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But Who Cares If You Were Actually Confused? No Proof of Confusion Required for Claims Under Section 1692g of the FDCPA

Posted in FDCPA

This week the Seventh Circuit Court of Appeals ruled that claims under Section 1692g of the FDCPA can survive summary judgment, even without extrinsic proof the plaintiffs were confused by a creditor’s correspondence.  In Janetos v. Fulton Friedman & Gullace, Case No. 15-1859, 2016 U.S. App. LEXIS 6361 (7th Cir. Apr. 7, 2016), the Plaintiffs brought suit alleging a law firm/debt collector had violated the FDCPA by failing to disclose the identity of the current creditor and by failing to disclose that the current creditor could be vicariously liable for the law firm’s actions. The district court granted the law firm’s motion for summary judgment, recognizing the letters at issue were ambiguous as to the identity of the current creditor but ruling that the Plaintiffs needed to present extrinsic evidence of confusion to survive summary judgment. The district court also concluded that, even if the Plaintiffs had presented evidence they were confused by the law firm’s correspondence, their claims would still fail because the ambiguity about the current creditor’s identification was immaterial and “would neither contribute to nor undermine the [FDCPA’s] objective of providing ‘information that helps consumers to choose intelligently.’”

The Seventh Circuit reversed. Although it agreed with the district court that the law firm’s correspondence failed to clearly identify the name of the current creditor, the Seventh Circuit disagreed that additional evidence of confusion was necessary to establish a violation of Section 1692g. The Court pointed out that Section 1692g requires debt collectors to disclose the name of the creditor, and failure to do so constitutes a violation of the Act regardless of whether the consumer was actually confused. The Court also rejected the district court’s application of a materiality requirement to claims under Section 1692g: “[F]or good reason, we have not extended the materiality requirement of Section 1692e to reach claims under Section 1692g(a)…Since Section 1692g(a)(2) clearly requires the disclosure, we decline to offer debt collectors a free pass to violate that provision on the theory that the disclosure Congress required is not important enough.”

The Court also addressed whether the owner of the debt, also a debt collector itself under the FDCPA’s definition, could be vicariously liable for the law firm’s violations. Following the Third Circuit and the Ninth Circuit, the Seventh Circuit decided that vicarious liability could exist.  This reiterates the importance of determining if you are a “debt collector.”  If the owner of the debt is not a “debt collector,” the Sixth Circuit has held that it is not vicariously liable for its debt collector’s actions.

Opinions like this should give “debt collectors” a reason to pause and reevaluate the letters they are sending and those that are being sent on their behalves. In addition to putting letters through a thorough in-house evaluation before they are sent, test the letters on friends and relatives from various backgrounds. If any confusion arises, no matter how slight, revisions should be considered.  And don’t forget the mandated disclosures under Section 1692g(a)(2) where actual confusion apparently does not matter.

Kentucky Legislative Tweaks

Posted in Kentucky Law

With only one day left in the 2016 legislative session—the legislature is scheduled to adjourn sine die on April 12—the General Assembly has passed, and the Governor signed, less than 30 of the 941 bills introduced—a success rate of only 3%.  Most of the remaining time will be spent in budget negotiations, and the Governor will be considering whether to sign or veto some additional bills.

For creditors, the Governor has signed some technical amendments of note:

  1. A termination statement of a lien noted on a motor vehicle (or other) certificate of title may be faxed from any county clerk to the county clerk of the county where originally filed. SB 74, amending KRS 186.045.
  2. The effectiveness of a lien noted on a motor vehicle (or other) certificate of title is extended from 7 years to 10 years. Continuation statements must be filed within 6 months of expiration, and will last 5 years (down from 7) counting from the date the existing lien would have expired. SB 122, amending KRS 186A.190.
  3. The provisions requiring deeds and mortgages to refer to the source of title of grantor or mortgagor are clarified – some were concerned that the language “next immediate source” meant a second step back in title. The amendment drops the word “next, ” and leaves it “immediate source.” SB 122, amending KRS 382.110 and 382.290.
  4. In foreclosures, the grantee by commissioner’s deed must be recorded within five days of receipt from the commissioner. SB 122, amending KRS 382.110.  This is a change supported by consumer advocates, thought it is not clear that there was a problem that needed fixing.
  5. The provisions allowing correction of mortgages by attorney’s affidavit were clarified to confirm that limitations prohibiting changes to terms, dollar amounts and interest rates apply only to affidavits of amendments, and not to amendments signed by both mortgagor and mortgagee. Also, the provision clarifies that such affidavits may be used to correct manifest clerical or typographical errors, such as spelling, punctuation or numbering mistakes in typing or printing. SB 122, amending KRS 382.297.

