Author Archive for Thomas Dominczyk – Page 2

8th Cir. Declines to Apply Rooker-Feldman to Preclude FDCPA Action Based on State Court Lawsuit

In a federal Fair Debt Collection Practices Act (FDCPA) lawsuit, the U.S. Court of Appeals for the Eighth Circuit recently held that the Rooker-Feldman doctrine does not apply where the complained of conduct was not the underlying judgment but rather events that occurred during the state court litigation.

A copy of the opinion in Hageman v. Barton is available at:  Link to Opinion.

The original creditor assigned a debt to a collection agency which in turn hired an attorney to collect the debt from the debtor.  The attorney sent a letter, made a phone call and ultimately filed suit in the name of the creditor against the debtor in Missouri state court in November 2012.

The debtor did not answer or otherwise appear, and the attorney obtained a default judgment in December 2012.  Thereafter, the attorney docketed the judgment in Illinois state court to initiate garnishment proceedings.  The debtor again did not answer or otherwise contest the garnishment proceedings, and a wage garnishment order was entered on Dec. 4, 2013.

Debtor filed an FDCPA complaint against the debt collector attorney on Dec. 19, 2013 alleging that based on the assignment documents, the attorney did not have the authority to file suit in the name of the original creditor, and that the real party in interest was actually the collection agency and not the original creditor.

The debtor further alleged that the Illinois garnishment action was filed in an improper venue, and that the amounts being sought under the garnishment were improper.

The trial court dismissed part of the complaint based on statute of limitations grounds, and held that the FDCPA’s venue requirement does not apply to the post-judgment wage garnishment under the Rooker-Feldman doctrine as the complaint related to attempts to challenge the legitimacy of the Missouri judgment.

On appeal the Eighth Circuit addressed Rooker-Feldman, first explaining that the doctrine precludes lower federal courts from exercising jurisdiction over actions seeking review of, or relief from, state court judgments.  Citing prior Eighth Circuit opinions, the Court further explained that the “doctrine is limited in scope and does not bar jurisdiction over actions alleging independent claims arising from conduct in underlying state proceedings.”

Because the alleged violation was the ability to actually file the underlying state court complaint, the debt collector attorney argued that Rooker-Feldman necessarily had to apply here as the underlying issue was an issue in the state court litigation.

However, relying on prior Eighth Circuit decisions, the Court rejected the argument holding instead that “prior litigation of an issue in state court may trigger traditional preclusion principles, but it does not necessarily strip the federal courts of jurisdiction.”  Ultimately, because the debtor was alleging statutory violations based on the attorney’s actions “in the process of obtaining the judgment and order,” the Eighth Circuit held that the Rooker-Feldman doctrine would not apply.

After declining to apply Rooker-Feldman, the Court addressed the statute of limitations argument, and agreed with the lower court that all of the activities in Missouri including the filing of the complaint and default judgment were barred by the FDCPA’s one year statute of limitations.  The Eighth Circuit also declined to apply equitable tolling based on its prior ruling holding that the FDCPA’s statute of limitations is jurisdictional and not subject to equitable tolling.

The Eighth Circuit also affirmed the lower court’s ruling that the FDCPA’s venue restriction does not apply to the registration of a foreign judgment.

Finally, the Eighth Circuit remanded the case back to the lower court to address potential violations arising from the conduct in the Illinois wage garnishment proceedings that were neither barred by the statute of limitations or Rooker-Feldman but were not otherwise addressed in the lower court’s opinion.

6th Cir. Rejects Debtor’s Chapter 11 BK Plan as Not Proposed in Good Faith

The U.S. Court of Appeals for the Sixth Circuit recently held that a bankruptcy court clearly erred in its finding that a debtor proposed a Chapter 11 plan in good faith, when the secured mortgagee would be paid only in part and very slowly after 10 years with no obligation by the debtor to maintain the building and obtain insurance, while a second class would be paid in full in two payments of $1,200 each over 60 days.

In so ruling, the Sixth Circuit held that the artificial creation of an “impaired” class under section 1124(1) of the Bankruptcy Code, 11 U.S.C. § 1124(1), must pass muster under a “good faith” analysis under 11 U.S.C. § 1129(a)(3).

A copy of the opinion in Village Green I, GP v. Federal Nat’l Mortgage Assoc. is available at:  Link to Opinion.

The debtor in this case defaulted on its monthly mortgage payment for an apartment building that it financed with the secured creditor.  Shortly after default, the debtor filed Chapter 11 bankruptcy to halt the secured creditor’s foreclosure action.  Aside from the $8.6 million owed to the secured creditor, the only other debts provided for in the proposed plan of reorganization was less than $2,400 owed in total to the debtor’s former attorney and accountant.

