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11th Cir. Reverses Denial of Class Cert in Challenge to Post-Discharge Mortgage Statements

In a putative class action of borrowers who received mortgage statements after a bankruptcy discharge, the U.S. Court of Appeals for the Eleventh Circuit recently reversed a trial court order denying certification for failure to establish predominance.

In so ruling, the Eleventh Circuit held that a mortgage servicer’s affirmative defense that it is not liable under the federal Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692 et seq., and the Florida Consumer Collection Practices Act (FCCPA), Fla. Stat. § 559.55 et seq., because the only remedy for violating a discharge injunction is under the Bankruptcy Code requires no individualized inquiries and is common to all class members.

A copy of the opinion in Sellers v. Rushmore Loan Management Services, LLC is available at:  Link to Opinion.

The named-plaintiff borrowers obtained a home loan secured by a mortgage.  After the borrowers defaulted, the note holder filed foreclosure.  The borrowers then filed for Chapter 7 bankruptcy protection.  The borrowers did not reaffirm the debt, vacated the property, and the bankruptcy court entered a discharge order pursuant to section 524(a)(2) that relieved them from any personal liability on the mortgage debt.

After the discharge order, the note holder’s mortgage servicer sent the borrowers multiple monthly statements for their mortgage loan.  In response the borrowers sued the mortgage servicer on behalf of themselves and a putative class alleging claims arising out of the FDCPA and the FCCPA.

The named-plaintiff borrowers alleged that the servicer violated the FDCPA because the monthly mortgage statements “attempted to collect a debt and represented that it had a legal right to collect upon discharged monetary amounts.” This allegedly violated the FDCPA’s prohibition against using “false, deceptive, or misleading representation[s]” including by making false representations about “the character, amount, or legal status of [a] debt.” 15 U.S.C. § 1692e(2)(A). The named-plaintiff borrowers claimed that sending the monthly statements falsely represented that the servicer “had a legal right to collect the mortgage debt from the [borrowers] and also falsely represented the legal status of the debt.”

The named-plaintiff borrowers also claimed that the servicer violated the FCCPA as the mortgage statements allegedly “claim[ed] and attempt[ed] to enforce a debt which was not legitimate and not due and owing.” Fla. Stat. § 559.72(9).

Relevant to this appeal, the servicer raised an affirmative defense that the Bankruptcy Code precluded the FDCPA and FCCPA claims.

The borrowers moved for class certification and asked the trial court to certify the following class:

“All Florida consumers who (1) have or had a residential mortgage loan serviced by [the servicer], which [the servicer] obtained when the loan was in default; (2) received a Chapter 7 discharge of their personal liability on the mortgage debt; and (3) were sent a mortgage statement dated September 11, 2013 or later, in substantially the same form [as mortgage statements the borrowers received that] was mailed to the debtor’s home address in connection with the discharged mortgage debt.”

The trial court determined that the named-plaintiff borrowers failed to establish predominance as required under Federal Rule of Civil Procedure Rule 23(b)(3), and denied the motion for class certification.

The trial court found that the class included members who, like the named-plaintiff borrowers, vacated their homes, as well as members who did not leave their homes. The trial court determined that the servicer’s preemption defense would only apply when borrowers remained in their homes and the exception to discharge injunctions in section 524(j) applied.  As such, the trial court then reasoned that it would be necessary to conduct individualized inquiries “for every class member to determine whether the § 524(j) exception applied, and if so, whether the Bankruptcy Code precluded and/or preempted the FDCPA and FCCPA.”

This interlocutory appeal followed.

The Eleventh Circuit framed the question before it as follows: “whether the district court abused its discretion in deciding that common issues did not predominate for the alleged claims.”

As you may recall, Rule 23(b)(3) requires a trial court to determine whether “the issues in the class action that are subject to generalized proof and thus applicable to the class as a whole . . . predominate over those issues that are subject only to individualized proof.”  To accomplish this, the court must “identify the parties’ claims and defenses and their elements” and “then classify these issues as common questions or individual questions by predicting how the parties will prove them at trial.” “Common questions are ones where the same evidence will suffice for each member, and individual questions are ones where the evidence will vary from member to member.” The court then must “determine whether the common questions predominate over the individual ones.”

