, the Eleventh Circuit had handed down the decision in Crawford.  Entirely not coincidentally, on July 14, 2016, Johnson filed a putative class action asserting that Midland Funding had violated the FDCPA in the Southern District of Alabama, Johnson v Midland Funding, LLC, No.. 14-322-WS-C (N.D. Ala.).  Midland Funding, faced with the immovable object that is the Crawford precedent in the Eleventh Circuit moved to dismiss utilizing a new argument - that the FDCPA as applied by Crawford is in irreconcilable conflict with the Bankruptcy Code.

The trial court, in a fairly thorough opinion, agreed.  The Eleventh Circuit, however, reversed the trial court and held that there is no irreconcilable conflict that would lead to preemption of the FDCPA by the Bankruptcy Code.


Midland Funding's argument is based upon a rule of statutory construction which holds that when two statutes are in irreconcilable conflict, the newer statute is presumed to have been enacted with knowledge of the conflict and so constitutes an "implied repeal" of the earlier statute.  Since the FDCPA was enacted in 1977 and the current Bankruptcy Code dates from 1978, the Code will preempt the FDCPA in the case of a conflict.

Wednesday, July 13, 2016

Eighth Circuit Rejects Crawford Decision on Stale Claims

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

Creating a circuit split, the Eighth Circuit has rejected the Eleventh Circuit's Crawford ruling that filing a time-barred claim violates the FDCPA.    Nelson v. Midland Credit Management, Inc., No. 15-2984 (8th Cir. 7/11/16).

What Happened

In a scenario that has played out dozens of times in the past two years, a debtor filed chapter 13 and a creditor filed a proof of claim on a debt that was outside the statute of limitations.   Rather than simply objecting to the claim, the Debtor filed suit for violation of the FDCPA.   The District Court dismissed the case for failure to state a cause of action, resulting in an appeal to the Court of Appeals.   The Eighth Circuit affirmed.

How the Court Ruled

Under the FDCPA, a debt collector is not prohibited from attempting to collect a debt which is beyond the statute of limitations.   However, the debt collector cannot file suit or threaten to file suit.  In Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014), the Eleventh Circuit found that filing a proof of claim was similar to filing suit to collect a debt.    The Eighth Circuit disagreed, distinguishing Crawford in four short paragraphs.

Monday, June 20, 2016

Fourth Circuit Precludes Modifying Default Interest on Home Mortgage Loan

By Reuel Ash
Ulmer & Berne, LLP
Cincinnati, OH

The Fourth Circuit recently decided that the provisions of Bankruptcy Code Sections 1322(b) allowing Chapter 13 debtors to cure a prepetition mortgage arrearage do not enable debtors to bring the interest rate on the mortgage note to its original rate, where the default rate had been in place prepetition. Anderson v. Hancock, No. 15-1505, 2016 WL 1660178 (4th Cir.Apr. 27, 2016)(click on citation for link to opinion). This case sensibly limits the scope of modification by debtors of residential first mortgages, which is consistent with Congress’ intention of protecting mortgage holders in the residential market.

What Happened

The facts of the case may stated simply.  The debtors bought a $255,000 house, which was financed by a seller mortgage for a 30–year term at an interest rate of 5%.  The promissory note provided a default rate of interest of 7%.  The debtors defaulted, and the mortgagees sent the debtors a notice of default invoking the default rate of interest, but the mortgagees did not accelerate the note.  The debtors made no payments after being notified of the default, and the mortgagees initiated foreclosure proceedings.  The debtors filed a Chapter 13 bankruptcy case to stop the foreclosure. 

The debtors filed a Chapter 13 plan that proposed paying off the arrearage over a 60 month term at the note’s original interest rate of 5%, and reinstating the original maturity date along with proposing post-petition note payments at the 5% original interest rate.  The mortgagees objected to the plan, contending that the default interest rate of 7% must apply to both the repayment of the arrearage and the post-petition payments going forward.
The Fourth Circuit’s Ruling
In finding for the seller mortgagees, the Fourth Circuit harmonized three provisions of Bankruptcy Code Section 1322(b): (b)(2), on the one hand, and (b)(3) and (b)(5) on the other hand.  On the one hand, Section 1322(b)(2) prohibits a debtor from modifying a first mortgage on the debtor’s residence.  On the other hand, Section 1322(b)(3) says that a plan may “provide for the “cure or waiver of any default,” and Section 1322(b)(5) provides that “notwithstanding  paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment after the date on which the final payment under the plan is due.”

The question before the court was whether the plan’s proposed change to the debtors’ rate of interest was part of a permissible cure under Sections 1322(b)(3) and (b)(5), or an impermissible modification of the note under Section 1322(b)(2).  The Fourth Circuit ruled that the plan’s providing for the original, pre-default interest rate was an impermissible modification of the note, and sustained the mortgagees’ objection to the Chapter 13 plan.  The debtor must pay the default rate of interest both on the arrearage and the note payments going forward.  The Fourth Circuit observed that while the “rights” that cannot be modified under Section 1322(b)(2) are not defined in the Code, case authority from the Supreme Court in Nobelman v. Am. Savings Bk, 508 U.S. 324, 329, 113 S. Ct. 2106 (1993), and the Fourth Circuit in In re Litton, 330 F.3d 636, 643 (4th Cir. 2003) held that such rights included those bargained for by the two parties and enforceable under state law (Nobelman), and that Section 1322(b)(2) prohibited “any fundamental alteration of a debtor’s obligations, e.g., lowering monthly payments, converting a variable interest rate to a fixed interest rate, or extending the repayment term of a note.” (Litton)  The Fourth Circuit also found that the core of Section 1322(b)(5) concerns the maintenance of payments, i.e. decelerating the promissory note and continuing paying the loan, thereby avoiding foreclosure.  


The Fourth Circuit reached the proper result. Allowing Chapter 13 debtors to change material terms of a loan contract post-petition, including a default interest rate provision, would cause a major torrent of problems in the first mortgage market, and conflict with secured creditors’ legitimate expectations that the terms of their loan documents cannot be altered in bankruptcy, other than deceleration.
That said, the Code language appears not to answer the question raised, since Section 1322(b)(5) does not define the limits of what note and mortgage rights a debtor may modify when its plan proposes to cure arrearages.  The Fourth Circuit had to fill in the silence in (b)(5) through case authority, policy arguments, and legislative history.  Clarity might be promoted by the inclusion in Section 1322(b) of a provision stating that contract rights other than acceleration clauses in first residential mortgages and notes may not be modified.