Debtor proposed two classes of claims in its plan of reorganization.  The secured creditor would be paid very slowly leaving a balance of $6.6 million after 10 years and the proposed plan removed the debtor’s obligation to maintain the building and obtain insurance.  The second class would be paid in full in two payments of $1,200 each over 60 days.

Because the second class was technically “impaired” (because they were entitled to be paid on their claims immediately), the bankruptcy court held that the second class satisfied the requirements of 11 U.S.C. § 1124(1).  Because the second class voted to accept the plan of reorganization, the bankruptcy court confirmed the plan pursuant to 11 U.S.C. § 1129(a)(10).

The secured creditor appealed to the district court, which vacated the bankruptcy court’s confirmation of the plan and remanded for a determination as to whether the plan was proposed in good faith pursuant to 11 U.S.C. § 1129(a)(3).  On remand, the bankruptcy court held that the plan was proposed in good faith, and the secured creditor again appealed to the district court that in turn vacated and remanded.  This led to the dismissal of the case by the bankruptcy court and the subsequent appeal to the Sixth Circuit.

The Sixth Circuit recognized that the “impairment” of the minor second class claims was impaired only in a technical sense, but noted “that this impairment seems contrived to create a class to vote in favor of the plan is immaterial” citing a Fifth Circuit opinion in In re Village at Camp Bowie, 710 F.3d 239, 245-46 (5th Cir. 2013).

However, the Sixth Circuit also found the debtor’s motives to be expressly relevant when analyzing a plan under the good faith standard of 11 U.S.C. § 1129(a)(3).

When analyzing the plan for good faith, the Sixth Circuit cited the bankruptcy court’s findings that the debtor had net income of $71,400 per month, “which renders dubious at best [its] assertion that it could not safely pay off the minor claims (total value: less than $2,400) up front rather than over 60 days.”

Considering also that the “impaired” claimants were also closely allied with the debtor increased the appearance that the “impairment” was contrived solely for the purpose of circumventing the purposes of 11 U.S.C. § 1129(a)(10).

Accordingly, the Sixth Circuit affirmed the district court’s ruling, and held that the bankruptcy court clearly erred when it found that the debtor proposed its plan in good faith.

Interestingly, although the Sixth Circuit agreed with the Fifth Circuit on the artificial impairment analysis, it parted ways with the Fifth Circuit on the good faith analysis.  The Camp Bowie opinion from the Fifth Circuit does not contain a significant good faith analysis of the plan at issue but rather only affirmed the bankruptcy court in the absence of clear error.

Florida Bankruptcy Court Denies Mortgagee’s Motion to Reopen Chapter 7 Case

The U.S. Bankruptcy Court for the Southern District of Florida recently denied a mortgagee’s motion to reopen a Chapter 7 case to compel the surrender of real property, due to a five-year delay in filing the motion.

In so ruling, the court agreed with an earlier ruling from the U.S. Bankruptcy Court for the Middle District of Florida (In re Plummer, 513 B.R. 135 (Bankr. M.D. Fla. 2014)), distinguishing “surrender” from “foreclosure,” and holding that a creditor cannot use the Bankruptcy Code to circumvent the obligations imposed by state law.

A copy of the opinion in In Re Kourogenis is available at:  Link to Opinion.

The debtor filed a Chapter 7 case in October 2009 and stated an intent to surrender her real property on her schedules.  The debtor received her discharge in February 2010 and the case was closed in April 2010.

Five years later, the mortgagee sought to reopen the bankruptcy case to compel the debtor to surrender the real property and preclude her from contesting a foreclosure action pending in state court.

The mortgagee argued that section 521(a)(2)(B) of the bankruptcy code, 11 U.S.C. § 521(a)(2)(B), requires a debtor to perform her intention with regard to property as specified in her schedules within 30 days after the date first set for the meeting of creditors.

However, the bankruptcy court noted that the mortgagee delayed in asserting its rights for five years, and the doctrine of laches barred any argument that the mortgagee had to enforce the 30-day period.

The bankruptcy court further opined that “surrender” as that term is used in section 521(a)(2)(A) does not require the debtor to physically deliver the property to the creditor.

