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11th Cir. Holds No Violation of Bankruptcy Discharge for ‘Informational Statement’

The U.S. Court of Appeals for the Eleventh Circuit recently affirmed the bankruptcy court’s denial of a debtor-borrower’s motion for sanctions, which alleged that her mortgage loan servicer violated her bankruptcy discharge by mailing a communication in a purported attempt to collect upon a discharged debt.

In so ruling, the Eleventh Circuit held that the purportedly violative letter, entitled “Informational Statement,” which provided an amount due, due date, and payment instructions, coupled with a disclaimer, did not constitute an unlawful attempt at debt collection, because the servicer had not foreclosed the subject property and the borrower had the option to repay the debt under section 524(f) of the Bankruptcy Code, and thus, was not designed to have the objective effect of pressuring the borrower to pay a discharged debt.

A copy of the opinion in Arlene Roth v. Nationstar Mortgage, LLC is available at:  Link to Opinion.

In December 2010, a borrower on a mortgage loan filed a voluntary petition for bankruptcy under Chapter 13.  Her bankruptcy schedules listed the mortgage on non-homestead property, which she indicated she would surrender.  Her Chapter 13 plan provided that “[s]ecured creditors, whether or not dealt with under the Plan, shall retain the liens securing such claims.” Prior to the borrower’s completion of payments under her Chapter 13 plan and discharge of the debt, the mortgage was transferred to a new loan servicer.

The servicer was notified of the discharge, which prohibited any attempt to collect debts from the borrower.  However, the discharge order also provided that “a creditor may have the right to enforce a valid lien, such as a mortgage or security interest, against the [borrower’s] property after the bankruptcy, if that lien was not avoided or eliminated in the bankruptcy case and that the Borrower may voluntarily pay any debt that has been discharged.”

Even after the discharge, the servicer did not foreclose the property; thus, the borrower could have voluntarily paid the amounts due to retain the property.

About four months after entry of the discharge order, the servicer began mailing monthly mortgage statements to the borrower, providing the amount due, due date, payment instructions, and a disclaimer that the statements were not debt collection.  After the servicer continued to mail statements to the borrower despite receipt of a cease and desist letter from her attorney, the borrower filed a motion for sanctions in bankruptcy court alleging violations of the discharge injunction under section 11 U.S.C. § 524 of the bankruptcy code, the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq., and the Florida Consumer Collection Practices Act, Fla. Stat. § 559.55, et seq. The parties reached a settlement to resolve the borrower’s motion for sanctions.

After the settlement, the borrower received a communication from the servicer entitled “Informational Statement” which again contained an amount due, and deadline and instructions to tender payment.

The informational statement also contained a lengthy disclaimer that [the] statement is sent for informational purposes only and is not intended as an attempt to collect, assess, or recover a discharged debt from you, or as a demand for payment from any individual protected by the United States Bankruptcy Code. If this account is active or has been discharged in a bankruptcy proceeding, be advised this communication is for informational purposes only and is not an attempt to collect a debt. Please note, however [servicer] reserves the right to exercise its legal rights, including but not limited to foreclosure of its lien interest, only against the property securing the original obligation.”

In response to the informational statement, the borrower: (i) filed suit against the servicer in federal trial court alleging a violation of the FDCPA, and; (ii) filed a second motion for sanctions against the servicer in the bankruptcy proceedings, again alleging violations of the discharge injunction under section 11 U.S.C. § 524 of the bankruptcy code.  The federal trial court case settled, while the bankruptcy court denied the borrower’s motion for sanctions, holding that the informational statement was not an attempt to collect the discharged mortgage loan debt, and therefore did not violate the discharge injunction.

The borrower appealed the denial of the motion for sanctions to the trial court, which affirmed the bankruptcy court’s opinion, and rejected her request to apply the FDCPA’s “least sophisticated consumer” standard to section 524.  The instant appeal followed.

Initially, the Eleventh Circuit noted that it “sits as a second court of review and thus examines independently the factual and legal determinations of the bankruptcy court and employs the same standards of review as the district court.” In re Ocean Warrior, Inc., 835 F.3d 1310, 1315 (11th Cir. 2016) (internal citations omitted).

Here, the borrower appealed the trial court’s affirmation of the bankruptcy court’s denial of her motion for sanctions, and separately, its decision to dispose of the motion without an evidentiary hearing.

