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.

Supreme Court Embraces Broad Definition of Fraud

By Louis S. Robin

Law Offices of Louis S. Robin

Longmeadow, MA

Yesterday, the Supreme Court ruled that a debtor may not be discharged from a debt arising from a fraudulent transfer.   No. 15-145, Husky International Electronics, Inc. v. Ritz (5/16/16).   The case can be found here.   

 

In short, the principal of a debtor corporation transferred assets, without consideration, to other companies he controlled in order to avoid payment to creditors of the initial debtor corporation. The principal eventually filed under Chapter 7. 

 

The Supreme Court sent the case back to the Fifth Circuit which had found that section 523(a)(2)(A) requires a false representation.    Instead, Justice Sotomayor ruled that "actual fraud" was a broader concept. She provides an interesting review of “fraud” and “fraudulent transfers” dating back to 1571’s Statute of Elizabeth, finding that “fraud” was a very broad term, with “actual” meaning a more specific intent (so that the principal committed general fraud, but knew exactly what he was doing). The dissent of Justice Thomas centered on his concerns that (i) “fraudulent transfers” are not included in the phrase of “actual fraud” as defined under the common law and (ii) where, under 523(a)(2), “money, property [or] services [are] obtained by” actual fraud, no such items are “obtained by” in a fraudulent transfer context.

On remand, the Fifth Circuit will need to reach an issue that  it did not previously decide:  whether the owner of a company who initiates a fraudulent transfer to other companies he controls is personally liable.     Under Tex. Bus. Org. Code section 21.223(b), the court may pierce the corporate veil to hold a shareholder liable based on "actual fraud."   The District Court had found that Ritz was liable under this statute, but the Fifth Circuit did not decide the issue.   This highlights an issue in these types of cases since a debtor is not usually the “obligor” under a fraudulent transfer, only the transferor. Regardless of how the remand comes out, the Supreme Court has issued a decision that puts debtors on notice that any activities that can be interpreted as less than honest may not receive protection in bankruptcy.

Third Circuit Upholds Secured Creditor's "Gift" to Unsecured Creditors in Process Pioneered by CLLA Leader

By Louis Robin

Law Offices of Louis S. Robin

Longmeadow, MA

            The Third Circuit recently entered a decision regarding sales of assets and payment of funds to unsecured creditors over other priority creditors.  It provides additional support for these sales, and enhances the possibility of unsecured creditors gleaning some return for its claims in an otherwise hopeless situation.  It also has some personal significance for me and others as it forces us to revisit an old friend of the CLLA who recently passed. 

            In In re ICL Holding Company, Inc. No. 14-2709, (3rd Cir. 9/14/15), the Third Circuit reviewed the decision of the Bankruptcy Court approving a sale for substantially all the debtor's assets for $320 million to the secured creditor who was owed at least $350 million (the purchase was a credit bid).  There were two objections: first, by the creditors' committee which was resolved when it agreed to accept $3.5 million to be paid into a trust for the benefit of unsecured creditors; and, second, by the U.S. Government which maintained that the funds being paid to the unsecured creditors avoided the priority position of the IRS as the IRS was entitled to an administrative claim based upon capital gains incurred as a result of the sale. 

            There were various technical and substantive arguments made and discussed.  In short, the Third Circuit, after resolving the technical arguments, resolved the substantive issues by relying on the structure of the payment to the trust for the benefit of unsecured creditors – these funds were from the secured creditor, not the bankruptcy estate.

            This case provides a path for unsecured creditors in otherwise hopelessly under-secured cases.  True, the amount may be minor – I would estimate the return in ICL could be less than 5% (and maybe less) – I have had two such cases in the past, one with a dividend of less than 5% and one that may have exceeded 40%.  The later I would consider an anomaly, although garnering anything should be considered a small victory in such cases.

            In the First Circuit, these cases are common.  They were pioneered by Eugene Berman, a past president of the CLLA, in In re SPM Manufacturing Corp., 984 F.2d 1305 (1^st Cir. 1993).  This was a novel concept, accepted by no courts at the time.  Indeed, the Bankruptcy Court and District Court rejected the proposed distribution scheme, which made the Circuit Court decision even more of an accomplishment.  Eugene passed away on September 14, 2015, the day that the Third Circuit issued its decision.  Eugene would have taken great pride that the Third Circuit adopted the concept and procedure that he spearheaded.