Agreeing with an earlier opinion from a bankruptcy court in the Middle District of Florida (In re Plummer, 513 B.R. 135 (Bankr. M.D. Fla. 2014)), the judge distinguished “surrender” from “foreclosure” and held that a creditor cannot use section 521 to circumvent the obligations imposed by state law.  The court noted that both opinions however are at odds with other cases requiring a debtor who “surrenders” property to “refrain from taking any overt act that impedes a secured creditor’s ability to foreclose its interest in the secured property.”  See in re Metzler, 530 B.R. 894 (Bankr. M.D. Fla. 2015).

Ultimately, the court concluded that a borrower who indicates an intent to surrender will not necessarily receive a free pass in state court.  Specifically, the court noted that judicial estoppel could very well apply to bar a debtor from challenging the foreclosure in state court after the debtor surrendered the property in bankruptcy court.

NJ Fed. Court Reverses Bankr. Court Ruling that Foreclosure Was Barred by NJ Six-Year Statute of Limitations

The U.S. District Court for the District of New Jersey recently held that New Jersey’s 20-year statute of limitations for residential foreclosures applied to a re-filed foreclosure action, reversing a bankruptcy court’s ruling that the shorter six-year statute of limitations period applied.

A copy of the opinion is available at:  Link to Opinion.

The borrower obtained a $520,000 mortgage loan in February 2007.  The Mortgage and Note listed March 1, 2037 as the maturity date.  The borrower defaulted in July 2007, and a foreclosure action was filed.  However, the foreclosure action was later dismissed for want of prosecution, and then dismissed with prejudice and the lis pendens discharged.

The borrower filed for bankruptcy in March 2014.  In the bankruptcy action, the borrower sued the servicer and loan owner seeking a declaration that the mortgage debt is unenforceable because (1) the plaintiff in the foreclosure action was allegedly not the true owner and holder of the Note and Mortgage; and (2) enforcement of the Note and Mortgage was supposedly “barred by the doctrine of payment and the statute of limitations.”

The bankruptcy court held that the creditors’ proof of claim pursuant to 11 U.S.C. § 502(b)(1) to foreclose the mortgage on the accelerated note was time-barred under New Jersey’s six-year statute of limitations.  The bankruptcy court also held that, because the creditors could not foreclose on the mortgage loan, the creditors’ proof of claim in bankruptcy also was barred because the underlying lien was unenforceable.

The creditors appealed.

On appeal, the trial court noted that an action to foreclose a residential mortgage in New Jersey must be commenced by the earlier of:

  1. “Six years from the date fixed for the making of the last payment or the maturity date set forth in the mortgage or the note … secured by the mortgage;”
  2. “Thirty-six years from the date of recording of the mortgage, or, if the mortgage is not recorded, 36 years from the date of execution, so long as the mortgage itself does not provide for a period of prepayment in excess of 30 years;” or
  3. “Twenty years from the date on which the debtor defaulted…” (N.J.S.A. § 2A:50-56.1.)

The Court noted that the bankruptcy court interpreted the words “six years from the date fixed for making the last payment or maturity date set forth,” to mean an “accelerated” mortgage or advanced maturity date.

However, the Court held, the word “accelerated” does not appear in the relevant subsection and is not defined.  Moreover, the Court found no indication in the record to indicate that the maturity date in the loan documents (March 1, 2037) was accelerated by the default or by the filing of the foreclosure action.

In addition, the Court found persuasive two state court rulings, holding that if the maturity date were accelerated to the date of default then the plain meaning of the language in the six-year limitations period would be rendered superfluous, and that merely filing a complaint does not reasonably accelerate the mortgage and note.  See Pennymac Corp. v Crystal, No. F-31289-14 (N.J. Super. Ct. Ch. Div. May 8, 2015); Wells Fargo Bank v. Jackson, No. F-29217-14 (N.J. Super. Ct. Ch. Div. May 6, 2015).

The Court also held that applying the shorter six-year statute of limitations would ignore the intended purpose of the statute.  The Court noted that the New Jersey residential foreclosure statutes of limitations have “been construed to address problems caused by the presence of residential mortgages on property records, which have been paid or which are otherwise unenforceable,” and that the policy behind the statute is that “all homeowners should be given every opportunity to pay their home mortgages and that mortgagees benefit when defaulting loans return to performing status.”

In addition, and perhaps most importantly, the Court repeated the bankruptcy court’s words that “[n]o one gets a free house.”  The Court held that “[d]eeming the mortgage collection claim as time-barred would be inequitable,” and “would be contrary to public policy by depriving [the creditors] of any remedy for [the borrower’s] default.”

NY Court of Appeals Holds Mortgage Loan Repurchase Action Time-Barred

The Court of Appeals of New York recently held that a mortgage loan repurchase action for breach of representations and warranties accrued when the representations and warranties were made, and the obligation to cure and repurchase was not a separate and continuing promise of future performance.