Judicial Estoppel Not a Slam Dunk

Posted in Bankruptcy Trends, Circuit Split

Seeing my Virginia Cavaliers lose to the Syracuse Orange and reading Mefford v. Norton Hospitals, reminds me that any discussion of judicial estoppel needs to be tempered by the doctrine’s exceptions and that the game is not over after the first half.  In Mefford, the Kentucky Court of Appeals reversed the trial court’s summary judgment based on judicial estoppel.  The debtor initially filed for Chapter 13 relief.  Post-confirmation, Norton treated the debtor in its emergency room.  The debtor moved to suspend her plan payments due to having “suffered several strokes and being unable to work.”  Shortly after suspending her plan payments, the debtor’s malpractice counsel put Norton on notice of the potential claim and filed suit.  The debtor continued to have difficulty making plan payments and the bankruptcy court ordered the dismissal of the case if the debtor failed to turnover her 2012 tax refund.  Facing dismissal, the debtor moved to convert the case to one under Chapter 7.  In her amended schedules and at the meeting of creditors, the debtor did not disclose the pending malpractice litigation.  The debtor answered in the negative to a direct question regarding current lawsuits.  After the bankruptcy court granted a discharge, Norton moved for summary judgment on the malpractice claim based on the debtor’s failure to disclose the litigation in her bankruptcy schedules.  The trial court granted the motion.  The appellate court reversed and remanded.

The appellate court began with the proposition that judicial estoppel is a harsh remedy which “may bind a party to a position without regard to the ‘truth-seeking function of the court.'”  The equitable doctrine is not absolute with courts recognizing that it is not appropriate in cases amounting to nothing more than mistake or inadvertence.  This inadvertence can be shown if the debtor lacks knowledge of the factual basis of the undisclosed claims or lacks a motive for concealment.  Since the debtor had been deposed in the malpractice litigation and knew the factual basis, she instead relied on advice of counsel to show that she had no motive.  At this point, the procedural history of her bankruptcy case became important.  In a Chapter 13 bankruptcy, the bankruptcy estate includes all property—including tort claims— that is acquired during the pendency of the case.  In a Chapter 7 bankruptcy, however, only claims which exist “as of the commencement of the case” become property of the estate.  Prior to 1994, courts had split on the result in a converted Chapter 7 case.  Congress amended § 348 to establish that, in the absence of bad faith, the estate property in a converted Chapter 7 only includes that which existed “as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion.”  Even with this amendment, post-conversion issues remain.  Most recently, the U.S. Supreme Court has held that the Chapter 13 Trustee must return all undistributed payments upon conversion (Harris v. Viegelahn).  But tort claims that arose post-petition have consistently been held not to be property of the converted estate.  Courts have also pointed out that a Chapter 13 debtor does not have an obligation to disclose post-petition tort claims because they are not included in § 541(a)(5).  Another issue pointed out in Mefford is that if the claim is completely exempt, there is no motive for concealment.

While Mefford came to the correct conclusion based on the procedural history of the bankruptcy case, it does raise a concern with the potential validity of an advice of counsel defense.  After the debtor disclosed the pending litigation, her counsel made the professional decision not to list the litigation on the post-conversion amended schedules.  While her counsel’s assessment that the claim was not property of the estate was correct, Mefford should not stand for the proposition that, as long as it is the attorney that encourages the cynical gamesmanship upon which judicial estoppel is based, the debtor cannot be held responsible.  In Mefford, this resulted in the debtor falsely answering a question of the Chapter 7 Trustee.  He may have had no claim to the current malpractice litigation, but the debtor did have a current lawsuit.  When the debtor testified falsely at the meeting of creditors, her counsel had some obligation to correct the testimony.  Bankruptcy is a remedy for the “honest but unfortunate debtor” and the rule of disclosure by the debtor should remain one of full disclosure.  Judicial estoppel—while a harsh remedy—protects the integrity of the bankruptcy process by preventing the gamesmanship which was present in Mefford.

Judicial Estoppel Better than Not Being a Debt Collector

Posted in Bankruptcy Trends, FDCPA

When handling an FDCPA claim, there are many initial questions to ask.  Besides the definitional issue, it is valuable to look for prior bankruptcies.  When a debtor fails to disclose the claim on the bankruptcy schedules, judicial estoppel prevents the debtor from later asserting it.  In Jarrett v. LVNV Funding, the Western District of Kentucky Court made quick work dismissing the debtors’ claim.  The debtors had listed the debt on Schedule F but had not indicated a dispute.  The bankruptcy court granted a discharge and two months later the debtors filed an FDCPA action in state court.  The creditor properly—and wisely—removed the action.