As you may recall, Section 524(a)(2) provides that a discharge of debt in a bankruptcy proceeding “operates as an injunction against the commencement or continuation of . . . an act . . . to collect . . . any such [discharged] debt.” 11 U.S.C. § 524(a)(2).  This injunction is enforced through section 105, whereby the bankruptcy court “may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. § 105(a).

Together, the Court held, the sections authorize the bankruptcy court to impose civil contempt sanctions “when there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order” or “no fair ground of doubt as to whether the order barred the creditor’s conduct.”  Taggart v. Lorenzen, 139 S. Ct. 1795, 1799, 1801 (2019).

Thus, the Eleventh Circuit was first tasked with determining whether the informational statement’s objective was to pressure the borrower to repay a discharged debt, and if so, to evaluate whether it was sanctionable under section 105.  In re McLean, 794 F.3d 1313, 1322 (11th Cir. 2015); Taggart, 139 S. Ct. at 1799.

Reviewing the informational statement, the Eleventh Circuit found that the inclusion of an “amount due,” “due date” and negative escrow balance did not diminish the disclaimer language in bold typeface on the first page of the communication.  The Court further noted that the borrower had the option to repay the debt under section 524(f) of the bankruptcy code, because the servicer had not completed a foreclosure on the property.

The borrower submitted that the Eleventh Circuit should adopt the “least sophisticated consumer” standard—the standards applied by the trial court in denying the servicer’s motion to dismiss in the separate FDCPA action—arguing that “underlying questions [of § 524 and the FDCPA] are designed to protect the same vulnerable parties from the same improper conduct.”

The Eleventh Circuit declined to incorporate the “least sophisticated consumer” analysis for alleged bankruptcy discharge violations, noting that what is considered “debt collection” may vary between statutory schemes.  See Midland Funding, LLC v. Johnson, 137 S. Ct. 1407, 1414 (2017) (“The [FDCPA] and the [Bankruptcy] Code have different purposes and structural features. The [FDCPA] seeks to help consumers . . . . The Bankruptcy Code, by way of contrast, creates and maintains what we have called the delicate balance of a debtor’s protections and obligations.”) (citation and internal quotations marks omitted).

Here, the Court noted, the statutory scheme under section 524 of the Bankruptcy Code allows for creditors, such as the servicer, to send potentially helpful informational statements to debtors, such as the borrower, without simultaneously casting those statements as debt collection.

Accordingly, the Eleventh Circuit concluded that the informational statement was not designed to have the “objective effect” of “pressur[ing] the debtor to pay a discharged debt,” (In re McLean, 794 F.3d at 1322), and was not an unlawful attempt at debt collection in violation of § 524.

Because the Eleventh Circuit held that the informational statement did not violate the bankruptcy discharge injunction, it did not have to consider whether sanctions were appropriate under section 105 of the Bankruptcy Code.

However, the Eleventh Circuit nonetheless noted that sanctions were unavailable under the rigorous “no fair ground of doubt” standard recently established by the Supreme Court in Taggart, which would require the court to hold that “there [was] no objectively reasonable basis for concluding that [servicer’s] conduct might be lawful.”  Taggart, 139 S. Ct. at 1799.

Lastly, the Court declined to accept the borrower’s argument that she was improperly denied an evidentiary hearing on her motion for sanctions, noting that it was not requested by either party, and the bankruptcy court needed only to review the informational statement to determine whether its objective effect was to pressure a debtor to repay a discharged debt, and that the borrower’s subjective belief was irrelevant.  In re McLean, 794 F.3d at 1324.

For the above reasons, the bankruptcy court’s denial of the borrower’s motion for sanctions without hearing was affirmed.

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Christopher P. Hahn practices in Maurice Wutscher’s Commercial Litigation, Consumer Credit Litigation and Insurance Recovery and Advisory groups. Prior to joining Maurice Wutscher LLP, he served under the General Counsel at the Florida Office of Financial Regulation. He also obtained extensive experience litigating property insurance claims through all phases of discovery, motion practice and other pre-trial activities. Christopher obtained his Bachelor of Science degree in Business Administration from the University of Southern California, followed by his Juris Doctorate degree from the University of Miami School of Law. He is also a graduate of the University of Miami’s Masters of Business Administration program, completing his degree with an emphasis on finance and mergers and acquisitions.

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