A copy of the opinion is available at:  Link to Opinion.

The sponsor of a residential mortgage-backed securities trust purchased 8,815 mortgage loans from third-party originators. This pool of loans was sold to an affiliate, known as a “depositor,” pursuant to a Mortgage Loan Purchase Agreement (MLPA) between the sponsor and the depositor dated March 28, 2006.

Also on March 28, 2006, the depositor transferred the loans and its rights under the MLPA to the trust pursuant to a Pooling and Servicing Agreement (PSA) between the depositor, the servicer, a bank as master servicer and securities administrator, and another bank as trustee.

In the MLPA, the sponsor made more than 50 representations and warranties as to the quality and other attributes of the loans as of the closing date, March 28, 2006. The MLPA also allowed the trust to examine each mortgage loan file and exclude from the final pool any that did not conform to the representations and warranties. The sole remedy in the event of a breach of the MLPA was for the sponsor to cure or repurchase the non-conforming loans.

The PSA provided that the trustee had the right to enforce the sponsor’s repurchase obligation by notifying the sponsor and servicer and demanding a cure within 60 days. If the default was not cured, the trustee had the right to enforce the sponsor’s obligation to repurchase under the MLPA within 90 days after the sponsor was notified of the breach. The PSA also provided that certificate holders with at least 25 percent of voting rights in the trust could enforce certain events of default after giving notice in writing to the trustee demanding that it file suit and the trustee failed or refused to do so within 15 days.

The trust and certificate holders allegedly lost almost $330 million due to borrower defaults and delinquencies, leading two independent investment fund certificate holders—who together held 25 percent of the voting rights—to hire a forensic mortgage loan review company to analyze a portion of the loan pool. The result was that 99 percent of the loans reviewed failed to comply with one or more representations and warranties.

In January 2012, the two certificate holders gave notice of default under the PSA to the trustee bank, demanded that the trustee require the sponsor to repurchase all of the loans in the trust, and also demanded that the trustee obtain a tolling agreement from the sponsor given potential problems with the statute limitations.

The trustee neither sued the sponsor nor obtained a tolling agreement, so the two certificate holders sued the sponsor for breach of contract on March 28, 2012, exactly six years after the MLPA and PSA were signed.

In September 2012, the trustee sought to substitute itself as the party plaintiff, filing a complaint on the trust’s behalf against the sponsor for breach of the representations and warranties and failure to cure and repurchase. The trustee alleged that it had notified the sponsor of the breaches in nine letters sent between February and July 2012.

In November 2012, the sponsor moved to dismiss the complaint, arguing that it was untimely because the trustee’s claims accrued on March 28, 2006, more than six years before the trustee filed its complaint, the certificate holders did not give the sponsor the required 60 days’ notice to cure and 90 days to repurchase before suing, the certificate holders lacked standing because only the trustee could sue for breaches of the representations and warranties, and the trustee’s substitution as plaintiff could not relate back to March 28, 2012 because the certificate holders’ action was not valid.

The trial court denied the sponsor’s motion to dismiss, concluding that the sponsor’s obligation to cure or repurchase was recurring, such that the sponsor breached the PSA each time it failed to cure or repurchase a defective loan after receiving notice of breach. The trial court also held that the trustee had satisfied the condition precedent to give notice of breach before filing suit because the sponsor repudiated its obligation to repurchase.

The New York Appellate Division reversed and granted the sponsor’s motion to dismiss the complaint as untimely, reasoning that the claims accrued on the closing date of the MLPA, March 28, 2006, when the breach occurred, the 60 and 90-day cure and repurchase periods had not expired when the certificate holders sued on March 28, 2012, and that the certificate holders lacked standing to sue on behalf of the trust and the trust’s substitution did not cure that defect and relate back to the certificate holders’ filing date.

The trustee sought leave to appeal, which the Court of Appeals granted.

The New York Court of Appeals began its analysis by stressing that New York’s law of contracts and statutes of limitation serve the same objectives of finality, certainty and predictability, and are designed “not only to save litigants from defending stale claims, but also express a societal interest or public policy of giving repose to human affairs.” In addition, the Court noted that New York courts have “rejected accrual dates which cannot be ascertained with any degree of certainty, in favor of a bright line approach.”

Thus, the New York Court of Appeals held that, under New York law, the statute of limitations for breach of contract does not begin to run when the plaintiff discovers that he has a cause of action, but “from the time when liability for wrong has arisen even though the injured party may be ignorant of the existence of the wrong or injury.”