Judicial estoppel prevents a debtor from abusing the process through gamesmanship.  Not listing the potential claim on Schedule B renders any assertion post-discharge contrary to that initial position relied upon by the bankruptcy court.  To avoid the application of judicial estoppel, the debtor must show mistake or inadvertence in omitting the claim.  In Jarrett, the debtor’s assertion of mistake failed because the same attorney represented the debtor in the bankruptcy and the FDCPA action.  While the opinion discusses that the debtor failed to schedule the debt as disputed on Schedule F, this should not create a new escape for debtors.  The Sixth Circuit has held that it is important that the disclosure be made on Schedule B—not on the SOFA—so that the trustee can know the value of the claim.  Listing a debt as disputed on Schedule F provides no valuation or even an indication that there is an affirmative claim.

Judicial estoppel should be an arrow in every defense litigator’s quiver, not just creditor attorneys.  It can be difficult to have a state court enforce the doctrine and requires explaining bankruptcy schedules and the bankruptcy process (which may need the help of a bankruptcy attorney).  Often the debtor will attempt to correct the non-disclosure by reopening the bankruptcy case, but allowing the disclosure of a claim after being caught to cure the non-disclosure only encourages gamesmanship.  Also, there remains the possibility that the bankruptcy trustee will pick up the ball when it is returned to his court.  But at that point you will be dealing with a detached plaintiff who will only look at the economics of the claim.

Artificial Impairment, Artificial Confirmation

Posted in Bankruptcy Trends, Chapter 11, Circuit Split

Similar to pizza ingredients, artificial impairment of creditors results in artificial confirmation of the Chapter 11 plan.  In Village Green I, GP v. Fannie Mae (In re Village Green I, GP), the Sixth Circuit affirmed the decision to vacate the confirmation order a second time.  The debtor had three creditors: its lender, its former lawyer, and its former accountant.  The debtor’s only collateral, an apartment building, partially secured the lender’s claim ($3.2MM unsecured).  The debtor proposed paying the two minor claims in full over 60 days while cramming down the lender.  The plan provided for $2 million in principal payments over ten years while releasing the debtor from its obligation to maintain and insure the collateral adequately.  In the first appeal, the district court remanded for a determination as to whether the debtor had proposed the plan in good faith.  On remand, the bankruptcy court found good faith but the district court again vacated and remanded the case.  The bankruptcy court dismissed the case and the debtor appealed.

The Sixth Circuit addressed two issues with the confirmation of the plan.  In order to impair any class of creditors, under § 1129(a)(10), at least one class must accept its proposed impairment.  Section 1124 defines impairment but only asks if the creditor’s rights have been altered, not if the alteration appears contrived.  The Sixth joins the Fifth and Ninth Circuit in requiring the artificial nature of the impairment to be tested under § 1129(a)(3).  Only the Eighth Circuit makes a distinction on whether the impairment is economically driven or an exercise of discretion.  But when the Sixth tested whether “the plan has been proposed in good faith,” it noted that the debtor had ample cash flow to satisfy the minor claims.  Further, the closely allied “impaired” creditors compounded the appearance of circumvention.  Finally, the lender had offered to pay the minor claims in full.  The artifice employed by the debtor to “impair” a class showed the lack of good faith.

Artificial impairment occurs most often in single asset real estate (SARE) cases because the debtor must deal with the controlling lender.  SARE cases also provide opportunity for the lender to control the class of other creditors through claim buying.  But after Village Green, maybe debtors will attempt to disguise the artificial impairment better or make the cramdown a little more palatable.

Feeling Comfortable Using Legal Jargon in Everyday Life

Posted in Bankruptcy Trends, Chapter 11, Proof of Claim

While I thought that only a Kentucky senator would object to his own legislation, Chapter 11 debtors in the Eighth Circuit must object to their own plan to have person-aggrieved standing for an appeal.  In O&S Trucking, Inc. v. Mercedes Benz Financial Services USA (In re O&S Trucking, Inc.), the court affirmed the BAP’s dismissal of the appeal for lack of jurisdiction based on standing.  Early in the case, the debtor and creditor entered into an agreed adequate protection order.  On the debtor’s motion under § 506, the bankruptcy court determined the value of the secured claim.  In addition to setting the value of the equipment, it included the value of post-petition income from the use of the equipment.  The debtor appealed the “secured-status order” which was dismissed for lack of finality.