            Eugene was an attorney with an immense personality and perseverance.  He accumulated many accomplishments as a creditors’ attorney and as a leader in the CLLA.  Over the years I have heard many accolades for him, although it should not be ignored that he had his share of detractors (something he would have taken pride in also). 

            I understand that Eugene last words were “Massachusetts should enact a judicial foreclosure statute, and that they should name it the 'Eugene Berman Judicial Foreclosure Act'”.  That Eugene, anew, focused on this new issue in the last seven years speaks volumes for his intellect, perspective, and personality.  And I understand that this issue is not over in the Commonwealth of Massachusetts, as some will continue this fight – I hope that I (with my debtor's counsel's hat on) can provide some assistance, although I would add that there is much for both sides to work together to benefit debtors, mortgage holders, and commerce if both sides take a fresh perspective.

Three Recent Supreme Court Cases--None Concerning Jurisdiction

By Louis S. Robin

Law Offices of Louis S. Robin

Longmeadow, MA 

As we return from our summer respites (if any of us consider the few moments we may be able to steal as a summer respite), some discussion of three recent Supreme Court cases might quicken our return to our the struggles we endure in our legal practices.  They may have some effect on our practices.  I will also provide some suggestions and comments.

Harris v. Viegelahn

            This case provides guidance regarding payments (usually based upon earnings) to a Chapter 13 trustee for the plan but not yet distributed, followed by the Chapter 13 case being converted to Chapter 7.  I would suggest similar guidance applies to Chapter 13 cases which have been dismissed (a circumstance that is unfortunately common). 

Massachusetts Bankruptcy Court Allows "Vesting" of Property to Secured Creditor Under Chapter 13 Plan

By Louis Robin

Law Office of Louis Robin

Longmeadow, MA

In In re Sagendorph, II, No. 14-4675, 2015 Bankr. LEXIS 2055 (Bankr. D. Mass. 6/22/15), Bankruptcy Judge Hoffman, in a well reasoned and workmanlike opinion, has mechanically and, in my opinion and that of most debtor practitioners, properly applied the provisions of Chapter 13 to allow "vesting" of property to a secured creditor; the opinion may even provide secured creditors an opportunity to save significant foreclosure costs.  In this decision, Judge Hoffman permitted a debtor to surrender a property, and take the additional step of vesting the property to the secured creditor.  Section 1325(a)(5)(C) permits “surrendering” of assets as one of the alternatives for treatment of a secured claim as a precondition to confirmation.  “Vesting” is permitted as an element of plan under Section 1322(b)(9).  Despite Wells Fargo's objection that “vesting” was “subservient”, Judge Hoffman found no such direction in the Code – Section 1325 only set forth the confirmation requirements, while Section 1322 set forth terms that are permissible.

The Massachusetts state law prohibition of involuntary transfers of real estate did not restrict the Bankruptcy Code provisions because bankruptcy law, as a federal law, preempts state law.

Wellness International v. Sharif: The Supreme Court Decides Whether Consent Permits Entry of Final Orders on Non-Core Issues and “Stern” Claims

By Louis S. Robin

Law Offices of Louis Robin

Longmeadow, MA  

 The Supreme Court, in an opinion eagerly anticipated by bankruptcy practitioners and the bankruptcy judiciary, has issued its opinion in Wellness International v. Sharif.   The Court permitted parties to consent to entry of final orders in non-core and “Stern” issues. As a 6 – 3 decision, there are still issues remaining to be decided.

Factual Background

            Richard Sharif was the debtor/defendant in a dischargeability case which included a count seeking to determine that a trust, which the debtor alleged he administered for the benefit of his mother and sister was Sharif's alter ego and that its assets were part of the bankruptcy estate. Although litigation persisted with the alleged consent of the debtor Sharif, default judgments were eventually issued by the Bankruptcy Court, including Count V regarding the trust. This trust judgment was reversed by the Seventh Circuit which ruled that the Bankruptcy Court did not have jurisdiction, regardless of consent, to issue judgments on these claims which could be considered “Stern” claims – that is, final judgments on “claims that seek only to 'augment' the bankruptcy estate” and would otherwise “exis[t] without regard to any bankruptcy proceeding.” Slip Opinion at 9, citing Stern, 564 U.S. at ___, ___ (slip Op., at 27, 34). The debtor Sharif's sole defense on appeal was that the Bankruptcy Court lacked jurisdiction to issue final judgments, regardless of consent.