The Court of Appeals rejected the trustee’s argument that its claim did not accrue until the sponsor refused to cure or repurchase, at which point the trustee or certificate holders had six years to sue, distinguishing the ruling in Bulova Watch Co. v. Celotex Corp., 26 NY 2d 606 (1979), because although “parties may agree to undertake a separate obligation, the breach of which does not arise until some future date, the repurchase obligation undertaken by [the sponsor] does not fit this description.”

The New York Court of Appeals explained that Bulova Watch involved a provision in a contract for a new roof that obligated the seller to make repairs for 20 years. The Court held that the repair guarantee was an agreement separate and distinct from the agreement to supply roofing materials, and the agreement to repair was subject to a six-year statute of limitations, running from the time each breach of the obligation to repair occurred, not when the contract was signed.

In contrast, the Court held, in the case at bar, the sponsor never guaranteed the future performance of the mortgage loans, but rather only that certain facts were true as of a date certain – here, March 28, 2006, when the MLPA and PSA were signed. In addition, the Court held, the agreements expressly stated that the representations and warranties did not survive the closing date.

The Court of Appeals also rejected the trustee’s argument that the obligation to cure or repurchase was a condition precedent that delayed accrual of the cause of action, because the trustee could not sue the sponsor until the sponsor refused to cure or repurchase, and only then did the PSA allow the trustee to sue to enforce the obligation.

Relying on a decision more than 100 years old, Dickinson v. Mayor of City of N.Y., 92 NY 584, 590 (1883), the Court of Appeals reasoned that the trustee ignored “the difference between a demand that is a condition to a party’s performance, and a demand that seeks a remedy for a pre-existing wrong.”

In Dickinson, the Court of Appeals held that a 30-day statutory period that the city had to investigate claims before suit could be filed did not affect when the cause of action against the city accrued, contrasting that situation with one in which “a demand was a part of the cause of action and necessary to be alleged and proven, and without this no cause of action existed.”

Like in Dickinson, the Court of Appeals held, the trust “suffered a legal wrong” when the sponsor breached the representations and warranties, and the case before the Court was not one where no cause of action existed until the demand was made.

The Court held that the sponsor’s obligation to cure or repurchase was not a separate and continuing promise of future performance, but was instead the sole remedy if the sponsor breached its representations and warranties.  Accordingly, the Court held, the obligation to cure or repurchase “was not an independently enforceable right, nor did it continue for the life of the investment.”

Accordingly, the Court of Appeals concluded that the trustee’s claim was subject to the six-year statute of limitations for contract actions, which accrued on March 28, 2006, when the MLPA was signed. In addition, the Court of Appeals held that the sponsor’s failure to cure or repurchase “was not a substantive condition precedent that deferred accrual of the trust’s claim; instead, it was a procedural prerequisite to suit.”

Finally, because the Court held the trust failed to fulfill the procedural condition precedent, the Court did not address the issues of standing and relation-back, and affirmed the order of the Appellate Division.

NY High Court: Only Possession of Note is Required to Have Standing to Foreclose

nysealThe New York Court of Appeals recently confirmed that, under New York state law, a loan servicer had standing to foreclose on delinquent borrowers based only upon the servicer’s demonstrated possession of the note evidencing the borrowers’ loan since the time the foreclosure action was filed.

The Court also held that, although the loan servicer’s affidavit set out sufficient facts to show exclusive possession and control of the note prior to the date the foreclosure action was filed, the affidavit would have been better and clearer if it had also included facts describing how the servicer came into possession of the note.

A copy of the opinion is available at: Link to Opinion.

In this case, the borrowers obtained a $600,000 adjustable rate mortgage loan in July 2006, and delivered the fully executed note and mortgage to the lender that originated the loan.  Subsequently, the loan became part of a residential mortgage-backed securitization trust pursuant to a pooling and servicing agreement (PSA).  In March 2008, the plaintiff loan servicer began servicing the PSA.  The mortgage was also assigned to the plaintiff loan servicer in August 2009.

Shortly after that, the borrowers defaulted by failing to make their January 2010 payment and every monthly payment after that.  In May 2010, by limited power of attorney, the PSA trustee granted the loan servicer the right to perform certain acts including the right to commence foreclosure proceedings.  The loan servicer also took physical possession of the original note on May 20, 2010.

On May 24, 2010, the loan servicer commenced foreclosure proceedings.  Throughout those proceedings, the borrowers never disputed their default or obligation to pay under the note.

Instead, they argued that the loan servicer lacked standing to foreclose, and filed a motion for summary judgment.  In their motion, they argued that the loan servicer lacked standing because the loan servicer did not also possess the mortgage.