While the first appeal was pending, the debtor proposed a plan using the court-determined valuation but included language that the amount was “subject to adjustment” if the pending (or subsequent) appeal were successful.  The debtor had surrendered all equipment so only the post-petition income portion of the creditor’s secured claim remained.  The bankruptcy court confirmed the plan and the debtor appealed.  While the Bankruptcy Code lacks a standard for appellate standing, the Eighth Circuit applies a “person aggrieved” standard.  This heightened standard requires a debtor to show that the challenged order directly and adversely affects its pecuniary interests.  To appeal from a favorable plan-confirmation judgment, the debtor must follow a specific procedure to overcome the policy favoring finality.  In O&S Trucking, the debtor included the alleged erroneous interlocutory decision on valuation as a term of the plan.  An objection, however, is necessary to highlight the offending provision and become an aggrieved party.  Without objection, the debtor who proposes a plan term is presumed to accept that term.  The “subject to adjustment” clause did not provide notice that the debtor intended to appeal its proposed plan, just that if its pending appeal of the interlocutory order succeeded, the amount of the secured claim would be adjusted.  By not following the proper procedure, the Eighth Circuit would not permit an appeal.

This decision highlights the importance of making your record to preserve the issue for appeal.  With the multitude of interlocutory orders which are entered during a Chapter 11 bankruptcy, it is important to keep track.  Bankruptcy appellate panels—without prompting—examine their jurisdiction.  This often leads to swift justice but not necessarily justice on the merits.  At least person-aggrieved standing just requires objecting to yourself, as opposed to knowing that you must be abecedarian in your approach.  And for that piece of jargon, we can thank the BAP’s opinion.

Eleventh Circuit Protects Creditors from Unscrupulous Attorneys

Posted in FDCPA

When an FDCPA complaint comes across my desk, one of the first questions I ask is whether my client is a “debt collector.”  A “debt collector” under the FDCPA (15 U.S.C. § 1692a(6)F)(iii)) cannot be “any person collecting or attempting to collect a debt . . . which was not in default at the time it was obtained by such person.”  The Eleventh Circuit recently held that question should also be the first one asked by a plaintiff’s attorney.  In Diaz v. First Marblehead Corp., the Court affirmed the award of the creditor’s attorney fees as a Rule 11 sanction against the plaintiff’s attorney.  The Court, however, refused to impute the attorney’s knowledge that the claim was frivolous on the client and reversed the joint award under § 1692k(a)(3).

The defendant in Diaz began servicing the student loan debt shortly after origination.  When the debtor failed to make payments, the servicer allegedly made daily phone calls and sent repeated correspondence to the debtor.  The debtor retained counsel who filed an action alleging violations of the FDCPA.  The servicer moved to dismiss based on the allegations which established that it was not a statutory “debt collector.”  The plaintiff voluntarily dismissed the complaint but the servicer sought sanctions.  Plaintiff’s counsel argued that the 11th Circuit had not decided the definitional issue so sanctions were unwarranted, but this was the second case that he had brought against a servicer that did not meet the definition.  The 11th Circuit pointed out that “a simple reading of the statute underlying Diaz’s claim reveals that the amended complaint employed an objectively frivolous legal theory.”  But the Court was unwilling to find that the client knew it was a meritless claim and would not impose attorney fees for the harassment.

It is difficult to see a case in which a creditor would be able to satisfy § 1692k(a)(3) against a plaintiff.  This section limits the award to reasonable attorney fees.  In order to prove its case, a creditor would have to delve into the motive underlying the filing of the baseless complaint and would run into the attorney-client privilege.  From the standpoint of collectability of a judgment, the creditor already knows the difficulty in getting paid by the debtor so counsel may be a better source for payment.  Since I often see FDCPA claims as counterclaims to a foreclosure action, establishing the definitional defense works because the debtor claims that the foreclosure is wrong because the debt is not in default and the creditor used unfair practices in violation of the FDCPA.  I’m just not allowed to refer to this as a Schrödinger’s cat problem in my motion to dismiss.

Kentucky Legislature To Consider Commercial Receivership Reform

Posted in Foreclosure, Kentucky Law

As the Kentucky General Assembly passed the midpoint in its session, a bill was introduced to overhaul the procedures in commercial receivership (Senate Bill 149). A receiver is a person appointed by a court to take possession of the real property to receive rents and to care for the property.   It is appointed to preserve and avoid waste of property that is the subject of litigation, such as foreclosure (which can take six months or more in Kentucky, even in the best case), or in the context of dissolution or liquidation of a corporation or other legal entity.  Currently, the process in Kentucky is governed by a single statute, and so a lot of things are left to the discretion of individual judges and receivers, and to caselaw that is decades old.  The National Conference of Commissioners of Uniform State Laws approved the Uniform Commercial Real Estate Receivership Act in late 2015, and recommended adoption in all the states.   Kentucky would be the first state to adopt it, and the proposed bill would replace the single page with 22 pages of definitions and provisions in an attempt to address the appointment and powers of real estate receivers in a more comprehensive and modern fashion.  Also, the Commissioners recommend adoption to address the wide variation of practice and procedure among the various states.