Regarding the FDCPA claim, the Eleventh Circuit found that the trial court erred when it found that the servicer’s Bankruptcy Code preemption affirmative defense only applied “to class members who remained in their homes.” Instead, because the servicer’s affirmative defense “potentially barred every class member’s FDCPA claim, the district court was required to treat the defense as raising a common issue.”

The Eleventh Circuit observed that section 1692e(2)(A) of the FDCPA bars a debt collector from making “any false, deceptive, or misleading representation . . . in connection with the collection of any debt,” which includes making a false representation about “the character, amount, or legal status of any debt.” Here, the named-plaintiff borrowers alleged that the servicer violated this section by attempting “to collect a mortgage debt that had been discharged.”

The servicer’s preemption affirmative defense asserted “that the Bankruptcy Code provides the only remedy for a claim that a creditor violated a bankruptcy court’s discharge injunction and thus bars an FDCPA claim resting on the creditor’s attempt to collect a debt in violation of a bankruptcy court’s discharge injunction.”

The Eleventh Circuit determined that the trial court erred because whether the Bankruptcy Code precludes an FDCPA “claim that a creditor engaged in false or deceptive conduct by trying to collect a debt in violation of a discharge injunction is common to all class members.”

Specifically, according to the Eleventh Circuit, the trial court wrongly ignored the borrowers’ allegations that the servicer violated discharge injunctions when it sent mortgage statements to class members who left their homes “as section 524(a) provides that a bankruptcy court’s discharge order operates as an injunction that bars any act to collect a discharged debt as a personal liability of the debtor.” 11 U.S.C. § 524(a)(2). Thus, the servicer’s affirmative defense “that it is not liable under the FDCPA because the only remedy for violation of a discharge injunction is under the Bankruptcy Code applies to all class members,” regardless of whether they vacated their properties.

This error, the Eleventh Circuit held, requires vacating the class certification order because when a trial court “improperly categorizes a question as presenting a common or an individual issue” in determining predominance, it abuses its discretion.

The Eleventh Circuit did not decide whether the servicer’s preclusion affirmative defense is “meritorious — that is, whether the Bankruptcy Code actually precludes or displaces any remedy available under the FDCPA and FCCPA” and specifically noted that it has not yet “addressed this question, which has split the circuits.”  Compare, Walls v. Wells Fargo Bank, N.A., 276 F.3d 502, 511 (9th Cir. 2002) (“Because [the debtor’s] remedy for violation of § 524 no matter how cast lies in the Bankruptcy Code, her simultaneous FDCPA claim is precluded.”), with Garfield v. Ocwen Loan Servicing, LLC, 811 F.3d 86, 91 (2d Cir. 2016) (“the Bankruptcy Code does not broadly repeal the FDCPA for purposes of FDCPA claims based on conduct that would constitute alleged violations of the discharge injunction.”)

Turning to the alleged FCCPA claim, the Eleventh Circuit reached the same conclusion.  The servicer raised the same defense that the Bankruptcy Code preempted each class member’s FCCPA claim. For the same reasons that it used concerning the FDCPA claim, the Eleventh Circuit determined that the trial court abused its discretion in finding that the preemption affirmative defense raised an individualized issue instead of an issue common to all class members.

Therefore, the Eleventh Circuit reversed the trial court’s order denying class certification, and remanded for the trial court to reconsider whether common questions of law or fact predominate given that whether the Bankruptcy Code preempted the alleged claims raises a common, rather than an individualized, issue.

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Ernest Wagner practices in Maurice Wutscher's Commercial Litigation and Consumer Litigation groups, and leads the firm’s Insurance Recovery and Advisory group. Based in Chicago, he also supports the firm’s litigation matters in its Miami office. Ernest has substantial experience in various types of commercial and insurance recovery litigation. He has conducted more than 35 jury trials, and more than 150 arbitrations for plaintiffs and defendants. He has also successfully represented clients in numerous appeals, in various jurisdictions. Ernest earned his Juris Doctor from Emory University School of Law in Atlanta, Georgia, and his Bachelor of the Arts from the University of Iowa.

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