The loan servicer filed a cross-motion for summary judgment, which the trial court granted.  The trial court also denied the borrowers’ motion for summary judgment.  The loan servicer provided an affidavit that stated in pertinent part that the “original Note has been in custody of Plaintiff…and in its present condition since May 20, 2010.”   The affidavit also stated that “prior to commencement of the action…[the servicer] has been in exclusive possession of the original note and allonge affixed thereto…and has not transferred same to any other person or entity.”

The Court of Appeals held the servicer was entitled to summary judgment, and affirmed the lower court’s judgment.

The Court of Appeals held that the borrowers “misconstrue the legal principle that an entity with a mortgage but no note lacks standing to foreclose…to also mean the opposite—that an entity with a note but no mortgage lacks standing.”   The Court held the borrowers’ argument is “simply incorrect.”

Rather, the Court held, the loan servicer’s affidavit and its demonstrated physical possession of the note was enough under New York law to confer standing to foreclose.

Contrary to the borrowers’ argument, the Court of Appeals confirmed that “it is not necessary to have possession of the mortgage at the time the [foreclosure] action is commended.”  The Court held this “conclusion follows from the fact that the note, and not the mortgage, is the dispositive instrument that conveys standing to foreclose under New York law.”

Finally, the Court held that although the loan servicer’s affidavit was sufficient as a matter of law, “the better practice would have been for [it]…to state how it came into possession of the note in its affidavit in order to clarify the situation completely.”


No FDCPA Violations in Simon After Remand

Court House ExteriorTwo years ago, in Simon v. FIA Card Services, N.A., the Third Circuit held that alleged violations of the FDCPA resulting from conduct in a bankruptcy case were not precluded by the Bankruptcy Code.

At issue was whether the defendants engaged in false, misleading or deceptive conduct in connection with their service of a subpoena for a Rule 2004 examination.  The certification of service on the subpoenas indicated service both directly on the plaintiffs and on their attorney whereas they were actually only served on the attorney. In addition, the location provided for the examination was improper under the bankruptcy rules.

The district court originally held that the complaint failed to state a claim for relief prior to the Third Circuit reversing and remanding the case.

Now on remand, the district court has granted the defendants’ motions for summary judgment, holding that the alleged irregularities with the subpoena were immaterial and would not mislead a competent attorney regarding a consumer’s rights.

Two significant holdings come from this opinion which can be found here.

First, the district court held that although technically inaccurate, the statement that the subpoenas had been served on the plaintiffs at their home address was immaterial and thus would not mislead the least sophisticated consumer regarding his rights under the FDCPA.  The court recognized that multiple Circuits including the Second, Fourth, Sixth, Seventh and Ninth as well as district courts within the Third Circuit have all included a materiality component in FDCPA claims.

The court held:

“the misstatement regarding service had no connection to the nature or legal status of the debt, it was of no consequence to the bankruptcy proceeding, and it would not in any way have affected the decisionmaking of the least sophisticated debtor with respect to their response to the debt collector’s action.”

The second significant holding is that the court applied a “competent attorney standard” to evaluate the claims that the subpoenas were false and deceptive.  Because the subpoenas were sent to the plaintiffs’ attorneys and not to them directly, the district court determined that the interpretation of the misstatement at issue (the location of the deposition) had to be determined from the perspective of the competent attorney and not the least sophisticated debtor.

The district court acknowledged that the Third Circuit has rejected the competent attorney standard in specific situations such as whether the 1692e(11) disclosure had been provided or a threshold inquiry of whether the subpoena rule had been violated.  However, because the issue was whether the recipient would be misled by the content of the subpoena, the district court agreed with other Circuits that have held that the least sophisticated debtor standard is inappropriate for judging communications with lawyers.

Ultimately, the district court found that the competent attorney would not be misled by the subpoenas and would recognize immediately, as plaintiffs’ attorney actually did, the defects in the subpoenas and advise the plaintiffs accordingly.

Plaintiffs have already appealed the summary judgment ruling to the Third Circuit so now the Third Circuit will have to directly address both materiality and the competent attorney standard.

Seventh Circuit Denies Petition in Proof of Claim Case

Like the 80 inches of snow that pummeled Buffalo this week, the crusade against time-barred debt continues to hammer the collection industry.  Today the United States Court of Appeals for the Seventh Circuit denied a petition for leave to file an interlocutory appeal in the matter of Patrick v. PYOD, LLC.