For additional discussion of receivership cases in Kentucky (like Thompson v. BB&T, 2008-CA-1217 (Ky. Ct. App. June 12, 2009)), see this earlier post.

Riding Through the Reaffirmation Agreement

Posted in Bankruptcy Trends, Collateral

While the number of ECF notices I receive may overwhelm my inbox, it is the rare occasion when I don’t recognize the case number.  But that happened this week when a reaffirmation agreement came across the desk.  The court “received” the document rather than “filing” it because the case had been closed for two months.  Since I’ve been exploring the new bankruptcy forms which became effective on December 1, 2015, I took this opportunity to compare B240A/B ALT (12/11) with the new form B2400A/B ALT (12/15).  But I only found changes in the cover sheet (Form 427) for the reaffirmation agreement (replaced B27).  That does follow the pattern of just adding extra numbers to the rules of civil procedure to make them rules of bankruptcy procedure (Rule 4 and Bankruptcy Rule 7004).  Since proper service is rarely made for contested matters, we won’t talk about the recent changes to Rule 4(m) reducing the time to serve a complaint to 90 days.

The effectiveness of this “received” reaffirmation agreement is the real question.  Rule 4008 requires the reaffirmation agreement to be filed no later than 60 days after the meeting of creditors.  Section 524 establishes the requirements for an effective reaffirmation agreement, including that any hearing on a presumption of undue hardship be held before the discharge is entered.  Even if the creditor reopened the case as the court notice suggested, it is doubtful that the court could approve the reaffirmation agreement for a discharged debt.  But with no presumption of undue hardship, the court does not need to approve it.  This reaffirmation agreement was signed before the deadlines but neither the creditor nor the debtor filed it.  The debtor may be able to ride through and keep the collateral so it had little incentive to make it official.  But the creditor has created itself a potential trap if the debtor defaults and it seeks to collect a deficiency which could violate the discharge injunction.  The parties intended the debt to be reaffirmed, but instead created a myriad of issues.  So, do you have any reaffirmation agreements that need to be filed with the court before a discharge is entered?

Five Out of Six Not Good Enough

Posted in Bankruptcy Trends, Collateral, Interest Rates, Kentucky Law

While hitting 5 out of 6 shots may be good on the court, it is not sufficient to prevent modification of a mortgage in the Bankruptcy Court for the Eastern District of Kentucky.  The Court recently allowed debtors to modify the debt on their manufactured home despite the anti-modification provision 0f § 1322(b)(2)See In re Snowden, Case No. 15-51308, 2016 Bankr. LEXIS 446 (Bankr. E.D. Ky. Feb. 12, 2016).  But this is not the typical modification of a debt secured by a manufactured home where a debtor crams down the unsecured portion based on the treatment of the home as a motor vehicle.  In Kentucky, for the lien to be perfected, a manufactured home must either be permanently affixed to real property (KRS 186A.297) or the lien must be noted on the certificate of title (KRS 186A.190).  In Snowden, the manufactured home had been affixed through an affidavit of conversion recorded in the land records.  That affidavit referenced six lots owned by the debtors but the creditor’s mortgage only encumbered five of the six lots.

The mortgage did include the lot on which the manufactured home was located, however, the septic system for the manufactured home was located on the one unencumbered lot.  With this integral system being on the unencumbered lot, the Court could not conclude that the five remaining lots were a single parcel.  The anti-modification provision prevents a cramdown where the claim is “secured only by a security interest in real property that is the debtor’s principal residence.”  With the separate lots indicating more than one parcel of real estate securing the debt, the creditor was not entitled to the protection of the anti-modification clause.  The Court will hear further evidence on the proposed valuation and interest rate before addressing confirmation of the plan.

Snowden raises many questions that creditors must consider when originating a loan secured by separately designated, yet contiguous, parcels on which the debtor will have their principal residence.  While the creditor avoided the affixation trap which has snared many a creditor, there was no explanation for why the one lot was omitted from the mortgage.  Even if this lot was included, the Court may have still allowed modification because of the various uses for the surrounding lots (second manufactured home for rental).  The question that this case does not discuss—and is often overlooked when modifying long-term debt in a Chapter 13 Plan—is will this debt now be excepted from the discharge under § 1328(a)(1)?