Earlier this summer, a judge sitting in the United States District Court for the Southern District of Indiana denied a collector’s motion to dismiss an FDCPA complaint based on the filing of a proof of claim on a debt that was beyond the statute of limitations. Relying on Randolph v. IMBS, Inc., 368 F.3d 726 (7th Cir. 2004), the court reasoned that the Seventh Circuit had previously held that violations of the Bankruptcy Code can be the basis for a violation of the FDCPA. Relying on the Seventh Circuit’s prior admonitions for collecting time-barred debt (Phillips v. Asset Acceptance, LLC, 736 F.3d 1076 (7th Cir. 2013)) as well as Crawford v. LVNV Funding, LLC, 758 F.2d 1254 (11th Cir. 2014), the district court denied the motion to dismiss.

In its opinion, the court did acknowledge the vast authority contrary to its position in other districts and circuits.  This split in authority was one of the reasons given for granting the petitioner’s motion for leave to file an interlocutory appeal.

In denying the petition for leave to appeal, the Seventh Circuit declined to rule early on an issue that will shortly be back before it as the only issue to be determined in district court is how many proofs of claim did PYOD file and what is its net worth.  Even if PYOD settles, the avalanche of Crawford-type cases being filed will continue and one will ultimately reach the Seventh Circuit through the normal appeals process.

Consumer Baits Collector to Violate FDCPA, Files Suit

If I did not read this opinion I never would have believed it. In one of the greatest examples of baiting a collector into a violation of the FDCPA, a plaintiff in Missouri decided he was not going to wait for a collector to call him and instead called the collector himself to induce a 1692c(a)(2) violation.

3d handshake dangerousAccording to the opinion, “In mid-June 2014 plaintiff retained an attorney to represent him regarding his debts, including those which defendants are attempting to collect from him. Shortly after retaining legal counsel plaintiff phoned defendant MRG to ask about the debt and to inform MRG that he had retained counsel regarding the debts MRG was trying to collect.”

Because the collector did not immediately end the call at this point and continued to attempt to resolve the account, the court found that the complaint stated a claim for a violation of both 1692c(a)(2) 1692d and 1692f. The fact that the consumer initiated the call did not constitute “prior consent of the consumer” under 1692(c)(a) according to the court.  Worse yet, this same conduct of answering a consumer’s telephone call also stated a claim for harassment and unconscionable means to collect under sections 1692d and 1692f.

The full opinion can be found here.



Eleventh Circuit Clarifies Prior Express Consent Under TCPA, Reverses Mais

eleventh_appellate_court_seal[1]With its decision in Crawford v. LVNV Funding, LLC still leaving a bad taste in the collection industry’s mouth, the Eleventh Circuit has provided some solace to the financial services industry with its decision in Mais v. Gulf Coast Collection Bureau, Inc., No. 13-14008 (11th Cir. Sept. 29, 2014).  The key holding was the reversal of the district court’s interpretation of “prior express consent” under the Telephone Consumer Protection Act.

Plaintiff sued the medical service provider and its debt collection agent for making autodialed or prerecorded calls to his cellular telephone in violation of the TCPA.  His wife had given his cellular telephone number to a hospital representative at the time of his admission. The collector argued that this was prior express consent under the TCPA and relied on the 2008 FCC Ruling in support of that argument.  The district court rejected the 2008 FCC Ruling as inconsistent with the TCPA and further held that it did not apply to the facts of this case because the ruling was meant to cover consumer and commercial contexts and not medical settings.

The Eleventh Circuit began by noting that the district court exceeded its jurisdiction by declaring the 2008 FCC Ruling to be inconsistent with the TCPA.  The court held that the federal courts of appeals have “exclusive jurisdiction to enjoin, set aside, suspend (in whole or in part), or to determine the validity of such FCC orders.”  As a result, the district court did not have jurisdiction to challenge the 2008 FCC Ruling.  The court also reversed the district court’s holding that the 2008 FCC Ruling did not apply to medical debts noting that the ruling did not distinguish between the types of debts at issue.

As far as “consent” was concerned, the Eleventh Circuit rejected Mais’ argument that he did not provide his number to the “creditor” but rather to hospital representatives at the time of his admission.  The court reasoned that because it was known that the intermediary would ultimately be providing the phone number to the creditor it was no different than if Mais (or his wife) had given the number to the creditor himself as the 2008 FCC Ruling finds prior express consent when the subscriber “made the number available to the creditor regarding the debt.”  The court also cited a recent FCC ruling that held that consent may be obtained through intermediaries.  Ultimately, the Eleventh Circuit held that this interpretation supported the legislative history of the TCPA because “if a person knowingly releases his phone number . . . the called party has in essence requested the contact by providing the caller with their telephone number for use in normal business communications.”

Finally, the Eleventh Circuit rejected Mais’ argument that the “health information” that he authorized the medical provider to share did not include his cell phone number.  The court noted that “health information” included “billing-related information” in addition to other medical information.

This is the second significant decision from the Eleventh Circuit this year addressing TCPA prior express consent.  Osorio v. State Farm, was handed down in March. The Eleventh Circuit’s opinion in Mais is a major victory for the credit and collection industry in the TCPA arena and adds clarity to an otherwise confusing regulatory landscape.

NJ Court Holds No FDCPA Violation for Filing Suit on Time-Barred Debt

Filing a lawsuit to collect a time-barred debt does not violate the Fair Debt Collection Practices Act according to a June 30 decision from a New Jersey state trial court.

The decision, Midland Funding v. Thiel, involved a collection action to recover the unpaid balance of a Home Depot credit card. The law firm representing the creditor filed suit under New Jersey’s six-year limitation period for contracts, which has been applied to countless credit card debts. The trial court dismissed the claim reasoning that this particular credit card could only be used to make purchases at Home Depot.iStock_000019638890Small

Four Year Limitations Period for “Store Branded” Credit Card Debt

A little over three months ago, this exact same issue was decided by the Appellate Division in an unpublished opinion in New Century Financial Services v. McNamara (you can read our analysis of that decision here). Although the trial court here did not rely on McNamara, it similarly reasoned that because the use of credit was limited to goods and services available only at Home Depot, the correct limitations period, according to the trial court, was New Jersey’s four-year limitations period for the sale of goods.

No FDCPA Violation

The filing of the lawsuit under the wrong statute of limitations is not the type of conduct the FDCPA prohibited, the court wrote. “While the process of debt collection may be an unhappy event for a Defendant, Plaintiff did not engage in oppressive conduct that would warrant a FDCPA violation or sanctions,” the court concluded.

The trial court departed from the reasoning of the New Jersey State Appellate Division in McNamara. There, the Appellate Division remanded the case to make findings on whether a time-barred lawsuit violates the FDCPA.

Unfortunately, the trial court’s decision has limited impact and other New Jersey state courts can choose not to follow it.

11th Circuit Holds Filing a Proof of Claim on Time-Barred Debt Violates FDCPA

Addressing what it termed “a deluge [that] has swept through U.S. bankruptcy courts of late” the 11th Circuit Court of Appeals in Crawford v. LVNV Funding, LLC  held that filing a proof of claim on time barred debt is conduct that violates the Fair Debt Collection Practices Act (“FDCPA”).


The last payment on the underlying debt was made in 2001 and subject to Alabama’s three year statute of limitations. The debtor filed for relief under the Bankruptcy Code in 2008 during which the current owner of the debt filed a proof of claim. Neither the debtor nor the Chapter 13 Trustee objected to the claim and the Trustee distributed Bankruptcy documentspayments to the creditor during the pendency of the bankruptcy case. Four years later, the debtor filed an adversary complaint in the bankruptcy case alleging that the filing of the proof of claim on the time barred debt violated the FDCPA. The Bankruptcy Court dismissed the complaint in its entirety and the District Court affirmed the dismissal on appeal.

Calls the Practice “Misleading”

The 11th Circuit reviewed the ever growing number of cases to hold that filing suit on a time barred debt is a violation of the FDCPA and reasoned that filing a proof of claim on a stale debt “creates the misleading impression to the debtor that the debt collector can legally enforce the debt.” The court rejected the creditor’s arguments that filing a proof of claim was not collection activity that was subject to the FDCPA applying the broad definition of debt collection like so many courts before it.

A key factor for the Court was the fact that a “debtor’s memory of a stale debt may have faded and personal records documenting the debt may have vanished, making it difficult for a consumer debtor to defend against the time-barred claim.” While the debtor does have the burden to object to the claim, the fact that the claim is time barred is alone sufficient to sustain an objection under 11 U.S.C. § 502(b)(1). Thereafter, the burden shifts back to the creditor to support its claim. The opinion does not address what other difficulties a debtor may face when objecting to a claim other than to note that the debtor may not be aware that the debt is time barred and thus fail to object to the claim.

Deviates from other Circuits’ Holdings

Interestingly, the 11th Circuit declined to consider whether the Bankruptcy Code preempts the FDCPA in certain situations as the 2nd, 3rd and 9th Circuits have previously held. The 11th Circuit’s opinion in Crawford is another in a growing list of cases to find the collection of time-barred debt to violate the FDCPA.